<PAGE> 1
As filed with the Securities and Exchange Commission on March 1, 1999
1933 Act File No. 33-91058
1940 Act File No. 811-9018
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
------
Post-Effective Amendment No. 8 [X]
------
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 [X]
Amendment No. 9
------
(Check appropriate box or boxes.)
AMERICAN AADVANTAGE MILEAGE FUNDS
(Exact name of Registrant as Specified in Charter)
4333 Amon Carter Boulevard
Fort Worth, Texas 76155
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code: (817) 967-3509
WILLIAM F. QUINN, PRESIDENT
4333 Amon Carter Boulevard
Fort Worth, Texas 76155
(Name and Address of Agent for Service)
Copy to:
ROBERT J. ZUTZ, ESQ.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, NW
Washington, DC 20036
Approximate Date of Proposed Public Offering March 1, 1999
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[X] on March 1, 1999 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
Registrant has adopted a master-feeder operating structure for each of its
series. This Post-Effective Amendment includes signature pages for the AMR
Investment Services Trust and the Equity 500 Index Portfolio, the master trusts,
and the American AAdvantage Mileage Funds, the feeder trust.
<PAGE> 2
AMERICAN AADVANTAGE MILEAGE FUNDS
CONTENTS OF REGISTRATION STATEMENT
This registration statement is comprised of the following:
Cover Sheet
Contents of Registration Statement
Prospectus for the following American AAdvantage
Mileage Funds: Balanced Mileage Fund, Large Cap Value Mileage
Fund, Small Cap Value 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 and U.S.
Government Money Market Mileage Fund
Statement of Additional Information for the following
American AAdvantage Mileage Funds: Balanced Mileage Fund,
Large Cap Value Mileage Fund, Small Cap Value Mileage Fund,
International Equity Mileage Fund, S&P 500 Index Mileage Fund,
Intermediate Bond Mileage Fund, Short-Term Bond Mileage Fund,
Money Market Fund, Municipal Money Market Mileage Fund and
U.S. Government Money Market Mileage Fund
Prospectus for the Platinum Class of the American
AAdvantage Money Market Mileage Fund, American AAdvantage
Money Market Fund, American AAdvantage Municipal Money Market
Fund and American AAdvantage U.S. Government Money Market Fund
Statement of Additional Information for the Platinum
Class of the American AAdvantage Money Market Mileage Fund,
American AAdvantage Money Market Fund, American AAdvantage
Municipal Money Market Fund and American AAdvantage U.S.
Government Money Market Fund
Part C
Signature Pages
Exhibits
<PAGE> 3
-------
MILEAGE
-------
[LOGO]
PROSPECTUS
MARCH 1, 1999
[AMERICAN AADVANTAGE MILEAGE FUNDS LOGO]
EQUITY FUNDS
------------------------------------------
o BALANCED FUND
o LARGE CAP VALUE FUND
o SMALL CAP VALUE FUND
o INTERNATIONAL EQUITY FUND
o S&P 500 INDEX FUND
BOND FUNDS
------------------------------------------
o INTERMEDIATE BOND FUND
o SHORT-TERM BOND FUND
MONEY MARKET FUNDS
---------------------------------------------------
o MONEY MARKET FUND
o MUNICIPAL MONEY MARKET FUND
o U.S. GOVERNMENT MONEY MARKET FUND
MANAGED BY AMR INVESTMENT SERVICES, INC.
[EAGLE LOGO]
The Securities and Exchange Commission does not guarantee that the information
in this Prospectus or any other mutual fund's prospectus is accurate or
complete, nor does it judge the investment merit of these Funds. To state
otherwise is a criminal offense.
<PAGE> 4
[AMERICAN AADVANTAGE MILEAGE FUNDS LOGO]
TABLE OF CONTENTS
<TABLE>
<S> <C>
About the Funds
Overview........................................ 2
Balanced Mileage Fund....................... 3
Large Cap Value Mileage Fund................ 7
Small Cap Value Mileage Fund................ 10
International Equity Mileage Fund........... 12
S&P 500 Index Mileage Fund.................. 15
Intermediate Bond Mileage Fund.............. 18
Short-Term Bond Mileage Fund................ 21
Money Market Mileage Fund................... 24
Municipal Money Market Mileage Fund......... 26
U.S. Government Money Market Mileage Fund... 28
The Manager..................................... 30
Equity 500 Index Portfolio Administrator........ 31
The Investment Advisers......................... 31
Valuation of Shares............................. 32
About Your Investment
Purchase and Redemption of Shares............... 33
Distributions and Taxes......................... 36
AAdvantage(R) Miles............................. 37
Additional Information
Distribution of Trust Shares.................... 38
Master-Feeder Structure......................... 38
Year 2000....................................... 38
Financial Highlights............................ 38
Additional Information.....................Back Cover
</TABLE>
ABOUT THE FUNDS
- --------------------------------------------------------------------------------
OVERVIEW
The American AAdvantage Mileage Funds (the "Funds") are managed by AMR
Investment Services, Inc. (the "Manager"), a wholly owned subsidiary of AMR
Corporation.
The Funds operate under a master-feeder structure. This means that each Fund,
except for 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") that has a similar name and identical
investment objective. The S&P 500 Index Mileage Fund invests all of its
investable assets in the Equity 500 Index Portfolio, which is a separate
investment company managed by Bankers Trust Company ("BT") with an identical
investment objective. Throughout this Prospectus, statements regarding
investments by a Fund refer to investments made by its corresponding Portfolio.
For easier reading, the term "Fund" is used throughout the Prospectus to refer
to either a Fund or its Portfolio, unless stated otherwise. See "Master-Feeder
Structure".
Each shareholder will receive American Airlines(R) AAdvantage(R) travel awards
program ("AAdvantage") miles.(1) 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".
- ---------------
(1) American Airlines and AAdvantage are registered trademarks of American
Airlines, Inc.
- --------------------------------------------------------------------------------
About the Funds 2 Prospectus
<PAGE> 5
AMERICAN AADVANTAGE
BALANCED MILEAGE FUND(SM)
- --------------------------------------------------------------------------------
Investment Objective
- -------------------------------
Income and capital appreciation.
Principal Strategies
- ------------------------------
This Fund typically invests between 50% and 65% of its total assets in equity
securities and between 35% and 50% of its total assets in debt securities.
The Fund's equity investments may include common stocks, preferred stocks,
securities convertible into common stocks, and U.S. dollar-denominated American
Depositary Receipts (collectively referred to as "stocks").
The Fund's investment advisers select stocks which, in their opinion, have most
or all of the following characteristics:
- - above-average earnings growth potential,
- - a market price below perceived economic value,
- - below-average price to earnings ratio,
- - below-average price to book value ratio, and
- - above-average dividend yields.
Each of the Fund's investment advisers determines the earnings growth prospects
of companies based upon a combination of internal and external research using
fundamental analysis and considering changing economic trends. The decision to
sell a stock is typically based on the belief that the company is no longer
considered undervalued or shows deteriorating fundamentals, or that better
investment opportunities exist in other stocks. The Manager believes that this
strategy will help the Fund outperform other investment styles over the longer
term while minimizing volatility and downside risk.
The Fund's investments in debt securities may include: obligations of the U.S.
Government, its agencies and instrumentalities; corporate debt securities, such
as notes and bonds; mortgage-backed securities; asset-backed securities;
master-demand notes; Yankeedollar and Eurodollar bank certificates of deposit,
time deposits, bankers' acceptances, commercial paper and other notes; and other
debt securities. The Fund will only buy debt securities that are investment
grade at the time of purchase. Investment grade securities include securities
issued or guaranteed by the U.S. Government, its agencies and instrumentalities,
as well as securities rated in one of the four highest rating categories by all
nationally recognized statistical rating organizations rating that security
(such as Standard & Poor's Corporation or Moody's Investors Service, Inc.).
Obligations rated in the fourth highest rating category are limited to 25% of
the Fund's total assets. The Fund, at the discretion of the applicable
investment adviser, may retain a security that has been downgraded below the
initial investment criteria.
In determining which debt securities to buy and sell, the investment advisers
generally use either a "top-down" or "bottom-up" investment strategy. One of the
Fund's investment advisers uses a top-down strategy, two of the Fund's
investment advisers use a bottom-up strategy, and two of the Fund's investment
advisers use a combination of both strategies.
The top-down fixed income investment strategy is implemented as follows:
- - Develop an overall investment strategy, including a portfolio duration target,
by examining the current trend in the U.S. economy.
- - Set desired portfolio maturity structure by comparing the differences between
corporate and U.S. Government securities of similar duration to judge their
potential for optimal return in accordance with the target duration benchmark.
- - Determine sector weightings by analyzing the difference in yield spreads
between corporate and U.S. Government securities.
- - Select specific debt securities within each sector.
- - Review and monitor portfolio composition for changes in credit, risk-return
profile and comparisons with benchmarks.
The bottom-up fixed income investment strategy is implemented as follows:
- - Search for eligible securities with a yield to maturity advantage versus a
U.S. Government security with a similar maturity.
- --------------------------------------------------------------------------------
Prospectus 3 About the Funds
<PAGE> 6
AMERICAN AADVANTAGE
BALANCED MILEAGE FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
- - Evaluate credit quality of the securities.
- - Perform an analysis of the expected price volatility of the securities to
changes in interest rates by examining actual price volatility between U.S.
Government and non-U.S. Government securities.
Under adverse market conditions, the Fund may, for temporary defensive purposes,
invest up to 100% of its assets in cash or cash equivalents, including
investment grade short-term obligations. To the extent that the Fund invokes
this strategy, its ability to achieve its investment objective may be affected
adversely.
Risk Factors
- -------------------
MARKET RISK (STOCKS)
Since this Fund invests a substantial portion of its assets in stocks, it is
subject to stock market risk. Market risk involves the possibility that the
value of the Fund's investments in stocks will decline due to drops in the stock
market. In general, the value of the Fund will move in the same direction as the
overall stock market, which will vary from day to day in response to the
activities of individual companies and general market and economic conditions.
INTEREST RATE RISK (BONDS)
The Fund is subject to the risk that the market value of the bonds it holds will
decline due to rising interest rates. When interest rates rise, the price of
most bonds go down. When interest rates go down, bond prices generally go up.
The price of a bond is also affected by its maturity. Bonds with longer
maturities generally have greater sensitivity to changes in interest rates.
CREDIT RISK (BONDS)
The Fund is subject to the risk that the issuer of a bond will fail to make
timely payment of interest or principal. A decline in an issuer's credit rating
can cause its price to go down. This risk is somewhat minimized by the Fund's
policy of only investing in bonds that are considered investment grade at the
time of purchase.
PREPAYMENT RISK (BONDS)
The Fund's investments in asset-backed and mortgage-backed securities are
subject to the risk that the principal amount of the underlying collateral may
be repaid prior to the bond's maturity date. If this occurs, no additional
interest will be paid on the investment and the Fund may have to invest at a
lower rate.
ADDITIONAL RISKS
An investment in the Fund is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. The value of an investment in the Fund will fluctuate up and down. When
you sell your shares of the Fund, they could be worth less than what you paid
for them.
Investor Profile
- -----------------------
This Fund may be suitable for investors who:
- - need to fund a long-term objective, such as a child's college education or a
comfortable retirement
- - seek a convenient way to invest in value-oriented stocks and investment grade
bonds in a single, professionally managed portfolio
- - desire long-term performance from an investment style that may help to
minimize volatility and downside risk
- - require investment income
- - want to take advantage of the investment expertise of value-oriented
investment advisers
- - desire to receive miles in the American Airlines AAdvantage(R) program
- --------------------------------------------------------------------------------
About the Funds 4 Prospectus
<PAGE> 7
AMERICAN AADVANTAGE
BALANCED MILEAGE FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
Historical Performance
- -----------------------------------
The bar chart below provides an indication of risk by showing how the Fund's
performance has varied from year to year. The table shows how the Fund's
performance compares to two broad-based market indices and the Lipper Balanced
Index, a composite of mutual funds with the same investment objective as the
Fund. The performance shown in the chart and table below is a combination of the
Fund's performance and that of its predecessor fund. The Fund was created from a
predecessor fund that began offering its shares on July 17, 1987. Performance
results through July 31, 1994 are for the Institutional Class of the predecessor
fund, and from August 1, 1994 through October 31, 1995 are for the predecessor
fund's Mileage Class. The Fund began offering it shares on November 1, 1995.
Performance results shown from that date through December 31, 1998 are for the
Fund. Because the predecessor fund had lower expenses, its performance was
better than the Fund would have realized in the same period. Past performance is
not necessarily indicative of how the Fund will perform in the future.
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[GRAPH]
<TABLE>
<S> <C>
89.......................................................... 18.05%
90.......................................................... 0.29%
91.......................................................... 21.22%
92.......................................................... 8.97%
93.......................................................... 14.46%
94.......................................................... -1.90%
95.......................................................... 28.31%
96.......................................................... 13.51%
97.......................................................... 19.47%
98.......................................................... 7.83%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: 9.79%
(1/1/89 through 12/31/98) (2nd Quarter 1997)
Lowest Quarterly Return: -7.48%
(1/1/89 through 12/31/98) (3rd Quarter 1990)
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
-----------------------------
AS OF 12/31/98
-----------------------------
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
<S> <C> <C> <C>
BALANCED FUND 7.83% 12.98% 12.66%
S&P 500 Index* 28.76% 24.07% 19.20%
Lehman Bros. Intermediate
Gov./Corp. Index** 8.42% 6.59% 8.51%
Lipper Balanced Index 15.06% 13.81% 13.29%
</TABLE>
* The S&P 500 is an unmanaged index of common stocks publicly traded in the
United States.
** Lehman Brothers Intermediate Gov./Corp. Index is a market value weighted
performance benchmark for government and corporate fixed-rate debt issues
with maturities between one and ten years.
Fees and Expenses
- ----------------------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Balanced Mileage Fund.(1)
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
<TABLE>
<S> <C>
Management Fees 0.30%
Distribution (12b-1) Fees 0.25
Other Expenses 1.19
----
Total Annual Fund Operating Expenses 1.74%
====
Fee Waiver and/or Expense Reimbursement 0.75%(2)
NET EXPENSES 0.99%
</TABLE>
(1) The expense table and the Example below reflect the expenses of both the
Fund and its corresponding Portfolio.
(2) The Manager has contractually agreed to waive Distribution Fees and to
reimburse the Fund for Other Expenses through October 31, 1999 to the
extent that Total Annual Fund Operating Expenses exceed 0.99%.
- --------------------------------------------------------------------------------
Prospectus 5 About the Funds
<PAGE> 8
AMERICAN AADVANTAGE
BALANCED MILEAGE FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
Example
-------------
This Example is intended to help you compare the
cost of investing in the Fund with the cost of
investing in other mutual funds. The Example
assumes that you invest $10,000 in the Fund for
the time periods indicated and then redeem all
of your shares at the end of those periods. The
Example also assumes that your investment has a
5% return each year and that the Fund's
operating expenses remain the same. Although
your actual costs may be higher or lower, based
on these assumptions your costs would be:
1 YEAR .....................................$101
3 YEARS.....................................$475
5 YEARS.....................................$873
10 YEARS..................................$1,989
Investment Advisers
- ----------------------------------
The Manager allocates the assets of the Fund among the following investment
advisers:
Barrow, Hanley, Mewhinney & Strauss, Inc.
Brandywine Asset Management, Inc.
GSB Investment Management, Inc.
Hotchkis and Wiley
Independence Investment Associates, Inc.
- --------------------------------------------------------------------------------
About the Funds 6 Prospectus
<PAGE> 9
AMERICAN AADVANTAGE
LARGE CAP VALUE MILEAGE FUND(SM)
- --------------------------------------------------------------------------------
Investment Objective
- -------------------------------
Long-term capital appreciation and current income.
Principal Strategies
- ------------------------------
Ordinarily at least 65% of the total assets of this Fund are invested in equity
securities of U.S. companies with market capitalizations of $5 billion or more
at the time of investment. The Fund's investments may include common stocks,
preferred stocks, securities convertible into U.S. common stocks, and U.S.
dollar-denominated American Depositary Receipts (collectively referred to as
"stocks").
The Fund's investment advisers select stocks which, in their opinion, have most
or all of the following characteristics:
- - above-average earnings growth potential,
- - a market price below perceived economic value,
- - below average price to earnings ratio,
- - below average price to book value ratio, and
- - above-average dividend yields.
Each of the Fund's investment advisers determines the earnings growth prospects
of companies based upon a combination of internal and external research using
fundamental analysis and considering changing economic trends. The decision to
sell a stock is typically based on the belief that the company is no longer
considered undervalued or shows deteriorating fundamentals, or that better
investment opportunities exist in other stocks. The Manager believes that this
strategy will help the Fund outperform other investment styles over the longer
term while minimizing volatility and downside risk.
Under adverse market conditions, the Fund may, for temporary defensive purposes,
invest up to 100% of its assets in cash or cash equivalents, including
investment grade short-term obligations. To the extent that the Fund invokes
this strategy, its ability to achieve its investment objective may be affected
adversely.
Risk Factors
- -------------------
MARKET RISK
Since this Fund invests most of its assets in stocks, it is subject to stock
market risk. Market risk involves the possibility that the value of the Fund's
investments in stocks will decline due to drops in the stock market. In general,
the value of the Fund will move in the same direction as the overall stock
market, which will vary from day to day in response to the activities of
individual companies and general market and economic conditions.
ADDITIONAL RISKS
An investment in the Fund is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. The value of an investment in the Fund will fluctuate up and down. When
you sell your shares of the Fund, they could be worth less than what you paid
for them.
Investor Profile
- -----------------------
This Fund may be suitable for investors who:
- - need to fund a long-term objective, such as a child's college education or a
comfortable retirement
- - seek a U.S. stock mutual fund that invests in fundamentally strong companies
- - require total returns including income
- - want to take advantage of the expertise of value-oriented investment advisers
- - desire to receive miles in the American Airlines AAdvantage(R) program
- --------------------------------------------------------------------------------
Prospectus 7 About the Funds
<PAGE> 10
AMERICAN AADVANTAGE
LARGE CAP VALUE MILEAGE FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
Historical Performance
- -----------------------------------
The bar chart below provides an indication of risk by showing how the Fund's
performance has varied from year to year. The table shows how the Fund's
performance compares to the S&P 500, a widely recognized unmanaged index of
common stocks publicly traded in the U.S., and the Lipper Growth and Income
Index, a composite of mutual funds with the same investment objective as the
Fund. The performance shown in the chart and table below is a combination of the
Fund's performance and that of its predecessor fund. The Fund was created from a
predecessor fund that began offering its shares on July 17, 1987. Performance
results through July 31, 1994 are for the Institutional Class of the predecessor
fund, and from August 1, 1994 through October 31, 1995 are for the predecessor
fund's Mileage Class. The Fund began offering its shares on November 1, 1995.
Performance results shown from that date through December 31, 1998 are for the
Fund. Because the predecessor fund had lower expenses, its performance was
better than the Fund would have realized in the same period. Past performance is
not necessarily indicative of how the Fund will perform in the future.
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[GRAPH]
<TABLE>
<S> <C>
89.......................................................... 23.91%
90.......................................................... -5.97%
91.......................................................... 26.00%
92.......................................................... 11.90%
93.......................................................... 15.74%
94.......................................................... -1.27%
95.......................................................... 33.85%
96.......................................................... 20.65%
97.......................................................... 26.09%
98.......................................................... 5.88%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: 13.97%
(1/1/89 through 12/31/98) (2nd Quarter 1997)
Lowest Quarterly Return: -14.17%
(1/1/89 through 12/31/98) (3rd Quarter 1998)
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURN
----------------------------
AS OF 12/31/98
----------------------------
1 YEAR 5 YEARS 10 YEARS
------ -------- --------
<S> <C> <C> <C>
LARGE CAP VALUE FUND 5.88% 16.31% 15.00%
S&P 500 Index 28.76% 24.07% 19.20%
Lipper Growth and Income
Index 13.59% 18.21% 15.73%
</TABLE>
Fees and Expenses
- ----------------------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Large Cap Value Mileage Fund.(1)
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
<TABLE>
<S> <C>
Management Fees 0.30%
Distribution (12b-1) Fees 0.25
Other Expenses 0.66
----
Total Annual Fund Operating Expenses 1.21%
====
Fee Waiver and/or Expense Reimbursement 0.22%(2)
NET EXPENSES 0.99%
</TABLE>
(1) The expense table and the Example below reflect the expenses of both the
Fund and its corresponding Portfolio.
(2) The Manager has contractually agreed to waive Distribution Fees through
October 31, 1999 to the extent that Total Annual Fund Operating Expenses
exceed 0.99%.
Example
-------------
This Example is intended to help you compare the
cost of investing in the Fund with the cost of
investing in other mutual funds. The Example
assumes that you invest $10,000 in the Fund for
the time periods indicated and then redeem all
of your shares at the end of those periods. The
Example also assumes that your investment has a
5% return each year and that the Fund's
operating expenses remain the same. Although
your actual costs may be higher or lower, based
on these assumptions your costs would be:
1 YEAR .....................................$101
3 YEARS.....................................$362
5 YEARS.....................................$644
10 YEARS..................................$1,446
- --------------------------------------------------------------------------------
About the Funds 8 Prospectus
<PAGE> 11
AMERICAN AADVANTAGE
LARGE CAP VALUE MILEAGE FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
Investment Advisers
- ----------------------------------
The Manager allocates the assets of the Fund among the following investment
advisers:
Barrow, Hanley, Mewhinney & Strauss, Inc.
Brandywine Asset Management, Inc.
GSB Investment Management, Inc.
Hotchkis and Wiley
Independence Investment Associates, Inc.
- --------------------------------------------------------------------------------
Prospectus 9 About the Funds
<PAGE> 12
AMERICAN AADVANTAGE
SMALL CAP VALUE MILEAGE FUND(SM)
- --------------------------------------------------------------------------------
Investment Objective
- -------------------------------
Long-term capital appreciation and current income.
Principal Strategies
- ------------------------------
Ordinarily at least 80% of the total assets of the Fund are invested in equity
securities of U.S. companies with market capitalizations of $1 billion or less
at the time of investment. The Fund's investments may include common stocks,
preferred stocks, securities convertible into common stocks, and U.S. dollar-
denominated American Depositary Receipts (collectively, "stocks").
The investment advisers select stocks which, in their opinion, have most or all
of the following characteristics:
- - above-average earnings growth potential,
- - a market price below perceived economic value,
- - below-average price to earnings ratio,
- - below-average price to book value ratio, and
- - above-average dividend yields.
Each of the investment advisers determines the earnings growth prospects of
companies based upon a combination of internal and external research using
fundamental analysis and considering changing economic trends. The decision to
sell a stock is typically based on the belief that the company is no longer
considered undervalued or shows deteriorating fundamentals, or that better
investment opportunities exist in other stocks. The Manager believes that this
strategy will help the Fund outperform other investment styles over the longer
term while minimizing volatility and downside risk.
Under adverse market conditions, the Fund may, for temporary defensive purposes,
invest up to 100% of its assets in cash or cash equivalents, including
investment grade short-term obligations. To the extent that the Fund invokes
this strategy, its ability to achieve its investment objective may be affected
adversely.
Risk Factors
- -------------------
MARKET RISK
Since this Fund invests most of its assets in stocks, it is subject to stock
market risk. Market risk involves the possibility that the value of the Fund's
investments in stocks will decline due to drops in the stock market. In general,
the value of the Fund will move in the same direction as the overall stock
market, which will vary from day to day in response to the activities of
individual companies and general market and economic conditions.
SMALL CAPITALIZATION COMPANIES
Investing in the securities of small capitalization companies involves greater
risk and the possibility of greater price volatility than investing in larger
capitalization and more established companies, since smaller companies may have
limited operating history, product lines, and financial resources, and the
securities of these companies may lack sufficient market liquidity.
ADDITIONAL RISKS
An investment in the Fund is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. The value of an investment in the Fund will fluctuate up and down. When
you sell your shares of the Fund, they could be worth less than what you paid
for them.
Investor Profile
- -----------------------
This Fund may be suitable for investors who:
- - need to fund a long-term objective, such as a child's education or a
comfortable retirement
- - seek a U.S. stock mutual fund that invests in small, less well-known companies
- - want to take advantage of the expertise of value-oriented investment advisers
- - are willing to accept the increased risks of small stock investing
- - desire to receive miles in the American Airlines AAdvantage(R) program
- --------------------------------------------------------------------------------
About the Funds 10 Prospectus
<PAGE> 13
AMERICAN AADVANTAGE
SMALL CAP VALUE MILEAGE FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
Fees and Expenses
- ----------------------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Small Cap Value Mileage Fund.(1)
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
<TABLE>
<S> <C>
Management Fees 0.68%
Distribution (12b-1) Fees 0.25
Other Expenses 4.95(2)
----
Total Annual Fund Operating Expenses 5.88%
====
Fee Waiver and/or Expense Reimbursement 4.39%(3)
NET EXPENSES 1.49%
</TABLE>
(1) The expense table and the Example below reflect the expenses of both the
Fund and its corresponding Portfolio.
(2) Other Expenses are based on estimates for the current fiscal year.
(3) The Manager has contractually agreed to waive Distribution Fees and to
reimburse the Fund for Other Expenses through October 31, 1999 to the
extent that Total Annual Fund Operating Expenses exceed 1.49%.
<TABLE>
<S> <C> <C>
Example
-------------
This Example is intended to help you compare the
cost of investing in the Fund with the cost of
investing in other mutual funds. The Example
assumes that you invest $10,000 in the Fund for
the time periods indicated and then redeem all
of your shares at the end of those periods. The
Example also assumes that your investment has a
5% return each year and that the Fund's
operating expenses remain the same. Although
your actual costs may be higher or lower, based
on these assumptions your costs would be:
1 YEAR .....................................$152
3 YEARS...................................$1,358
</TABLE>
Investment Advisers
- ------------------------------
The Manager allocates the assets of the Fund among the following investment
advisers:
Brandywine Asset Management, Inc.
Hotchkis and Wiley
Historical Performance
- -----------------------------------
The Small Cap Value Mileage Fund began offering its shares on March 1, 1999, and
therefore, long-term historical performance is not available. However,
Brandywine and Hotchkis each have experience managing other accounts with
investment objectives, policies and strategies similar to those of the Fund.
Unlike the Fund, all of the accounts managed by Brandywine include an allocation
to micro-cap companies, which are defined as companies with total market
capitalization of less than $250 million. Thus, the performance below consists
of only the Hotchkis and Wiley Small Cap Fund ("Hotchkis Fund"), an investment
company which has investment objectives, policies and strategies substantially
similar to those of the Fund. The data shown below reflects the total return for
the periods shown, reduced by the actual expenses of the Hotchkis Fund. Applying
the Fund's expense structure to the Hotchkis Fund would have lowered the
performance results shown. THIS PERFORMANCE OF THE HOTCHKIS FUND IS NOT THE
PERFORMANCE OF THE FUND. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF HOW
THE FUND WILL PERFORM IN THE FUTURE.
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[GRAPH]
<TABLE>
<S> <C>
88.......................................................... 8.90%
89.......................................................... 20.50%
90.......................................................... -9.02%
91.......................................................... 48.29%
92.......................................................... 13.72%
93.......................................................... 12.57%
94.......................................................... 1.11%
95.......................................................... 18.44%
96.......................................................... 14.27%
97.......................................................... 39.52%
98.......................................................... -15.56%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: 22.92%
(1/1/88 through 12/31/98) (1st Quarter 1991)
Lowest Quarterly Return: -27.51%
(1/1/88 through 12/31/98) (3rd Quarter 1990)
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
----------------------------
AS OF 12/31/98
----------------------------
1 YEAR 5 YEARS 10 YEARS
------- ------- --------
<S> <C> <C> <C>
HOTCHKIS FUND -15.56% 10.02% 12.87%
Russell 2000 Index* -2.56% 11.87% 12.92%
</TABLE>
* The Russell 2000 Index is an unmanaged index of 2,000 small capitalization
stocks.
- --------------------------------------------------------------------------------
Prospectus 11 About the Funds
<PAGE> 14
AMERICAN AADVANTAGE
INTERNATIONAL EQUITY MILEAGE FUND(SM)
- --------------------------------------------------------------------------------
Investment Objective
- -------------------------------
Long-term capital appreciation.
Principal Strategies
- ------------------------------
Under normal circumstances, at least 80% of the Fund's total assets are invested
in common stocks and securities convertible into common stocks (collectively,
"stocks") of issuers based in at least three different countries located outside
the United States.
The current countries in which the Fund may invest are:
<TABLE>
<S> <C> <C> <C>
Australia France Mexico South Korea
Austria Germany Netherlands Spain
Belgium Hong Kong New Zealand Sweden
Canada Ireland Norway Switzerland
Denmark Italy Portugal United Kingdom
Finland Japan Singapore
</TABLE>
The investment advisers select stocks which, in their opinion, have most or all
of the following characteristics:
- - above-average earnings growth potential,
- - a market price below perceived economic value,
- - below-average price to earnings ratio,
- - below-average price to book value ratio, and
- - above-average dividend yields.
The investment advisers will also consider potential changes in currency
exchange rates when choosing stocks. Each of the investment advisers determines
the earnings growth prospects of companies based upon a combination of internal
and external research using fundamental analysis and considering changing
economic trends. The decision to sell a stock is typically based on the belief
that the company is no longer considered undervalued or shows deteriorating
fundamentals, or that better investment opportunities exist in other stocks. The
Manager believes that this strategy will help the Fund outperform other
investment styles over the longer term while minimizing volatility and downside
risk. The Fund may trade forward foreign currency contracts to hedge currency
fluctuations of underlying stock positions when it is believed that a foreign
currency may suffer a decline against the U.S. dollar.
Under adverse market conditions, the Fund may, for temporary defensive purposes,
invest up to 100% of its assets in cash or cash equivalents, including
investment grade short-term obligations. To the extent that the Fund invokes
this strategy, its ability to achieve its investment objective may be affected
adversely.
Risk Factors
- -------------------
MARKET RISK
Since this Fund invests most of its assets in stocks, it is subject to stock
market risk. Market risk involves the possibility that the value of the Fund's
investments in stocks of a particular country will decline due to drops in that
country's stock market. In general, the value of the Fund will move in the same
direction as the international stock market it invests in, which will vary from
day to day in response to the activities of individual companies and general
market and economic conditions of that country.
FOREIGN INVESTING
Overseas investing carries potential risks not associated with domestic
investments. Such risks include, but are not limited to: (1) currency exchange
rate fluctuations, (2) political and financial instability, (3) less liquidity
and greater volatility of foreign investments, (4) lack of uniform accounting,
auditing and financial reporting standards, (5) less government regulation and
supervision of foreign stock exchanges, brokers and listed companies, (6)
increased price volatility, (7) delays in transaction settlement in some foreign
markets, and (8) adverse impact of the euro conversion on the business or
financial condition of companies in which the Fund is invested.
ADDITIONAL RISKS
An investment in the Fund is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. The value of an investment in the Fund
- --------------------------------------------------------------------------------
About the Funds 12 Prospectus
<PAGE> 15
AMERICAN AADVANTAGE
INTERNATIONAL EQUITY MILEAGE FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
will fluctuate up and down. When you sell your shares of the Fund, they could be
worth less than what you paid for them.
Investor Profile
- -----------------------
This Fund may be appropriate for investors who:
- - need to fund a long-term objective that requires growth of capital, such as a
child's college education or a comfortable retirement
- - seek to complement U.S. stock holdings with an international stock mutual fund
that invests in large, well-capitalized foreign companies
- - want to take advantage of the expertise of leading international equity
investment advisors
- - are willing to accept the increased risks of international investing,
including currency and exchange rate risks, accounting differences and
political risks
- - desire to receive miles in the American Airlines AAdvantage(R) program
Historical Performance
- -----------------------------------
The bar chart below provides an indication of risk by showing how the Fund's
performance has varied from year to year. The table shows how the Fund's
performance compares to the Morgan Stanley Europe Australasia Far East ("EAFE")
Index, a widely recognized unmanaged index of international stock investment
performance and the Lipper International Index, a composite of mutual funds with
the same investment objective as the Fund. The performance shown in the chart
and table below is a combination of the Fund's performance and that of its
predecessor fund. The Fund was created from a predecessor fund that began
offering its shares on August 7, 1991. Performance results through July 31, 1994
are for the Institutional Class of the predecessor fund, and from August 1, 1994
through October 31, 1995 are for the predecessor fund's Mileage Class. The Fund
began offering its shares on November 1, 1995. Performance results shown from
that date through December 31, 1998 are for the Fund. Because the predecessor
fund had lower expenses, its performance was better than the Fund would have
realized in the same period. Past performance is not necessarily indicative of
how the Fund will perform in the future.
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[GRAPH]
<TABLE>
<S> <C>
92.......................................................... -11.03%
93.......................................................... 42.33%
94.......................................................... 0.83%
95.......................................................... 17.09%
96.......................................................... 19.02%
97.......................................................... 8.83%
98.......................................................... 11.12%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: 15.12%
(1/1/92 through 12/31/98) (4th Quarter 1998)
Lowest Quarterly Return: -15.87%
(1/1/92 through 12/31/98) (3rd Quarter 1998)
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
----------------------------------
AS OF 12/31/98
----------------------------------
SINCE INCEPTION
1 YEAR 5 YEARS (8/7/91)
------ ------- ---------------
<S> <C> <C> <C>
INTERNATIONAL EQUITY
FUND 11.12% 11.19% 11.24%
EAFE Index 20.34% 9.50% 9.60%
Lipper International
Index 12.69% 8.60% 10.49%
</TABLE>
Fees and Expenses
- -----------------------------
This table describes the fees and expenses that you pay if you buy and hold
shares of the International Equity Mileage Fund.(1)
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
<TABLE>
<S> <C>
Management Fees 0.41%
Distribution (12b-1) Fees 0.25
Other Expenses 0.99
----
Total Annual Fund Operating Expenses 1.65%
====
Fee Waiver and/or Expense Reimbursement 0.16%(2)
NET EXPENSES 1.49%
</TABLE>
(1) The expense table and the Example below reflect the expenses of both the
Fund and its corresponding Portfolio.
(2) The Manager has contractually agreed to waive Distribution Fees through
October 31, 1999 to the extent that Total Annual Fund Operating Expenses
exceed 1.49%.
- --------------------------------------------------------------------------------
Prospectus 13 About the Funds
<PAGE> 16
AMERICAN AADVANTAGE
INTERNATIONAL EQUITY MILEAGE FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
Example
-------------
This Example is intended to help you compare the
cost of investing in the Fund with the cost of
investing in other mutual funds. The Example
assumes that you invest $10,000 in the Fund for
the time periods indicated and then redeem all
of your shares at the end of those periods. The
Example also assumes that your investment has a
5% return each year and that the Fund's
operating expenses remain the same. Although
your actual costs may be higher or lower, based
on these assumptions your costs would be:
1 YEAR .....................................$152
3 YEARS.....................................$505
5 YEARS.....................................$882
10 YEARS..................................$1,941
Investment Advisers
- ------------------------------
The Manager allocates the assets of the Fund among the following investment
advisers:
Hotchkis and Wiley
Independence Investment Associates, Inc.
Lazard Asset Management
Templeton Investment Counsel, Inc.
- --------------------------------------------------------------------------------
About the Funds 14 Prospectus
<PAGE> 17
AMERICAN AADVANTAGE
S&P 500 INDEX MILEAGE FUND(SM )(1)
- --------------------------------------------------------------------------------
Investment Objective
- -------------------------------
To match, as closely as possible, (before expenses) the performance of the
Standard & Poor's 500 Composite Stock Price Index ("S&P 500" or "Index"), which
emphasizes stocks of large U.S. companies.
Principal Strategies
- ------------------------------
The Fund invests for capital appreciation, not income; any dividend and interest
income is incidental to the pursuit of its objective. While the Fund's
investment adviser gives priority to matching the Index's performance, it cannot
offer any assurance of achieving this objective. The Fund's investment objective
is not a fundamental policy. A shareholder vote is not required to change it,
but shareholders must be notified before it is changed.
An index is a group of securities whose overall performance is used as a
standard to measure investment performance. This Fund is not actively managed by
investment advisers who buy and sell securities based on research and analysis.
Instead, this Fund is passively managed in that it tries to match, as closely as
possible, the performance of a target index by holding either all, or a
representative sample, of the securities in the index.
Under normal conditions, the Fund will invest at least 80% of its total assets
in stocks of companies included in the S&P 500, except Bankers Trust
Corporation. The Fund's securities are weighted to make the Fund's total
investment characteristics similar to those of the Index as a whole. The
investment adviser may exclude or may remove any S&P stock from the Fund, if the
investment adviser believes that the stock is illiquid or has impaired financial
conditions due to extraordinary events.
To match the risk and return characteristics of the S&P 500 Index as closely as
possible, the Fund invests in a statistically selected sample of the securities
found in the S&P 500 Index, using a process known as "optimization." This
process selects stocks for the Fund so that industry weightings, market
capitalizations and fundamental characteristics (price to book ratios, price to
earnings ratios, debt to asset ratios and dividend yields) closely match those
of the securities in the S&P 500 Index. Over the long term, the investment
adviser seeks a correlation between the performance of the Fund (before
expenses) and the S&P 500 Index of 98% or better. (A figure of 100% would
indicate perfect correlation.)
The Fund cannot as a practical matter hold every one of the 500 stocks in the
S&P 500 Index. In an effort to run an efficient and effective strategy, the Fund
uses the process of "optimization," a statistical sampling technique. First, the
Fund buys the stocks that make up the larger portions of the Index's value in
roughly the same proportion as the Index. Second, smaller stocks are analyzed
and selected. In choosing smaller stocks, the investment adviser tries to match
the industry and risk characteristics of all of the small companies in the S&P
500 Index without buying all of those stocks. This approach attempts to maximize
the Fund's liquidity and returns while minimizing its costs.
Under normal conditions, the investment adviser will attempt to invest as much
of the Fund's assets as is practical in common stocks included in the S&P 500.
However, the Fund may maintain up to 20% of its total assets in short-term debt
securities and money market instruments and stock index futures and options. The
Fund will not use these derivatives for speculative purposes or as leveraged
investments that magnify the gains or losses of an investment. The Fund intends
to buy futures in
- ---------------
(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
this Fund.
- --------------------------------------------------------------------------------
Prospectus 15 About the Funds
<PAGE> 18
AMERICAN AADVANTAGE
S&P 500 INDEX MILEAGE FUND(SM ) -- (CONTINUED)
- --------------------------------------------------------------------------------
anticipation of buying stocks. The reasons for which the Fund will invest in
derivatives are:
- - to keep cash on hand to meet shareholder redemptions or other needs while
maintaining exposure to the stock market, and
- - they are a low cost method of gaining exposure to a particular securities
market without investing directly in that market.
Risk Factors
- -------------------
MARKET RISK
As with any investment in common stocks, an investment in the Fund could lose
money, or the Fund's performance could trail that of other investments. For
example:
- Stock prices overall could decline over short or even extended periods.
Stock markets tend to move in cycles, with periods of rising stock prices
and periods of falling stock prices.
- Returns on stocks of large U.S. companies could trail the returns from
the overall stock market. Each type of stock tends to go through cycles
of outperformance and underperformance in comparison to the overall stock
market. These periods in the past have lasted for several years.
TRACKING ERROR RISK
Unlike an index itself, an index fund has operating expenses. In addition, the
Fund's ability to match the Index may be affected by the timing and magnitude of
cash flows in and out of the Fund. Therefore, while the Fund is expected to
track the S&P 500 Index as closely as possible, it will not be able to match the
performance of the Index exactly.
DERIVATIVES
The use of these instruments to pursue the S&P 500 Index returns requires
special skills, knowledge and investment techniques that differ from those
required for normal portfolio management. Gains or losses from positions in a
derivative instrument may be much greater than the derivative's original cost.
ADDITIONAL RISKS
An investment in the Fund is not a deposit of Bankers Trust Company or any other
bank and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency. The value of an investment in the
Fund will fluctuate up and down. When you sell your shares of the Fund, they
could be worth less than what you paid for them.
Investor Profile
- -----------------------
This Fund may be appropriate for investors who:
- - need to fund a long-term objective, such as a child's college education or a
comfortable retirement
- - seek a stock mutual fund that reflects the performance of publicly traded U.S.
stocks in general
- - want to take advantage of a "passive," indexing investment approach
- - desire to receive miles in the American Airlines AAdvantage(R) program
- --------------------------------------------------------------------------------
About the Funds 16 Prospectus
<PAGE> 19
AMERICAN AADVANTAGE
S&P 500 INDEX MILEAGE FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
Historical Performance
- -----------------------------------
The bar chart below provides an indication of risk by showing how the Fund's
performance has varied from year to year. The table shows how the Fund's
performance compares to the S&P 500 Index, a widely recognized unmanaged index
of common stocks publicly traded in the United States. The performance shown in
the chart and table below is a combination of the Fund's performance and that of
another feeder fund not offered in this prospectus, but which invests in the
same master portfolio. The other feeder fund began offering its shares on
January 1, 1997. Performance results through February 28, 1998 are for the other
feeder fund. The Fund began offering its shares on March 2, 1998. Performance
results shown from that date through December 31, 1998 are for the Fund. Because
the other feeder fund had lower expenses, its performance was better than the
Fund would have realized in the same period. Past performance is not necessarily
indicative of how the Fund will perform in the future.
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[GRAPH]
<TABLE>
<S> <C>
97.......................................................... 33.09%
98.......................................................... 28.95%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: 21.61%
(1/1/97 through 12/31/98) (4th Quarter 1998)
Lowest Quarterly Return: -10.15%
(1/1/97 through 12/31/98) (3rd Quarter 1998)
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
------------------------
AS OF 12/31/98
------------------------
SINCE INCEPTION
1 YEAR (1/1/97)
------ ---------------
<S> <C> <C>
S&P 500 INDEX FUND................ 28.95% 31.00%
S&P 500 Index..................... 28.76% 30.97%
</TABLE>
Fees and Expenses
- ----------------------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of the S&P 500 Index Mileage Fund.(1)
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
<TABLE>
<S> <C>
Management Fees 0.08%
Distribution (12b-1) Fees 0.25
Other Expenses 3.01
-----
Total Annual Fund Operating Expenses 3.34%
=====
Fee Waiver and/or Expense Reimbursement 2.79%(2)
NET EXPENSES 0.55%
</TABLE>
(1) The expense table and the Example below reflect the expenses of both the
Fund and the Equity 500 Index Portfolio.
(2) The Manager has contractually agreed to waive Distribution Fees and to
reimburse the Fund for Other Expenses through October 31, 1999 to the
extent that Total Annual Fund Operating Expenses exceed 0.55%.
Example
-------------
This Example is intended to help you compare the
cost of investing in the Fund with the cost of
investing in other mutual funds. The Example
assumes that you invest $10,000 in the Fund for
the time periods indicated and then redeem all
of your shares at the end of those periods. The
Example also assumes that your investment has a
5% return each year and that the Fund's
operating expenses remain the same. Although
your actual costs may be higher or lower, based
on these assumptions your costs would be:
1 YEAR ......................................$56
3 YEARS.....................................$733
5 YEARS...................................$1,434
10 YEARS..................................$3,302
Investment Adviser
- -----------------------------
Bankers Trust Company
- --------------------------------------------------------------------------------
Prospectus 17 About the Funds
<PAGE> 20
AMERICAN AADVANTAGE
INTERMEDIATE BOND MILEAGE FUND(SM)
- --------------------------------------------------------------------------------
Investment Objective
- -------------------------------
Income and capital appreciation.
Principal Strategies
- ------------------------------
The Fund invests in obligations of the U.S. Government, its agencies and
instrumentalities; corporate debt securities, such as commercial paper, master
demand notes, loan participation interests, medium-term notes and funding
agreements; mortgage-backed securities; asset-backed securities; and
Yankeedollar and Eurodollar bank certificates of deposit, time deposits,
bankers' acceptances and other notes. As an investment policy, the Fund
primarily seeks income and secondarily seeks capital appreciation.
The Fund will only buy debt securities that are investment grade at the time of
purchase. Investment grade securities include securities issued or guaranteed by
the U.S. Government, its agencies and instrumentalities, as well as securities
rated in one of the four highest rating categories by all rating organizations
rating the securities (such as Standard & Poor's Corporation or Moody's
Investors Service, Inc.). No more than 25% of assets may be invested in
securities rated in the fourth highest rating category. The Fund, at the
discretion of the applicable investment adviser, may retain a security that has
been downgraded below the initial investment criteria.
In determining which securities to buy and sell, the Manager employs a top-down
fixed income investment strategy, as follows:
- - Develop an overall investment strategy, including a portfolio duration target,
by examining the current trend in the U.S. economy.
- - Set desired portfolio maturity structure by comparing the differences between
corporate and U.S. Government securities of similar duration to judge their
potential for optimal return in accordance with the target duration benchmark.
- - Determine sector weightings by analyzing the difference in yield spreads
between corporate and U.S. Government securities.
- - Select specific debt securities within each sector.
- - Review and monitor portfolio composition for changes in credit, risk-return
profile and comparisons with benchmarks.
The other investment adviser to the Fund uses a bottom-up fixed income
investment strategy in determining which securities to buy and sell, as follows:
- - Search for eligible securities with a yield to maturity advantage versus a
U.S. Government security with a similar maturity.
- - Evaluate credit quality of the securities.
- - Perform an analysis of the expected price volatility of the securities to
changes in interest rates by examining actual price volatility between U.S.
Government and non-U.S. Government securities.
Under normal circumstances, the Fund seeks to maintain a duration of three to
seven years. Duration is a measure of total price sensitivity relative to
changes in interest rates. Portfolios with longer durations are typically more
sensitive to changes in interest rates. Under adverse market conditions, the
Fund may, for temporary defensive purposes, invest up to 100% of its assets in
cash or cash equivalents, including investment grade short-term debt
obligations. To the extent that the Fund invokes this strategy, its ability to
achieve its investment objective may be affected adversely.
Risk Factors
- -------------------
INTEREST RATE RISK
The Fund is subject to the risk that the market value of the bonds it holds will
decline due to rising interest rates. When interest rates rise, the price of
most bonds go down. When interest rates go down, bond prices generally go up.
The price of a bond is also affected by its maturity. Bonds with longer
maturities generally have greater sensitivity to changes in interest rates.
CREDIT RISK
The Fund is subject to the risk that the issuer of a bond will fail to make
timely payment of interest or
- --------------------------------------------------------------------------------
About the Funds 18 Prospectus
<PAGE> 21
AMERICAN AADVANTAGE
INTERMEDIATE BOND MILEAGE FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
principal. A decline in an issuer's credit rating can cause its price to go
down. This risk is somewhat minimized by the Fund's policy of only investing in
bonds that are considered investment grade at the time of purchase.
PREPAYMENT RISK
The Fund's investments in asset-backed and mortgage-backed securities are
subject to the risk that the principal amount of the underlying collateral may
be repaid prior to the bond's maturity date. If this occurs, no additional
interest will be paid on the investment and the Fund may have to invest at a
lower rate.
ADDITIONAL RISKS
An investment in the Fund is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. The value of an investment in the Fund will fluctuate up and down. When
you sell your shares of the Fund, they could be worth less than what you paid
for them.
Investor Profile
- -----------------------
This Fund may be appropriate for investors who:
- - seek regular monthly income for retirement or other current expenses
- - want the relative stability of investment grade bonds
- - can benefit from a diversified portfolio of fixed income securities
- - wish to complement their equity holdings
- - desire to receive miles in the American Airlines AAdvantage(R) program
Historical Performance
- -----------------------------------
The bar chart below provides an indication of risk by showing how the Fund has
performed during the past year. The table shows how the Fund's performance
compares to the Lehman Brothers Intermediate Gov./Corp. Index, a broad-based
market index, and the Lipper Intermediate Investment Grade Debt Average, a
composite of mutual funds with the same investment objective as the Fund. The
performance shown in the chart and table below is a combination of the Fund's
performance and that of another feeder fund not offered in this prospectus, but
which invests in the same master portfolio. The other feeder fund began offering
its shares on September 15, 1997. Performance results through February 28, 1998
are for the other feeder fund. The Fund began offering its shares on March 2,
1998. Performance results shown from that date through December 31, 1998 are for
the Fund. Because the other feeder fund had lower expenses, its performance was
better than the Fund would have realized in the same period. Past performance is
not necessarily indicative of how the Fund will perform in the future.
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31/98
[GRAPH]
<TABLE>
<S> <C>
98.......................................................... 9.34%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: 5.35%
(1/1/98 through 12/31/98) (3rd Quarter 1998)
Lowest Quarterly Return: -0.06%
(1/1/98 through 12/31/98) (4th Quarter 1998)
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURN
------------------------
AS OF 12/31/98
------------------------
SINCE INCEPTION
1 YEAR (9/15/97)
------ ---------------
<S> <C> <C>
INTERMEDIATE BOND FUND 9.34% 10.68%
Lehman Bros. Intermediate
Gov./Corp. Index* 8.42% 8.89%
Lipper Intermediate Investment
Grade Debt Average 7.25% 8.38%
</TABLE>
* The Lehman Brothers Intermediate Gov./Corp. Index is a market value weighted
performance benchmark for government and corporate fixed-rate debt issues
with maturities between one and ten years. The Since Inception return of the
Index is shown from 8/31/97.
- --------------------------------------------------------------------------------
Prospectus 19 About the Funds
<PAGE> 22
AMERICAN AADVANTAGE
INTERMEDIATE BOND MILEAGE FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
Fees and Expenses
- ----------------------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Intermediate Bond Mileage Fund.(1)
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
<TABLE>
<S> <C>
Management Fees 0.25%
Distribution (12b-1) Fees 0.25
Other Expenses 116.45
------
Total Annual Fund Operating Expenses 116.95%
======
Fee Waiver and/or Expense Reimbursement 116.06%(2)
NET EXPENSES 0.89%
</TABLE>
(1) The expense table and the Example below reflect the expenses of both the
Fund and its corresponding Portfolio.
(2) The Manager has contractually agreed to waive Distribution Fees and to
reimburse the Fund for Other Expenses through October 31, 1999 to the
extent that Total Annual Fund Operating Expenses exceed 0.89%.
Example
-------------
This Example is intended to help you compare the
cost of investing in the Fund with the cost of
investing in other mutual funds. The Example
assumes that you invest $10,000 in the Fund for
the time periods indicated and then redeem all
of your shares at the end of those periods. The
Example also assumes that your investment has a
5% return each year and that the Fund's
operating expenses remain the same. Although
your actual costs may be higher or lower, based
on these assumptions your costs would be:
1 YEAR ......................................$91
3 YEARS...................................$4,811
5 YEARS...................................$4,878
10 YEARS..................................$4,879
Investment Advisers
- ------------------------------
The Manager allocates the assets of the Fund among the following investment
advisers:
AMR Investment Services, Inc.
Barrow, Hanley, Mewhinney & Strauss, Inc.
- --------------------------------------------------------------------------------
About the Funds 20 Prospectus
<PAGE> 23
AMERICAN AADVANTAGE
SHORT-TERM BOND MILEAGE FUND(SM)
- --------------------------------------------------------------------------------
Investment Objective
- -------------------------------
Income and capital appreciation.
Principal Strategies
- ------------------------------
The Fund invests in obligations of the U.S. Government, its agencies and
instrumentalities; corporate debt securities, such as commercial paper, master
demand notes, loan participation interests, medium-term notes and funding
agreements; mortgage-backed securities; asset-backed securities; and
Yankeedollar and Eurodollar bank certificates of deposit, time deposits,
bankers' acceptances and other notes. As an investment policy, the Fund
primarily seeks income and secondarily seeks capital appreciation.
The Fund will only buy debt securities that are investment grade at the time of
purchase. Investment grade securities include securities issued or guaranteed by
the U.S. Government, its agencies and instrumentalities, as well as securities
rated in one of the four highest rating categories by all rating organizations
rating the securities (such as Standard & Poor's Corporation or Moody's
Investors Service, Inc.). No more than 25% of total assets may be invested in
securities rated in the fourth highest rating category. The Fund, at the
discretion of the investment advisers, may retain a security that has been
downgraded below the initial investment criteria.
In determining which securities to buy and sell, the Manager employs a top-down
fixed income investment strategy, as follows:
- - Develop an overall investment strategy, including a portfolio duration target,
by examining the current trend in the U.S. economy.
- - Set desired portfolio maturity structure by comparing the differences between
corporate and U.S. Government securities of similar duration to judge their
potential for optimal return in accordance with the target duration benchmark.
- - Determine sector weightings by analyzing the difference in yield spreads
between corporate and U.S. Government securities.
- - Select specific debt securities within each sector.
- - Review and monitor portfolio composition for changes in credit, risk-return
profile and comparisons with benchmarks.
Under normal circumstances, the Fund seeks to maintain a duration of one to
three years. Duration is a measure of total price sensitivity relative to
changes in interest rates. Portfolios with longer durations are typically more
sensitive to changes in interest rates. Under adverse market conditions, the
Fund may, for temporary defensive purposes, invest up to 100% of its assets in
cash or cash equivalents, including investment grade short-term debt
obligations. To the extent that the Fund invokes this strategy, its ability to
achieve its investment objective may be affected adversely.
Risk Factors
- -------------------
INTEREST RATE RISK
The Fund is subject to the risk that the market value of the bonds it holds will
decline due to rising interest rates. When interest rates rise, the price of
most bonds go down. When interest rates go down, bond prices generally go up.
The price of a bond is also affected by its maturity. Bonds with longer
maturities generally have greater sensitivity to changes in interest rates.
CREDIT RISK
The Fund is subject to the risk that the issuer of a bond will fail to make
timely payment of interest or principal. A decline in an issuer's credit rating
can cause its price to go down. This risk is somewhat minimized by the Fund's
policy of only investing in bonds that are considered investment grade at the
time of purchase.
PREPAYMENT RISK
The Fund's investments in mortgage-backed securities are subject to the risk
that the principal amount of the underlying mortgage may be repaid prior to the
bond's maturity date. If this occurs, no additional
- --------------------------------------------------------------------------------
Prospectus 21 About the Funds
<PAGE> 24
AMERICAN AADVANTAGE
SHORT-TERM BOND MILEAGE FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
interest will be paid on the investment and the Fund may have to invest at a
lower rate.
ADDITIONAL RISKS
An investment in the Fund is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. The value of an investment in the Fund will fluctuate up and down. When
you sell your shares of the Fund, they could be worth less than what you paid
for them.
Investor Profile
- -----------------------
This Fund may be appropriate for investors who:
- - seek regular monthly income for retirement or other current expenses
- - want the relative stability of investment grade bonds
- - can benefit from a diversified portfolio of fixed income securities
- - wish to complement their equity holdings
- - desire to receive miles in the American Airlines AAdvantage(R) program
Historical Performance
- -----------------------------------
The bar chart below provides an indication of risk by showing how the Fund's
performance has varied from year to year. The table shows how the Fund's
performance compares to the Lehman Brothers Intermediate Gov./Corp. Index, a
broad-based market index, and the Linked Lipper Investment Grade Debt Averages,
a composite of funds with the same investment objective as the Fund. The
performance shown in the chart and table below is a combination of the Fund's
performance and that of its predecessor fund. The Fund was created from a
predecessor fund that began offering its shares on December 3, 1987. Performance
results through July 31, 1994 are for the Institutional Class of the predecessor
fund, and from August 1, 1994 through October 31, 1995 are for the predecessor
fund's Mileage Class. The Fund began offering its shares on November 1, 1995.
Performance results shown from that date through December 31, 1998 are for the
Fund. Because the predecessor fund had lower expenses, its performance was
better than the Fund would have realized in the same period. Past performance is
not necessarily indicative of how the Fund will perform in the future.
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[GRAPH]
<TABLE>
<S> <C>
89.......................................................... 8.86%
90.......................................................... 8.47%
91.......................................................... 12.97%
92.......................................................... 5.19%
93.......................................................... 6.50%
94.......................................................... 1.04%
95.......................................................... 9.43%
96.......................................................... 3.32%
97.......................................................... 6.47%
98.......................................................... 5.34%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: 4.66%
(1/1/89 through 12/31/98) (4th Quarter 1991)
Lowest Quarterly Return: -0.69%
(1/1/89 through 12/31/98) (2nd Quarter 1996)
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
-----------------------------
AS OF 12/31/98
-----------------------------
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
<S> <C> <C> <C>
SHORT-TERM BOND FUND 5.34% 5.08% 6.71%
Lehman Bros. Intermediate
Gov./Corp. Index* 8.42% 6.59% 8.51%
Linked Lipper Investment
Grade Debt Averages** 5.70% 5.08% 6.73%
</TABLE>
* The Lehman Brothers Intermediate Gov./Corp. Index is a market value weighted
performance benchmark for government and corporate fixed-rate debt issues
with maturities between one and ten years.
** The Linked Lipper Investment Grade Debt Averages includes the Lipper
Short-Term Investment Grade Debt Average prior to 1/1/96, the Lipper
Short-Intermediate Investment Grade Debt Average from 1/1/96 through 7/31/96
and the Lipper Short-Term Investment Grade Debt Average since 8/1/96.
- --------------------------------------------------------------------------------
About the Funds 22 Prospectus
<PAGE> 25
AMERICAN AADVANTAGE
SHORT-TERM BOND MILEAGE FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
Fees and Expenses
- ----------------------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Short-Term Bond Mileage Fund.(1)
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
<TABLE>
<S> <C>
Management Fees 0.25%
Distribution (12b-1) Fees 0.25
Other Expenses 2.24
----
Total Annual Fund Operating Expenses 2.74%
====
Fee Waiver and/or Expense Reimbursement 1.89%(2)
NET EXPENSES 0.85%
</TABLE>
(1) The expense table and the Example below reflect the expenses of both the
Fund and its corresponding Portfolio.
(2) The Manager has contractually agreed to waive Distribution Fees and to
reimburse the Fund for Other Expenses through October 31, 1999 to the
extent that Total Annual Fund Operating Expenses exceed 0.85%.
Example
-------------
This Example is intended to help you compare the
cost of investing in the Fund with the cost of
investing in other mutual funds. The Example
assumes that you invest $10,000 in the Fund for
the time periods indicated and then redeem all
of your shares at the end of those periods. The
Example also assumes that your investment has a
5% return each year and that the Fund's
operating expenses remain the same. Although
your actual costs may be higher or lower, based
on these assumptions your costs would be:
1 YEAR ......................................$87
3 YEARS.....................................$670
5 YEARS...................................$1,281
10 YEARS..................................$2,932
Investment Adviser
- --------------------------------
AMR Investment Services, Inc.
- --------------------------------------------------------------------------------
Prospectus 23 About the Funds
<PAGE> 26
AMERICAN AADVANTAGE
MONEY MARKET MILEAGE FUND(SM)
- --------------------------------------------------------------------------------
Investment Objective
- -------------------------------
Current income, liquidity and the maintenance of a stable price of $1.00 per
share.
Principal Strategies
- ------------------------------
The Fund invests exclusively in high quality variable or fixed rate, U.S. dollar
denominated short-term money market instruments. These securities may include
obligations of the U.S. Government, its agencies and instrumentalities;
corporate debt securities, such as commercial paper, master demand notes, loan
participation interests, medium-term notes and funding agreements; Yankeedollar
and Eurodollar bank certificates of deposit, time deposits, and bankers'
acceptances; asset-backed securities; and repurchase agreements involving the
foregoing obligations.
The Fund will only buy securities with the following credit qualities:
- - rated in the highest short-term categories by two rating organizations, such
as "A-1" by Standard & Poor's Corporation and "P-1" by Moody's Investors
Service, Inc.,
- - rated in the highest short-term category by one rating organization if the
securities are rated only by one rating organization, or
- - unrated securities that are determined to be of equivalent quality by the
Manager.
The Fund invests more than 25% of its total assets in obligations issued by the
banking industry. However, for temporary defensive purposes when the Manager
believes that maintaining this concentration may be inconsistent with the best
interests of shareholders, the Fund may not maintain this concentration.
Securities purchased by the Fund 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 maturity of the Fund will not exceed 90 days.
Risk Factors
- -------------------
- - The yield paid by the Fund is subject to changes in interest rates. As a
result, there is risk that a decline in short-term interest rates would lower
its yield and the overall return on your investment.
- - Although the Fund seeks to preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in the Fund.
- - As with any money market fund, there is the risk that the issuers or
guarantors of securities owned by the Fund will default on the payment of
principal or interest or the obligation to repurchase securities from the
Fund.
Your investment in the Fund is not insured or guaranteed by the U.S. Government
or any financial or government institution.
Investor Profile
- -----------------------
This Fund may be suitable for investors who:
- - seek the preservation of capital and to avoid fluctuations in principal
- - desire regular, monthly income from a highly liquid investment
- - require a short-term vehicle for cash when making long-term investment
decisions
- - seek a rate of return that is potentially higher than certificates of deposit
or savings accounts
- - desire to receive miles in the American Airlines AAdvantage(R) program
- --------------------------------------------------------------------------------
About the Funds 24 Prospectus
<PAGE> 27
AMERICAN AADVANTAGE
MONEY MARKET MILEAGE FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
Historical Performance
- -----------------------------------
The bar chart below provides an indication of risk by showing how the Fund's
performance has varied from year to year. The performance shown in the chart and
table below is a combination of the Fund's performance and that of its
predecessor fund. The Fund was created from a predecessor fund that began
offering its shares on September 1, 1987. Performance results through October
31, 1991 are for the Institutional Class of the predecessor fund, and results
from November 1, 1991 through October 31, 1995 are for the predecessor fund's
Mileage Class. The Fund began offering its shares on November 1, 1995.
Performance results shown from that date through December 31, 1998 are for the
Fund. Because the predecessor fund had lower expenses, its performance was
better than the Fund would have realized in the same period. Past performance is
not necessarily indicative of how the Fund will perform in the future. Investors
may call 1-800-388-3344 to obtain the Fund's current seven-day yield.
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[GRAPH]
<TABLE>
<S> <C>
89.......................................................... 9.47%
90.......................................................... 8.40%
91.......................................................... 6.73%
92.......................................................... 3.76%
93.......................................................... 3.03%
94.......................................................... 3.91%
95.......................................................... 5.67%
96.......................................................... 5.05%
97.......................................................... 5.18%
98.......................................................... 5.11%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: 2.45%
(1/1/89 through 12/31/98) (2nd Quarter 1989)
Lowest Quarterly Return: 0.74%
(1/1/89 through 12/31/98) (2nd & 4th Quarter 1993,
1st Quarter 1994)
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURN
---------------------------
AS OF 12/31/98
---------------------------
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
<S> <C> <C> <C>
MONEY MARKET FUND 5.11% 4.98% 5.61%
</TABLE>
Fees and Expenses
- ----------------------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Money Market Mileage Fund.(1)
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
<TABLE>
<S> <C>
Management Fees 0.10%
Distribution (12b-1) Fees 0.25
Other Expenses 0.34
----
Total Annual Fund Operating Expenses 0.69%
====
Fee Waiver and/or Expense Reimbursement 0.02%(2)
NET EXPENSES 0.67%
</TABLE>
(1) The expense table and the Example below reflect the expenses of both the
Fund and its corresponding Portfolio.
(2) The Manager has contractually agreed to waive Distribution Fees through
October 31, 1999 to the extent that Total Annual Fund Operating Expenses
exceed 0.67%.
Example
-------------
This Example is intended to help you compare the
cost of investing in the Fund with the cost of
investing in other mutual funds. The Example
assumes that you invest $10,000 in the Fund for
the time periods indicated and then redeem all
of your shares at the end of those periods. The
Example also assumes that your investment has a
5% return each year and that the Fund's
operating expenses remain the same. Although
your actual costs may be higher or lower, based
on these assumptions your costs would be:
1 YEAR ..............................................$68
3 YEARS.............................................$219
5 YEARS.............................................$382
10 YEARS............................................$857
Investment Adviser
- -----------------------------
AMR Investment Services, Inc.
- --------------------------------------------------------------------------------
Prospectus 25 About the Funds
<PAGE> 28
AMERICAN AADVANTAGE
MUNICIPAL MONEY MARKET MILEAGE FUND(SM)
- --------------------------------------------------------------------------------
Investment Objective
- -------------------------------
Current income, liquidity and the maintenance of a stable price of $1.00 per
share.
Principal Strategies
- ------------------------------
Under normal market conditions, the Fund invests at least 80% of its net assets
in securities whose interest income is exempt from federal income tax. These
securities may be issued by or on behalf of the governments of U.S. states,
counties, cities, towns, territories, or public authorities. All securities
purchased by the Fund will be guaranteed by the U.S. Government, its agencies,
or instrumentalities; secured by irrevocable letters of credit issued by
qualified banks; or guaranteed by one or more municipal bond insurance policies.
The Fund will only buy securities with the following credit qualities:
- - rated in the highest short-term categories by two rating organizations, such
as "A-1" by Standard & Poor's Corporation and "P-1" by Moody's Investors
Service, Inc.,
- - rated in the highest short-term category by one rating organization if the
securities are rated only by one rating organization, or
- - unrated securities that are determined to be of equivalent quality by the
Manager.
Securities purchased by the Fund 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 maturity of the Fund will not exceed 90 days.
Risk Factors
- -------------------
- - The yield paid by the Fund is subject to changes in interest rates. As a
result, there is risk that a decline in short-term interest rates would lower
its yield and the overall return on your investment.
- - Although the Fund seeks to preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in the Fund.
- - As with any money market fund, there is the risk that the issuers or
guarantors of securities owned by the Fund will default on the payment of
principal or interest or the obligation to repurchase securities from the
Fund.
Your investment in the Fund is not insured or guaranteed by the U.S. Government
or any financial or government institution.
Investor Profile
- -----------------------
This Fund may be suitable for investors who:
- - seek the preservation of capital and to avoid fluctuations in principal
- - desire regular, monthly income that is generally exempt from Federal income
tax
- - require a short-term vehicle for cash when making long-term investment
decisions
- - seek an after-tax rate of return that is potentially higher than certificates
of deposit or savings accounts
- - desire to receive miles in the American Airlines AAdvantage(R) program
- --------------------------------------------------------------------------------
About the Funds 26 Prospectus
<PAGE> 29
AMERICAN AADVANTAGE
MUNICIPAL MONEY MARKET MILEAGE FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
Historical Performance
- -----------------------------------
The bar chart below provides an indication of risk by showing how the Fund's
performance has varied from year to year. The performance shown in the chart and
table below is a combination of the Fund's performance and that of its
predecessor fund. The Fund was created from a predecessor fund that began
offering its shares on November 10, 1993. Performance results through October
31, 1995 are for the predecessor fund's Mileage Class. The Fund began offering
its shares on November 1, 1995. Performance results shown from that date through
December 31, 1998 are for the Fund. Because the predecessor fund had slightly
lower expenses, its performance was slightly better than the Fund would have
realized in the same period. Past performance is not necessarily indicative of
how the Fund will perform in the future. Investors may call 1-800-388-3344 to
obtain the Fund's current seven-day yield.
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[GRAPH]
<TABLE>
<S> <C>
94.......................................................... 2.37%
95.......................................................... 3.48%
96.......................................................... 3.09%
97.......................................................... 3.23%
98.......................................................... 3.06%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: 0.91%
(1/1/94 through 12/31/98) (2nd Quarter 1995)
Lowest Quarterly Return: 0.46%
(1/1/94 through 12/31/98) (1st Quarter 1994)
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
-------------------------------
AS OF 12/31/98
-------------------------------
SINCE
INCEPTION
1 YEAR 5 YEARS (11/10/93)
------ ------- ----------
<S> <C> <C> <C>
MUNICIPAL MONEY MARKET
FUND................... 3.06% 3.04% 3.01%
</TABLE>
Fees and Expenses
- ----------------------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Municipal Money Market Mileage Fund.(1)
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
<TABLE>
<S> <C>
Management Fees 0.10%
Distribution (12b-1) Fees 0.25
Other Expenses 0.48
----
Total Annual Fund Operating Expenses 0.83%
====
Fee Waiver and/or Expense Reimbursement 0.18%(2)
NET EXPENSES 0.65%
</TABLE>
(1) The expense table and the Example below reflect the expenses of both the
Fund and its corresponding Portfolio.
(2) The Manager has contractually agreed to waive Distribution Fees through
October 31, 1999 to the extent that Total Annual Fund Operating Expenses
exceed 0.65%.
Example
-------------
This Example is intended to help you compare the
cost of investing in the Fund with the cost of
investing in other mutual funds. The Example
assumes that you invest $10,000 in the Fund for
the time periods indicated and then redeem all
of your shares at the end of those periods. The
Example also assumes that your investment has a
5% return each year and that the Fund's
operating expenses remain the same. Although
your actual costs may be higher or lower, based
on these assumptions your costs would be:
1 YEAR ......................................$66
3 YEARS.....................................$247
5 YEARS.....................................$443
10 YEARS..................................$1,009
Investment Adviser
- --------------------------------
AMR Investment Services, Inc.
- --------------------------------------------------------------------------------
Prospectus 27 About the Funds
<PAGE> 30
AMERICAN AADVANTAGE
U.S. GOVERNMENT MONEY MARKET MILEAGE FUND(SM)
- --------------------------------------------------------------------------------
Investment Objective
- -------------------------------
Current income, liquidity and the maintenance of a stable price of $1.00 per
share.
Principal Strategies
- ------------------------------
The Fund invests exclusively in obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities and repurchase agreements that are
collateralized by such obligations. Some of these securities are not backed by
the full faith and credit of the U.S. Government. U.S. Government securities
include direct obligations of the U.S. Treasury (such as Treasury bills,
Treasury notes and Treasury bonds).
Securities purchased by the Fund 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 maturity of the Fund will not exceed 90 days.
Risk Factors
- -------------------
- - The yield paid by the Fund is subject to changes in interest rates. As a
result, there is risk that a decline in short-term interest rates would lower
its yield and the overall return on your investment.
- - Although the Fund seeks to preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in the Fund.
Your investment in the Fund is not insured or guaranteed by the U.S. Government
or any financial or government institution.
Investor Profile
- -----------------------
This Fund may be suitable for investors who:
- - seek the preservation of capital and to avoid fluctuations in principal
- - desire regular, monthly income from a highly liquid investment
- - require a short-term vehicle for cash when making long-term investment
decisions
- - seek a rate of return that is potentially higher than certificates of deposit
or savings accounts
- - desire to receive miles in the American Airlines AAdvantage(R) program
Historical Performance
- -----------------------------------
The bar chart below provides an indication of risk by showing how the Fund's
performance has varied from year to year. The performance shown in the chart and
table below is a combination of the Fund's performance and that of its
predecessor fund. The Fund was created from a predecessor fund that began
offering its shares on March 2, 1992. Performance results through October 31,
1993 are for the Institutional Class of the predecessor fund, and from November
1, 1993 through October 31, 1995 are for the predecessor fund's Mileage Class.
The Fund began offering its shares on November 1, 1995. Performance results
shown from that date through December 31, 1998 are for the Fund. Because the
predecessor fund had lower expenses, its performance was better than the Fund
would have realized in the same period. Past performance is not necessarily
indicative of how the Fund will perform in the
- --------------------------------------------------------------------------------
About the Funds 28 Prospectus
<PAGE> 31
AMERICAN AADVANTAGE
U.S. GOVERNMENT MONEY MARKET MILEAGE FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
future. Investors may call 1-800-388-3344 to obtain the Fund's current seven-day
yield.
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[GRAPH]
<TABLE>
<S> <C>
93.......................................................... 3.00%
94.......................................................... 3.79%
95.......................................................... 5.37%
96.......................................................... 4.91%
97.......................................................... 5.04%
98.......................................................... 5.04%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: 1.35%
(1/1/93 through 12/31/98) (2nd Quarter 1995)
Lowest Quarterly Return: 0.70%
(1/1/93 through 12/31/98) (4th Quarter 1993,
1st Quarter 1994)
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
-------------------------------
AS OF 12/31/98
-------------------------------
SINCE
INCEPTION
1 YEAR 5 YEARS (3/2/92)
------ ------- ----------
<S> <C> <C> <C>
U.S. GOVERNMENT MONEY
MARKET FUND 5.04% 4.83% 4.40%
</TABLE>
Fees and Expenses
- ----------------------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of the U.S. Government Money Market Mileage Fund.(1)
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
<TABLE>
<S> <C>
Management Fees 0.10%
Distribution (12b-1) Fees 0.25
Other Expenses 0.31
----
Total Annual Fund Operating Expenses 0.66%
====
Fee Waiver and/or Expense Reimbursement 0.04%(2)
NET EXPENSES 0.62%
</TABLE>
(1) The expense table and the Example below reflect the expenses of both the
Fund and its corresponding Portfolio.
(2) The Manager has contractually agreed to waive Distribution Fees through
October 31, 1999 to the extent that Total Annual Fund Operating Expenses
exceed 0.62%.
Example
- -------------
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and then redeem all
of your shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
1 YEAR ....................................$63
3 YEARS...................................$207
5 YEARS...................................$364
10 YEARS..................................$819
Investment Adviser
- --------------------------------
AMR Investment Services, Inc.
- --------------------------------------------------------------------------------
Prospectus 29 About the Funds
<PAGE> 32
The Manager
- ---------------------
The Trust has retained AMR Investment Services, Inc. to serve as its Manager.
The Manager, located at 4333 Amon Carter Boulevard, Fort Worth, Texas 76155, is
a wholly owned subsidiary of AMR Corporation, the parent company of American
Airlines, Inc. The Manager was organized in 1986 to provide investment
management, advisory, administrative and asset management consulting services.
As of December 31, 1998, the Manager had approximately $20.4 billion of assets
under management, including approximately $7.2 billion under active management
and $13.2 billion as named fiduciary or financial adviser. Of the total,
approximately $14.5 billion of assets are related to AMR Corporation.
The Manager provides or oversees the provision of all administrative, investment
advisory and portfolio management services to the Funds. The Manager
- - develops the investment programs for each Fund,
- - selects and changes investment advisers (subject to requisite approvals),
- - allocates assets among investment advisers,
- - monitors the investment advisers' investment programs and results,
- - coordinates the investment activities of the investment advisers to ensure
compliance with regulatory restrictions,
- - oversees each Fund's securities lending activities and actions taken by the
securities lending agent, and
- - with the exception of the International Equity and S&P 500 Index Funds,
invests the portion of Fund assets which the investment advisers determine
should be allocated to high quality short-term debt obligations.
As compensation for providing management services, the Manager receives an
annualized advisory fee that is calculated and accrued daily, equal to the sum
of:
- - 0.25% of the net assets of the Manager's portion of the Intermediate Bond
Fund,
- - 0.25% of the net assets of the Short-Term Bond Fund, plus
- - 0.10% of the net assets of all other Funds.
In addition, the Balanced, Large Cap Value, Small Cap Value, International
Equity and Intermediate Bond Funds pay the Manager the amounts due to their
respective investment advisers. The Manager then remits these amounts to the
investment advisers.
The Manager also may receive up to 25% of the net annual interest income or up
to 25% of loan fees in regards to security lending activities. Currently the
Manager receives 10% of the net annual interest income from the investment of
cash collateral or 10% of the loan fees posted by borrowers. The Securities and
Exchange Commission ("SEC") has granted exemptive relief that permits the Funds
to invest cash collateral received from securities lending transactions in
shares of one or more private investment companies managed by the Manager.
Subject to the receipt of exemptive relief from the SEC, the Funds may also
invest cash collateral received from securities lending transactions in shares
of one or more registered investment companies managed by the Manager.
The management fees paid by the Funds for the fiscal year ended October 31,
1998, net of reimbursements and shown as a percentage of average net assets,
were as follows:
<TABLE>
<CAPTION>
MANAGEMENT
FUND FEES
---- ------------
<S> <C>
Balanced............................ 0.30%
Large Cap Value..................... 0.30%
Intermediate Bond................... 0.25%
International Equity................ 0.41%
S&P 500 Index....................... 0.08%
Short-Term Bond..................... 0.25%
Money Market........................ 0.10%
Municipal Money Market.............. 0.10%
U.S. Government Money Market........ 0.10%
</TABLE>
William F. Quinn and Nancy A. Eckl have primary responsibility for the
day-to-day operations of the Balanced, Large Cap Value, Small Cap Value,
International Equity and Intermediate Bond Funds, except as indicated otherwise
below. These responsibilities include oversight of the investment advisers,
regular review of each investment adviser's performance and asset allocations
among multiple investment advisers. Mr. Quinn has served as President of the
Manager since its inception in 1986. Ms. Eckl has served as Vice President-Trust
Investments of the Manager since May 1995. Prior to her current position, Ms.
Eckl held the position of Vice President-Finance and Compliance of the Manager
from December 1990 through April 1995.
Michael W. Fields is responsible for the portfolio management of the Short-Term
Bond Fund.
- --------------------------------------------------------------------------------
About the Funds 30 Prospectus
<PAGE> 33
Mr. Fields has been with the Manager since it was founded in 1986 and serves as
Chief Investment Officer and Vice President-Fixed Income Investments.
Equity 500 Index Portfolio Administrator
- ------------------------------------------------------------
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 0.005% 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, at
BT's expense.
The Investment Advisers
- ----------------------------------------
Set forth below is a brief description of the investment advisers for each Fund.
The Manager is the sole investment adviser of the Money Market Funds and the
Short-Term Bond Fund. Except for these Funds and the S&P 500 Index Fund, each
Fund's assets are allocated among the investment advisers by the Manager. The
assets of the Intermediate Bond Fund are allocated by the Manager between the
Manager and another investment adviser. Each investment adviser has discretion
to purchase and sell securities for its segment of a Fund's assets in accordance
with the Fund's objectives, policies, restrictions and more specific strategies
provided by the Manager. Pursuant to an exemptive order issued by the SEC, the
Manager is permitted to enter into new or modified investment advisory
agreements with existing or new investment advisers without approval of a Fund's
shareholders, but subject to approval of the Trust's Board of Trustees ("Board")
and the AMR Investment Services Trust Board ("AMR Trust Board"). The Prospectus
will be supplemented if additional investment advisers are retained or the
contract with any existing investment adviser is terminated.
BANKERS TRUST COMPANY ("BT"), 130 Liberty Street, One Bankers Trust Plaza, New
York, New York 10006, is a New York banking corporation and a wholly owned
subsidiary of Bankers Trust Corporation. BT serves as investment adviser and
administrator to the Equity 500 Index Portfolio. As of December 31, 1998,
Bankers Trust Corporation was the eighth largest bank holding company in the
United States with total assets of approximately $156 billion and approximately
$338 billion in assets under management globally. On November 30, 1998, Bankers
Trust Corporation entered into an Agreement and Plan of Merger with Deutsche
Bank AG under which Bankers Trust Corporation and all of its subsidiaries would
merge with and into a subsidiary of Deutsche Bank AG. The transaction is
contingent upon various regulatory approvals, as well as the approval of the
Equity 500 Index Portfolio's Board of Trustees, the S&P 500 Index Mileage Fund's
Board of Trustees and shareholders.
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, 1998, Barrow had discretionary investment management authority with
respect to approximately $36.3 billion of assets, including approximately $2.0
billion of assets of AMR and its subsidiaries and affiliated entities. Barrow
serves as an investment adviser to the Balanced, Large Cap Value, Intermediate
Bond and Short-Term Bond Funds, although the Manager does not presently intend
to allocate any of the assets in the Short-Term Bond Fund to Barrow.
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, 1998, Brandywine had assets under management totaling approximately
$7.3 billion, including approximately $1.1 billion of assets of AMR and its
subsidiaries and affiliated entities. Brandywine serves as an investment adviser
to the Balanced, Large Cap Value and Small Cap Value Funds.
GSB INVESTMENT MANAGEMENT, INC. ("GSB"), 301 Commerce Street, Fort Worth, Texas
76102, is a professional investment management firm which was founded in 1987.
GSB is wholly owned by United Asset Management Corporation, a Delaware
corporation. As of December 31, 1998, GSB managed approximately $2.5 billion of
assets, including approximately $924.7 million of assets of AMR and its
subsidiaries and affiliated entities. GSB serves as
- --------------------------------------------------------------------------------
Prospectus 31 About the Funds
<PAGE> 34
an investment adviser to the Balanced and Large Cap Value Funds.
HOTCHKIS AND WILEY, 725 South Figueroa Street, Suite 4000, Los Angeles,
California 90017, is a professional investment management firm which was founded
in 1980. Hotchkis and Wiley is a division of Merrill Lynch Asset Management,
L.P., a wholly owned indirect subsidiary of Merrill Lynch & Co., Inc. Assets
under management as of December 31, 1998 were approximately $14.5 billion, which
included approximately $1.9 billion of assets of AMR and its subsidiaries and
affiliated entities. Hotchkis and Wiley serves as an investment adviser to the
Balanced, Large Cap Value, Small Cap Value, and International Equity Funds.
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, 1998,
including funds managed for its parent company, were approximately $30.4
billion, which included approximately $1.2 billion of assets of AMR and its
subsidiaries and affiliated entities. IIA serves as an investment adviser to the
Balanced, Large Cap Value and International Equity Funds.
LAZARD ASSET MANAGEMENT ("LAZARD"), 30 Rockefeller Plaza, New York, New York
10112, is a division of Lazard Freres & Co. LLC, a registered investment adviser
and member of the New York, American and Midwest Stock Exchanges, providing its
clients with a wide variety of investment banking, brokerage and related
services. Lazard provides investment management services to client discretionary
accounts with assets totaling approximately $70 billion as of December 31, 1998.
Lazard serves as an investment adviser to the International Equity Fund.
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,
1998, Templeton had discretionary investment management authority with respect
to approximately $24.7 billion of assets, including approximately $679.7 million
of assets of AMR and its subsidiaries and affiliated entities. Templeton serves
as an investment adviser to the International Equity Fund.
All other assets of American Airlines, Inc. and its affiliates under management
by each respective investment adviser (except assets managed by Barrow under the
HALO Bond Program) are considered when calculating the fees for each investment
adviser other than BT. Including these assets lowers the investment advisory
fees for each applicable Fund.
Valuation of Shares
- -------------------------------
The price of each Fund's shares is based on its net asset value ("NAV") per
share. With the exception of the Money Market Mileage Fund-Mileage Class
("Mileage Class Fund"), the NAV for each Fund is computed by adding total
assets, subtracting all of the Fund's liabilities, and dividing the result by
the total number of shares outstanding. The Mileage Class Fund's NAV is based on
a pro rata allocation of its corresponding Portfolio's investment income,
expenses and total capital gains and losses. Equity securities are valued based
on market value. Debt securities (other than short-term securities) usually are
valued on the basis of prices provided by a pricing service. In some cases, the
price of debt securities is determined using quotes obtained from brokers.
Securities are valued at fair value, as determined in good faith and pursuant to
procedures approved by the Board and the AMR Trust Board, under certain limited
circumstances. For example, fair valuation would be used if market quotations
are not readily available or a material event occurs after the close of the
Exchange which may affect a Security's value. Securities held by the Money
Market Funds are valued in accordance with the amortized cost method, which is
designed to enable those Funds to maintain a stable NAV of $1.00 per share.
Each Fund's NAV per share is determined as of the close of the New York Stock
Exchange ("Exchange"), generally 4:00 p.m. Eastern Time, on each day on which it
is open for business. The Money Market Funds are not open and no NAV is
calculated on Columbus Day and Veteran's Day. The NAV per share of the
International Equity Fund may change on days when shareholders will not be able
to purchase or redeem the Fund's shares.
- --------------------------------------------------------------------------------
About the Funds 32 Prospectus
<PAGE> 35
ABOUT YOUR INVESTMENT
- ------------------------------------------------------------
Purchase and Redemption
of Shares
- --------------
Eligibility
- ---------------
Fund shares are offered 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 Funds.
Purchase Policies
- --------------------------
No sales charges are assessed on the purchase or sale of Fund shares. Shares of
the Funds are offered and purchase orders accepted until the deadlines listed
below on each day on which the Exchange is open for trading. In addition, shares
of the Money Market Funds are not offered and orders are not accepted on
Columbus Day and Veteran's Day.
<TABLE>
<CAPTION>
PURCHASE BY
FUND (EASTERN TIME)*:
---- ----------------
<S> <C>
Municipal Money Market 11:45 a.m.
All other Funds 4:00 p.m.
</TABLE>
* or the close of the Exchange (whichever comes first)
If a purchase order is received in good order prior to the applicable Fund's
deadline, the purchase price will be the NAV per share next determined on that
day. If a purchase order is received in good order after the applicable
deadline, the purchase price will be the NAV of the following day that the Fund
is open for business. Checks to purchase shares are accepted subject to
collection at full face value in U.S. funds and must be drawn in U.S. dollars on
a U.S. bank. The Funds will not accept "starter" checks, credit card checks or
third party checks.
Opening an Account
- -------------------------------
A completed, signed application is required to open an account. If you are not
yet a member of the AAdvantage program, you may join by calling (800) 433-7300.
You may request a Fund application form by:
- - calling (800) 388-3344, or
- - visiting the Funds' web site at www.aafunds.com and downloading an account
application.
Complete the application, sign it and:
Mail to:
American AAdvantage Mileage Funds
P.O. Box 419643
Kansas City, MO 64141-6643
Redemption Policies
- ------------------------------
Shares of any Fund may be redeemed by telephone or mail on any day that the Fund
is open for business. The redemption price will be the NAV next determined after
a redemption order is received in good order. For assistance with completing a
redemption request, please call (800) 388-3344. Except for the Money Market
Funds, proceeds from redemption orders received by 4:00 p.m. Eastern Time
generally are transmitted to shareholders on the next day that the Funds are
open for business. Proceeds from redemptions requested for the Money Market
Funds by the following deadlines will generally be wired to shareholders on the
same day.
<TABLE>
<CAPTION>
SAME DAY WIRE
FUND REDEMPTION ORDER DEADLINE:*
- ---- ---------------------------
<S> <C>
Money Market 2:00 p.m. Eastern Time
Municipal Money
Market 11:45 a.m. Eastern Time
U.S. Government Money
Market 2:00 p.m. Eastern Time
</TABLE>
* Or the close of the Exchange (whichever comes first)
In any event, proceeds from a redemption order for any Fund will be transmitted
to a shareholder by no later than seven days after the receipt of a redemption
request in good order. Delivery of proceeds from shares purchased by check or
pre-authorized automatic investment may be delayed until the funds have cleared,
which may take up to 15 days.
The Funds reserve the right to suspend redemptions or postpone the date of
payment (i) when the Exchange is closed (other than for customary weekend and
holiday closings); (ii) when trading on the Exchange is restricted; (iii) when
the SEC determines that an emergency exists so that disposal of a Fund's
investments or determination of its NAV is not reasonably practicable; or (iv)
by order of the SEC for protection of the Funds' shareholders.
Although the Funds intend to redeem shares in cash, each Fund reserves the right
to pay the redemption price in whole or in part by a distribution of readily
marketable securities held by the applicable Fund's corresponding Portfolio.
Unpaid dividends credited to an account up to the date of redemption of all
shares of a Money Market Fund generally will be paid at the time of redemption.
- --------------------------------------------------------------------------------
Prospectus 33 About Your Investment
<PAGE> 36
<TABLE>
<CAPTION>
HOW TO PURCHASE SHARES
To Make an Initial Purchase To Add to an Existing Account
<S> <C>
By Check
- - Make check payable to American AAdvantage Mileage Funds Include the shareholder's account number, Fund name and
- - Include the Fund name and Fund number on the check Fund number on the check. Mail check ($50 minimum) to:
- - Mail check ($2,500 minimum) to:
American AAdvantage Mileage Funds
P.O. Box 419643 American AAdvantage Mileage Funds
Kansas City, MO 64141-6643 P.O. Box 419643
Kansas City, MO 64141-6643
By Wire
If your account has been established, you may call (800) Call (800) 388-3344 to purchase shares by wire. Send a bank
388-3344 to purchase shares by wire. Send a bank wire wire ($500 minimum) to State Street Bank & Trust Co. with
($2,500 minimum) to State Street Bank & Trust Co. with these instructions:
these instructions:
- - ABA# 0110-0002-8; AC-9905-342-3
- - Attn: American AAdvantage Mileage Funds - ABA# 0110-0002-8; AC-9905-342-3
- - the Fund name and Fund number - Attn: American AAdvantage Mileage Funds
- - account number and registration - the Fund name and Fund number
- shareholder's account number and registration
By Pre-Authorized Automatic Investment
- - Fill in required information on the account application, - Funds will be transferred automatically from your bank
including amount ($50 minimum) account via Automated Clearing House ("ACH") on or about
- - Attach a voided check to the account application the 5th day of each month or quarter, depending upon
which periods you specify.
By Exchange
- - Send a written request to the address above or call (800) - You may purchase shares of a Fund by exchanging shares
388-3344 from another American AAdvantage Mileage Fund if you have
- - A $2,500 minimum is required to establish a new account owned shares of the other Fund for at least 15 days.
in another American AAdvantage Mileage Fund by making an - The minimum amount for each exchange is $50.
exchange.
</TABLE>
- --------------------------------------------------------------------------------
About Your Investment 34 Prospectus
<PAGE> 37
<TABLE>
<CAPTION>
HOW TO REDEEM SHARES
Method Additional Information
<S> <C>
By Telephone
Call (800) 388-3344 to request a redemption. - Telephone redemption orders are limited to $25,000 within
any 30 day period.
- Proceeds will generally be mailed only to the account
address of record or transmitted by wire to a commercial
bank designated on the account application form.
By Mail
Write a letter of instruction including - Proceeds will only be mailed to the account address of
- - the Fund name and Fund number record or transmitted by wire to a commercial bank
- - shareholder account number account designated on the account application form.
- - shares or dollar amount to be redeemed
- - authorized signature(s) of all persons required to sign A signature guarantee is required for redemption orders:
for the account - in amounts of $25,000 or more
Mail to: - with a request to send the proceeds to an address or
American AAdvantage Mileage Funds P.O. Box 419643 Kansas commercial bank account other than the address or
City, MO 64141-6643 commercial bank account designated on the account
application, or
- for an account whose address has changed within the last
30 days.
Call (800) 388-3344 for instructions and further
assistance.
By Check
(Money Market Funds' shareholders only) - Minimum check amount is $100
Choose the check writing feature on the account - A $2 service fee per check is charged for check copies
application.
By Pre-Authorized Automatic Redemption
- - Fill in required information on the account application, - Proceeds will be transferred automatically from your Fund
including amount ($100 minimum). account to your bank account via ACH on or about the 15th
day of each month.
By Exchange
- - Send a written request to the address above or call (800) - You may sell shares of a Fund in exchange for shares of
388-3344 to exchange shares. another American AAdvantage Mileage Fund if you have
owned shares of the Fund for at least 15 days.
- The minimum amount for each exchange is $50.
</TABLE>
- --------------------------------------------------------------------------------
Prospectus 35 About Your Investment
<PAGE> 38
General Policies
- ------------------------
If a shareholder's account balance in any Fund falls below $2,500, the
shareholder may be asked to increase the balance. If the account balance remains
below $2,500 after 45 days, the Funds reserve the right to close the account and
send the proceeds to the shareholder. The Manager 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.
The following policies apply to instructions you may provide to the Funds by
telephone:
- - The Funds, their officers, trustees, directors, employees, or agents are not
responsible for the authenticity of instructions provided by telephone, nor
for any loss, liability, cost or expense incurred for acting on them.
- - The Funds employ procedures reasonably designed to confirm that instructions
communicated by telephone are genuine.
- - Due to the volume of calls or other unusual circumstances, telephone
redemptions may be difficult to implement during certain time periods.
The Funds reserve the right to:
- - reject any order for the purchase of shares and to limit or suspend, without
prior notice, the offering of shares,
- - modify or terminate the exchange privilege at any time,
- - limit the number of exchanges between Funds an investor may exercise,
- - seek reimbursement from you for any related loss incurred if your payment for
the purchase of Fund shares by check does not clear your bank, and
Third parties, such as broker-dealers, who offer Fund shares, may charge
transaction fees and set different minimum investments or limitations on
purchasing or redeeming shares.
Distributions and Taxes
- ---------------------------------------
The Funds distribute most or all of their net earnings in the form of dividends
from net investment income and distributions of realized net capital gains and
gains from certain foreign currency transactions. Unless the account application
instructs otherwise, distributions will be reinvested in additional Fund shares.
Monthly distributions are paid to shareholders on the first business day of the
following month.
Distributions are paid as follows:
<TABLE>
<CAPTION>
OTHER
DISTRIBUTIONS
FUND DIVIDENDS PAID PAID
- ---- -------------- -------------
<S> <C> <C>
Balanced Annually Annually
Large Cap Value Annually Annually
Small Cap Value Annually Annually
International Equity Annually Annually
S&P 500 Index April, July, October Annually
and December
Intermediate Bond Monthly Annually
Short-Term Bond Monthly Annually
Money Market Monthly Monthly
Municipal Money Monthly Monthly
Market
U.S. Government Money Monthly Monthly
Market
</TABLE>
Usually, any dividends (except those paid by the Municipal Money Market Fund)
and distributions of net realized gains are taxable events. Shareholders may
realize a taxable gain or loss when selling or exchanging shares (other than
shares of the Money Market Funds). That gain or loss may be treated as a
short-term or long-term capital gain, depending on how long the sold or
exchanged shares were held. The following table outlines the typical tax
liabilities for transactions in taxable accounts:
<TABLE>
<CAPTION>
TYPE OF TRANSACTION TAX STATUS
- ------------------- ----------
<S> <C>
Dividends from net investment Ordinary income rate
income*
Distributions of realized net Ordinary income rate
short-term capital gains*
Distributions of gains from Ordinary income rate
certain foreign currency
transactions*
Distributions of realized net Long-term capital gains
long-term capital gains* rate
Sales or exchanges of shares owned Long-term capital gains
for more than one year or losses
Sales or exchanges of shares owned Net gains are treated as
for less than one year ordinary income;
net losses are subject
to special rules
</TABLE>
* whether reinvested or taken in cash
Some foreign countries may impose taxes on dividends paid to and gains realized
by the International Equity Fund. The Fund may treat these taxes as a deduction
or, under certain conditions, "flow the tax through" to shareholders. In the
latter event, shareholders may either deduct the taxes or use them to calculate
a credit against their federal income tax.
- --------------------------------------------------------------------------------
About Your Investment 36 Prospectus
<PAGE> 39
The Municipal Money Market Fund designates most of its distributions as
"exempt-interest dividends," which may be excluded from gross income. If the
Fund earns taxable income from any of its investments, that income will be
distributed as a taxable dividend. If the Fund invests in private activity
obligations, shareholders will be required to treat a portion of the
exempt-interest dividends they receive as a "tax preference item" in determining
their liability for the federal alternative minimum tax ("AMT"). Some states
exempt from income tax the interest on their own obligations and on obligations
of governmental agencies and municipalities in the state; accordingly, each year
shareholders will receive tax information on the Fund's exempt-interest income
by state.
This is only a summary of some of the important income tax considerations that
may affect Fund shareholders. Shareholders should consult their tax adviser
regarding specific questions as to the effect of federal, state or local income
taxes on an investment in the Funds.
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 travel awards ("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 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.
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.
- --------------------------------------------------------------------------------
Prospectus 37 About Your Investment
<PAGE> 40
ADDITIONAL INFORMATION
- ------------------------------------------------------------
Distribution of Trust Shares
- ----------------------------------------------
The Trust has adopted a Distribution Plan in accordance with Rule 12b-1 under
the Investment Company Act of 1940 ("1940 Act") which authorizes the use of any
fees received by the Manager in accordance with the Administrative Services and
Management Agreements, and any fees received by the investment advisers pursuant
to their Advisory Agreements with the Manager, to be used for the sale and
distribution of Fund shares. 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 primary
expenses expected to be incurred under the Plan are advertising and
participation in the AAdvantage program.
Master-Feeder Structure
- --------------------------------------
The Funds operate under a master-feeder structure. This means that each Fund is
a "feeder" fund that invests all of its investable assets in a "master" fund
with the same investment objective. The "master" fund purchases securities for
investment. The master-feeder structure works as follows:
Investor
-----------------------
purchase shares of
-----------------------
Feeder Fund
-----------------------
which invests in
-----------------------
Master Fund
-----------------------
which buys
-----------------------
Investment Securities
-----------------------
Each Fund can withdraw its investment in its corresponding Portfolio at any time
if the Board determines that it is in the best interest of the Fund and its
shareholders to do so. If this happens, the Fund's assets will be invested
according to the investment policies and restrictions described in this
Prospectus.
Year 2000
- -----------------
The Funds could be affected adversely if the computer systems used by the
Manager, the Funds' other service providers, or companies in which the Funds
invest do not properly process and calculate information that relates to dates
beginning on January 1, 2000 and beyond. Due to the Funds' reliance on various
service providers to perform essential functions, each of the Funds could have
difficulty calculating its NAV, processing orders for share redemptions and
delivering account statements and other information to shareholders. The
International Equity Mileage Fund could experience difficulties in effecting
transactions if any of its foreign subcustodians, or if foreign broker-dealers
or foreign markets are not ready for the Year 2000. The Manager has taken steps
that it believes are reasonably designed to address the potential failure of
computer systems used by the Manager and the Funds' service providers to address
the Year 2000 issue. There can be no assurance that the steps taken by the
Manager will be sufficient to avoid any adverse impact.
In evaluating current and potential portfolio positions, Year 2000 is one of the
factors that each Fund's investment advisers take into consideration. The Funds'
investment advisers will rely upon public filings and other statements made by
companies regarding their Year 2000 readiness. Issuers in countries outside of
the U.S. may not be required to make the level of disclosure regarding Year 2000
readiness that is required in the U.S. If the value of a Fund's investment is
adversely affected by a Year 2000 problem, the NAV of the Fund may be affected
as well.
Financial Highlights
- ---------------------------------
The financial highlights tables are intended to help you understand each Fund's
financial performance for the past five fiscal years (or, if shorter, the period
of the Fund's operations). Certain information reflects financial results for a
single Fund share. The total returns in the table represent the rate that an
investor would have earned (or lost) on an investment in the Fund (assuming
reinvestment of all dividends and distributions). Financial highlights are not
available for the Small Cap Value Mileage Fund because as of October 31, 1998,
it had not commenced active operations. Except for the S&P 500 Index Mileage
Fund, each Fund's highlights were audited by Ernst & Young LLP, independent
auditors. The financial highlights of the S&P 500
- --------------------------------------------------------------------------------
Additional Information 38 Prospectus
<PAGE> 41
Index Mileage Fund were audited by PricewaterhouseCoopers LLP, independent
auditors. More financial information about the Funds is found in their Annual
Report, which you may obtain upon request.
<TABLE>
<CAPTION>
BALANCED MILEAGE FUND
------------------------------
YEAR ENDED OCTOBER 31,
------------------------------
1998 1997 1996(A)(C)
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: ------ ------ ----------
<S> <C> <C> <C>
Net asset value, beginning of period(B)..................... $18.32 $16.01 $13.97
Income from investment operations
Net investment income..................................... 0.57(D) 0.58(D) 0.49(D)
Net gains on securities (realized and unrealized)....... 0.93(D) 2.44(D) 1.65(D)
------ ------ ------
Total from investment operations............................ 1.50 3.02 2.14
------ ------ ------
Less distributions:
Dividends from net investment income...................... (0.58) (0.49) (0.10)
Distributions from net realized gains on securities....... (1.16) (0.22) --
------ ------ ------
Total distributions......................................... (1.74) (0.71) (0.10)
------ ------ ------
Net asset value, end of period.............................. $18.08 $18.32 $16.01
====== ====== ======
Total return................................................ 8.74% 19.52% 15.97%
====== ====== ======
Ratios and supplemental data:
Net assets, end of period (in thousands).................. $3,808 $3,437 $2,495
Ratios to average net assets(E)
Expenses................................................ 0.99%(D) 0.99%(D) 1.01%(D)
Net investment income................................... 3.16%(D) 3.45%(D) 3.58%(D)
Portfolio turnover rate(F).................................. 87% 105% 76%
</TABLE>
(A)The Balanced Mileage Fund commenced active operations on November 1, 1995.
(B)The net asset value has been adjusted for a stock split which occurred on
November 1, 1995 in the ratio of 1.43169.
(C)Brandywine Asset Management, Inc. replaced Capital Guardian Trust Company as
an investment adviser to the Fund as of April 1, 1996.
(D)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.
(E)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 2.93% and 1.66%, respectively, for the year ended
October 31, 1996, 1.83% and 2.61%, respectively, for the year ended October
31, 1997, and 1.74% and 2.41%, respectively, for the year ended October 31,
1998.
(F)Portfolio turnover rate is that of the Portfolio.
- --------------------------------------------------------------------------------
Prospectus 39 Additional Information
<PAGE> 42
<TABLE>
<CAPTION>
LARGE CAP VALUE MILEAGE FUND
----------------------------------
YEAR ENDED OCTOBER 31,
----------------------------------
1998(B) 1997 1996(A)(D)
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: ------- ------- ----------
<S> <C> <C> <C>
Net asset value, beginning of period(C)..................... $ 23.72 $ 19.35 $15.94
Income from investment operations
Net investment income..................................... 0.45(E) 0.31(E) 0.34(E)
Net gains on securities (realized and unrealized)....... 0.92(E) 4.87(E) 3.16(E)
------- ------- ------
Total from investment operations............................ 1.37 5.18 3.50
------- ------- ------
Less distributions:
Dividends from net investment income...................... (0.39) (0.34) (0.09)
Distributions from net realized gains on securities....... (1.27) (0.47) --
------- ------- ------
Total distributions......................................... (1.66) (0.81) (0.09)
------- ------- ------
Net asset value, end of period.............................. $ 23.43 $ 23.72 $19.35
======= ======= ======
Total return................................................ 6.01% 27.60% 22.77%
======= ======= ======
Ratios and supplemental data:
Net assets, end of period (in thousands).................. $10,015 $12,513 $6,234
Ratios to average net assets(F)
Expenses................................................ 0.98%(E) 0.99%(E) 1.00%(E)
Net investment income................................... 1.46%(E) 1.78%(E) 2.13%(E)
Portfolio turnover rate(G).................................. 40% 35% 40%
</TABLE>
(A)The Large Cap Value Mileage Fund commenced active operations on November 1,
1995.
(B)Prior to March 1, 1999, the Large Cap Value Mileage Fund was known as the
American AAdvantage Growth and Income Mileage Fund.
(C)The net asset value has been adjusted for a stock split which occurred on
November 1, 1995 in the ratio of 1.254705.
(D)Brandywine Asset Management, Inc. replaced Capital Guardian Trust Company as
an investment adviser to the Fund as of April 1, 1996.
(E)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.
(F)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 1.88% and 1.25%, respectively, for the year ended
October 31, 1996, 1.31% and 1.46%, respectively, for the year ended October
31, 1997, and 1.21% and 1.23%, respectively, for the year ended October 31,
1998.
(G)Portfolio turnover rate is that of the Portfolio.
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY
MILEAGE FUND
---------------------------
YEAR ENDED OCTOBER 31,
---------------------------
1998 1997 1996(A)
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: ------ ------ -------
<S> <C> <C> <C>
Net asset value, beginning of period(B)..................... $17.67 $15.31 $13.15
Income from investment operations
Net investment income..................................... 0.25(C) 0.25(C) 0.20(C)
Net gains on securities (realized and unrealized)....... 0.33(C) 2.52(C) 2.03(C)
------ ------ ------
Total from investment operations............................ 0.58 2.77 2.23
------ ------ ------
Less distributions:
Dividends from net investment income...................... (0.27) (0.18) (0.07)
Distributions from net realized gains on securities....... (0.42) (0.23) --
------ ------ ------
Total distributions......................................... (0.69) (0.41) (0.07)
------ ------ ------
Net asset value, end of period.............................. $17.56 $17.67 $15.31
====== ====== ======
Total return................................................ 3.49% 18.44% 16.58%
====== ====== ======
Ratios and supplemental data:
Net assets, end of period (in thousands).................. $5,356 $5,219 $3,387
Ratios to average net assets(D)
Expenses................................................ 1.47%(C) 1.47%(C) 1.48%(C)
Net investment income................................... 1.32%(C) 1.61%(C) 1.63%(C)
Portfolio turnover rate(E).................................. 24% 15% 19%
</TABLE>
(A)The International Equity Mileage Fund commenced active operations on November
1, 1995.
(B)The net asset value has been adjusted for a stock split which occurred on
November 1, 1995 in the ratio of 1.520913.
(C)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.
(D)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 2.71% and 0.40%, respectively, for the year ended
October 31, 1996, 1.68% and 1.40%, respectively, for the year ended October
31, 1997, and 1.65% and 1.14%, respectively, for the year ended October 31,
1998.
(E)Portfolio turnover rate is that of the Portfolio.
- --------------------------------------------------------------------------------
Additional Information 40 Prospectus
<PAGE> 43
<TABLE>
<CAPTION>
S&P 500 INDEX
MILEAGE FUND
-------------
MARCH 2 TO
DECEMBER 31,
1998(A)
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: -------------
<S> <C>
Net asset value, beginning of period........................ $10.00
Income from investment operations
Net investment income..................................... 0.10
Net gains on securities (realized and unrealized)(B)...... 1.78
------
Total from investment operations............................ 1.88
------
Less distributions:
Dividends from net investment income...................... (0.10)
Distributions from net realized gains on securities....... --
------
Total distributions......................................... (0.10)
------
Net asset value, end of period.............................. $11.78
======
Total return................................................ 18.92%
Ratios and supplemental data:
Net assets, end of period (in thousands).................. $2,551
Ratios to average net assets (annualized)(B)
Net investment income................................... 1.00%
Expenses................................................ 0.55%
Decrease reflected in above expense ratio due to
absorption of expenses by Bankers Trust and the
Manager................................................ 2.81%
Portfolio turnover rate (annualized)(C)..................... 4%
</TABLE>
(A)The S&P 500 Index Mileage Fund commenced active operations on March 2, 1998.
(B)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
Equity 500 Index Portfolio.
(C)Portfolio turnover rate is that of the Equity 500 Index Portfolio.
<TABLE>
<CAPTION>
INTERMEDIATE BOND
MILEAGE FUND
-----------------
MARCH 2 TO
OCTOBER 31,
1998(A)
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: -----------------
<S> <C>
Net asset value, beginning of period........................ $10.00
Income from investment operations
Net investment income..................................... 0.38(B)
Net gains on securities (realized and unrealized)......... 0.40(B)
------
Total from investment operations............................ 0.78
------
Less distributions:
Dividends from net investment income...................... (0.38)
Distributions from net realized gains on securities....... --
------
Total distributions......................................... (0.38)
------
Net asset value, end of period.............................. $10.40
======
Total return................................................ 7.94%
======
Ratios and supplemental data:
Net assets, end of period (in thousands).................. $ 58
Ratios to average net assets (annualized)(C)
Expenses................................................ 0.87%(B)
Net investment income................................... 5.53%(B)
Portfolio turnover rate(D).................................. 181%
</TABLE>
(A)The Intermediate Bond Mileage Fund commenced active operations on March 2,
1998.
(B)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.
(C)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 116.95% and (110.55%), respectively.
(D)Portfolio turnover rate is that of the Portfolio.
- --------------------------------------------------------------------------------
Prospectus 41 Additional Information
<PAGE> 44
<TABLE>
<CAPTION>
SHORT-TERM BOND
MILEAGE FUND
----------------------------
YEAR ENDED OCTOBER 31,
----------------------------
1998(B) 1997 1996(A)
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: ------- ------ -------
<S> <C> <C> <C>
Net asset value, beginning of period(C)..................... $ 9.60 $ 9.65 $ 9.83
Income from investment operations
Net investment income..................................... 0.60(D) 0.61(D) 0.59(D)
Net gains (losses) on securities (realized and
unrealized)............................................ -- (0.05)(D) (0.18)(D)
------ ------ ------
Total from investment operations............................ 0.60 0.56 0.41
------ ------ ------
Less distributions:
Dividends from net investment income...................... (0.60) (0.61) (0.59)
------ ------ ------
Total distributions......................................... (0.60) (0.61) (0.59)
------ ------ ------
Net asset value, end of period.............................. $ 9.60 $ 9.60 $ 9.65
====== ====== ======
Total return................................................ 6.45% 5.90% 4.55%
====== ====== ======
Ratios and supplemental data:
Net assets, end of period (in thousands).................. $1,494 $1,226 $1,168
Ratios to average net assets(E)
Expenses................................................ 0.85%(D) 0.85%(D) 0.86%(D)
Net investment income................................... 6.24%(D) 6.37%(D) 6.08%(D)
Portfolio turnover rate(F).................................. 74% 282% 304%
</TABLE>
(A)The Short-Term Bond Mileage Fund commenced active operations on November 1,
1995.
(B)Prior to March 1, 1998, the Short-Term Bond Mileage Fund was known as the
American AAdvantage Limited-Term Income Mileage Fund.
(C)The net asset value per share was adjusted for a stock split which occurred
on November 1, 1995 in the ratio of 2.034588.
(D)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.
(E)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 3.19% and 3.75%, respectively, for the year ended
October 31, 1996, 3.01% and 4.21%, respectively, for the year ended October
31, 1997, and 2.74% and 4.35%, respectively, for the year ended October 31,
1998.
(F)Portfolio turnover rate is that of the Portfolio.
<TABLE>
<CAPTION>
MONEY MARKET MILEAGE FUND-
MILEAGE CLASS
------------------------------
YEAR ENDED OCTOBER 31,
------------------------------
1998 1997 1996(A)
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: -------- -------- --------
<S> <C> <C> <C>
Net asset value, beginning of period........................ $ 1.00 $ 1.00 $ 1.00
-------- -------- --------
Net investment income..................................... 0.05(B) 0.05(B) 0.05(B)
Less dividends from net investment income................. (0.05) (0.05) (0.05)
-------- -------- --------
Net asset value, end of period.............................. $ 1.00 $ 1.00 $ 1.00
======== ======== ========
Total return................................................ 5.18% 5.14% 5.12%
======== ======== ========
Ratios and supplemental data:
Net assets, end of period (in thousands).................. $114,844 $104,947 $106,709
Ratios to average net assets(c)
Expenses................................................ 0.66%(B) 0.67%(B) 0.67%(B)
Net investment income................................... 5.07%(B) 5.02%(B) 5.02%(B)
</TABLE>
(A)The Money Market Mileage Fund commenced active operations on November 1,
1995. On January 29, 1996, existing shares of the Fund were designated as
Mileage Class shares.
(B)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.
(C)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 0.78% and 4.91%, respectively, for the year ended
October 31, 1996, 0.74% and 4.95%, respectively, for the year ended October
31, 1997, and 0.69% and 5.04%, respectively, for the year ended October 31,
1998.
- --------------------------------------------------------------------------------
Additional Information 42 Prospectus
<PAGE> 45
<TABLE>
<CAPTION>
MUNICIPAL MONEY MARKET
MILEAGE FUND
-----------------------------
YEAR ENDED OCTOBER 31,
-----------------------------
1998 1997 1996
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: ------- ------- -------
<S> <C> <C> <C>
Net asset value, beginning of period........................ $ 1.00 $ 1.00 $ 1.00
------- ------- -------
Net investment income..................................... 0.03(A) 0.03(A) 0.03(A)
Less dividends from net investment income................. (0.03) (0.03) (0.03)
------- ------- -------
Net asset value, end of period.............................. $ 1.00 $ 1.00 $ 1.00
======= ======= =======
Total return................................................ 3.16% 3.18% 3.19%
======= ======= =======
Ratios and supplemental data:
Net assets, end of period (in thousands).................. $24,742 $26,564 $28,726
Ratios to average net assets(B)
Expenses................................................ 0.65%(A) 0.65%(A) 0.66%(A)
Net investment income................................... 3.12%(A) 3.13%(A) 3.14%(A)
</TABLE>
(A)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.
(B)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 0.80% and 3.00%, respectively, for the year ended
October 31, 1996, 0.78% and 3.00%, respectively, for the year ended October
31, 1997 and 0.83% and 2.94%, respectively, for the year ended October 31,
1998.
<TABLE>
<CAPTION>
U.S. GOVERNMENT MONEY
MARKET MILEAGE FUND
-----------------------------
YEAR ENDED OCTOBER 31,
-----------------------------
1998 1997(A) 1996
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: ------- ------- -------
<S> <C> <C> <C>
Net asset value, beginning of period........................ $ 1.00 $ 1.00 $ 1.00
------- ------- -------
Net investment income..................................... 0.05(B) 0.05(B) 0.05(B)
Less dividends from net investment income................. (0.05) (0.05) (0.05)
------- ------- -------
Net asset value, end of period.............................. $ 1.00 $ 1.00 $ 1.00
======= ======= =======
Total return................................................ 5.13% 5.00% 4.98%
======= ======= =======
Ratios and supplemental data:
Net assets, end of period (in thousands).................. $33,713 $28,791 $10,638
Ratios to average net assets(C)
Expenses................................................ 0.62%(B) 0.62%(B) 0.62%(B)
Net investment income................................... 5.02%(B) 4.91%(B) 4.82%(B)
</TABLE>
(A)Prior to March 1, 1997, the American AAdvantage U.S. Government Money Market
Mileage Fund was known as the American AAdvantage U.S. Treasury Money Market
Mileage Fund and operated under different investment policies.
(B)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.
(C)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 1.11% and 4.33%, respectively, for the year ended
October 31, 1996, 0.78% and 4.75%, respectively, for the year ended October
31, 1997 and 0.66% and 4.98%, respectively, for the year ended October 31,
1998.
- --------------------------------------------------------------------------------
Prospectus 43 Additional Information
<PAGE> 46
ADDITIONAL INFORMATION
ADDITIONAL INFORMATION ABOUT THE FUNDS IS FOUND IN THE DOCUMENTS LISTED BELOW.
REQUEST A FREE COPY OF THESE DOCUMENTS BY CALLING (800) 388-3344.
ANNUAL REPORT/SEMI-ANNUAL REPORT
The Fund's Annual and Semi-Annual Reports list each Fund's actual investments as
of the reports date. They also include a discussion by the Manager of market
conditions and investment strategies that significantly affected the Fund's
performance. The report of the Fund's independent auditors is included in the
Annual Report.
STATEMENT OF ADDITIONAL INFORMATION
The SAI contains more details about the Fund's and their investment policies.
The SAI is incorporated in this Prospectus by reference (it is legally part of
this Prospectus). A current SAI is on file with the Securities and Exchange
Commission (SEC).
TO OBTAIN MORE INFORMATION ABOUT THE FUNDS OR TO REQUEST A COPY OF THE DOCUMENTS
LISTED ABOVE:
BY TELEPHONE:
Call (800) 388-3344
BY MAIL:
American AAdvantage Funds
P.O. Box 619003, MD5645
DFW Airport, TX 75261-9003
BY E-MAIL:
[email protected]
ON THE INTERNET:
Visit our website at www.aafunds.com
Visit the SEC website at www.sec.gov
Copies of these documents may also be obtained from the SEC Public Reference
Room in Washington, D.C. The Public Reference Room can be reached at (800)
732-0330 or by mailing a request, including a duplicating fee to: SEC's Public
Reference Section, 450 5th Street NW, Washington, D.C. 20549-6009.
FUND SERVICE PROVIDERS:
<TABLE>
<S> <C> <C> <C>
CUSTODIAN TRANSFER AGENT INDEPENDENT AUDITORS DISTRIBUTOR
STATE STREET BANK NATIONAL FINANCIAL ERNST & YOUNG LLP BROKERS TRANSACTION
AND TRUST DATA SERVICES Dallas, Texas SERVICES
Boston, Massachusetts Kansas City, Missouri Dallas, Texas
PRICEWATERHOUSECOOPERS LLP
Baltimore, Maryland
(S&P 500 Index Fund)
</TABLE>
[AMERICAN AADVANTAGE FUNDS LOGO]
SEC File Number 811-9018
American Airlines is not responsible for investments made in the American
AAdvantage Mileage Funds. American AAdvantage Mileage Funds is a registered
service mark of AMR Corporation. American AAdvantage Balanced Mileage Fund,
American AAdvantage Large Cap Value Mileage Fund, American AAdvantage
International Equity Mileage Fund, American AAdvantage Intermediate Bond Mileage
Fund, American AAdvantage Short-Term Bond Mileage Fund, American AAdvantage
Small Cap Value 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.
<PAGE> 47
STATEMENT OF ADDITIONAL INFORMATION
AMERICAN AADVANTAGE MILEAGE FUNDS(R)
MARCH 1, 1999
The American AAdvantage Balanced Mileage Fund(SM) (the "Balanced Fund"),
American AAdvantage Large Cap Value Mileage Fund(SM), formerly known as the
American AAdvantage Growth and Income Mileage Fund prior to March 1, 1999 (the
"Large Cap Value 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 Fund"), American AAdvantage Intermediate Bond
Mileage Fund(SM) (the "Intermediate Bond Fund"), American AAdvantage Small Cap
Value Mileage Fund(SM) (the "Small Cap Fund"), American AAdvantage Short-Term
Bond Mileage Fund(SM), formerly known as the American AAdvantage Limited-Term
Income Mileage Fund prior to March 1, 1998 (the "Short-Term Bond 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 known as the American AAdvantage U.S. Treasury Money
Market Mileage Fund prior to March 1, 1997 (the "U.S. Government Money Market
Fund"), (individually, a "Fund" and, collectively, the "Funds") are ten
separate investment portfolios of the American AAdvantage Mileage Funds (the
"Mileage Trust"), a no load, open-end diversified management investment company
organized as a Massachusetts business trust on February 22, 1995. Each Fund
constitutes a separate investment portfolio with a distinct investment
objective, and distinct purpose and strategy. All Funds consist of one class of
shares, except for the Money Market Fund, which consists of two classes of
shares to meet the needs of different groups of investors. 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, 1999 ("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.
<PAGE> 48
TABLE OF CONTENTS
<TABLE>
<S> <C>
Non-Principal Investment Strategies and Risks............................. 2
Investment Restrictions................................................... 3
Temporary Defensive Position.............................................. 7
Portfolio Turnover........................................................ 7
Trustees and Officers of the Mileage Trust and the AMR Trust.............. 8
Trustees and Officers of the Equity 500 Index Portfolio................... 10
Control Persons and 5% Shareholders....................................... 11
Investment Advisory Agreements............................................ 13
Management, Administrative Services and Distribution Fees................. 14
Other Service Providers................................................... 16
Portfolio Securities Transactions......................................... 16
Redemptions in Kind....................................................... 18
Net Asset Value........................................................... 18
Tax Information........................................................... 19
Yield and Total Return Quotations......................................... 21
Description of the Mileage Trust.......................................... 24
Other Information......................................................... 25
Financial Statements...................................................... 37
Appendix A................................................................ 38
</TABLE>
NON-PRINCIPAL INVESTMENT STRATEGIES AND RISKS
In addition to the investment strategies described in the Prospectus, the
Balanced Fund, the Large Cap Value Fund, the International Equity Fund, and the
Small Cap Value Fund may:
Invest up to 20% of total assets in debt securities that are investment
grade at the time of purchase, including obligations of the U.S.
Government, its agencies and instrumentalities, corporate debt securities,
mortgage-backed securities, asset-backed securities, master-demand notes,
Yankeedollar and Eurodollar bank certificates of deposit, time deposits,
bankers' acceptances, commercial paper and other notes, and other debt
securities. Investment grade securities include securities issued or
guaranteed by the U.S. Government, its agencies and instrumentalities, as
well as securities rated in one of the four highest rating categories by
all rating organizations rating that security (such as Standard & Poor's
Corporation or Moody's Investors Service, Inc.). Obligations rated in the
fourth highest rating category are limited to 25% of each of these Funds'
debt allocations. The International Equity Fund may invest up to 20% of its
total assets in non-U.S. debt securities that are rated at the time of
purchase 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. These
Funds, at the discretion of the investment advisers, may retain a debt
security that has been downgraded below the initial investment criteria.
Each Fund may:
1. Engage in dollar rolls or purchase or sell securities on a when-issued
or forward commitment basis. The purchase or sale of when-issued securities
enables an investor to hedge against anticipated changes in interest rates
and prices by locking in an attractive price or yield. The price of
when-issued securities is fixed at the time the commitment to purchase or
sell is made, but delivery and payment for the when-issued securities take
place at a later date, normally one to two months after the date of
purchase. During the period between purchase and settlement, no payment is
made by the purchaser to the issuer and no interest accrues to the
purchaser. Such transactions therefore involve a risk of loss if the value
of the security to be purchased declines prior to the settlement date or if
the value of the security to be sold increases prior to the settlement
date. A sale of a when-issued security also involves the risk that the
other party will be unable to settle the transaction. Dollar rolls are a
type of forward commitment transaction. Purchases and sales of securities
on a forward commitment basis involve a commitment to purchase or sell
securities with payment and delivery to take place at some future date,
normally one to two months after the date of the transaction. As with
when-issued securities, these transactions involve certain risks, but they
also enable an investor to hedge against anticipated changes in interest
rates and prices. Forward commitment transactions are executed for existing
obligations, whereas in a when-issued transaction, the obligations have not
yet been issued. When purchasing securities on a when-issued or forward
commitment basis, a segregated account of liquid assets at least equal to
the value of purchase commitments for such securities will be maintained
until the settlement date.
2
<PAGE> 49
2. Invest in other investment companies to the extent permitted by the
Investment Company Act of 1940 ("1940 Act") or exemptive relief granted by
the Securities and Exchange Commission ("SEC").
3. Loan securities to broker-dealers or other institutional investors.
Securities loans will not be made if, as a result, the aggregate amount of
all outstanding securities loans by a Portfolio exceeds 33 1/3% of its
total assets (including the market value of collateral received). For
purposes of complying with a Portfolio's investment policies and
restrictions, collateral received in connection with securities loans is
deemed an asset of the Portfolio to the extent required by law. The Manager
receives compensation for administrative and oversight functions with
respect to securities lending. The amount of such compensation depends on
the income generated by the loan of the securities. A Portfolio continues
to receive interest on the securities loaned and simultaneously earns
either interest on the investment of the cash collateral or fee income if
the loan is otherwise collateralized.
4. Enter into repurchase agreements. A repurchase agreement is an agreement
under which securities are acquired by a Portfolio from a securities dealer
or bank subject to resale at an agreed upon price on a later date. The
acquiring Portfolio bears a risk of loss in the event that the other party
to a repurchase agreement defaults on its obligations and the Portfolio is
delayed or prevented from exercising its rights to dispose of the
collateral securities. However, the investment advisers 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's Board of Trustees
("AMR Trust Board") or the Equity 500 Index Portfolio's Board of Trustees
("Equity 500 Index Portfolio Board"), as appropriate.
5. Purchase securities in private placement offerings made in reliance on
the "private placement" exemption from registration afforded by Section
4(2) of the Securities Act of 1933 ("1933 Act"), and resold to qualified
institutional buyers under Rule 144A under the 1933 Act ("Section 4(2)
securities"). The Money Market Portfolios will not invest more than 10%
(and the other Funds' respective Portfolios will not invest more than 15%)
of their respective net assets in Section 4(2) securities and illiquid
securities unless the applicable investment adviser 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.
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
Board and the 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 nine 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 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
3
<PAGE> 50
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.
8. Invest more than 5% of its total assets (taken at market value) in
securities of any one issuer, other than obligations issued by the U.S.
Government, its agencies and instrumentalities, or purchase more than 10%
of the voting securities of any one issuer, with respect to 75% of the
Portfolio's total assets; or
9. Invest more than 25% of its total assets in the securities of companies
primarily engaged in any one industry, provided that: (i) this limitation
does not apply to obligations issued or guaranteed by the U.S. Government,
its agencies and instrumentalities; (ii) municipalities and their agencies
and authorities are not deemed to be industries; and (iii) financial
service companies are classified according to the end users of their
services (for example, automobile finance, bank finance, and diversified
finance will be considered separate industries).
The above percentage limits are based upon asset values at the time of the
applicable transaction; accordingly, a subsequent change in asset values will
not affect a transaction that was in compliance with the investment restrictions
at the time such transaction was effected.
The following non-fundamental investment restrictions may be changed with
respect to each Fund by a vote of a majority of the Board or, with respect to
the Portfolio, by a vote of a majority of the AMR Trust Board. The Portfolio may
not:
1. Invest more than 15% of its net assets in illiquid securities, including
time deposits and repurchase agreements that mature in more than seven
days; or
4
<PAGE> 51
2. Purchase securities on margin, effect short sales (except that a
Portfolio may obtain such short term credits as may be necessary for the
clearance of purchases or sales of securities) or purchase or sell call
options or engage in the writing of such options.
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 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. (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 lending of the
Portfolio's portfolio securities and provided that any such loans not
exceed 30% of the Portfolio's net assets (taken at market value); (b)
through the use of repurchase agreements or the purchase of short-term
obligations; or (c) 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.
7. With respect to 75% of the Portfolio's total assets, invest more than 5%
of its total assets in the securities of any one issuer (excluding cash and
cash-equivalents, U.S. Government securities and the securities of other
investment companies) or own more than 10% of the voting securities of any
issuer.
5
<PAGE> 52
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, and repurchase agreements 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.
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, unless
permitted to exceed these limitations by an exemptive order of the SEC;
and, provided further that, except in the case of merger or consolidation,
the Portfolio shall not purchase securities of any 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.
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. 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.
6
<PAGE> 53
11. 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.
12. 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).
13. 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).
14. 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.
TEMPORARY DEFENSIVE POSITION
While assuming a temporary defensive position, a Fund may invest in cash or
cash equivalent short-term investment grade obligations, including: obligations
of the U.S. Government, its agencies and instrumentalities; corporate debt
securities, such as commercial paper, master demand notes, loan participation
interests, medium-term notes and funding agreements; Yankeedollar and Eurodollar
bank certificates of deposit, time deposits, and banker's acceptances;
asset-backed securities; and repurchase agreements involving the foregoing
obligations.
PORTFOLIO TURNOVER
Following is a list of the Funds' corresponding Portfolios exhibiting
significant variation in the portfolio turnover rate for the fiscal years ended
October 31, 1997 and 1998.
<TABLE>
<CAPTION>
Portfolio 1997 1998
- --------- ------ ------
<S> <C> <C>
Balanced 105% 87%
Short-Term Bond 282% 74%
</TABLE>
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. The portfolio turnover rate for the Short-Term Bond Fund may
continue to exceed 100% due to the active style in which the portfolio is
managed in response to changes in market conditions.
7
<PAGE> 54
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* (51) Trustee President, AMR Investment Services, Inc. (1986-Present); Chairman,
and President 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(61) Trustee Partner, Akin, Gump, Strauss, Hauer & Feld, LLP (1960-Present)#;
1700 Pacific Avenue Suite 4100 Director, Clear Channel Communications (1984-Present); Director,
Dallas, Texas 75201 CenterPoint Properties, Inc. (1994-Present); Trustee, American
AAdvantage Funds (1996-Present).
Ben J. Fortson (66) Trustee President and CEO, Fortson Oil Company (1958-Present); Director,
301 Commerce Street Kimbell Art Foundation (1964-Present); Director, Burnett Foundation
Suite 3301 (1987-Present); Honorary Trustee, Texas Christian University
Forth Worth, Texas 76012 (1986-Present); Trustee, American AAdvantage Funds (1996-Present).
John S. Justin (82) Trustee Chairman and Chief Executive Officer, Justin Industries, Inc.
2821 West Seventh Street (a diversified holding company) (1969-Present); Executive Board
Fort Worth, Texas 76107 Member, Blue Cross/BlueShield 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* (63) Trustee Consultant (1994-Present); Vice President and Controller, American
Airlines, Inc. (1985-1994); Trustee, American AAdvantage Funds
(1987-Present).
</TABLE>
8
<PAGE> 55
<TABLE>
<CAPTION>
POSITION WITH
NAME, AGE AND ADDRESS EACH TRUST PRINCIPAL OCCUPATION DURING PAST 5 YEARS
- --------------------- ------------ ----------------------------------------
<S> <C> <C>
Roger T. Staubach (57) Trustee Chairman of the Board and Chief Executive Officer of The Staubach
6750 LBJ Freeway Company (a commercial real estate company) (1982-Present); Director,
Dallas, Texas 75240 Brinker International (1993-Present); Director, International Home
Foods, Inc. (1997-Present); 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 (42) Trustee Managing Partner, Pharos Capital Group, L.L.C. (a private equity
100 Crescent Court firm) (1998-Present); Trustee, Teachers Retirement System of Texas
Suite 1740 (1993-Present); Director, United States Enrichment Corporation
Dallas, Texas 75201 (1993-1998), Director, Just For the Kids (1995-Present); Director,
Starwood Financial Trust (1998-Present); Member, Council on Foreign
Relations (1995-Present); Trustee, American AAdvantage Mileage Funds
(1996-Present).
Nancy A. Eckl (36) Vice President Vice President, AMR Investment Services, Inc. (1990-Present).
Michael W. Fields (45) Vice President Vice President, AMR Investment Services, Inc. (1988-Present).
Barry Y. Greenberg (35) Vice President Vice President, Legal and Compliance, AMR Investment Services, Inc.
and Assistant (1995-Present); Branch Chief (1992-June 1995), and Staff Attorney
Secretary (1988-1992), Securities and Exchange Commission.
Rebecca L. Harris (32) Treasurer Vice President, Finance (1995-Present), Controller (1991- 1995), AMR
Investment Services, Inc.
John B. Roberson (40) Vice President Vice President, AMR Investment Services, Inc. (1991-Present).
Robert J. Zutz (46) Secretary Partner, Kirkpatrick & Lockhart LLP (law firm)
1800 Massachusetts Ave., NW
Washington, D.C. 20036
</TABLE>
* Messrs. Quinn and O'Sullivan are deemed to be "interested persons" of the
Mileage Trust and the AMR Trust as defined by the 1940 Act.
# The law firm of Akin, Gump, Strauss, Hauer & Feld LLP ("Akin, Gump")
provides legal services to American Airlines, Inc., an affiliate of the
Manager. Mr. Feld has advised the Trusts that he has had no material
involvement in the services provided by Akin, Gump to American Airlines,
Inc. and that he has received no material benefit in connection with these
services. Akin, Gump does not provide legal services to the Manager of AMR
Corporation.
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
9
<PAGE> 56
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, as a retiree of
American Airlines, Inc., already receives flight benefits. The Trusts compensate
Mr. O'Sullivan up to $10,000 annually to cover his personal flight service
charges and the charges for his three adult children, as well as any income tax
charged on the value of these flight benefits. 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, 1998.
<TABLE>
<CAPTION>
Total Compensation
Pension or Retirement Benefits Estimated From American
Aggregate Compensation Accrued as Annual Benefits AAdvantage Funds
From the Part of the Upon Complex
Name of Trustee Trust Trust's Expenses Retirement (30 Funds)
- --------------- ----- ---------------- ---------- ----------
<S> <C> <C> <C> <C>
William F. Quinn $ 0 $0 $0 $ 0
Alan D. Feld $15,962 $0 $0 $35,605
Ben J. Fortson $ 6,802 $0 $0 $35,038
John S. Justin $ 225 $0 $0 $ 1,618
Stephen D. O'Sullivan $ 493 $0 $0 $ 5,686
Roger T. Staubach $ 8,269 $0 $0 $17,423
Kneeland Youngblood $ 9,525 $0 $0 $79,563
</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.
<TABLE>
<CAPTION>
POSITION WITH
EQUITY 500 INDEX
NAME, AGE AND ADDRESS PORTFOLIO PRINCIPAL OCCUPATION DURING PAST 5 YEARS
- --------------------- ------------ ----------------------------------------
<S> <C> <C>
Charles P. Biggar (68) Trustee Retired; formerly Vice President of International Business Machines
12 Hitching Post Lane and President of the National Services and the Field Engineering
Chappaqua, NY 10514 Divisions of IBM.
S. Leland Dill (68) Trustee Retired; Director, Coutts (U.S.A.) International, and Coutts Trust
5070 North Ocean Drive Holdings Ltd.; Director, Zweig Series Trust; formerly Partner of
Singer Island, FL 33404 KPMG Peat Marwick; Director, Vinters International Company Inc.;
General Partner of Pemco (an investment company registered under the
1940 Act).
Philip Saunders, Jr. (63) Trustee Principal, Philip Saunders Associates (Economic and Finance
445 Glen Road Consulting); former Director of Financial Industry Consulting, Wolf
Weston, MA 02193 & Company; President, JohnHancock Home Mortgage Corporation; and
Senior Vice President of Treasury and Financial Services, John Hancock
Mutual Life Insurance Company, Inc.
John Y. Keffer (56) President and Chief President, Forum Financial Group.
2 Portland Square Executive Officer
Portland, ME 04101
</TABLE>
10
<PAGE> 57
<TABLE>
<CAPTION>
POSITION WITH
EQUITY 500 INDEX
NAME, AGE AND ADDRESS PORTFOLIO PRINCIPAL OCCUPATION DURING PAST 5 YEARS
- --------------------- ------------ ----------------------------------------
<S> <C> <C>
Joseph A. Finelli (41) Treasurer Vice President, BT Alex. Brown Incorporated and Vice President,
One South Street Investment Company Capital Corp. (registered investment adviser),
Baltimore, MD 21202 September 1995 - present; former Vice President and Treasurer, The
Delaware Group of Funds (registered investment companies) and Vice
President, Delaware Management Company Inc. (investments),
1980-August 1995.
Daniel O. Hirsch (44) Secretary Principal, BT Alex. Brown since July 1998; Assistant General Counsel
2901 Dorset Avenue in the Office of the General Council at the United States Securities
Chevy Chase, MD 20815 and ExchangeCommission from 1993 to 1998.
</TABLE>
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 ICC
Distributors, Inc. ("ICC") 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, ICC, 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, 1997 and 1998, the
Equity 500 Index Portfolio incurred Trustees fees equal to $2,723 and $2,982,
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, 1998.
<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 $1,106 $35,000
S. Leland Dill $ 935 $35,000
Philip Saunders, Jr. $ 942 $35,000
</TABLE>
11
<PAGE> 58
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, 1999 The effect of their control is:
<TABLE>
<S> <C>
American AAdvantage Short-Term Bond Mileage Fund
Seemore Light, Elaine and Larry Licht and Alysia Krueger....................39%
P.O. Box 4383
Scottsdale, AZ 85261
American AAdvantage Intermediate Bond Mileage Fund
Ruby A. Murphy and Kathryn A. Govaerts......................................61%
8316 South Indianapolis Avenue
Tulsa, OK 74137
American AAdvantage S&P 500 Index Mileage Fund
Tumbler Family Trust........................................................43%
200 North Bristol Avenue
Los Angeles, CA 90049
</TABLE>
In addition, the following persons own 5% or more of the outstanding shares
of a Fund or Class as of January 31, 1999:
<TABLE>
<S> <C>
American AAdvantage Balanced Mileage Fund
Maurice T. and Winifred A. Downing..........................................5%
11 Beacon Street
Dumont, NJ 07628
American AAdvantage International Equity Mileage Fund
Ronald P. and Judith M. Cram................................................14%
6409 Westbourne Drive
Brentwood, TN 37027
Gregg Schneider Family Trust.................................................5%
3434 Vantage Lane
Glenview, IL 60025
American AAdvantage S&P 500 Index Mileage Fund
Julia T. Abrams and Leonard W. Kraisel......................................12%
1500 South Ocean Drive #6-K
Hollywood, FL 33019
Mark S. Holecek.............................................................10%
6951 High Grove Blvd.
Burr Ridge, IL 60521
Pad S. and Vicki Krishnal...................................................10%
199 South Ferrari Way
Anaheim, CA 92807
American AAdvantage Intermediate Bond Mileage Fund
Rodger L. Thompson..........................................................18%
1213 Garden Lane
Roanoke, TX 76262
Kathryn A. and Kenneth C. Govaerts...........................................7%
8316 South Indianapolis Avenue
Tulsa, OK 74137
Randall W. and Gail A. Legee.................................................5%
7707 East Monticello Way
Crystal Lake, IL 60014
American AAdvantage Short-Term Bond Mileage Fund
Christopher and Linda C. Cavallaro..........................................21%
60 Gerard Avenue
New Hyde Park, NY 11040
Edward Mueller..............................................................12%
200 West Adams, Suite 2500
Chicago, IL 60606
Robert W. and Teresa M. Israel...............................................6%
1622 W. 5th Street
Irving, TX 75060
</TABLE>
12
<PAGE> 59
<TABLE>
<S> <C>
Jerry and Ina McKinzey.......................................................5%
3402 Country Club Road
Pantego, TX 76013
American AAdvantage Municipal Money Market Mileage Fund
Kimberly B., Gale B. and Howard A. Randall..................................11%
1140 Parkinson Avenue
Palo Alto, CA 94301
Harry V. Whitehill...........................................................8%
1533 North Lee Trevino, Suite 210
El Paso, TX 79936
Eric and Catherine Kobren....................................................7%
21A Farm Street
Dover, MA 02030
Jerry L. and Donna L. Weiss..................................................5%
12651 South Dixie Highway #324
Miami, FL 33156
American AAdvantage U.S. Government Money Market Mileage Fund
William H. Regnery II Trust.................................................24%
P.O. Box 9800
Calabasas, CA 91372
William F. Regnery Trust....................................................19%
1100 North Market Street
Wilmington, DE 19801
Martin H. Proyect, Trustee...................................................9%
OSO Loc Tract D Trust
P.O. Box 98
Santa Fe, NM 87504
William Regnery Trustee.....................................................8%
Western Shade Cloth Charitable Foundation
P.O. Box 1369
Boca Grande, FL 33921
</TABLE>
INVESTMENT ADVISORY AGREEMENTS
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, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
Investment Advisory Investment Advisory Investment Advisory
Adviser Fees for 1996 Fees for 1997 Fees for 1998
------- ------------- ------------- -------------
<S> <C> <C> <C>
Barrow, Hanley Mewhinney & Strauss, Inc. $ 862,335 $1,052,749 $1,324,073
Brandywine Asset Management, Inc. $ 297,073 $ 857,875 $1,291,065
GSB Investment Management, Inc. $ 575,720 $ 804,221 $ 936,043
Hotchkis and Wiley $1,327,731 $1,607,851 $1,970,618
Independence Investment Associates, Inc. $ 893,078 $1,110,438 $1,258,417
Morgan Stanley Asset Management $ 504,731 $ 885,253 $1,231,651
Templeton Investment Counsel, Inc. $ 410,013 $ 669,848 $ 994,381
</TABLE>
13
<PAGE> 60
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, ICC, 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, 1996, 1997 and 1998, BT earned $1,505,963,
$2,430,147 and $3,186,503, respectively, as compensation for investment advisory
services provided to the Equity 500 Index Portfolio. During the same periods, BT
reimbursed $870,024, $1,739,490 and $799,296, 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.
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.
Brokers Transaction Services, Inc. ("BTS"), located at 7001 Preston Road,
Dallas, Texas 75205, is the distributor and principal underwriter of the Funds'
shares and, as such, receives an annualized fee of $50,000 from the Manager for
distributing shares of the Trust and the American AAdvantage Mileage Funds.
MANAGEMENT, ADMINISTRATIVE SERVICES AND DISTRIBUTION FEES
The Manager is paid a management fee as compensation for paying investment
advisory fees and for providing the Trust and the AMR Trust with advisory and
asset allocation services. Pursuant to management and administrative services
agreements, the Manager provides the Trust and the AMR Trust with office space,
office equipment and personnel necessary to manage and administer the Trusts'
operations. This includes:
o complying with reporting requirements;
o corresponding with shareholders;
o maintaining internal bookkeeping, accounting and auditing
services and records; and
14
<PAGE> 61
o supervising the provision of services to the Trusts by third
parties.
In addition to its oversight of the investment advisers, the Manager
invests the portion of Fund assets which the investment advisers determine to be
allocated to high quality short-term debt obligations.
Management fees 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 $7,061,014
was paid by the Manager to the other investment advisers and 1998, $17,230,000,
of which approximately $8,675,000 was paid by the Manager to the other
investment advisers. Management fees in the amount of approximately $44,000,
$7,309 and $407,195 were waived by the Manager during the fiscal years ended
October 31, 1996, 1997 and 1998.
Under the Management Agreement, the Manager presently monitors the services
provided by BT to the Equity 500 Index Portfolio. The Manager receives no fee
for providing these monitoring services. In the event that the Board determines
that it is in the best interest of the S&P 500 Index Fund's shareholders to
withdraw its investment from the Equity 500 Index Portfolio, the Manager would
become responsible for directly managing the assets of the S&P 500 Index Fund.
In such event, the Fund would pay the Manager an annual fee of up to 0.10% of
the Fund's average net assets, accrued daily and paid monthly.
In addition to the management fee, 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, 1997 and
1998 were approximately $95,944, $275,120 and $548,000, respectively.
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, including costs of advertising and AAdvantage
Miles. Distribution fees pursuant to Rule 12b-1 under the 1940 Act for the
fiscal years ended October 31, 1996, 1997 and 1998 were approximately $188,590,
$470,306 and $632,000, respectively.
The Manager receives compensation for administrative and oversight
functions with respect to securities lending of the Portfolios of the AMR Trust.
Fees received by the Manager from securities lending for the fiscal years ended
October 31, 1997 and 1998 were approximately $81,113 and $175,025.
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 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 stationery 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, 1996, 1997 and 1998, BT earned, $752,981,
$1,215,073 and $676,625, respectively, as compensation for administrative and
other services provided to the Equity 500 Index Portfolio.
15
<PAGE> 62
OTHER SERVICE PROVIDERS
The transfer agent for the Trust is State Street Bank & Company ("State
Street"), Boston, Massachusetts, who provides transfer agency services to Fund
shareholders directly and through its affiliate National Financial Data
Services, Kansas City, Missouri. State Street also serves as custodian for the
Portfolios of the AMR Trust and the Funds. Bankers Trust Company, New York, NY,
serves as custodian and transfer agent for the assets of the Equity 500 Index
Portfolio. The independent auditor for the Funds (except as noted otherwise) 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
PricewaterhouseCoopers LLP, Baltimore, Maryland.
PORTFOLIO SECURITIES TRANSACTIONS
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, as appropriate, an investment
adviser of a Portfolio, or its affiliated broker-dealer, may execute portfolio
transactions and receive usual and customary brokerage commissions (within the
meaning of Rule 17e-1 of the 1940 Act) for doing so. A Portfolio's turnover
rate, or the frequency of portfolio transactions, will vary from year to year
depending on market conditions and the Portfolio's cash flows. High portfolio
activity increases a Portfolio's transaction costs, including brokerage
commissions, and may result in a greater number of taxable transactions.
The Investment Advisory Agreements provide, in substance, that in executing
portfolio transactions and selecting brokers or dealers, the principal objective
of each investment adviser is to seek the best net price and execution
available. It is expected that securities ordinarily will be purchased in the
primary markets, and that in assessing the best net price and execution
available, each investment adviser shall consider all factors it deems relevant,
including the breadth of the market in the security, the price of the security,
the financial condition and execution capability of the broker or dealer and the
reasonableness of the commission, if any, for the specific transaction and on a
continuing basis.
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.
16
<PAGE> 63
For the fiscal years ended October 31, 1996, 1997 and 1998, the following
brokerage commissions were paid by the corresponding Portfolios.
<TABLE>
<CAPTION>
Portfolio 1996 1997 1998
---------- ---- ---- ----
<S> <C> <C> <C>
Balanced $503,947 $ 562,493 $ 520,881
Large Cap Value $956,767 $1,192,792 $1,643,540
International Equity $544,844 $ 956,160 $1,828,348
Intermediate Bond* N/A $ 0 $ 0
Short-Term Bond $ 0 $ 0 $ 0
Money Market Funds $ 0 $ 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.
For the fiscal years ended December 31, 1996, 1997 and 1998 the Equity 500
Index Portfolio paid the following brokerage commissions: $289,791, $341,058 and
$534,801. 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.
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, 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
Large Cap Value 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 Large
Cap Value Portfolio and the International Equity Portfolio paid to affiliated
brokers in 1996 were 0.02%, 0.29% and 2.68%, respectively. The transactions
represented 0.03% of the Balanced Portfolio, 0.25% of the Large Cap Value
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
Large Cap Value 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
International Equity Morgan Stanley Intl. Morgan Stanley Asset Management Inc. $ 5,413
International Equity Merrill Lynch & Co. Hotchkis and Wiley $ 50,428
</TABLE>
The percentages of total commissions of the Balanced Portfolio, the Large
Cap Value 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 Large Cap Value
Portfolio and 9.2% of the International Equity Portfolio's total dollar value of
portfolio transactions for the fiscal year ended October 31, 1997.
17
<PAGE> 64
During the fiscal year ended October 31, 1998, 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 $ 38,538
Balanced Morgan Stanley Intl. Morgan Stanley Asset Management $ 16,486
Balanced Legg Mason Wood Walker Legg Mason, Inc. $ 930
Large Cap Value Merrill Lynch & Co. Hotchkis and Wiley $ 131,987
Large Cap Value Morgan Stanley Intl. Morgan Stanley Asset Management $ 61,469
Large Cap Value Legg Mason Wood Walker Legg Mason, Inc. $ 4,598
International Equity Merrill Lynch & Co. Hotchkis and Wiley $ 29,669
International Equity Morgan Stanley Intl. Morgan Stanley Asset Management $ 24,946
International Equity Robert Fleming & Co. Rowe-Price Fleming International, Inc. $ 93,606
International Equity Ord Minnett Rowe-Price Fleming International, Inc. $ 13,959
International Equity Jardine Fleming Rowe-Price Fleming International, Inc. $ 3,846
</TABLE>
The percentages of total commissions of the Balanced Portfolio, the Large
Cap Value Portfolio and the International Equity Portfolio paid to affiliated
brokers in 1998 were 10.74%, 12.05% and 9.33%, respectively. The transactions
represented 7.09% of the Balanced Portfolio, 8.81% of the Large Cap Value
Portfolio and 9.14% of the International Equity Portfolio's total dollar value
of portfolio transactions for the fiscal year ended October 31, 1998.
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.
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 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
18
<PAGE> 65
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");
o Diversify its investments in securities within certain statutory
limits ("Diversification Requirement"); and
o Distribute annually to its shareholders at least 90% of its investment
company taxable income (generally, taxable net investment income plus
net short-term capital gain and, in the case of the 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.
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. If a Fund failed to qualify as a
RIC for any taxable year, it would be taxed on the full amount of its taxable
income for that year without being able to deduct the distributions it makes to
its shareholders and the shareholders would treat all those distributions as
dividends (that is, ordinary income) to the extent of the Fund's earnings and
profits.
TAXATION OF THE PORTFOLIOS
Each Portfolio should be classified as a separate partnership for federal
income tax purposes and is not a "publicly traded partnership." As a result,
each Portfolio is 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.
19
<PAGE> 66
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
If the Balanced, the Large Cap Value, the International Equity, or the
Small Cap 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.
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<PAGE> 67
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 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
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<PAGE> 68
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 the same
manner used to compute the "current yield" over a 7 calendar-day period as
described above. One is then added to the base period return and the sum is
raised to the 365/7 power. One is subtracted from the result, according to
the following formula:
(365/7)]
EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1) - 1
The current and effective yields for the Funds are as follows:
<TABLE>
<CAPTION>
Current yield for the Effective yield for the
Seven-day period seven-day period
American AAdvantage Current daily yield as ended ended
Mileage Funds: of October 31, 1998 October 31, 1998 October 31, 1998
-------------- ------------------- --------------------- ----------------
<S> <C> <C> <C>
Money Market Fund(1) 4.85% 4.84% 4.95%
Municipal Money Market Fund(2) 2.69% 2.66% 2.70%
U.S. Government Money Market Fund(3) 4.75% 4.62% 4.73%
</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 4.81%, 4.80% and
4.91%.
(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 2.61%,
2.58% and 2.62%.
(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
4.70%, 4.57% and 4.68%.
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,
1998 were 4.40% and 4.47%, 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, 1998
would have been 4.27% and 4.34%, 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
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<PAGE> 69
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 30-day yield for the period
ended October 31, 1998 was 4.64% for the Intermediate Bond Fund and 5.92% for
the Short-Term Bond Fund.
The Intermediate Bond Fund and 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 month of October 1998 was 4.47% for the Intermediate Bond Fund and 5.92% for
Short-Term Bond Fund. 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 For the For the operations
one-year five-year ten-year through
period ended period ended period ended October 31,
October 31, 1998(1) October 31, 1998(1)(2) October 31, 1998(1) 1998(1)(3)
------------------- ---------------------- ------------------- ----------
<S> <C> <C> <C> <C>
Balanced Fund 8.74% 12.37% 12.29% 11.20%
Large Cap Value Fund(4) 6.01% 15.59% 14.46% 12.85%
International Equity Fund 3.49% 11.35% N/A(2) 10.68%
S&P 500 Index Fund 21.95% N/A(2) N/A(2) 25.96%
Intermediate Bond Fund 10.53% N/A(2) N/A(2) 11.65%
Short-Term Bond Fund 6.45% 5.01% 6.70% 6.75%
Money Market Fund-Mileage Class 5.18% 4.92% 5.68% 5.86%
Municipal Money Market Fund 3.16% N/A(2) N/A(2) 3.02%
U.S. Government Money Market Fund 5.13% 4.76% N/A(2) 4.40%
</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 Large Cap
Value, 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:
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<PAGE> 70
<TABLE>
<CAPTION>
American AAdvantage Funds
Institutional Class Mileage Class American AAdvantage Mileage Funds
------------------- ------------- ---------------------------------
<S> <C> <C> <C>
Balanced 7/17/87 8/1/94 11/1/95
Large Cap Value 7/17/87 8/1/94 11/1/95
International Equity 8/7/91 8/1/94 11/1/95
S&P 500 Index 1/1/97 N/A 3/1/98
Intermediate Bond 9/15/97 N/A 3/1/98
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>
(4) Prior to March 1, 1999, the Large Cap Value Fund was known as the Growth and
Income Fund and operated under different investment policies.
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 also will 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, Merrill Lynch, Morgan Stanley or Lehman
Brothers or to unmanaged indices that may assume reinvestment of dividends but
generally do not reflect deductions for administrative and management costs.
Each Fund may advertise the standard deviation of its returns for various
time periods and compare its standard deviation to that of various indices.
Standard deviation of returns over time is a measure of volatility. It indicates
the spread of 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 and other liabilities.
Thus, the risk of a shareholder incurring financial loss due to shareholder
liability is limited to
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<PAGE> 71
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 Large Cap Value, the
International Equity, the Small Cap Value and the Intermediate Bond and
Short-Term 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.
OTHER INFORMATION
American Depositary Receipts (ADRs), European Depositary Receipts
(EDRs)-ADRs are depositary receipts for foreign issuers in registered form
traded in U.S. securities markets, whereas, EDRs are in bearer form and traded
in European securities markets. These securities are not denominated in the same
currency as the securities into which they may be converted. Investing in ADRs
and EDRs involves greater risks than are normally present in domestic
investments. There is generally less publicly available information about
foreign companies and there may be less governmental regulation and supervision
of foreign stock exchanges, brokers and listed companies. In addition, such
companies may use different accounting and financial standards (and certain
currencies may become unavailable for transfer from a foreign currency),
resulting in a Fund's possible inability to convert immediately into U.S.
currency proceeds realized upon the sale of portfolio securities of the affected
foreign companies.
Asset-Backed Securities-Through the use of trusts and special purpose
subsidiaries, various types of assets (primarily home equity loans, automobile
and credit card receivables, other types of receivables/assets as well as
purchase contracts, financing leases and sales agreements entered into by
municipalities) are securitized in pass-through structures similar to
Mortgage-Backed Securities, as described below. The Portfolios are permitted to
invest in asset-backed securities, subject to the Portfolios' rating and quality
requirements.
Bank Deposit Notes-Bank deposit notes are obligations of a bank, rather
than bank holding company corporate debt. The only structural difference between
bank deposit notes and certificates of deposit is that interest on bank deposit
notes is calculated on a 30/360 basis as are corporate notes/bonds. Similar to
certificates of deposit, deposit notes represent bank level investments and,
therefore, are senior to all holding company corporate debt.
Bankers' Acceptances-Bankers' acceptances are short-term credit instruments
designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by a bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be as
long as 270 days, most acceptances have maturities of six months or less.
Cash Equivalents-Cash equivalents include certificates of deposit, bearer
deposit notes, bankers' acceptances, government obligations, commercial paper,
short-term corporate debt securities and repurchase agreements.
Certificates of Deposit-Certificates of deposit are issued against funds
deposited in an eligible bank (including its domestic and foreign branches,
subsidiaries and agencies), are for a definite period of time, earn a specified
rate of return and are normally negotiable.
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 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.
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<PAGE> 72
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.
Dollar Rolls-A dollar roll is a contract to sell mortgage-backed securities
as collateral against a commitment to repurchase similar, but not identical,
mortgage-backed securities on a specified future date. The other party to the
contract is entitled to all principal, interest, and prepayment cash flows while
it holds the collateral. Each Portfolio maintains with the Custodian a
segregated account containing high-grade liquid securities in an amount at least
equal to the forward purchase obligation.
Eurodollar and Yankeedollar obligations-Eurodollar obligations are U.S.
dollar obligations issued outside the United States by domestic or foreign
entities, while Yankeedollar obligations are U.S. dollar obligations issued
inside the United States by foreign entities. There is generally less publicly
available information about foreign issuers and there may be less governmental
regulation and supervision of foreign stock exchanges, brokers and listed
companies. Foreign issuers may use different accounting and financial standards,
and the addition of foreign governmental restrictions may affect adversely the
payment of principal and interest on foreign investments. In addition, not all
foreign branches of United States banks are supervised or examined by regulatory
authorities as are United States banks, and such branches may not be subject to
reserve requirements.
Forward Foreign Currency Exchange Contracts-A forward foreign currency
exchange contract ("forward contract") is a contract to purchase or sell a
currency at a future date. The two parties to the contract set the number of
days and the price. Forward contracts are used as a hedge against movements in
future foreign exchange rates. The corresponding 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
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<PAGE> 73
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 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.
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Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a futures contract can vary from the previous
day's settlement price; once that limit is reached, no trades may be made that
day at a price beyond the limit. Daily price limits do not limit potential
losses because prices could move to the daily limit for several consecutive days
with little or no trading, thereby preventing liquidation of unfavorable
positions.
If a Portfolio were unable to liquidate a futures contract due to the
absence of a liquid secondary market or the imposition of price limits, it could
incur substantial losses. The Portfolio would continue to be subject to market
risk with respect to the position. In addition, the Portfolio would continue to
be required to make daily variation margin payments and might be required to
maintain the position being hedged by the futures contract or option thereon or
to maintain cash or securities in a segregated account.
To the extent that a Portfolio enters into futures contracts, in each case
other than for bona fide hedging purposes (as defined by the Commodities Futures
Trading Commission ("CFTC"), the aggregate initial margin will not exceed 5% of
the liquidation value of a Portfolio's portfolio, after taking into account
unrealized profits 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.
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However, the fact that there are contractual or legal restrictions on resale of
such investments to the general public or to certain institutions may not be
indicative of their liquidity.
Index Futures Contracts and Options on Index Futures Contracts-The 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
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unexpected manner, the full anticipated benefits of Futures Contracts may not be
achieved or a loss may be realized.
Although Futures Contracts would be entered into for cash management
purposes only, such transactions do involve certain risks. These risks could
include a lack of correlation between the Futures Contract and the equity
market, a potential lack of liquidity in the secondary market and incorrect
assessments of market trends which may result in worse overall performance than
if a Futures Contract had not been entered into.
Brokerage costs will be incurred and "margin" will be required to be
posted and maintained as a good-faith deposit against performance of obligations
under Futures Contracts written into by the 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 its
position in stock index options prior to expiration by entering into a closing
transaction on an exchange or the option may expire unexercised.
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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 to be of good financial
standing and will not be made unless the consideration to be earned from such
loans would justify the risk. If the borrower of the securities fails
financially, there is a risk of delay in recovery of the securities loaned or
loss of rights in the collateral. Such loan transactions are referred to in this
Statement of Additional Information as "qualified" loan transactions.
The cash collateral so acquired through qualified loan transactions may be
invested only in those categories of high quality liquid securities previously
authorized by the AMR Trust Board.
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
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established for the purpose of issuing such CMOs and often have no assets other
than those underlying the securities and any credit support provided. A REMIC is
a mortgage securities vehicle that holds residential or commercial mortgages and
issues securities representing interests in those mortgages. A REMIC may be
formed as a corporation, partnership, or segregated pool of assets. The REMIC
itself is generally exempt from federal income tax, but the income from the
mortgages is reported by investors. For investment purposes, interests in REMIC
securities are virtually indistinguishable from CMOs.
Mortgage Pass-Through Certificates-Mortgage pass-through certificates
are issued by governmental, government-related and private organizations which
are backed by pools of mortgage loans.
(1) Government National Mortgage Association ("GNMA") Mortgage Pass-Through
Certificates ("Ginnie Maes")-GNMA is a wholly-owned U.S. Government corporation
within the Department of Housing and Urban Development. Ginnie Maes represent an
undivided interest in a pool of mortgages that are insured by the Federal
Housing Administration or the Farmers Home Administration or guaranteed by the
Veterans Administration. Ginnie Maes entitle the holder to receive all payments
(including prepayments) of principal and interest owed by the individual
mortgagors, net of fees paid to GNMA and to the issuer which assembles the
mortgage pool and passes through the monthly mortgage payments to the
certificate holders (typically, a mortgage banking firm), regardless of whether
the individual mortgagor actually makes the payment. Because payments are made
to certificate holders regardless of whether payments are actually received on
the underlying mortgages, Ginnie Maes are of the "modified pass-through"
mortgage certificate type. The GNMA is authorized to guarantee the timely
payment of principal and interest on the Ginnie Maes. The GNMA guarantee is
backed by the full faith and credit of the United States, and the GNMA has
unlimited authority to borrow funds from the U.S. Treasury to make payments
under the guarantee. The market for Ginnie Maes is highly liquid because of the
size of the market and the active participation in the secondary market of
security dealers and a variety of investors.
(2) FHLMC Mortgage Participation Certificates ("Freddie Macs")-Freddie Macs
represent interests in groups of specified first lien residential conventional
mortgages underwritten and owned by the FHLMC. Freddie Macs entitle the holder
to timely payment of interest, which is guaranteed by the FHLMC. The FHLMC
guarantees either ultimate collection or timely payment of all principal
payments on the underlying mortgage loans. In cases where the FHLMC has not
guaranteed timely payment of principal, the FHLMC may remit the amount due
because of its guarantee of ultimate payment of principal at any time after
default on an underlying mortgage, but in no event later than one year after it
becomes payable. Freddie Macs are not guaranteed by the United States or by any
of the Federal Home Loan Banks and do not constitute a debt or obligation of the
United States or of any Federal Home Loan Bank. The secondary market for Freddie
Macs is highly liquid because of the size of the market and the active
participation in the secondary market of the FHLMC, security dealers and a
variety of investors.
(3) FNMA Guaranteed Mortgage Pass-Through Certificates ("Fannie
Maes")-Fannie Maes represent an undivided interest in a pool of conventional
mortgage loans secured by first mortgages or deeds of trust, on one family or
two to four family, residential properties. The FNMA is obligated to distribute
scheduled monthly installments of principal and interest on the mortgages in the
pool, whether or not received, plus full principal of any foreclosed or
otherwise liquidated mortgages. The obligation of the FNMA under its guarantee
is solely its obligation and is not backed by, nor entitled to, the full faith
and credit of the United States.
(4) Mortgage-Related Securities Issued by Private Organizations-Pools
created by non-governmental issuers generally offer a higher rate of interest
than government and government-related pools because there are no direct or
indirect government guarantees of payments in such pools. However, timely
payment of interest and principal of these pools is often partially supported by
various enhancements such as over-collateralization and senior/subordination
structures and by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance. The insurance and guarantees are issued
by government entities, private insurers or the mortgage poolers. Although the
market for such securities is becoming increasingly liquid, securities issued by
certain private organizations may not be readily marketable.
Municipal Lease Obligations ("MLOs")-MLOs are issued by state and local
governments and authorities to acquire land and a wide variety of equipment and
facilities. These obligations typically are not fully backed by the
municipality's credit and thus interest may become taxable if the lease is
assigned. If funds are not appropriated for the following year's lease payments,
a lease may terminate with the possibility of default on the lease obligation.
With respect to MLOs purchased by the corresponding Portfolio of the Municipal
Money Market Fund, the AMR Trust Board has established the following guidelines
for determining the liquidity of the MLOs in its portfolio, and, subject to
review by the AMR Trust Board, has delegated that responsibility to the
investment adviser: (1) the frequency of trades and quotes for the security; (2)
the number of dealers willing to purchase or
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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 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
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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.
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.
34
<PAGE> 81
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.
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.
35
<PAGE> 82
Section 4(2) Securities-Section 4(2) securities are restricted as to
disposition under the federal securities laws, and generally are sold to
institutional investors, such as the Portfolio, that agree they are purchasing
the securities for investment and not with an intention to distribute to the
public. Any resale by the purchaser must be pursuant to an exempt transaction
and may be accomplished in accordance with Rule 144A. Section 4(2) securities
normally are resold to other institutional investors through or with the
assistance of the issuer or dealers that make a market in the Section 4(2)
securities, thus providing liquidity.
The AMR Trust Board, the Equity 500 Index Portfolio Board and the
applicable investment adviser will carefully monitor the Portfolio's investments
in Section 4(2) securities offered and sold under Rule 144A, focusing on such
important factors, among others, as valuation, liquidity, and availability of
information. Investments in Section 4(2) securities could have the effect of
reducing the Portfolio's liquidity to the extent that qualified institutional
buyers no longer wish to purchase these restricted securities.
Separately Traded Registered Interest and Principal Securities and Zero
Coupon Obligations-Separately traded registered interest and principal
securities or "STRIPS" and zero coupon obligations are securities that do not
make regular interest payments. Instead they are sold at a discount from their
face value. Each Portfolio will take into account as income a portion of the
difference between these obligations' purchase prices and their face values.
Because they do not pay coupon income, the prices of STRIPS and zero coupon
obligations can be very volatile when interest rates change. STRIPS are zero
coupon bonds issued by the U.S. Treasury.
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:
36
<PAGE> 83
(1) An obligation that is issued or guaranteed by the United States
Government or any agency thereof which has a variable rate of interest
readjusted no less frequently than every 762 days will be deemed by a Portfolio
to have a maturity equal to the period remaining until the next readjustment of
the interest rate.
(2) A variable rate obligation, the principal amount of which is scheduled
on the face of the instrument to be paid in 397 days or less, will be deemed by
a Portfolio to have a maturity equal to the period remaining until the next
readjustment of the interest rate.
(3) A variable rate obligation that is subject to a demand feature will be
deemed by a Portfolio to have a maturity equal to the longer of the period
remaining until the next readjustment of the interest rate or the period
remaining until the principal amount can be recovered through demand.
(4) A floating rate obligation that is subject to a demand feature will be
deemed by a Portfolio to have a maturity equal to the period remaining until the
principal amount can be recovered through demand.
As used above, an obligation is "subject to a demand feature" when a
Portfolio is entitled to receive the principal amount of the obligation either
at any time on no more than 30 days' notice or at specified intervals not
exceeding one year and upon no more than 30 days' notice.
Variable Rate Auction and Residual Interest Obligations-Variable rate
auction and residual interest obligations are created when an issuer or dealer
separates the principal portion of a long-term, fixed-rate municipal bond into
two long-term, variable-rate instruments. The interest rate on one portion
reflects short-term interest rates, while the interest rate on the other portion
is typically higher than the rate available on the original fixed-rate bond.
When-Issued and Forward Commitment Transactions- For purchases on a
when-issued basis, the price of the security is fixed at the date of purchase,
but delivery of and payment for the securities is not set until after the
securities are issued (generally one to two months later). The value of
when-issued securities is subject to market fluctuation during the interim
period and no income accrues to a Portfolio until settlement takes place.
Forward commitment transactions involve a commitment to purchase or sell
securities with payment and delivery to take place at some future date, normally
one to two months after the date of the transaction. The payment obligation and
interest rate are fixed at the time the buyer enters into the forward
commitment. Forward commitment transactions are typically used as a hedge
against anticipated changes in interest rates and prices. Each Portfolio
maintains with the Custodian a segregated account containing high-grade liquid
securities in an amount at least equal to the when-issued or forward commitment
transaction. Forward commitment transactions are executed for existing
obligations, whereas in a when-issued transaction, the obligations have not yet
been issued. When entering into a when-issued or forward commitment transaction,
a Portfolio will rely on the other party to consummate the transaction; if the
other party fails to do so, the Portfolio may be disadvantaged.
FINANCIAL STATEMENTS
The Mileage Trust's Annual Report to Shareholders for the period ended
October 31, 1998 and the S&P 500 Index Fund's Annual Report to Shareholders for
the period ended December 31, 1998 are 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.
37
<PAGE> 84
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>
1998 28.76% 1973 (14.66)% 1948 5.50%
1997 33.26% 1972 18.98% 1947 5.71%
1996 23.03% 1971 14.31% 1946 (8.0)
1995 37.49% 1970 4.01% 1945 36.44%
1994 1.32% 1969 (8.51)% 1944 19.75%
1993 9.99% 1968 11.06% 1943 25.90%
1992 7.67% 1967 23.98% 1942 20.34%
1991 30.55% 1966 (10.06)% 1941 (11.59)
1990 (3.17)% 1965 12.45% 1940 (9.78)
1989 31.49% 1964 16.48% 1939 (0.41)
1988 16.81% 1963 22.08% 1938 31.12%
1987 5.23% 1962 (8.73)% 1937 (35.03)
1986 18.47% 1961 26.89% 1936 33.92%
1985 32.16% 1960 0.47% 1935 47.67%
1984 6.27% 1959 11.96% 1934 (1.44)
1983 22.51% 1958 43.36% 1933 53.99%
1982 21.41% 1957 (10.78)% 1932 (8.19)
1981 (4.91)% 1956 6.56% 1931 (43.34)
1980 32.42% 1955 31.56% 1930 (24.90)
1979 18.44% 1954 52.62% 1929 (8.42)
1978 6.56% 1953 (.99)% 1928 43.61%
1977 (7.18)% 1952 18.73% 1927 37.49%
1976 23.84% 1951 24.02% 1926 11.62%
1975 37.20% 1950 31.71%
1974 (26.47)% 1949 18.79%
</TABLE>
38
<PAGE> 85
------------------
PLATINUM CLASS(SM)
------------------
[LOGO]
PROSPECTUS
MARCH 1, 1999
[AMERICAN AADVANTAGE FUNDS LOGO]
o MONEY MARKET FUND
o MUNICIPAL MONEY MARKET FUND
o U.S. GOVERNMENT MONEY MARKET FUND
[AMERICAN AADVANTAGE MILEAGE FUNDS LOGO]
o MONEY MARKET MILEAGE FUND
MANAGED BY AMR INVESTMENT SERVICES, INC.
[EAGLE LOGO]
The Securities and Exchange Commission does not guarantee that the information
in this Prospectus or any other mutual fund's prospectus is accurate or
complete, nor does it judge the investment merit of these Funds. To state
otherwise is a criminal offense.
<PAGE> 86
TABLE OF CONTENTS
<TABLE>
<S> <C>
About the Funds
Overview.................................................... 2
Money Market Fund...................................... 3
Municipal Money Market Fund............................ 7
U.S. Government Money Market Fund...................... 11
Money Market Mileage Fund.............................. 14
The Manager................................................. 18
Valuation of Shares......................................... 18
About Your Investment
Purchase and Redemption of Shares........................... 19
Distributions and Taxes..................................... 24
AAdvantage(R) Miles......................................... 24
Additional Information
Distribution of Trust Shares................................ 26
Master-Feeder Structure..................................... 26
Year 2000................................................... 27
Financial Highlights........................................ 27
</TABLE>
ABOUT THE FUNDS
- --------------------------------------------------------------------------------
Overview
- ---------------
The American AAdvantage Funds (the "AAdvantage Funds") and the American
AAdvantage Mileage Funds (the "Mileage Funds") are managed by AMR Investment
Services, Inc. (the "Manager"), a wholly owned subsidiary of AMR Corporation.
The AAdvantage Funds and Mileage Funds (collectively, the "Funds") operate under
a master-feeder structure. This means that each 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
identical investment objective. Throughout this Prospectus, statements regarding
investments by a Fund refer to investments made by its corresponding Portfolio.
For easier reading, the term "Fund" is used throughout the Prospectus to refer
to either a Fund or its Portfolio, unless stated otherwise. See "Master-Feeder
Structure".
Each shareholder of the Money Market Mileage Fund will receive American
Airlines(R) AAdvantage(R) travel awards program ("AAdvantage") miles.(1)
AAdvantage miles will 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".
- ---------------
(1)American Airlines and AAdvantage are registered trademarks of American
Airlines, Inc.
- --------------------------------------------------------------------------------
About the Funds 2 Prospectus
<PAGE> 87
AMERICAN AADVANTAGE
MONEY MARKET FUND(SM)
- --------------------------------------------------------------------------------
Investment Objective
- -------------------------------
Current income, liquidity and the maintenance of a stable price of $1.00 per
share.
Principal Strategies
- ------------------------------
The Fund invests exclusively in high quality variable or fixed rate, U.S.
dollar-denominated short-term money market instruments. These securities may
include obligations of the U.S. Government, its agencies and instrumentalities;
corporate debt securities, such as commercial paper, master demand notes, loan
participation interests, medium-term notes and funding agreements; Yankeedollar
and Eurodollar bank certificates of deposit, time deposits, and bankers'
acceptances; asset-backed securities; and repurchase agreements involving the
foregoing obligations.
The Fund will only buy securities with the following credit qualities:
- - rated in the highest short-term categories by two rating organizations, such
as "A-1" by Standard & Poor's Corporation and "P-1" by Moody's Investors
Service, Inc.,
- - rated in the highest short-term category by one rating organization if the
securities are rated only by one rating organization, or
- - unrated securities that are determined to be of equivalent quality by the
Manager.
The Fund invests more than 25% of its total assets in obligations issued by the
banking industry. However, for temporary defensive purposes when the Manager
believes that maintaining this concentration may be inconsistent with the best
interests of shareholders, the Fund may not maintain this concentration.
Securities purchased by the Fund 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 maturity of the Fund will not exceed 90 days.
- --------------------------------------------------------------------------------
Prospectus 3 About the Funds
<PAGE> 88
AMERICAN AADVANTAGE
MONEY MARKET FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
Risk Factors
- -------------------
- - The yield paid by the Fund is subject to changes in interest rates. As a
result, there is risk that a decline in short-term interest rates would lower
its yield and the overall return on your investment.
- - Although the Fund seeks to preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in the Fund.
- - As with any money market fund, there is the risk that the issuers or
guarantors of securities owned by the Fund will default on the payment of
principal or interest or the obligation to repurchase securities from the
Fund.
Your investment in the Fund is not insured or guaranteed by the U.S. Government
or any financial or government institution.
Investor Profile
- -----------------------
This Fund may be suitable for investors who:
- - seek the preservation of capital and to avoid fluctuations in principal
- - desire regular, monthly income from a highly liquid investment
- - require a short-term vehicle for cash when making long-term investment
decisions
- - seek a rate of return that is potentially higher than certificates of deposit
or savings accounts
Historical Performance
- -----------------------------------
The bar chart below provides an indication of risk by showing how the Fund's
performance has varied from year to year. The Platinum Class of the Fund began
offering its shares on November 7, 1995. However, another class of shares of the
Fund not offered in this prospectus has been offered since September 1, 1987. In
the chart and table below, performance results before November 7, 1995 are for
the older class. Because the other class had lower expenses, its performance was
better than the Platinum Class of the Fund would have realized in the same
period. Past performance is not necessarily
- --------------------------------------------------------------------------------
About the Funds 4 Prospectus
<PAGE> 89
AMERICAN AADVANTAGE
MONEY MARKET FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
indicative of how the Fund will perform in the future. Investors may call
1-800-388-3344 to obtain the Fund's current seven-day yield.
TOTAL RETURN FOR THE CALENDER YEAR ENDED 12/31 OF EACH YEAR
[PERFORMANCE GRAPH]
<TABLE>
<S> <C>
1989................................................. 9.47%
1990................................................. 8.40%
1991................................................. 6.77%
1992................................................. 4.02%
1993................................................. 3.28%
1994................................................. 4.22%
1995................................................. 5.93%
1996................................................. 4.77%
1997................................................. 4.90%
1998................................................. 4.82%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: 2.45%
(1/1/89 through 12/31/98) (2nd Quarter 1989)
Lowest Quarterly Return: 0.80%
(1/1/89 through 12/31/98) (2nd & 4th Quarter 1993,
1st Quarter 1994)
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURN
---------------------------
AS OF 12/31/98
---------------------------
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
<S> <C> <C> <C>
Money Market Fund........................................... 4.82% 4.93% 5.64%
</TABLE>
- --------------------------------------------------------------------------------
Prospectus 5 About the Funds
<PAGE> 90
AMERICAN AADVANTAGE
MONEY MARKET FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
Fees and Expenses
- ----------------------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Money Market Fund.(1)
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
<TABLE>
<S> <C>
Management Fees............................................. 0.10%
Distribution (12b-1) Fees................................... 0.25
Other Expenses.............................................. 0.59
----
TOTAL ANNUAL FUND OPERATING EXPENSES........................ 0.94%
====
</TABLE>
(1) The expense table and the Example below reflect the expenses of both the
Fund and its corresponding Portfolio.
Example
- -------------
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and then redeem all of
your shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
1 YEAR ......................................................$96
3 YEARS.....................................................$300
5 YEARS.....................................................$520
10 YEARS..................................................$1,155
Investment Adviser
- -----------------------------
AMR Investment Services, Inc.
- --------------------------------------------------------------------------------
About the Funds 6 Prospectus
<PAGE> 91
AMERICAN AADVANTAGE
MUNICIPAL MONEY MARKET FUND(SM)
- --------------------------------------------------------------------------------
Investment Objective
- -------------------------------
Current income, liquidity and the maintenance of a stable price of $1.00 per
share.
Principal Strategies
- ------------------------------
Under normal market conditions, the Fund invests at least 80% of its net assets
in securities whose interest income is exempt from federal income tax. These
securities may be issued by or on behalf of the governments of U.S. states,
counties, cities, towns, territories, or public authorities. All securities
purchased by the Fund will be guaranteed by the U.S. Government, its agencies,
or instrumentalities; secured by irrevocable letters of credit issued by
qualified banks; or guaranteed by one or more municipal bond insurance policies.
The Fund will only buy securities with the following credit qualities:
- - rated in the highest short-term categories by two rating organizations, such
as "A-1" by Standard & Poor's and "P-1" by Moody's Investors Service, Inc.,
- - rated in the highest short-term category by one rating organization if the
securities are rated only by one rating organization, or
- - unrated securities that are determined to be of equivalent quality by the
Manager.
Securities purchased by the Fund 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 maturity of the Fund will not exceed 90 days.
- --------------------------------------------------------------------------------
Prospectus 7 About the Funds
<PAGE> 92
AMERICAN AADVANTAGE
MUNICIPAL MONEY MARKET FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
Risk Factors
- -------------------
- - The yield paid by the Fund is subject to changes in interest rates. As a
result, there is risk that a decline in short-term interest rates would lower
its yield and the overall return on your investment.
- - Although the Fund seeks to preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in the Fund.
- - As with any money market fund, there is the risk that the issuers or
guarantors of securities owned by the Fund will default on the payment of
principal or interest or the obligation to repurchase securities from the
Fund.
Your investment in the Fund is not insured or guaranteed by the U.S. Government
or any financial or government institution.
Investor Profile
- -----------------------
This Fund may be suitable for investors who:
- - seek the preservation of capital and to avoid fluctuations in principal
- - desire regular, monthly income that is generally exempt from Federal income
tax
- - require a short-term vehicle for cash when making long-term investment
decisions
- - seek an after-tax rate of return that is potentially higher than certificates
of deposit or savings accounts
Historical Performance
- -----------------------------------
The bar chart below provides an indication of risk by showing how the Fund's
performance has varied from year to year. The Platinum Class of the Fund began
offering its shares on November 7, 1995. However, another class of shares of the
Fund not offered in this prospectus has been offered since November 10, 1993. In
the chart and table below, performance results before November 7, 1995 are for
the older class. Because the other class had lower expenses, its performance was
better than the Platinum Class of the Fund would have realized in the same
period. Past performance is not necessarily
- --------------------------------------------------------------------------------
About the Funds 8 Prospectus
<PAGE> 93
AMERICAN AADVANTAGE
MUNICIPAL MONEY MARKET FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
indicative of how the Fund will perform in the future. Investors may call 1-800-
388-3344 to obtain the Fund's current seven-day yield.
PERFORMANCE GRAPH
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
1994 ....................................... 2.66%
1995 ....................................... 3.71%
1996 ....................................... 2.78%
1997 ....................................... 2.83%
1998 ....................................... 2.64%
<TABLE>
<S> <C>
Highest Quarterly Return: 1.00%
(1/1/94 through 12/31/98) (2nd Quarter 1995)
Lowest Quarterly Return: 0.52%
(1/1/94 through 12/31/98) (1st Quarter 1994)
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
----------------------------------
AS OF 12/31/98
----------------------------------
SINCE INCEPTION
1 YEAR 5 YEARS (11/10/93)
------ ------- ---------------
<S> <C> <C> <C>
Municipal Money Market Fund.......................... 2.64% 2.92% 2.91%
</TABLE>
- --------------------------------------------------------------------------------
Prospectus 9 About the Funds
<PAGE> 94
AMERICAN AADVANTAGE
MUNICIPAL MONEY MARKET FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
Fees and Expenses
- ----------------------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Municipal Money Market Fund.(1)
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
<TABLE>
<S> <C>
Management Fees............................................. 0.10%
Distribution (12b-1) Fees................................... 0.25
Other Expenses.............................................. 0.72
----
Total Annual Fund Operating Expenses........................ 1.07%
====
Fee Waiver and/or Expense Reimbursement..................... 0.02(2)
NET EXPENSES................................................ 1.05%
</TABLE>
(1) The expense table and the Example below reflect the expenses of both the
Fund and its corresponding Portfolio.
(2) The Manager has contractually agreed to waive a portion of Distribution
Fees through October 31, 1999 to the extent that Total Annual Fund
Operating Expenses exceed 1.05%.
Example
- -------------
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and then redeem all of
your shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
1 YEAR .....................................................$107
3 YEARS.....................................................$338
5 YEARS.....................................................$588
10 YEARS..................................................$1,304
Investment Adviser
- -----------------------------
AMR Investment Services, Inc.
- --------------------------------------------------------------------------------
About the Funds 10 Prospectus
<PAGE> 95
AMERICAN AADVANTAGE
U.S. GOVERNMENT MONEY MARKET FUND(SM)
- --------------------------------------------------------------------------------
Investment Objective
- -------------------------------
Current income, liquidity and the maintenance of a stable price of $1.00 per
share.
Principal Strategies
- ------------------------------
The Fund invests exclusively in obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities and repurchase agreements that are
collateralized by such obligations. Some of these securities are not backed by
the full faith and credit of the U.S. Government. U.S. Government securities
include direct obligations of the U.S. Treasury (such as Treasury bills,
Treasury notes and Treasury bonds).
Securities purchased by the Fund 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 maturity of the Fund will not exceed 90 days.
Risk Factors
- -------------------
- - The yield paid by the Fund is subject to changes in interest rates. As a
result, there is risk that a decline in short-term interest rates would lower
its yield and the overall return on your investment.
- - Although the Fund seeks to preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in the Fund.
Your investment in the Fund is not insured or guaranteed by the U.S. Government
or any financial or government institution.
Investor Profile
- -----------------------
This Fund may be suitable for investors who:
- - seek the preservation of capital and to avoid fluctuations in principal
- - desire regular, monthly income from a highly liquid investment
- --------------------------------------------------------------------------------
Prospectus 11 About the Funds
<PAGE> 96
AMERICAN AADVANTAGE
U.S. GOVERNMENT MONEY MARKET FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
- - require a short-term vehicle for cash when making long-term investment
decisions
- - seek a rate of return that is potentially higher than certificates of deposit
or savings accounts
Historical Performance
- -----------------------------------
The bar chart below provides an indication of risk by showing how the Fund's
performance has varied from year to year. The Platinum Class of the Fund began
offering its shares on November 7, 1995. However, another class of shares of the
Fund not offered in this prospectus has been offered since March 2, 1992. In the
chart and table below, performance results before November 7, 1995 are for the
older class. Because the other class had lower expenses, its performance was
better than the Platinum Class of the Fund would have realized in the same
period. Past performance is not necessarily indicative of how the Fund will
perform in the future. Investors may call 1-800-388-3344 to obtain the Fund's
current seven-day yield.
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[PERFORMANCE GRAPH]
<TABLE>
<S> <C>
1993 ............................ 3.05%
1994 ............................ 4.09%
1995 ............................ 5.62%
1996 ............................ 4.51%
1997 ............................ 4.65%
1998 ............................ 4.62%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: 1.43%
(1/1/93 through 12/31/98) (2nd Quarter 1995)
Lowest Quarterly Return: 0.74%
(1/1/93 through 12/31/98) (4th Quarter 1993)
</TABLE>
- --------------------------------------------------------------------------------
About the Funds 12 Prospectus
<PAGE> 97
AMERICAN AADVANTAGE
U.S. GOVERNMENT MONEY MARKET FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
----------------------------------
AS OF 12/31/98
----------------------------------
SINCE INCEPTION
1 YEAR 5 YEARS (3/2/92)
------ ------- ---------------
<S> <C> <C> <C>
U.S. Government Money Market Fund................ 4.62% 4.70% 4.31%
</TABLE>
Fees and Expenses
- ----------------------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of the U.S. Government Money Market Fund.(1)
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
<TABLE>
<S> <C>
Management Fees............................................. 0.10%
Distribution (12b-1) Fees................................... 0.25
Other Expenses.............................................. 0.66
----
TOTAL ANNUAL FUND OPERATING EXPENSES........................ 1.01%
====
</TABLE>
(1) The expense table and the Example below reflect the expenses of both the
Fund and its corresponding Portfolio.
Example
- -------------
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and then redeem all of
your shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
1 YEAR .....................................................$103
3 YEARS.....................................................$322
5 YEARS.....................................................$558
10 YEARS..................................................$1,236
Investment Adviser
- -----------------------------
AMR Investment Services, Inc.
- --------------------------------------------------------------------------------
Prospectus 13 About the Funds
<PAGE> 98
AMERICAN AADVANTAGE
MONEY MARKET MILEAGE FUND(SM)
- --------------------------------------------------------------------------------
Investment Objective
- -------------------------------
Current income, liquidity and the maintenance of a stable price of $1.00 per
share.
Principal Strategies
- ------------------------------
The Fund invests exclusively in high quality variable or fixed rate, U.S.
dollar-denominated short-term money market instruments. These securities may
include obligations of the U.S. Government, its agencies and instrumentalities;
corporate debt securities, such as commercial paper, master demand notes, loan
participation interests, medium-term notes and funding agreements; Yankeedollar
and Eurodollar bank certificates of deposit, time deposits, and bankers'
acceptances; asset-backed securities; and repurchase agreements involving the
foregoing obligations.
The Fund will only buy securities with the following credit qualities:
- - rated in the highest short-term categories by two rating organizations, such
as "A-1" by Standard & Poor's Corporation and "P-1" by Moody's Investors
Service, Inc.,
- - rated in the highest short-term category by one rating organization if the
securities are rated only by one rating organization, or
- - unrated securities that are determined to be of equivalent quality by the
Manager.
The Fund invests more than 25% of its total assets in obligations issued by the
banking industry. However, for temporary defensive purposes when the Manager
believes that maintaining this concentration may be inconsistent with the best
interests of shareholders, the Fund may not maintain this concentration.
Securities purchased by the Fund 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 maturity of the Fund will not exceed 90 days.
- --------------------------------------------------------------------------------
About the Funds 14 Prospectus
<PAGE> 99
AMERICAN AADVANTAGE
MONEY MARKET MILEAGE FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
Risk Factors
- -------------------
- - The yield paid by the Fund is subject to changes in interest rates. As a
result, there is risk that a decline in short-term interest rates would lower
its yield and the overall return on your investment.
- - Although the Fund seeks to preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in the Fund.
- - As with any money market fund, there is the risk that the issuers or
guarantors of securities owned by the Fund will default on the payment of
principal or interest or the obligation to repurchase securities from the
Fund.
Your investment in the Fund is not insured or guaranteed by the U.S. Government
or any financial or government institution.
Investor Profile
- -----------------------
This Fund may be suitable for investors who:
- - seek the preservation of capital and to avoid fluctuations in principal
- - desire regular, monthly income from a highly liquid investment
- - require a short-term vehicle for cash when making long-term investment
decisions
- - seek a rate of return that is potentially higher than certificates of deposit
or savings accounts
- - desire to receive miles in the American Airlines AAdvantage(R) program
Historical Performance
- -----------------------------------
The bar chart below provides an indication of risk by showing how the Fund's
performance has varied from year to year. The performance shown in the chart and
table below is a combination of the Fund's performance and that of its
predecessor fund. The Fund was created from a predecessor fund that began
offering its shares on September 1, 1987. Performance results through October
31, 1991 are for the Institutional Class of the predecessor fund, and results
from November 1, 1991 through October 31, 1995 are for the predecessor fund's
Mileage Class, and results from November 1, 1995 through Janu-
- --------------------------------------------------------------------------------
Prospectus 15 About the Funds
<PAGE> 100
AMERICAN AADVANTAGE
MONEY MARKET MILEAGE FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
ary 28, 1996 are for the predecessor to this Fund. The Fund began offering its
shares on January 29, 1996. Performance results shown from that date through
December 31, 1998 are for the Fund. Because the predecessor fund had lower
expenses, its performance was better than the Platinum Class of the Fund would
have realized in the same period. Past performance is not necessarily indicative
of how the Fund will perform in the future. Investors may call 1-800-388-3344 to
obtain the Fund's current seven-day yield.
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[PERFORMANCE GRAPH]
<TABLE>
<S> <C>
1989 .......................................... 9.47%
1990 .......................................... 8.40%
1991 .......................................... 6.77%
1992 .......................................... 4.02%
1993 .......................................... 3.28%
1994 .......................................... 4.22%
1995 .......................................... 5.93%
1996 .......................................... 4.65%
1997 .......................................... 4.74%
1998 .......................................... 4.67%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: 2.45%
(1/1/89 through 12/31/98) (2nd Quarter 1989)
Lowest Quarterly Return: 0.74%
(1/1/89 through 12/31/98) (2nd & 4th Quarter 1993,
1st Quarter 1994)
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURN
---------------------------
AS OF 12/31/98
---------------------------
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
<S> <C> <C> <C>
Money Market Mileage Fund................................... 4.67% 4.73% 5.48%
</TABLE>
- --------------------------------------------------------------------------------
About the Funds 16 Prospectus
<PAGE> 101
AMERICAN AADVANTAGE
MONEY MARKET MILEAGE FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
Fees and Expenses
- ----------------------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Money Market Mileage Fund.(1)
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
<TABLE>
<S> <C>
Management Fees............................................. 0.10%
Distribution (12b-1) Fees................................... 0.25
Other Expenses.............................................. 0.77
----
Total Annual Fund Operating Expenses........................ 1.12%
====
Fee Waiver and/or Expense Reimbursement..................... 0.03(2)
NET EXPENSES................................................ 1.09%
</TABLE>
(1) The expense table and the Example below reflect the expenses of both the
Fund and its corresponding Portfolio.
(2) The Manager has contractually agreed to waive a portion of Distribution
Fees through October 31, 1999 to the extent that Total Annual Fund
Operating Expenses exceed 1.09%.
Example
- -------------
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and then redeem all of
your shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
1 YEAR .....................................................$111
3 YEARS.....................................................$353
5 YEARS.....................................................$614
10 YEARS..................................................$1,360
Investment Adviser
- -----------------------------
AMR Investment Services, Inc.
- --------------------------------------------------------------------------------
Prospectus 17 About the Funds
<PAGE> 102
The Manager
- ---------------------
The Trust has retained AMR Investment Services, Inc. to serve as its Manager.
The Manager, located at 4333 Amon Carter Boulevard, Fort Worth, Texas 76155, is
a wholly owned subsidiary of AMR Corporation, the parent company of American
Airlines, Inc. The Manager was organized in 1986 to provide investment
management, advisory, administrative and asset management consulting services.
As of December 31, 1998, the Manager had approximately $20.4 billion of assets
under management, including approximately $7.2 billion under active management
and $13.2 billion as named fiduciary or financial adviser. Of the total,
approximately $14.5 billion of assets are related to AMR Corporation.
The Manager provides or oversees the provision of all administrative, investment
advisory and portfolio management services to the Funds. The Manager develops
the investment programs for each Fund and serves as the sole investment adviser
to the Funds. As compensation for providing management services, each Fund pays
the Manager an annualized advisory fee that is calculated and accrued daily,
equal to the sum of 0.10% of the net assets of the Fund.
Valuation of Shares
- -------------------------------
The price of each Fund's shares is based on its net asset value ("NAV") per
share. Each Fund's NAV is computed by adding total assets, subtracting all of
the Fund's liabilities, and dividing the result by the total number of shares
outstanding. Securities held by the Funds are valued in accordance with the
amortized cost method, which is designed to enable the Funds to maintain a
stable NAV of $1.00 per share. Debt securities (other than short-term
securities) usually are valued on the basis of prices provided by a pricing
service. In some cases, the price of debt securities is determined using quotes
obtained from brokers.
The NAV of Platinum Class shares will be determined based on a pro rata
allocation of investment income, expenses and total capital gains and losses.
Each Fund's NAV per share is determined as of the close of the New York Stock
Exchange ("Exchange"), generally 4:00 p.m. Eastern time, on each day on which
the Exchange is open for business, with the exception of Columbus Day and
Veteran's Day. The Funds are closed and no NAV is calculated on these days.
- --------------------------------------------------------------------------------
About the Funds 18 Prospectus
<PAGE> 103
ABOUT YOUR INVESTMENT
- --------------------------------------------------------------------------------
Purchase and Redemption of Shares
- ----------------------------------------------------------
Eligibility
- ---------------
Platinum Class shares are offered on a continuous basis at net asset value
through selected financial institutions (such as banks and broker-dealers).
Money Market Mileage Fund shares are offered 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.
Purchase Policies
- --------------------------
No sales charges are assessed on the purchase or sale of Fund shares. Shares of
the Funds are offered and purchase orders accepted until the deadlines listed
below on each day on which the Exchange is open for trading. In addition, shares
are not offered and orders are not accepted on Columbus Day and Veteran's Day:
<TABLE>
<CAPTION>
PURCHASE BY
FUND (EASTERN TIME)*:
- ---- ----------------
<S> <C>
Money Market 4:00 p.m.
Municipal Money Market 11:45 a.m.
U.S. Government Money Market 4:00 p.m.
Money Market Mileage 4.00 p.m.
* or the close of the Exchange (whichever comes first)
</TABLE>
If a purchase order is received in good order prior to the applicable Fund's
deadline, the purchase price will be the NAV per share next determined on that
day. If a purchase order is received in good order after the applicable
deadline, the purchase price will be the NAV of the following day that the Fund
is open for business. Checks to purchase shares are accepted subject to
collection at full face value in U.S. funds and must be drawn in U.S. dollars on
a U.S. bank.
- --------------------------------------------------------------------------------
Prospectus 19 About Your Investment
<PAGE> 104
Opening an Account
- -------------------------------
A completed, signed application is required to open an account. Financial
institutions may have different procedures for opening an account. Eligible
investors in the Money Market Mileage Fund can enroll in the American Airlines
AAdvantage(R) Program by calling (800) 433-7300. You may request a Fund
application form by calling (800) 388-3344.
Complete the application, sign it and:
Mail to:
American AAdvantage Funds-Platinum Class
P.O. 419643
Kansas City, MO 64141-6643
Redemption Policies
- ------------------------------
Shares of any Fund may be redeemed by telephone or mail on any day that the Fund
is open for business. The redemption price will be the NAV next determined after
a redemption order is received in good order. Any questions regarding what
constitutes good order should be directed to the financial institution through
which Fund shares were purchased or the Fund's transfer agent at (800) 388-3344.
Proceeds from redemptions requested by the following deadlines will generally be
wired to shareholders on the same day.
<TABLE>
<CAPTION>
SAME DAY WIRE REDEMPTION
FUND ORDER DEADLINE:
- ---- ------------------------
<S> <C>
Money Market 2:00 p.m. Eastern Time*
Municipal Money Market 11:45 a.m. Eastern Time*
U.S. Government Money Market 2:00 p.m. Eastern Time*
Money Market Mileage 2:00 p.m. Eastern Time*
* or the close of the Exchange (whichever comes first)
</TABLE>
In any event, proceeds from a redemption order for any Fund will be transmitted
to a shareholder by no later than seven days after the receipt of a redemption
request in good order. Delivery of proceeds from shares purchased by check may
be delayed until the check has cleared, which may take up to 15 days.
The Funds reserve the right to suspend redemptions or postpone the date of
payment (i) when the Exchange is closed (other than for customary weekend and
holiday closings); (ii) when trading on the Exchange is restricted; (iii) when
the SEC determines that an emergency exists so that disposal of a
- --------------------------------------------------------------------------------
About Your Investment 20 Prospectus
<PAGE> 105
Fund's investments or determination of its NAV is not reasonably practicable; or
(iv) by order of the SEC for protection of the Funds' shareholders.
Although the Funds intend to redeem shares in cash, each Fund reserves the right
to pay the redemption price in whole or in part by a distribution of readily
marketable securities held by the applicable Fund's corresponding Portfolio.
Unpaid dividends credited to an account up to the date of redemption of all
shares generally will be paid at the time of redemption.
HOW TO PURCHASE SHARES
<TABLE>
<CAPTION>
To Make an Initial Purchase To Add to an Existing Account
- ------------------------------------------------------------------------------------------
<S> <C>
By Check
- - Make check payable to American AAdvantage Include the shareholder's account number and
Funds Fund name and Fund number on the check. Mail
- - Include the Fund name, Fund number and check ($50 minimum) to:
"Platinum Class" on the check.
- - Mail check ($2,500 minimum) to: American AAdvantage Funds-Platinum Class
P.O. Box 419643
American AAdvantage Funds-Platinum Class Kansas City, MO 64141-6643
P.O. Box 419643
Kansas City, MO 64141-6643
By Wire
If your account has been established, you Call (800) 388-3344 to purchase shares by
may call (800) 388-3344 to purchase shares wire. Send a bank wire to State Street Bank
by wire. Send a bank wire to State Street & Trust Co. with these instructions:
Bank & Trust Co. with these instructions: - ABA# 0110-0002-8; AC-9905-342-3
- - ABA# 0110-0002-8; AC-9905-342-3 - Attn: American AAdvantage Funds-Platinum
- - Attn: American AAdvantage Funds-Platinum Class
Class - the Fund name and Fund number
- - the Fund name and Fund number - shareholder's account number and
- - account number and registration registration
By Exchange
Shares of a Fund may be purchased by Shares of a Fund may be redeemed in exchange
exchange from another American AAdvantage for another American AAdvantage
Fund-Platinum Class if the shareholder has Fund-Platinum Class if the shareholder has
owned shares of the other Fund for at least owned shares of the Fund for at least 15
15 days. Send a written request to the days. Send a written request to the address
address above or call (800) 388-3344 to above or call (800) 388-3344 to exchange
exchange shares. shares.
</TABLE>
- --------------------------------------------------------------------------------
Prospectus 21 About Your Investment
<PAGE> 106
HOW TO REDEEM SHARES
<TABLE>
<CAPTION>
Method Additional Instructions
- ------------------------------------------------------------------------------------------
<S> <C>
By Telephone
Call (800) 388-3344 to request a redemption. Proceeds from redemptions placed by
telephone will generally be transmitted by
wire only, as instructed on the application
form.
By Mail
Write a letter of instruction including - Other supporting documents may be required
- - the Fund name, Fund number and class for estates, trusts, guardianships,
- - shareholder account number custodians, corporations, IRAs and welfare,
- - shares or dollar amount to be redeemed pension and profit sharing plans. Call (800)
- - authorized signature(s) of all persons 388-3344 for instructions.
required to sign for the account - Proceeds will only be mailed to the
account address of record or transmitted by
wire to a commercial bank account
designated on the account application
form.
Mail to:
American AAdvantage Funds-Platinum Class
P.O. Box 419643
Kansas City, MO 64141-6643
By Check
Choose the check writing feature on the - Minimum check amount is $100
account application. - A $2 service fee per check is charged for
check copies
- A $15 service fee will be charged when a
check is presented for an amount greater
than the value of the shareholder's
account
- A $12 fee will be charged for "stop
payment" requests
By Pre-Authorized Automatic Redemption
Contact the financial institution through Proceeds will be transferred automatically
which you purchased Fund shares. from your Fund account to your bank account
via ACH on or about the 15th day of each
month ($100 minimum).
By Exchange
Shares of a Fund may be redeemed in exchange for another American AAdvantage Fund-
Platinum Class if the shareholder has owned shares of the Fund for at least 15 days. Send
a written request to the address above or call (800) 388-3344 to exchange shares.
</TABLE>
- --------------------------------------------------------------------------------
About Your Investment 22 Prospectus
<PAGE> 107
General Policies
- ------------------------
If a shareholder's account balance in any Fund falls below $2,500, the
shareholder may be asked to increase the balance. If the account balance remains
below $2,500 after 45 days, the Funds reserve the right to close the account and
send the proceeds to the shareholder.
The following policies apply to instructions you may provide to the Funds by
telephone:
- - The Funds, their officers, trustees, directors, employees, or agents are not
responsible for the authenticity of instructions provided by telephone, nor
for any loss, liability, cost or expense incurred for acting on them.
- - The Funds employ procedures reasonably designed to confirm that instructions
communicated by telephone are genuine.
- - Due to the volume of calls or other unusual circumstances, telephone
redemptions may be difficult to implement during certain time periods.
The Funds reserve the right to:
- - reject any order for the purchase of shares and to limit or suspend, without
prior notice, the offering of shares,
- - modify or terminate the exchange privilege at any time,
- - limit the number of exchanges between Funds an investor may exercise, and
- - seek reimbursement from you for any related loss incurred if your payment for
the purchase of Fund shares by check does not clear your bank.
Each financial institution is responsible for the prompt transmission of
purchase and redemption orders of its clients. Financial institutions may
provide varying arrangements for their clients with respect to the purchase and
redemption of Platinum Class shares. Shares purchased through financial
institutions may be subject to transaction fees. Financial institutions offering
Platinum Class shares may impose fees on investors for check writing privileges
or, if approved by the Funds, establish variations on minimum check amounts.
Some institutions may arrange for additional privileges associated with Platinum
Class shares, such as a debit card, which may only be available subject to
certain conditions or limitations.
- --------------------------------------------------------------------------------
Prospectus 23 About Your Investment
<PAGE> 108
Distribution and Taxes
- -------------------------------------
The Funds distribute most or all of their net earnings in the form of dividends
from net investment income and distributions of realized net capital gains that
are paid to shareholders monthly on the first business day after the month ends.
Unless the account application instructs otherwise, distributions will be
reinvested in additional Fund shares. Usually, dividends (except those paid by
the Municipal Money Market Fund) and distributions of net realized gains are
taxable events.
The Municipal Money Market Fund designates most of its distributions as
"exempt-interest dividends," which may be excluded from gross income. If the
Fund earns taxable income from any of its investments, that income will be
distributed as a taxable dividend. If the Fund invests in private activity
obligations, shareholders will be required to treat a portion of the exempt-
interest dividends they receive as a "tax preference item" in determining their
liability for federal alternative minimum tax ("AMT"). Some states exempt from
income tax the interest on their own obligations and on obligations of
governmental agencies and municipalities in the state; accordingly, each year
shareholders will receive tax information on the Fund's exempt-interest income
by state.
This is only a summary of some of the important income tax considerations that
may affect Fund shareholders. Shareholders should consult their tax adviser
regarding specific questions as to the effect of federal, state or local income
taxes on an investment in the Funds.
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 rental and hotel accommodations. For more
information about the AAdvantage program, call American Airlines at (800)
433-7300.
AAdvantage travel awards ("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 Money Market Mileage Fund. Mileage is
calculated on the average daily balance and posted monthly. The average daily
- --------------------------------------------------------------------------------
About Your Investment 24 Prospectus
<PAGE> 109
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 an $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 Money
Market Mileage Fund. These miles appear on subsequent AAdvantage program
statements.
For 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
the Money Market Mileage 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 Money Market Mileage Fund 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 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.
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.
- --------------------------------------------------------------------------------
Prospectus 25 About Your Investment
<PAGE> 110
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Distribution of Trust Shares
- ----------------------------------------------
The AAdvantage Funds and Mileage Funds have each adopted a Distribution Plan for
the Platinum Class (the "Plans") in accordance with Rule 12b-1 under the
Investment Company Act of 1940 ("1940 Act"), which allow the Funds to pay
distribution and other fees for the sale of Fund shares and for other services
provided to shareholders. In addition, the Mileage Funds' Plan authorizes
expenses incurred in connection with participation in the AAdvantage program.
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). Because these fees are paid out of each Fund's assets on an
on-going basis, over time these fees will increase the cost of your investment
and may cost you more than paying other types of sales charges.
Master-Feeder Structure
- --------------------------------------
The Funds operate under a master-feeder structure. This means that each Fund is
a "feeder" fund that invests all of its investable assets in a "master" fund
with the same investment objective. The "master" fund purchases securities for
investment. The master-feeder structure works as follows:
---------------------
Investor
---------------------
purchases shares of
---------------------
Feeder Fund
---------------------
which invests in
---------------------
Master Fund
---------------------
which buys
---------------------
Investment Securities
---------------------
Each Fund can withdraw its investment in its corresponding Portfolio at any time
if the Board determines that it is in the best interest of the Fund and its
shareholders to do so. If this happens, the Fund's assets will be invested
according to the investment policies and restrictions described in this
Prospectus.
- --------------------------------------------------------------------------------
Additional Information 26 Prospectus
<PAGE> 111
Year 2000
- -----------------
The Funds could be affected adversely if the computer systems used by the
Manager, the Funds' other service providers, or companies in which the Funds
invest do not properly process and calculate information that relates to dates
beginning on January 1, 2000 and beyond. Due to the Funds' reliance on various
service providers to perform essential functions, each of the Funds could have
difficulty calculating its NAV, processing orders for share redemptions and
delivering account statements and other information to shareholders. The Manager
has taken steps that it believes are reasonably designed to address the
potential failure of computer systems used by the Manager and the Funds' service
providers to address the Year 2000 issue. There can be no assurance that the
steps taken by the Manager will be sufficient to avoid any adverse impact.
In evaluating current and potential portfolio positions, Year 2000 is one of the
factors that the Manager takes into consideration. The Manager will rely upon
public filings and other statements made by companies regarding their Year 2000
readiness. Issuers in countries outside of the U.S. may not be required to make
the level of disclosure regarding Year 2000 readiness that is required in the
U.S. If the value of a Fund's investment is adversely affected by a Year 2000
problem, the NAV of the Fund may be affected as well.
Financial Highlights
- ---------------------------------
The financial highlights tables are intended to help you understand each Fund's
financial performance for the past five years (or, if shorter, the period of the
Fund's operations). Certain information reflects financial results for a single
share of the Fund's Platinum Class. The total returns in the table represent the
rate that an investor would have earned (or lost) on an investment in the Fund
(assuming reinvestment of all dividends and distributions). Each Fund's
highlights were audited by Ernst & Young LLP, independent auditors. More
financial information about the Funds is found in their Annual Report, which you
may obtain upon request.
- --------------------------------------------------------------------------------
Prospectus 27 Additional Information
<PAGE> 112
<TABLE>
<CAPTION>
MONEY MARKET FUND
--------------------------------------------------------------------------------------------
PLATINUM CLASS
----------------------------------------- INSTITUTIONAL CLASS
YEAR ENDED PERIOD --------------------------------------------
OCTOBER 31, ENDED YEAR ENDED OCTOBER 31,
----------------------- OCTOBER 31, --------------------------------------------
FOR A SHARE OUTSTANDING 1998 1997 1996(A) 1996 1995 1994
THROUGHOUT THE PERIOD: -------- -------- ----------- ---------- ---------- ----------
<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.......... 0.05(B) 0.05(B) 0.05(B) 0.05(B) 0.06 0.04
Less dividends from net
investment income............. (0.05) (0.05) (0.05) (0.05) (0.06) (0.04)
-------- -------- -------- ---------- ---------- ----------
Net asset value, end of
period........................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ========== ========== ==========
Total return (annualized)...... 4.89% 4.87% 4.85%(C) 5.57% 5.96% 3.85%
======== ======== ======== ========== ========== ==========
Ratios and supplemental data:
Net assets, end of period (in
thousands).................. $744,226 $494,413 $119,981 $1,406,939 $1,206,041 $1,893,144
Ratios to average net assets
(annualized)
Expenses.................... 0.94%(B) 0.93%(B) 0.94%(B) 0.24%(B) 0.23% 0.21%
Net investment income....... 4.78%(B) 4.80%(B) 4.63%(B) 5.41%(B) 5.79% 3.63%
</TABLE>
(A) The Money Market Fund-Platinum Class commenced active operations on November
7, 1995.
(B) 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.
(C) 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.
- --------------------------------------------------------------------------------
Additional Information 28 Prospectus
<PAGE> 113
<TABLE>
<CAPTION>
MUNICIPAL MONEY MARKET FUND
-----------------------------------------------------------------------------------
PLATINUM CLASS INSTITUTIONAL CLASS
--------------------------------------- -------------------------------------
YEAR ENDED PERIOD YEAR ENDED PERIOD
OCTOBER 31, ENDED OCTOBER 31, ENDED
--------------------- OCTOBER 31, ------------------- OCTOBER 31,
FOR A SHARE OUTSTANDING 1998 1997 1996(A) 1996 1995 1994(A)
THROUGHOUT THE PERIOD: ------- ------- ----------- ------ ------ -----------
<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......... 0.03(B) 0.03(B) 0.03(B) 0.04(B) 0.04 0.02
Less dividends from net
investment income........... (0.03) (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 $ 1.00
======= ======= ======= ====== ====== ======
Total return (annualized)..... 2.75% 2.79% 2.88%(C) 3.59% 3.75% 2.44%
======= ======= ======= ====== ====== ======
Ratios and supplemental data:
Net assets, end of period
(in thousands)............ $87,852 $63,883 $49,862 $ 6 $ 7 $9,736
Ratios to average net assets
(annualized)(D)
Expenses.................. 1.04%(B) 1.03%(B) 0.97%(B) 0.27%(B) 0.35% 0.30%
Net investment income..... 2.69%(B) 2.75%(B) 2.72%(B) 3.49%(B) 3.70% 2.38%
</TABLE>
(A)The Municipal Money Market Fund commenced active operations on November 10,
1993. The Municipal Money Market Fund-Platinum Class commenced active
operations on November 7, 1995.
(B)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.
(C)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.
(D)Operating results exclude management and administrative services fees waived
by the Manager. Had the Platinum Class of the Fund paid such fees, the ratio
of expenses and net investment income to average net assets would have been
1.02% and 2.67%, respectively, for the period ended October 31, 1996, 1.04%
and 2.74%, respectively, for the year ended October 31, 1997 and 1.07% and
2.66%, respectively, for the year ended October 31, 1998. Had the
Institutional Class of the Fund paid such fees, the ratio of expenses and net
investment income to average net assets 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 and 0.33% and 3.43%,
respectively, for the year ended October 31, 1996.
- --------------------------------------------------------------------------------
Prospectus 29 Additional Information
<PAGE> 114
<TABLE>
<CAPTION>
U.S. GOVERNMENT MONEY MARKET FUND
---------------------------------------------------------------------------------
PLATINUM CLASS
--------------------------------------- INSTITUTIONAL CLASS
YEAR ENDED PERIOD -----------------------------------
OCTOBER 31, ENDED YEAR ENDED OCTOBER 31,
--------------------- OCTOBER 31, -----------------------------------
FOR A SHARE OUTSTANDING 1998 1997(B) 1996(A) 1996 1995 1994
THROUGHOUT THE PERIOD: ------- ------- ----------- ------- ------- -------
<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........ 0.05(C) 0.05(C) 0.04(C) 0.05(C) 0.06 0.04
Less dividends from net
investment income.......... (0.05) (0.05) (0.04) (0.05) (0.06) (0.04)
------- ------- ------- ------- ------- -------
Net asset value, end of
period..................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= ======= =======
Total return (annualized).... 4.71% 4.61% 4.58%(D) 5.29% 5.67% 3.70%
======= ======= ======= ======= ======= =======
Ratios and supplemental data:
Net assets, end of period
(in thousands)........... $78,412 $68,439 $52,153 $25,595 $47,184 $67,607
Ratios to average net
assets (annualized)(E)
Expenses................. 1.01%(C) 0.99%(C) 1.00%(C) 0.32%(C) 0.32% 0.25%
Net investment income.... 4.62%(C) 4.53%(C) 4.35%(C) 5.16%(C) 5.49% 3.44%
</TABLE>
(A) The U.S. Government Money Market Fund-Platinum Class commenced active
operations on November 7, 1995.
(B) Prior to March 1, 1997, the American AAdvantage U.S. Government Money Market
Fund was known as the U.S. Treasury Money Market Fund and operated under
different investment policies.
(C) 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.
(D) 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.
(E) Operating results excluded fees waived by the Manager during the year ended
October 31, 1998. The ratio of expenses to average net assets was 1.02% and
the ratio of net investment income to average net assets was 4.62% prior to
expenses waived.
- --------------------------------------------------------------------------------
Additional Information 30 Prospectus
<PAGE> 115
<TABLE>
<CAPTION>
MONEY MARKET MILEAGE FUND
----------------------------------------------------------
PLATINUM CLASS MILEAGE
---------------------------------------- CLASS
YEAR ENDED -----------
OCTOBER 31, PERIOD ENDED YEAR ENDED
--------------------- OCTOBER 31, OCTOBER 31,
FOR A SHARE OUTSTANDING THROUGHOUT 1998 1997 1996(A) 1996
THE PERIOD: ------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Net asset value, beginning of period..... $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- --------
Net investment income.................... 0.05(B) 0.05(B) 0.03(B) 0.05(B)
Less dividends from net investment
income................................. (0.05) (0.05) (0.03) (0.05)
------- ------- ------- --------
Net asset value, end of period........... $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ========
Total return (annualized)................ 4.74% 4.71% 4.78% 5.12%
======= ======= ======= ========
Ratios and supplemental data:
Net assets, end of period (in
thousands)........................... $73,875 $49,184 $15,429 $106,709
Ratios to average net assets
(annualized)(C)
Expenses............................. 1.09%(B) 1.09%(B) 1.09%(B) 0.67%(B)
Net investment income................ 4.64%(B) 4.64%(B) 4.48%(B) 5.02%(B)
</TABLE>
(A) The Money Market Mileage Fund-Platinum Class commenced active operations on
January 29, 1996, and at that time the existing shares of the Fund were
designated as Mileage Class shares.
(B) 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.
(C) Operating results exclude expenses reimbursed by the Manager. Had the
Platinum Class of 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, 1.14% and 4.59%,
respectively, for the year ended October 31, 1997 and 1.12% and 4.61%,
respectively, for the year ended October 31, 1998. Had the Mileage Class of
the Fund paid such fees, the ratio of expenses and net investment income to
average net assets would have been 0.78% and 4.91%, respectively, for the
year ended October 31, 1996.
- --------------------------------------------------------------------------------
Prospectus 31 Additional Information
<PAGE> 116
ADDITIONAL INFORMATION
ADDITIONAL INFORMATION ABOUT THE FUNDS IS FOUND IN THE DOCUMENTS LISTED BELOW.
REQUEST A FREE COPY OF THESE DOCUMENTS BY CALLING (800) 388-3344.
ANNUAL REPORT/SEMI-ANNUAL REPORT
The Fund's Annual and Semi-Annual Reports list the Fund's actual investments as
of the report's date. They also include a discussion by the Manager of market
conditions and investment strategies that ~significantly affected the Fund's
performance. The report of the Fund's independent auditors is included in the
Annual Report.
STATEMENT OF ADDITIONAL INFORMATION
The SAI contains more details about the Fund and its investment policies. The
SAI is incorporated in this Prospectus by reference (it is legally part of this
Prospectus). A current SAI is on file with the Securities and Exchange
Commission (SEC).
TO OBTAIN MORE INFORMATION ABOUT THE FUNDS OR TO REQUEST A COPY OF THE DOCUMENTS
LISTED ABOVE:
[TELEPHONE LOGO]
BY TELEPHONE:
Call (800) 388-3344
[MAILBOX LOGO]
BY MAIL:
American AAdvantage Funds
P.O. Box 619003, MD5645
DFW Airport, TX 75261-9003
[KEYBOARD LOGO]
BY E-MAIL:
[email protected]
[COMPUTER MOUSE LOGO]
ON THE INTERNET:
Visit our website at www.aafunds.com
Visit the SEC website at www.sec.gov
Copies of these documents may also be obtained from the SEC Public Reference
Room in Washington, D.C. The Public Reference Room can be reached at (800)
732-0330 or by mailing a request, including a duplicating fee to: SEC's Public
Reference Section, 450 5th Street NW, Washington, D.C. 20549-6009.
[AMERICAN AADVANTAGE FUNDS LOGO] [AMERICAN AADVANTAGE MILEAGE FUNDS LOGO]
SEC File Number 811-4984 SEC File Number 811-9018
American Airlines is not responsible for investments made in the American
AAdvantage Funds. American AAdvantage Funds and American AAdvantage Mileage
Funds are registered service marks of AMR Corporation. Platinum Class, American
AAdvantage Money Market Fund, American AAdvantage Municipal Money Market Fund,
American AAdvantage U.S. Government Money Market Fund and American AAdvantage
Money Market Mileage Fund are service marks of AMR Investment Services, Inc.
<PAGE> 117
STATEMENT OF ADDITIONAL INFORMATION
AMERICAN AADVANTAGE FUNDS(R)
AMERICAN AADVANTAGE MILEAGE FUNDS(R)
-- PLATINUM CLASS(SM) --
MARCH 1, 1999
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 known as the American AAdvantage U.S. Treasury Money Market
Fund prior to March 1, 1997 (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 no load,
open-end, diversified management investment companies. The Trusts were organized
as Massachusetts business trusts on January 16, 1987 and February 22, 1995,
respectively. 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, 1999 ("Prospectus"), a copy of which may be obtained without
charge by calling (800) 967-9009.
This SAI is not a prospectus and is authorized for distribution to
prospective investors only if preceded or accompanied by a current Prospectus.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Non-Principal Investment Strategies and Risks..................................2
Investment Restrictions........................................................2
Trustees and Officers of the Trust and the AMR Trust...........................4
Control Persons and 5% Shareholders............................................6
Management, Administrative Services and Distribution Fees......................6
Other Service Providers........................................................7
Redemptions in Kind............................................................7
Net Asset Value................................................................7
Tax Information................................................................8
Yield and Total Return Quotations..............................................9
Description of the Trusts.....................................................11
Other Information.............................................................12
Financial Statements..........................................................20
</TABLE>
<PAGE> 118
NON-PRINCIPAL INVESTMENT STRATEGIES AND RISKS
Each Fund may:
1. Invest in other investment companies to the extent permitted by the
Investment Company Act of 1940 ("1940 Act") or exemptive relief granted
by the Securities and Exchange Commission ("SEC").
2. Loan securities to broker-dealers or other institutional investors.
Securities loans will not be made if, as a result, the aggregate amount
of all outstanding securities loans by a Portfolio exceeds 33 1/3% of
its total assets (including the market value of collateral received).
For purposes of complying with a Portfolio's investment policies and
restrictions, collateral received in connection with securities loans
is deemed an asset of the Portfolio to the extent required by law. AMR
Investment Services, Inc. ("The Manager") receives compensation for
administrative and oversight functions with respect to securities
lending. The amount of such compensation depends on the income
generated by the loan of the securities. A Portfolio continues to
receive interest on the securities loaned and simultaneously earns
either interest on the investment of the cash collateral or fee income
if the loan is otherwise collateralized.
3. Enter into repurchase agreements. A repurchase agreement is an
agreement under which securities are acquired by a Portfolio from a
securities dealer or bank subject to resale at an agreed upon price on
a later date. The acquiring Portfolio bears a risk of loss in the event
that the other party to a repurchase agreement defaults on its
obligations and the Portfolio is delayed or prevented from exercising
its rights to dispose of the collateral securities. However, the
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's
Board of Trustees ("AMR Trust Board").
4. Purchase securities in private placement offerings made in reliance
on the "private placement" exemption from registration afforded by
Section 4(2) of the Securities Act of 1933 ("1933 Act"), and resold to
qualified institutional buyers under Rule 144A under the 1933 Act
("Section 4(2) securities"). The Portfolios will not invest more than
10% of their respective net assets in Section 4(2) securities and
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, that any
Section 4(2) securities held by such Portfolio in excess of this level
are at all times liquid.
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 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.
2
<PAGE> 119
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.
8. Invest more than 5% of its total assets (taken at market value) in
securities of any one issuer, other than obligations issued by the U.S.
Government, its agencies and instrumentalities, or purchase more than 10%
of the voting securities of any one issuer, with respect to 75% of the
Portfolio's total assets; or
9. Invest more than 25% of its total assets in the securities of
companies primarily engaged in any one industry, provided that: (i) this
limitation does not apply to obligations issued or guaranteed by the U.S.
Government, its agencies and instrumentalities; (ii) municipalities and
their agencies and authorities are not deemed to be industries; and (iii)
financial service companies are classified according to the end users of
their services (for example, automobile finance, bank finance, and
diversified finance will be considered separate industries).
The following non-fundamental investment restrictions may be changed
with respect to each Fund by a vote of a majority of the Board or, with respect
to the Portfolio, by a vote of a majority of the AMR Trust Board. The Portfolio
may not:
1. Invest more than 15% of its net assets in illiquid securities,
including time deposits and repurchase agreements that mature in more
than seven days; or
2. Purchase securities on margin, effect short sales (except that a
Portfolio may obtain such short term credits as may be necessary for
the clearance of purchases or sales of securities) or purchase or sell
call options or engage in the writing of such options.
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.
3
<PAGE> 120
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. The Manager is responsible
for the management and the administration of each Trust's assets, and each
Trust's officers are responsible for the respective Trust's operations. The
Trustees and officers of the Trusts and the AMR Trust are listed below, together
with their principal occupations during the past five years. Unless otherwise
indicated, the address of each person listed below is 4333 Amon Carter
Boulevard, MD 5645, Fort Worth, Texas 76155.
<TABLE>
<CAPTION>
POSITION WITH
NAME, AGE AND ADDRESS EACH TRUST PRINCIPAL OCCUPATION DURING PAST 5 YEARS
- --------------------- ---------- ----------------------------------------
<S> <C> <C>
William F. Quinn* (51) Trustee and President, AMR Investment Services, Inc. (1986-Present);
President 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 (61) Trustee Partner, Akin, Gump, Strauss, Hauer & Feld, LLP
1700 Pacific Avenue (1960-Present)#; Director, Clear Channel Communications
Suite 4100 (1984-Present); Director, CenterPoint Properties, Inc.
Dallas, Texas 75201 (1994-Present); Trustee, American AAdvantage Funds
(1993-Present); Trustee, American AAdvantage Funds(1996-
Present); Trustee American AAdvantage Mileage Funds
(1996-Present).
Ben J. Fortson (66) Trustee President and CEO, Fortson Oil Company (1958-Present);
301 Commerce Street Director, Kimbell Art Foundation (1964-Present); Director,
Suite 3301 Burnett Foundation (1987-Present); Honorary Trustee, Texas
Fort Worth, Texas 76102 Christian University (1986-Present); Trustee, American
AAdvantage Funds (1996-Present); Trustee, American AAdvantage
Mileage Funds (1996-Present).
John S. Justin (82) Trustee Chairman and Chief Executive Officer, Justin Industries, Inc.
2821 West Seventh Street (a diversified holding company) (1969-Present); Executive
Fort Worth, Texas 76107 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* (63) Trustee Consultant (1994-Present); Vice President and Controller,
American Airlines, Inc. (1985-1994); Trustee, American
AAdvantage Funds (1987-Present); Trustee, American AAdvantage
Mileage Funds (1995-Present).
</TABLE>
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<PAGE> 121
<TABLE>
<CAPTION>
POSITION WITH
NAME, AGE AND ADDRESS EACH TRUST PRINCIPAL OCCUPATION DURING PAST 5 YEARS
- --------------------- ---------- ----------------------------------------
<S> <C> <C>
Roger T. Staubach (57) Trustee Chairman of the Board and Chief Executive Officer of The
6750 LBJ Freeway Staubach Company (a commercial real estate company)
Dallas, TX 75240 (1982-Present); Director, Brinker International
(1993-Present); Director, International Home Foods, Inc.
(1997-Present); 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 (42) Trustee Managing Partner, Pharos Capital Group, L.L.C. (a private
100 Crescent Court equity firm) (1998-Present); Trustee, Teachers Retirement
Suite 1740 System of Texas (1993-Present); Director, United States
Dallas, Texas 75201 Enrichment Corporation (1993-1998), Director, Just For the
Kids (1995-Present); Director, Starwood Financial Trust
(1998-Present); Member, Council on Foreign Relations
(1995-Present); Trustee, American AAdvantage Funds
(1996-Present); Trustee, American AAdvantage Mileage Funds
(1996-Present).
Nancy A. Eckl (36) Vice President Vice President, AMR Investment Services, Inc. (December
1990-Present).
Michael W. Fields (45) Vice President Vice President, AMR Investment Services, Inc. (August
1988-Present).
Barry Y. Greenberg (35) Vice President Vice President, Legal and Compliance, AMR Investment
and Assistant Services, Inc. (1995-Present); Branch Chief (1992-1995) and
Secretary Staff Attorney (1988-1992), Securities and Exchange
Commission.
Rebecca L. Harris (32) Treasurer Vice President, Finance (1995-Present), Controller
(1991-1995), AMR Investment Services, Inc.
John B. Roberson (40) Vice President Vice President, AMR Investments Services, Inc. (1991-Present).
Robert J. Zutz (46) Secretary Partner, Kirkpatrick & Lockhart LLP (law firm)
1800 Massachusetts Ave. NW
Washington, D.C. 20036
</TABLE>
* Messrs. Quinn and O'Sullivan are deemed to be "interested persons" of each
Trust and the AMR Trust as defined by the 1940 Act.
# The law firm of Akin, Gump, Strauss, Hauer & Feld LLP ("Akin, Gump")
provides legal services to American Airlines, Inc., an affiliate of the
Manager. Mr. Feld has advised the Trusts that he has had no material
involvement in the services provided by Akin, Gump to American Airlines,
Inc. and that he has received no material benefit in connection with these
services. Akin, Gump does not provide legal services to the Manager or AMR
Corporation.
All Trustees and officers as a group own less than 1% of the outstanding
shares of 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, as a retiree of
American Airlines, Inc., already receives flight benefits. The Trusts compensate
Mr. O'Sullivan up to $10,000 annually to cover his personal flight service
charges and the charges for his three adult
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<PAGE> 122
children, as well as any income tax charged on the value of these flight
benefits. 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, 1998.
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Aggregate Aggregate Benefits Estimated From
Compensation Compensation Accrued as Annual AAdvantage
From the From the Part of the Benefits Funds
AAdvantage Mileage Trusts' Upon Complex
Name of Trustee Trust Trust Expenses Retirement (30 Funds)
- --------------- ----- ----- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
William F. Quinn $ 0 $ 0 $0 $0 $ 0
Alan D. Feld $ 8,901 $ 8,901 $0 $0 $35,605
Ben J. Fortson $ 8,760 $ 8,760 $0 $0 $35,038
John S. Justin $ 404 $ 404 $0 $0 $ 1,618
Stephen D. O'Sullivan $ 1,421 $ 1,421 $0 $0 $ 5,686
Roger T. Staubach $ 4,356 $ 4,356 $0 $0 $17,423
Kneeland Youngblood $19,891 $19,891 $0 $0 $79,563
</TABLE>
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, 1999.
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, 1999:
<TABLE>
<S> <C>
American AAdvantage Money Market Fund
Southwest Securities, Inc........................................................81%
1201 Elm Street, Suite 4300
Dallas, TX 75270-2180
American AAdvantage Municipal Money Market Fund
Southwest Securities, Inc........................................................78%
1201 Elm Street, Suite 4300
Dallas, TX 75270-2180
American AAdvantage U.S. Government Money Market Fund
Southwest Securities, Inc........................................................82%
1201 Elm Street, Suite 4300
Dallas, TX 75270-2180
American AAdvantage Money Market Mileage Fund
Southwest Securities, Inc........................................................32%
1201 Elm Street, Suite 4300
Dallas, TX 75270-2180
</TABLE>
MANAGEMENT, ADMINISTRATIVE SERVICES AND DISTRIBUTION FEES
The Manager is paid a management fee as compensation for paying
investment advisory fees and for providing the Trust and the AMR Trust with
advisory and asset allocation services. Pursuant to management and
administrative services agreements, the Manager provides the Trusts and the AMR
Trust with office space, office equipment and personnel necessary to manage and
administer the Trusts' operations. This includes:
o complying with reporting requirements;
o corresponding with shareholders;
o maintaining internal bookkeeping, accounting and auditing services and
records; and
o supervising the provision of services to the Trusts by third parties.
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<PAGE> 123
Management fees for the AAdvantage Trust 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 other investment advisers;
1997, $13,730,443, of which approximately $7,061,014 was paid by the Manager to
other investment advisers; and 1998, $17,230,000, of which approximately
$8,675,000 was paid by the Manager to other investment advisers. Management fees
in the amount of approximately $44,000, $7,309, and $407,195 were waived by the
Manager during the fiscal years ended October 31, 1996, 1997, and 1998
respectively. These amounts include payments by Portfolios in the AAdvantage
Trust other than the Funds.
Management fees for the Mileage Trust 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 other investment advisers; 1997,
$13,730,443, of which $7,061,014 was paid by the Manager to other investment
advisers and 1998, $17,230,000 of which approximately $8,675,000 was paid by the
Manager to other investment advisers. Management fees in the amount of
approximately $44,000, $7,309 and $407,195 were waived by the Manager during the
fiscal years ended October 31, 1996, 1997 and 1998.
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: 1996, $2,893,400; 1997, $4,538,345; and 1998, $7,476,000. These amounts
include payments by Portfolios in the AAdvantage Trust other than the Funds.
Administrative service fees for the Mileage Trust for the fiscal years ended
October 31, 1996, 1997 and 1998 were approximately $95,944, $275,120 and
$548,000, respectively.
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
0.25% per annum of the average daily net assets of each Mileage Fund for
distribution-related services, including costs of advertising and AAdvantage
Miles. Distribution fees pursuant to Rule 12b-1 under the 1940 Act for the
fiscal years ended October 31, 1996, 1997 and 1998 were approximately $188,590,
$470,306 and $632,000, respectively.
The Manager receives compensation for administrative and oversight
functions with respect to securities lending of the Portfolios of the AMR Trust.
Fees received by the Manager from securities lending for the fiscal years ended
October 31, 1997 and 1998 were approximately $81,113 and $175,025.
OTHER SERVICE PROVIDERS
The transfer agent for the Trust is State Street Bank & Company ("State
Street"), Boston, Massachusetts, who provides transfer agency services to Fund
shareholders directly and through its affiliate National Financial Data
Services, Kansas City, Missouri. State Street also serves as custodian for the
Portfolios of the AMR Trust and the Funds. The independent auditor for the Funds
(except as noted otherwise) and the AMR Trust is Ernst & Young LLP, Dallas,
Texas.
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
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<PAGE> 124
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:
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 certain
other income;
o Diversify its investments in securities within certain statutory
limits ("Diversification Requirement"); and
o Distribute annually to its shareholders at least 90% of its investment
company taxable income (generally, taxable net investment income plus
net short-term capital gain) 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, as an investor in its corresponding Portfolio, is deemed to
own a proportionate share of the Portfolio's assets and to earn the income on
that share for purposes of determining whether the Fund satisfies the Income and
Diversification Requirements. If a Fund failed to qualify as a RIC for any
taxable year, it would be taxed on the full amount of its taxable income for
that year without being able to deduct the distributions it makes to its
shareholders and the shareholders would treat all those distributions as
dividends (that is, ordinary income) to the extent of the Fund's earnings and
profits.
TAXATION OF THE PORTFOLIOS
Each Portfolio should be classified as a separate partnership for federal
income tax purposes and is not a "publicly traded partnership." As a result,
each Portfolio is 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
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<PAGE> 125
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).
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
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<PAGE> 126
depends on the quality, length of maturity and type of instruments invested in
by the Funds, and the applicable Fund's operating expenses. A comparison of the
quoted yields offered for various investments is valid only if yields are
calculated in the same manner. In addition, other similar investment companies
may have more or less risk due to differences in the quality or maturity of
securities held.
The yields of the Funds may be calculated in one of two ways:
(1) Current Yield--the net average annualized return without compounding
accrued interest income. For a 7-day current yield, this is computed by
dividing the net change in value over a 7 calendar-day period of a
hypothetical account having one share at the beginning of a 7
calendar-day period by the value of the account at the beginning of this
period to determine the "base period return". The quotient is multiplied
by 365 divided by 7 and stated to two decimal places. A daily current
yield is calculated by multiplying the net change in value over one day
by 365 and stating it to two decimal places. 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:
(365/7)
EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1) ] - 1
The current and effective yields for the Funds are as follows:
<TABLE>
<CAPTION>
Current daily Current yield for Effective yield for
yield as of the seven-day period the seven-day period
October 31, ended ended
1998 October 31, 1998 October 31, 1998
---- ---------------- ----------------
<S> <C> <C> <C>
Platinum Class
Money Market Fund 4.56% 4.55% 4.65%
Municipal Money Market Fund 2.28% 2.25% 2.28%
U.S. Government Money Market Fund 4.37% 4.25% 4.34%
Mileage Fund 4.41% 4.40% 4.49%
</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,
1998 were 3.73% and 3.77%, respectively (based upon a 39.6% personal tax rate).
The advertised total return for a class of a Fund would be calculated by
equating an initial amount invested in a class of a Fund to the ending
redeemable value, according to the following formula:
(n)
P(1 + T) = ERV
where "P" is a hypothetical initial payment of $1,000; "T" is the average annual
total return for the Fund; "n" is the number of years involved; and "ERV" is the
ending redeemable value of a hypothetical $1,000 payment made in the Fund at the
beginning of the investment period covered.
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<PAGE> 127
Based on this formula, annualized total returns were as follows for the
periods indicated:
<TABLE>
<CAPTION>
For the period
For the For the For the from
one-year period five-year ten-year commencement of
ended period ended period ended operations through
October 31, October 31, October 31, October 31,
1998(1) 1998(1) 1998(1) 1998(1)
------- ------- ------- -------
<S> <C> <C> <C> <C>
Platinum Class
Money Market Fund 4.89% 4.88% 5.71% 5.89%
Municipal Money Market Fund 2.75% N/A(2) N/A(2) 2.92%
U. S. Government Money Mkt. Fund (3) 4.71% 4.65% N/A(2) 4.32%
Mileage Fund 4.74% 4.68% 5.55% 5.75%
</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, Merrill Lynch,
Morgan Stanley or Lehman Brothers or to unmanaged indices that may assume
reinvestment of dividends but generally do not reflect deductions for
administrative and management costs.
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 TRUSTS
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
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express disclaimer of shareholder liability for acts or obligations of the Trust
and provides for indemnification and reimbursement of expenses out of Trust
property for any shareholder held personally liable for the obligations of the
Trust. The Declaration of Trust also provides that the Trusts may maintain
appropriate insurance (for example, fidelity bonding) for the protection of the
Trust, its shareholders, Trustees, officers, employees and agents to cover
possible tort and other liabilities. Thus, the risk of a shareholder incurring
financial loss due to shareholder liability is limited to circumstances in which
both inadequate insurance existed and the Trust itself was unable to meet its
obligations. The Trust has not engaged in any other business. The Platinum Class
was created as an investment vehicle for cash balances of customers of certain
broker-dealers.
OTHER INFORMATION
Asset-Backed Securities-Through the use of trusts and special purpose
subsidiaries, various types of assets (primarily home equity loans, automobile
and credit card receivables, other types of receivables/assets as well as
purchase contracts, financing leases and sales agreements entered into by
municipalities) are securitized in pass-through structures similar to
Mortgage-Backed Securities, as described below. The Portfolios are permitted to
invest in asset-backed securities, subject to the Portfolios' rating and quality
requirements.
Bank Deposit Notes-Bank deposit notes are obligations of a bank, rather
than bank holding company corporate debt. The only structural difference between
bank deposit notes and certificates of deposit is that interest on bank deposit
notes is calculated on a 30/360 basis as are corporate notes/bonds. Similar to
certificates of deposit, deposit notes represent bank level investments and,
therefore, are senior to all holding company corporate debt.
Bankers' Acceptances-Bankers' acceptances are short-term credit
instruments designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by a bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be as
long as 270 days, most acceptances have maturities of six months or less.
Cash Equivalents-Cash equivalents include certificates of deposit, bearer
deposit notes, bankers' acceptances, government obligations, commercial paper,
short-term corporate debt securities and repurchase agreements.
Certificates of Deposit-Certificates of deposit are issued against funds
deposited in an eligible bank (including its domestic and foreign branches,
subsidiaries and agencies), are for a definite period of time, earn a specified
rate of return and are normally negotiable.
Commercial Paper-Commercial paper refers to promissory notes representing
an unsecured debt of a corporation or finance company with a fixed maturity of
no more than 270 days. A variable amount master demand note (which is a type of
commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under a letter agreement between a
commercial paper issuer and an institutional lender pursuant to which the lender
may determine to invest varying amounts.
Derivatives-Generally, a derivative is a financial arrangement, the value
of which is based on, or "derived" from, a traditional security, asset or market
index. Some "derivatives" such as mortgage-related and other asset-backed
securities are in many respects like any other investment, although they may be
more volatile or less liquid than more traditional debt securities. There are,
in fact, many different types of derivatives and many different ways to use
them. There are a range of risks associated with those uses.
Eurodollar and Yankeedollar obligations-Eurodollar obligations are U.S.
dollar obligations issued outside the United States by domestic or foreign
entities, while Yankeedollar obligations are U.S. dollar obligations issued
inside the United States by foreign entities. There is generally less publicly
available information about foreign issuers and there may be less governmental
regulation and supervision of foreign stock exchanges, brokers and listed
companies. Foreign issuers may use different accounting and financial standards,
and the addition of foreign governmental restrictions may affect adversely the
payment of principal and interest on foreign investments. In addition, not all
foreign branches of United States banks are supervised or examined by regulatory
authorities as are United States banks, and such branches may not be subject to
reserve requirements.
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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 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. If the borrower of the securities fails
financially, there is a risk of delay in recovery of the securities loaned or
loss of rights in the collateral. Such loan transactions are referred to in this
Statement of Additional Information as "qualified" loan transactions.
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The cash collateral so acquired through qualified loan transactions may
be invested only in those categories of high quality liquid securities
previously authorized by the AMR Trust Board.
Mortgage-Backed Securities-Mortgage-backed securities consist of both
collateralized mortgage obligations and mortgage pass-through certificates.
Collateralized Mortgage Obligations ("CMOs")-CMOs and interests in
real estate mortgage investment conduits ("REMICs") are debt securities
collateralized by mortgages, or mortgage pass-through securities. CMOs divide
the cash flow generated from the underlying mortgages or mortgage pass-through
securities into different groups referred to as "tranches," which are then
retired sequentially over time in order of priority. The principal governmental
issuers of such securities are the Federal National Mortgage Association
("FNMA"), a government sponsored corporation owned entirely by private
stockholders and the Federal Home Loan Mortgage Corporation ("FHLMC"), a
corporate instrumentality of the United States created pursuant to an act of
Congress which is owned entirely by Federal Home Loan Banks. The issuers of CMOs
are structured as trusts or corporations established for the purpose of issuing
such CMOs and often have no assets other than those underlying the securities
and any credit support provided. A REMIC is a mortgage securities vehicle that
holds residential or commercial mortgages and issues securities representing
interests in those mortgages. A REMIC may be formed as a corporation,
partnership, or segregated pool of assets. The REMIC itself is generally exempt
from federal income tax, but the income from the mortgages is reported by
investors. For investment purposes, interests in REMIC securities are virtually
indistinguishable from CMOs.
Mortgage Pass-Through Certificates-Mortgage pass-through certificates
are issued by governmental, government-related and private organizations which
are backed by pools of mortgage loans.
(1) Government National Mortgage Association ("GNMA") Mortgage
Pass-Through Certificates ("Ginnie Maes")-GNMA is a wholly-owned U.S. Government
corporation within the Department of Housing and Urban Development. Ginnie Maes
represent an undivided interest in a pool of mortgages that are insured by the
Federal Housing Administration or the Farmers Home Administration or guaranteed
by the Veterans Administration. Ginnie Maes entitle the holder to receive all
payments (including prepayments) of principal and interest owed by the
individual mortgagors, net of fees paid to GNMA and to the issuer which
assembles the mortgage pool and passes through the monthly mortgage payments to
the certificate holders (typically, a mortgage banking firm), regardless of
whether the individual mortgagor actually makes the payment. Because payments
are made to certificate holders regardless of whether payments are actually
received on the underlying mortgages, Ginnie Maes are of the "modified
pass-through" mortgage certificate type. The GNMA is authorized to guarantee the
timely payment of principal and interest on the Ginnie Maes. The GNMA guarantee
is backed by the full faith and credit of the United States, and the GNMA has
unlimited authority to borrow funds from the U.S. Treasury to make payments
under the guarantee. The market for Ginnie Maes is highly liquid because of the
size of the market and the active participation in the secondary market of
security dealers and a variety of investors.
(2) FHLMC Mortgage Participation Certificates ("Freddie Macs")-Freddie
Macs represent interests in groups of specified first lien residential
conventional mortgages underwritten and owned by the FHLMC. Freddie Macs entitle
the holder to timely payment of interest, which is guaranteed by the FHLMC. The
FHLMC guarantees either ultimate collection or timely payment of all principal
payments on the underlying mortgage loans. In cases where the FHLMC has not
guaranteed timely payment of principal, the FHLMC may remit the amount due
because of its guarantee of ultimate payment of principal at any time after
default on an underlying mortgage, but in no event later than one year after it
becomes payable. Freddie Macs are not guaranteed by the United States or by any
of the Federal Home Loan Banks and do not constitute a debt or obligation of the
United States or of any Federal Home Loan Bank. The secondary market for Freddie
Macs is highly liquid because of the size of the market and the active
participation in the secondary market of the FHLMC, security dealers and a
variety of investors.
(3) FNMA Guaranteed Mortgage Pass-Through Certificates ("Fannie
Maes")-Fannie Maes represent an undivided interest in a pool of conventional
mortgage loans secured by first mortgages or deeds of trust, on one family or
two to four family, residential properties. The FNMA is obligated to distribute
scheduled monthly installments of principal and interest on the mortgages in the
pool, whether or not received, plus full principal of any foreclosed or
otherwise liquidated mortgages. The obligation of the FNMA under its guarantee
is solely its obligation and is not backed by, nor entitled to, the full faith
and credit of the United States.
(4) Mortgage-Related Securities Issued by Private Organizations-Pools
created by non-governmental issuers generally offer a higher rate of interest
than government and government-related pools because there are no direct or
indirect government guarantees of payments in such pools. However, timely
payment of interest and principal of
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these pools is often partially supported by various enhancements such as
over-collateralization and senior/subordination structures and by various forms
of insurance or guarantees, including individual loan, title, pool and hazard
insurance. The insurance and guarantees are issued by government entities,
private insurers or the mortgage poolers. Although the market for such
securities is becoming increasingly liquid, securities issued by certain private
organizations may not be readily marketable.
Municipal Lease Obligations ("MLOs")-MLOs are issued by state and local
governments and authorities to acquire land and a wide variety of equipment and
facilities. These obligations typically are not fully backed by the
municipality's credit and thus interest may become taxable if the lease is
assigned. If funds are not appropriated for the following year's lease payments,
a lease may terminate with the possibility of default on the lease obligation.
With respect to MLOs purchased by the corresponding Portfolio of the Municipal
Money Market Fund, the AMR Trust Board has established the following guidelines
for determining the liquidity of the MLOs in its portfolio, and, subject to
review by the AMR Trust Board, has delegated that responsibility to the
investment adviser: (1) the frequency of trades and quotes for the security; (2)
the number of dealers willing to purchase or sell the security and the number of
other potential buyers; (3) the willingness of dealers to undertake to make a
market in the security; (4) the nature of the marketplace trades; (5) the
likelihood that the marketability of the obligation will be maintained through
the time the security is held by the Portfolio; (6) the credit quality of the
issuer and the lessee; (7) the essentiality to the lessee of the property
covered by the lease and (8) for unrated MLOs, the MLOs' credit status analyzed
according to the factors reviewed by rating agencies.
Private Activity Obligations-Private activity obligations are issued to
finance, among other things, privately operated housing facilities, pollution
control facilities, convention or trade show facilities, mass transit, airport,
port or parking facilities and certain facilities for water supply, gas,
electricity, sewage or solid waste disposal. Private activity obligations are
also issued to privately held or publicly owned corporations in the financing of
commercial or industrial facilities. The principal and interest on these
obligations may be payable from the general revenues of the users of such
facilities. Shareholders, depending on their individual tax status, may be
subject to the federal alternative minimum tax on the portion of a distribution
attributable to these obligations. Interest on private activity obligations will
be considered exempt from federal income taxes; however, shareholders should
consult their own tax advisers to determine whether they may be subject to the
federal alternative minimum tax.
Ratings of Long-Term Obligations-The Portfolio utilizes ratings provided
by the following nationally recognized statistical rating organizations ("Rating
Organizations") in order to determine eligibility of long-term obligations.
The two highest Moody's Investors Service, Inc. ("Moody's") ratings for
long-term obligations (or issuers thereof) are Aaa and Aa. Obligations rated Aaa
are judged by Moody's to be of the best quality. Obligations rated Aa are judged
to be of high quality by all standards. Together with the Aaa group, such debt
comprises what is generally known as high-grade debt. Moody's states that debt
rated Aa is rated lower than Aaa debt because margins of protection or other
elements make long-term risks appear somewhat larger than for Aaa debt. Moody's
also supplies numerical indicators 1, 2, and 3 to rating categories. The
modifier 1 indicates that the security is in the higher end of its rating
category; the modifier 2 indicates a mid-range ranking; and modifier 3 indicates
a ranking toward the lower end of the category.
The two highest Standard & Poor's ratings for long-term obligations are
AAA and AA. Obligations rated AAA have the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
Obligations rated AA have a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in a small degree.
Duff & Phelps' two highest ratings for long-term obligations are AAA and
AA. Obligations rated AAA have the highest credit quality with risk factors
being negligible. Obligations rated AA are of high credit quality and strong
protection factors. Risk is modest but may vary slightly from time to time
because of economic conditions.
Thomson BankWatch ("BankWatch") long-term debt ratings apply to specific
issues of long-term debt and preferred stock. They specifically assess the
likelihood of an untimely repayment of principal or interest over the term to
maturity of the rated instrument. BankWatch's two highest ratings for long-term
obligations are AAA and AA. Obligations rated AAA indicate that the ability to
repay principal and interest on a timely basis is very high. Obligations rated
AA indicate a superior ability to repay principal and interest on a timely
basis, with limited incremental risk compared to issues rated in the highest
category.
Fitch 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
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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.
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
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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.
Section 4(2) Securities-Section 4(2) securities are restricted as to
disposition under the federal securities laws, and generally are sold to
institutional investors, such as the Portfolio, that agree they are purchasing
the securities for investment and not with an intention to distribute to the
public. Any resale by the purchaser must be pursuant to an exempt transaction
and may be accomplished in accordance with Rule 144A. Section 4(2) securities
normally are resold to other institutional investors through or with the
assistance of the issuer or dealers that make a market in the Section 4(2)
securities, thus providing liquidity.
The AMR Trust Board and the applicable investment adviser will carefully
monitor the Portfolio's investments in Section 4(2) securities offered and sold
under Rule 144A, focusing on such important factors, among others, as valuation,
liquidity, and availability of information. Investments in Section 4(2)
securities could have the effect of reducing the Portfolio's liquidity to the
extent that qualified institutional buyers no longer wish to purchase these
restricted securities.
Separately Traded Registered Interest and Principal Securities and Zero
Coupon Obligations-Separately traded registered interest and principal
securities or "STRIPS" and zero coupon obligations are securities that do not
make regular interest payments. Instead they are sold at a discount from their
face value. Each Portfolio will take into account as income a portion of the
difference between these obligations' purchase prices and their face values.
Because they do not pay coupon income, the prices of STRIPS and zero coupon
obligations can be very volatile when interest rates change. STRIPS are zero
coupon bonds issued by the U.S. Treasury.
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
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anticipation notes usually provide interim financing in advance of an issue of
bonds or notes, the proceeds of which are used to repay the anticipation notes.
Tax-exempt commercial paper is issued by municipalities to help finance
short-term capital or operating needs in anticipation of future tax or other
revenue.
U.S. Government Securities-U.S. Government securities are issued or
guaranteed by the U.S. Government and include U.S. Treasury obligations (see
definition below) and securities issued by U.S. agencies and instrumentalities.
U. S. Government agencies or instrumentalities that issue or guarantee
securities include, but are not limited to, the Federal Housing Administration,
Farmers Home Administration, Export-Import Bank of the United States, Small
Business Administration, GNMA, General Services Administration, Central Bank for
Cooperatives, Federal Home Loan Banks, FHLMC, Federal Intermediate Credit Banks,
Federal Land Banks, Maritime Administration, Tennessee Valley Authority,
District of Columbia Armory Board, Inter-American Development Bank,
Asian-American Development Bank, Agency for International Development, Student
Loan Marketing Association and International Bank of Reconstruction and
Development.
Obligations of U.S. Government agencies and instrumentalities may or may
not be supported by the full faith and credit of the United States. Some are
backed by the right of the issuer to borrow from the Treasury; others are
supported by discretionary authority of the U.S. Government to purchase the
agencies' obligations; while still others, such as the Student Loan Marketing
Association, are supported only by the credit of the instrumentality. In the
case of securities not backed by the full faith and credit of the United States,
the investor must look principally to the agency issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim against
the United States itself in the event the agency or instrumentality does not
meet its commitment.
U.S. Treasury Obligations-U.S. Treasury obligations include bills, notes
and bonds issued by the U.S. Treasury and Separately Traded Registered Interest
and Principal component parts of such obligations known as STRIPS.
Variable or Floating Rate Obligations-A variable rate obligation is one
whose terms provide for the adjustment of its interest rate on set dates and
which, upon such adjustment, can reasonably be expected to have a market value
that approximates its par value. A floating rate obligation is one whose terms
provide for the adjustment of its interest rate whenever a specified interest
rate changes and which, at any time, can reasonably be expected to have a market
value that approximates its par value. Variable or floating rate obligations may
be secured by bank letters of credit.
Pursuant to Rule 2a-7 under the 1940 Act, variable or floating rate
obligations with stated maturities of more than 397 days may be deemed to have
shorter maturities as follows:
(1) An obligation that is issued or guaranteed by the United States
Government or any agency thereof which has a variable rate of interest
readjusted no less frequently than every 762 days will be deemed by a Portfolio
to have a maturity equal to the period remaining until the next readjustment of
the interest rate.
(2) A variable rate obligation, the principal amount of which is
scheduled on the face of the instrument to be paid in 397 days or less, will be
deemed by a Portfolio to have a maturity equal to the period remaining until the
next readjustment of the interest rate.
(3) A variable rate obligation that is subject to a demand feature will
be deemed by a Portfolio to have a maturity equal to the longer of the period
remaining until the next readjustment of the interest rate or the period
remaining until the principal amount can be recovered through demand.
(4) A floating rate obligation that is subject to a demand feature will
be deemed by a Portfolio to have a maturity equal to the period remaining until
the principal amount can be recovered through demand.
As used above, an obligation is "subject to a demand feature" when a
Portfolio is entitled to receive the principal amount of the obligation either
at any time on no more than 30 days' notice or at specified intervals not
exceeding one year and upon no more than 30 days' notice.
Variable Rate Auction and Residual Interest Obligations-Variable rate
auction and residual interest obligations are created when an issuer or dealer
separates the principal portion of a long-term, fixed-rate municipal bond into
two long-term, variable-rate instruments. The interest rate on one portion
reflects short-term interest rates, while the interest rate on the other portion
is typically higher than the rate available on the original fixed-rate bond.
18
<PAGE> 135
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, 1998, as audited by Ernst & Young, LLP, are supplied with the SAI, and the
financial statements and accompanying notes appearing therein are incorporated
by reference in this SAI.
19
<PAGE> 136
AMERICAN AADVANTAGE MILEAGE FUNDS
PART C. OTHER INFORMATION
Item 23. Exhibits
(a) Amended and Restated Declaration of Trust - (ii)
(b) Amended Bylaws - (ii)
(c) Voting trust agreement -- none
(d)(i)(A) Management Agreement between American AAdvantage Mileage
Funds and AMR Investment Services, Inc. dated October 1,
1995 - (ii)
(i)(B) Supplement to Management Agreement dated December 17, 1996 -
(i)
(ii)(A) Investment Advisory Agreement between AMR Investment
Services, Inc. and Independence Investment Associates, Inc.
dated November 1, 1995 - (ii)
(ii)(B) Investment Advisory Agreement between AMR Investment
Services, Inc. and Morgan Stanley Asset Management Inc.
dated November 1, 1995 - (ii)
(ii)(C) Investment Advisory Agreement between AMR Investment
Services, Inc. and Templeton Investment Counsel, Inc. dated
November 1, 1995 - (ii)
(ii)(D) Investment Advisory Agreement between AMR Investment
Services, Inc. and Barrow, Hanley, Mewhinney & Strause, Inc.
dated November 1, 1995 - (ii)
(ii)(E) Investment Advisory Agreement between AMR Investment
Services, Inc. and GSB Investment Management, Inc. dated
November 1, 1995 - (ii)
(ii)(F) Investment Advisory Agreement between AMR Investment
Services, Inc. and Brandywine Asset Management, Inc. dated
January 16, 1998 - (iii)
(ii)(G) Investment Advisory Agreement between AMR Investment
Services, Inc. and Hotchkis and Wiley, a division of the
Capital Management Group of Merrill Lynch Asset Management,
L.P. dated November 12, 1996 - (i)
(ii)(H) Form of Investment Advisory Agreement between AMR Investment
Services, Inc. and Lazard Asset Management - filed herewith
(ii)(I) Amendment to Schedule A of Advisory Agreement between AMR
Investment Services, Inc. and Brandywine Asset Management,
Inc. - (iv)
(ii)(J) Amendment to Schedule A of Advisory Agreement between AMR
Investment Services, Inc. and Hotchkis and Wiley, a division
of the Capital Management Group of Merrill Lynch Asset
Management, L.P. - (iv)
(ii)(K) Form of Amendment to Schedule A of Advisory Agreement
between AMR Investment Services, Inc. and Independence
Investment Associates, Inc. - filed herewith
<PAGE> 137
(e) Distribution Agreement among the American AAdvantage Mileage
Funds, the American AAdvantage Funds and Brokers Transaction
Services, Inc. dated September 1, 1995 - (ii)
(f) Bonus, profit sharing or pension plans -- none
(g) Custodian Agreement between the American AAdvantage Mileage
Funds and State Street Bank and Trust Company dated December
1, 1997 - (iii)
(h)(i) Transfer Agency and Service Agreement between the American
AAdvantage Mileage Funds-and State Street Bank and Trust
Company dated January 1, 1998 - (iii)
(ii) Securities Lending Authorization Agreement between American
AAdvantage Mileage Funds and State Street Bank and Trust
Company dated January 2, 1998 - (iii)
(i) Opinion and consent of counsel - (v)
(j) Consent of Independent Auditors - filed herewith
(k) Financial statements omitted from prospectus -- (not
applicable)
(l) Letter of investment intent - (ii)
(m)(i) Plan pursuant to Rule 12b-1 for the Mileage Class - (ii)
(ii) Plan pursuant to Rule 12b-1 for the Platinum Class - (ii)
(iii) Administrative Services Plan for the Platinum Class - (ii)
(n) Financial Data Schedules - filed herewith
(o) Plan Pursuant to Rule 18f-3 - (ii)
Other: Powers of Attorney for Trustees - (i)
- -----------------------
(i) Incorporated by reference to Post-Effective Amendment No. 4 to the
American AAdvantage Mileage Funds' Registration Statement on Form N-1A
as filed with the Securities and Exchange Commission on February 13,
1997.
(ii) Incorporated by reference to Post-Effective Amendment No. 4 to the
American AAdvantage Mileage Funds' Registration Statement on Form N-1A
as filed with the Securities and Exchange Commission on December 15,
1997.
(iii) Incorporated by reference to Post-Effective Amendment No. 6 to the
American AAdvantage Mileage Funds' Registration Statement on Form N-1A
as filed with the Securities and Exchange Commission on February 26,
1998.
(iv) To be filed by subsequent amendment.
(v) Incorporated by reference to Post-Effective Amendment No. 7 to the
American AAdvantage Mileage Funds' Registration Statement on Form N-1A
as filed with the Securities and Exchange Commission on December 15,
1998.
<PAGE> 138
Item 24. Persons Controlled by or under Common Control with
Registrant
None.
Item 25. Indemnification
Article XI, Section 2 of the Declaration of Trust of the Mileage Trust
provides that:
(a) Subject to the exceptions and limitations contained in
paragraph (b) below:
(i) every person who is, or has been, a Trustee or officer of
the Mileage Trust (hereinafter referred to as "Covered Person") shall be
indemnified by the appropriate portfolios to the fullest extent permitted by law
against liability and against all expenses reasonably incurred or paid by him in
connection with any claim, action, suit or proceeding in which he becomes
involved as a party or otherwise by virtue of his being or having been a Trustee
or officer and against amounts paid or incurred by him in the settlement
thereof;
(ii) the words "claim," "action," "suit," or "proceeding"
shall apply to all claims, actions, suits or proceedings (civil, criminal or
other, including appeals), actual or threatened while in office or thereafter,
and the words "liability" and "expenses" shall include, without limitation,
attorneys' fees, costs, judgments, amounts paid in settlement, fines, penalties
and other liabilities.
(b) No indemnification shall be provided hereunder to a Covered
Person:
(i) who shall have been adjudicated by a court or body before
which the proceeding was brought (A) to be liable to the Mileage Trust or its
Shareholders by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office or (B)
not to have acted in good faith in the reasonable belief that his action was in
the best interest of the Mileage Trust; or
(ii) in the event of a settlement, unless there has been a
determination that such Trustee or officer did not engage in willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office (A) by the court or other body approving
the settlement; (B) by at least a majority of those Trustees who are neither
interested persons of the Mileage Trust nor are parties to the matter based upon
a review of readily available facts (as opposed to a full trial-type inquiry);
or (C) by written opinion of independent legal counsel based upon a review of
readily available facts (as opposed to a full trial-type inquiry); provided,
however, that any Shareholder may, by appropriate legal proceedings, challenge
any such determination by the Trustees, or by independent counsel.
(c) The rights of indemnification herein provided may be insured
against by policies maintained by the Mileage Trust, shall be severable, shall
not be exclusive of or affect any other rights to which any Covered Person may
now or hereafter be entitled, shall continue as to a person who has ceased to be
such Trustee or officer and shall inure to the benefit of the heirs, executors
and administrators of such a person. Nothing contained herein shall affect any
rights to
<PAGE> 139
indemnification to which Mileage Trust personnel, other than Trustees and
officers, and other persons may be entitled by contract or otherwise under law.
(d) Expenses in connection with the preparation and presentation
of a defense to any claim, action, suit, or proceeding of the character
described in paragraph (a) of this Section 2 may be paid by the applicable
Portfolio from time to time prior to final disposition thereof upon receipt of
an undertaking by or on behalf of such Covered Person that such amount will be
paid over by him to the Mileage Trust if it is ultimately determined that he is
not entitled to indemnification under this Section 2; provided, however, that:
(i) such Covered Person shall have provided appropriate
security for such undertaking;
(ii) the Mileage Trust is insured against losses arising out
of any such advance payments; or
(iii) either a majority of the Trustees who are neither
interested persons of the Mileage Trust nor parties to the matter, or
independent legal counsel in a written opinion, shall have determined, based
upon a review of readily available facts (as opposed to a trial-type inquiry or
full investigation), that there is reason to believe that such Covered Person
will be found entitled to indemnification under this Section 2.
According to Article XII, Section 1 of the Declaration of Trust, the
Mileage Trust is a trust, not a partnership. Trustees are not liable personally
to any person extending credit to, contracting with or having any claim against
the Mileage Trust, a particular Portfolio or the Trustees. A Trustee, however,
is not protected from liability due to willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office.
Article XII, Section 2 provides that, subject to the provisions of
Section 1 of Article XII and to Article XI, the Trustees are not liable for
errors of judgment or mistakes of fact or law, or for any act or omission in
accordance with advice of counsel or other experts or for failing to follow such
advice.
Item 26. I. Business and Other Connections of Investment Manager
AMR Investment Services, Inc., 4333 Amon Carter Boulevard, MD 5645,
Fort Worth, Texas 76155, offers investment management and administrative
services. Information as to the officers and directors of the Manager is
included in its current Form ADV filed with the SEC and is incorporated by
reference herein.
II. Business and Other Connections of Investment Advisers
The investment advisers listed below provide investment advisory
services to the Mileage Trust.
Barrow, Hanley, Mewhinney & Strauss, 3232 McKinney Avenue, Dallas,
Texas 75204.
<PAGE> 140
Brandywine Asset Management, Inc., 201 North Walnut Street, Wilmington,
Delaware 19801.
GSB Investment Management, Inc., 301 Commerce Street, Suite 1501, Fort
Worth, Texas 76102.
Hotchkis & Wiley, 800 West Sixth Street, 5th Floor, Los Angeles,
California 90017.
Independence Investment Associates, Inc., 53 State Street, Boston,
Massachusetts 02109.
Lazard Asset Management, 30 Rockefellar Plaza, New York, New York
10112.
Morgan Stanley Asset Management Inc., 1221 Avenue of the Americas, 21st
Floor, New York, New York 10020.
Templeton Investment Counsel, Inc. 500 East Broward Blvd., Ft.
Lauderdale, Florida 33394.
Information as to the officers and directors of each of the above
investment advisers is included in that adviser's current Form ADV filed with
the SEC and is incorporated by reference herein.
Item 27. Principal Underwriter
(a) Brokers Transaction Services, Inc., 7001 Preston Road,
Dallas, TX 75205, is the principal underwriter for the Mileage Trust and the
American AAdvantage Funds.
(b) The directors and officers of the Mileage Trust's principal
underwriter are:
<TABLE>
<CAPTION>
Positions & Offices Position
Name with Underwriter with Registrant
- ---- ------------------- ---------------
<S> <C> <C>
Sue H. Peden Chief Executive Officer None
Raymond E. Wooldridge Chairman None
Dianna Boswell President None
Diana Burrell Vice President None
Diane Scott Assistant Vice President None
</TABLE>
<PAGE> 141
Item 28. Location of Accounts and Records
The books and other documents required by Rule 31a-1 under the
Investment Company Act of 1940 are maintained as follows: 31a-1(b)(1) - Journals
- - in the physical possession of the Trust's custodian; 31-1(b)(2)(I), (ii) &
(iii) - in the physical possession of the Trust's custodian; 31a-1()(2)(iv) - in
the physical possession of the Trust's transfer agent; 31a-1(b)(4) - in the
physical possession of the Trust's Manager; 31a-1(b)(5) - in the physical
possession of the Trust's investment advisers; 31a-1(b)(6) - in the physical
possession of the Trust's Manager, investment advisers and custodian;
31a-1(b)(7) - in the physical possession of the Trust's custodian; 31a-1(b)(8) -
in the physical possession of the Trust's custodian; 31a-1(b)(9) - in the
physical possession of the Trust's investment advisers; 31a-1(b)(10) - in the
physical possession of the Trust's Manager; 31a-1(b)(11) - in the physical
possession of the Trust's Manager; 31a-1(b)(12) - in the physical possession of
the Trust's Manager, investment advisers and custodian.
Item 29. Management Services
All substantive provisions of any management-related service contract
are discussed in Part A or Part B.
Item 30. Undertakings
Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of its latest annual report to Shareholders,
upon request and without charge.
Registrant hereby undertakes to carry out all indemnification
provisions of its Declaration of Trust in accordance with Investment Company Act
Release No. 11330 (September 4, 1980) and successor releases.
Insofar as indemnification for liability arising under the Securities
Act of 1933, as amended ("1933 Act"), may be permitted to trustees, officers and
controlling persons of the Registrant pursuant to the provisions in under Item
25 herein, or otherwise, the Registrant has been advised that in the opinion of
the SEC such indemnification is against public policy as expressed in the 1933
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication.
<PAGE> 142
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant certifies
that it meets all of the requirements for effectiveness of this amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment No. 8 to its Registration
Statement on Form N-1A to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Fort Worth and the State of Texas, on March 1,
1999. No other material event requiring prospectus disclosure has occurred since
the latest of the three dates specified in Rule 485(b)(2).
AMERICAN AADVANTAGE MILEAGE FUNDS
By: /s/ William F. Quinn
-------------------------------
William F. Quinn
President
Attest:
/s/ Barry Y. Greenberg
- --------------------------------------
Barry Y. Greenberg
Vice President and Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Post-Effective Amendment No. 8 to the Registration Statement has been
signed below by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ William F. Quinn President and March 1, 1999
- ------------------------ Trustee
William F. Quinn
Alan D. Feld* Trustee March 1, 1999
- ------------------------
Alan D. Feld
Ben J. Fortson* Trustee March 1, 1999
- ------------------------
Ben J. Fortson
John S. Justin* Trustee March 1, 1999
- ------------------------
John S. Justin
Stephen D. O'Sullivan* Trustee March 1, 1999
- ------------------------
Stephen D. O'Sullivan
Roger T. Staubach* Trustee March 1, 1999
- ------------------------
Roger T. Staubach
Dr. Kneeland Youngblood * Trustee March 1, 1999
- -------------------------
Dr. Kneeland Youngblood
*By /s/ William F. Quinn
----------------------------------
William F. Quinn, Attorney-In-Fact
</TABLE>
<PAGE> 143
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, AMR Investment Services
Trust certifies that it meets all of the requirements for effectiveness of this
amendment to the Registration Statement as it relates to AMR Investment Services
Trust pursuant to Rule 485(b) under the Securities Act of 1933 and has duly
caused this Post-Effective Amendment No. 8 to the Registration Statement on Form
N-1A as it relates to AMR Investment Services Trust to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Fort Worth and the
State of Texas, on March 1, 1999. No other material event requiring prospectus
disclosure has occurred since the latest of the three dates specified in Rule
485(b)(2).
AMR INVESTMENT SERVICES TRUST
By: /s/ William F. Quinn
-------------------------
William F. Quinn
President
Attest:
/s/ Barry Y. Greenberg
- --------------------------------------
Barry Y. Greenberg
Vice President and Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Post-Effective Amendment No. 8 to the Registration Statement for the
American AAdvantage Mileage Funds as it relates to the AMR Investment Services
Trust has been signed below by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ William F. Quinn President and March 1, 1999
- ------------------------ Trustee
William F. Quinn
Alan D. Feld* Trustee March 1, 1999
- ------------------------
Alan D. Feld
Ben J. Fortson* Trustee March 1, 1999
- ------------------------
Ben J. Fortson
John S. Justin* Trustee March 1, 1999
- ------------------------
John S. Justin
Stephen D. O'Sullivan* Trustee March 1, 1999
- ------------------------
Stephen D. O'Sullivan
Roger T. Staubach* Trustee March 1, 1999
- ------------------------
Roger T. Staubach
Dr. Kneeland Youngblood * Trustee March 1, 1999
- ------------------------
Dr. Kneeland Youngblood
*By /s/ William F. Quinn
- --------------------------------------
William F. Quinn, Attorney-In-Fact
</TABLE>
<PAGE> 144
SIGNATURES
Equity 500 Index Portfolio has duly caused this Post-Effective
Amendment No. 8 to the Registration Statement on Form N-1A of American
AAdvantage Mileage Funds, as it relates to the American AAdvantage S&P 500
Index Mileage Fund, to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Baltimore and the State of Maryland on
March 1, 1999.
EQUITY 500 INDEX PORTFOLIO
By: /s/ DANIEL O. HIRSCH
------------------------------
Daniel O. Hirsch
Secretary
This Post-Effective Amendment No. 8 to the Registration Statement on
Form N-1A of American AAdvantage Mileage Funds, as it relates to the American
AAdvantage S&P 500 Index Mileage Fund, has been signed below by the following
persons, in the capacities indicated, with respect to Equity 500 Index
Portfolio on March 1, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
<S> <C>
/s/ Charles P. Biggar* Trustee
- ---------------------
Charles P. Biggar
/s/ S. Leland Dill* Trustee
- ---------------------
S. Leland Dill
/s/ Philip Saunders, Jr* Trustee
- ---------------------
Philip Saunders, Jr.
/s/ John Y. Keffer* President and Chief Executive Officer
- ---------------------
John Y. Keffer
*By: /s/ DANIEL O. HIRSCH
----------------------------
Daniel O. Hirsch, Secretary of Equity 500 Index Portfolio,
as Attorney-in-Fact pursuant to a Power of Attorney
</TABLE>
<PAGE> 145
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
(a) Amended and Restated Declaration of Trust - (ii)
(b) Amended Bylaws - (ii)
(c) Voting trust agreement -- none
(d)(i)(A) Management Agreement between American AAdvantage Mileage Funds
and AMR Investment Services, Inc. dated October 1, 1995 - (ii)
(i)(B) Supplement to Management Agreement dated December 17, 1996 - (i)
(ii)(A) Investment Advisory Agreement between AMR Investment Services,
Inc. Independence Investment Associates, Inc. dated November 1,
1995 - (ii)
(ii)(B) Investment Advisory Agreement between AMR Investment Services,
Inc. and Morgan Stanley Asset Management Inc. dated November 1,
1995 - (ii)
(ii)(C) Investment Advisory Agreement between AMR Investment Services,
Inc. and Templeton Investment Counsel, Inc. dated November 1,
1995 - (ii)
(ii)(D) Investment Advisory Agreement between AMR Investment Services,
Inc. and Barrow, Hanley, Mewhinney & Strauss, Inc. dated November
1, 1995 - (ii)
(ii)(E) Investment Advisory Agreement between AMR Investment Services,
Inc. and GSB Investment Management, Inc. dated November 1, 1995 -
(ii)
(ii)(F) Investment Advisory Agreement between AMR Investment Services,
Inc. and Brandywine Asset Management, Inc. dated January 16, 1998
- (iii)
(ii)(G) Investment Advisory Agreement between AMR Investment Services,
Inc. and Hotchkis and Wiley, a division of the Capital Management
Group of Merrill Lynch Asset Management, L.P. dated November 12,
1996 - (i)
(ii)(H) Form of Investment Advisory Agreement between AMR Investment
Services, Inc. and Lazard Asset Management - filed herewith
(ii)(I) Amendment to Schedule A of Advisory Agreement between AMR
Investment Services, Inc. and Brandywine Asset Management, Inc. -
(iv)
(ii)(J) Amendment to Schedule A of Advisory Agreement between AMR
Investment Services, Inc. and Hotchkis and Wiley, a division of
the Capital Management Group of Merrill Lynch Asset Management,
L.P. - (iv)
(ii)(K) Form of Amendment to Schedule A of Advisory Agreement between AMR
Investment Services, Inc. and Independence Investment Associates,
Inc. - filed herewith
(e) Distribution Agreement among the American AAdvantage Mileage
Funds, the American AAdvantage Funds and Brokers Transaction
Services, Inc. dated September 1, 1995 - (ii)
</TABLE>
<PAGE> 146
<TABLE>
<S> <C>
(f) Bonus, profit sharing or pension plans -- none
(g) Custodian Agreement between the American AAdvantage Mileage Funds
and State Street Bank and Trust Company dated December 1, 1997 -
(iii)
(h)(i) Transfer Agency and Service Agreement between the American
AAdvantage Mileage Funds-and State Street Bank and Trust Company
dated January 1, 1998 - (iii)
(ii) Securities Lending Authorization Agreement between American
AAdvantage Mileage Funds and State Street Bank and Trust Company
dated January 2, 1998 - (iii)
(i) Opinion and consent of counsel - (v)
(j) Consent of Independent Auditors - filed herewith
(k) Financial statements omitted from prospectus -- (not applicable)
(l) Letter of investment intent - (ii)
(m)(i) Plan pursuant to Rule 12b-1 for the Mileage Class - (ii)
(ii) Plan pursuant to Rule 12b-1 for the Platinum Class - (ii)
(iii) Administrative Services Plan for the Platinum Class - (ii)
(n) Financial Data Schedules - filed herewith
(o) Plan Pursuant to Rule 18f-3 - (ii)
Other: Powers of Attorney for Trustees - (i)
</TABLE>
- -----------------------
(i) Incorporated by reference to Post-Effective Amendment No. 4 to the
American AAdvantage Mileage Funds' Registration Statement on Form N-1A
as filed with the Securities and Exchange Commission on February 13,
1997.
(ii) Incorporated by reference to Post-Effective Amendment No. 4 to the
American AAdvantage Mileage Funds' Registration Statement on Form N-1A
as filed with the Securities and Exchange Commission on December 15,
1997.
(iii) Incorporated by reference to Post-Effective Amendment No. 6 to the
American AAdvantage Mileage Funds' Registration Statement on Form N-1A
as filed with the Securities and Exchange Commission on February 26,
1998.
(iv) To be filed by subsequent amendment.
(v) Incorporated by reference to Post-Effective Amendment No. 7 to the
American AAdvantage Mileage Funds' Registration Statement on Form N-1A
as filed with the Securities and Exchange Commission on December 15,
1998.
<PAGE> 1
EXHIBIT 99(d)(ii)(H)
AMERICAN AADVANTAGE MILEAGE FUNDS
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made this 1st day of March, 1999 by and between AMR
Investment Services, Inc., a Delaware Corporation (the "Manager"), and Lazard
Asset Management, Inc., a wholly owned subsidiary of Lazard Freres & Co.
LLC (the "Adviser");
WHEREAS, American AAdvantage Mileage Funds (the "Trust"), a
Massachusetts Business Trust, is an open-end, diversified management investment
company registered under the Investment Company Act of 1940, as amended ("1940
Act"), consisting of several portfolios of shares, each having its own
investment policies; and
WHEREAS, the Trust has retained the Manager to provide the Trust with
business and asset management services, subject to the control of the Trust's
Board of Trustees;
WHEREAS, the Trust's agreement with the Manager permits the Manager to
delegate to other parties certain of its asset management responsibilities; and
WHEREAS, the Manager desires to retain the Adviser to render investment
management services to the Trust with respect to certain of its investment
portfolios and such other investment portfolios as the Trust and the Adviser may
agree upon and so specify in the Schedule(s) attached hereto (collectively, the
"Portfolios") and as described in the Trust's registration statement on Form
N-1A as amended from time to time, and the Adviser is willing to render such
services;
NOW THEREFORE, in consideration of mutual covenants herein contained,
the parties hereto agree as follows:
1. DUTIES OF ADVISER. The Manager employs the Adviser to manage the
investment and reinvestment of such portion, if any, of the Portfolios' assets
as is designated by the Manager from time to time, and, with respect to such
assets, to continuously review, supervise, and administer the investment program
of the Portfolios, to determine in the Adviser's discretion the securities to be
purchased or sold, to provide the Manager and the Trust with records concerning
the Adviser's activities which the Trust is required to maintain, and to render
regular reports to the Manager and to the Trust's officers and Trustees
concerning the Adviser's discharge of the foregoing responsibilities. The
Adviser shall discharge the foregoing responsibilities subject to the Manager's
oversight and the control of the officers and the Trustees of the Trust and in
compliance with such policies as the Trustees may from time to time establish,
and in compliance with the objectives, policies, and limitations for each such
Portfolio set forth in the Trust's current registration statement as amended
from time to time, and applicable laws and regulations. The Adviser accepts such
employment and agrees to render the services for the compensation specified
herein and to provide at its own expense the office space, furnishings and
equipment and the personnel required by it to perform the services on the terms
and for the compensation provided herein. (With respect to any of the Portfolio
assets allocated for management by the Adviser, the Adviser can request that the
Manager make the investment
<PAGE> 2
decisions with respect to that portion of assets which the Adviser deems should
be invested in short-term money market instruments. The Manager agrees to
provide this service.) The Manager will instruct the Trust's Custodian(s) to
hold and/or transfer the Portfolios' assets in accordance with Proper
Instructions received from the Adviser. (For this purpose, the term "Proper
Instructions" shall have the meaning(s) specified in the applicable agreement(s)
between the Trust and its custodian(s).) The Adviser will not be responsible for
the cost of securities or brokerage commissions or any other Trust expenses
except as specified in this Agreement.
2. PORTFOLIO TRANSACTIONS. The Adviser is authorized to select the
brokers or dealers (including, to the extent permitted by law and applicable
Trust guidelines, the Adviser or any of its affiliates) that will execute the
purchases and sales of portfolio securities for the Portfolios and is directed
to use its best efforts to obtain the best net results with respect to brokers'
commissions and discounts as described in the Trust's current registration
statement as amended from time to time. In selecting brokers or dealers, the
Adviser may give consideration to factors other than price, including, but not
limited to, research services and market information. Any such services or
information which the Adviser receives in connection with activities for the
Trust may also be used for the benefit of other clients and customers of the
Adviser or any of its affiliates. The Adviser will promptly communicate to the
Manager and to the officers and the Trustees of the Trust such information
relating to portfolio transactions as they may reasonably request.
3. COMPENSATION OF THE ADVISER. For the services to be rendered by the
Adviser as provided in Sections 1 and 2 of this Agreement, the Manager shall pay
to the Adviser compensation at the rate specified in Schedule A attached hereto
and made a part of this Agreement. Such compensation shall be paid to the
Adviser quarterly in arrears, and shall be calculated by applying the annual
percentage rate(s) as specified in the attached Schedule A to the average
month-end assets of the specified portfolios during the relevant quarter. Solely
for the purpose of calculating the applicable annual percentage rates specified
in the attached Schedule(s), there shall be included such other assets as are
specified in said Schedule(s).
The Adviser agrees that the fee charged to the Manager will be no more
than that charged for any other client of similar type. Furthermore, the Adviser
agrees to notify the Manager on a timely basis of any fee schedule it enters
into with any other client of similar type which is lower than the fee paid by
the Manager.
4. OTHER SERVICES. At the request of the Trust or the Manager, the
Adviser in its discretion may make available to the Trust office facilities,
equipment, personnel, and other services. Such office facilities, equipment,
personnel and services shall be provided for or rendered by the Adviser and
billed to the Trust or the Manager at a price to be agreed upon by the Adviser
and the Trust or the Manager.
5. REPORTS. The Manager (on behalf of the Trust) and the Adviser agree
to furnish to each other, if applicable, current prospectuses, proxy statements,
reports to shareholders, certified
2
<PAGE> 3
statements of financial condition, and such other information with regard to
their affairs as each may reasonably request.
6. STATUS OF ADVISER. The services of the Adviser to the Trust are not
to be deemed exclusive, and the Adviser and its directors, officers, employees
and affiliates shall be free to render similar services to others so long as its
services to the Trust are not impaired thereby. The Adviser shall be deemed to
be an independent contractor and shall, unless otherwise expressly provided or
authorized, have no authority to act for or represent the Manager or the Trust
in any way or otherwise be deemed an agent to the Manager or the Trust.
7. CERTAIN RECORDS. Any records required to be maintained and preserved
pursuant to the provisions of Rule 31a-1 and Rule 31a-2 promulgated under the
1940 Act which are prepared or maintained by the Adviser on behalf of the
Manager or the Trust are the property of the Manager or the Trust and will be
surrendered promptly to the Manager or Trust on request.
8. LIABILITY OF ADVISER. No provision of this Agreement shall be deemed
to protect the Adviser against any liability to the Trust or its shareholders to
which it might otherwise be subject by reason of any willful misfeasance, bad
faith, or gross negligence in the performance of its duties or the reckless
disregard of its obligations under this Agreement.
9. PERMISSIBLE INTERESTS. To the extent permitted by law, Trustees,
agents, and shareholders of the Trust are or may be interested in the Adviser
(or any successor thereof) as directors, partners, officers, or shareholders, or
otherwise; directors, partners, officers, agents, and shareholders of the
Adviser are or may be interested in the Trust as Trustees, shareholders or
otherwise; and the Adviser (or any successor thereof) is or may be interested in
the Trust as a shareholder or otherwise; provided that all such interests shall
be fully disclosed between the parties on an ongoing basis and in the Trust's
registration statement as required by law.
10. DURATION AND TERMINATION. This Agreement, unless sooner terminated
as provided herein, shall continue for two years after its initial approval as
to each Portfolio and thereafter for periods of one year for so long as such
continuance thereafter is specifically approved at least annually (a) by the
vote of a majority of those Trustees of the Trust who are not parties to this
Agreement or interested persons of any such party, cast in person at a meeting
called for the purpose of voting on such approval, and (b) by the Trustees of
the Trust or by vote of a majority of the outstanding voting securities of each
Portfolio; provided, however, that if the shareholders of any Portfolio fail to
approve the Agreement as provided herein, the Adviser may continue to serve
hereunder in the manner and to the extent permitted by the 1940 Act and rules
thereunder. The foregoing requirement that continuance of this Agreement be
"specifically approved at least annually" shall be construed in a manner
consistent with the 1940 Act and the rules and regulations thereunder. This
Agreement may be terminated as to any Portfolio at any time, without the payment
of any penalty, by the Manager, by vote of a majority of the Trustees of the
Trust or by vote of a majority of the outstanding voting securities of the
Portfolio on not less than 30 days' nor more than 60 days' written notice to the
Adviser, or by the Adviser at any time without the payment of any penalty, on 60
days' written notice to the Trust. This Agreement will
3
<PAGE> 4
automatically and immediately terminate in the event of its assignment. Any
notice under this Agreement shall be given in writing, addressed and delivered,
or mailed postpaid, to the other party at the primary office of such party,
unless such party has previously designated another address.
As used in this Section 10, the terms "assignment," "interested
persons," and a "vote of a majority of the outstanding voting securities" shall
have the respective meanings set forth in the 1940 Act and the rules and
regulations thereunder, subject to such exemptions as may be granted by the
Securities and Exchange Commission under said Act.
11. SEVERABILITY. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby.
A copy of the Declaration of Trust of the Trust is on file with the
Secretary of the Commonwealth of Massachusetts, and notice is hereby given that
this instrument is not binding upon any of the Trustees, officers, or
shareholders of the Trust individually.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first written above.
Lazard Asset Management, Inc. AMR Investment Services, Inc.
By: By:
--------------------------- ---------------------------
Name: William F. Quinn
------------------------- President
Title:
------------------------
4
<PAGE> 5
Schedule A to the
American AAdvantage Mileage Funds
Investment Advisory Agreement
between
AMR Investment Services, Inc.
and
Lazard Asset Management, Inc.
AMR Investment Services, Inc. shall pay compensation to Lazard Asset
Management, Inc. pursuant to section 3 of the Investment Advisory Agreement
between said for rendering investment management services with respect to the
International Equity Mileage Fund in accordance with the following annual
percentage rates:
0.50% per annum for the first $100 million
0.325% per annum for the next $400 million
0.20% per annum on all excess assets
In calculating the amount of assets under management solely for the
purpose of determining the applicable percentage rate, there shall be included
all other assets managed by the Adviser on behalf of American Airlines, Inc.
To the extent that a Fund invests all of its investable assets (i.e.,
securities and cash) in another investment company, however, no portion of the
advisory fee attributable to that Fund as specified above shall be paid for the
period that such Fund's assets are so invested.
DATED: March 1, 1999
<PAGE> 1
EXHIBIT 99(d)(ii)(K)
Amendment dated March 1, 1999
to the
American AAdvantage Mileage Funds
Investment Advisory Agreement
between
AMR Investment Services, Inc.
and
Independence Investment Associates, Inc.
AMR Investment Services, Inc. shall pay compensation to Independence
Investment Associates, Inc. pursuant to section 3 of the Investment Advisory
Agreement between said parties for rendering investment management services with
respect to the Balanced, Growth and Income and International Equity Mileage
Funds in accordance with the following annual percentage rates:
0.50% per annum of the first $30 million
0.25% per annum of the next $70 million
0.20% per annum of all excess assets
In calculating the amount of assets under management solely for the
purpose of determining the applicable percentage rate, there shall be included
all other assets or trust assets of American Airlines, Inc.
also under management by the Adviser.
To the extent that a Fund invests all of its investable assets (i.e.,
securities and cash) in another investment company, however, no portion of the
advisory fee attributable to that Fund as specified above shall be paid for the
period that such Fund's assets are so invested.
IN WITNESS WHEREOF, the parties have executed the foregoing amendment
effective as of March 1, 1999.
Independence Investment Associates AMR Investment Services, Inc.
By: By:
---------------------------- ----------------------------
William F. Quinn
Name: President
--------------------------
Title:
-------------------------
<PAGE> 1
EXHIBIT 99(j)
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Financial Highlights"
and to the use of our reports dated December 17, 1998 in the Registration
Statement (Form N-1A) and its incorporation by reference in the related
Prospectus of the American AAdvantage Mileage Funds, filed with the Securities
and Exchange Commission in this Post-Effective Amendment No. 7 to the
Registration Statement under the Securities Act of 1933 (File No. 33-91058) and
in this Amendment No. 8 to the Registration Statement under the Investment
Company Act of 1940.
/s/ ERNST & YOUNG LLP
Dallas, Texas
March 1, 1999
<PAGE> 2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 8 to the registration statement on Form N-1A (the "Registration
Statement") of our report dated February 5, 1999, relating to the financial
statements and financial highlights appearing in the December 31, 1998 Annual
Report to Shareholders of American AAdvantage S&P 500 Index Mileage Fund, which
is incorporated by reference into the Registration Statement. We also consent
to the references to us under the heading "Financial Highlights" in the
Prospectus and under the heading "Other Service Providers" in the Statement of
Additional Information.
/s/ PricewaterhouseCoopers LLP
Baltimore, Maryland
March 1, 1999
<PAGE> 1
[ARTICLE] 6
[SERIES]
[NUMBER] 120
[NAME] AMERICAN AADVANTAGE BALANCED MILEAGE FUND
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] OCT-31-1998
[PERIOD-START] NOV-01-1997
[PERIOD-END] OCT-31-1998
[INVESTMENTS-AT-COST] 0
[INVESTMENTS-AT-VALUE] 3,818
[RECEIVABLES] 6
[ASSETS-OTHER] 4
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 3,828
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 20
[TOTAL-LIABILITIES] 20
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 3,189
[SHARES-COMMON-STOCK] 211
[SHARES-COMMON-PRIOR] 188
[ACCUMULATED-NII-CURRENT] 98
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 642
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] (121)
[NET-ASSETS] 3,808
[DIVIDEND-INCOME] 53
[INTEREST-INCOME] 106
[OTHER-INCOME] 1
[EXPENSES-NET] 38
[NET-INVESTMENT-INCOME] 122
[REALIZED-GAINS-CURRENT] 324
[APPREC-INCREASE-CURRENT] (148)
[NET-CHANGE-FROM-OPS] 298
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 112
[DISTRIBUTIONS-OF-GAINS] 227
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 41
[NUMBER-OF-SHARES-REDEEMED] 37
[SHARES-REINVESTED] 19
[NET-CHANGE-IN-ASSETS] 371
[ACCUMULATED-NII-PRIOR] 88
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 0
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 55
[AVERAGE-NET-ASSETS] 3,858
[PER-SHARE-NAV-BEGIN] 18.32
[PER-SHARE-NII] .57
[PER-SHARE-GAIN-APPREC] .93
[PER-SHARE-DIVIDEND] .58
[PER-SHARE-DISTRIBUTIONS] 1.16
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 18.08
[EXPENSE-RATIO] .99
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 2
[ARTICLE] 6
[SERIES]
[NUMBER] 110
[NAME] AMERICAN AADVANTAGE LARGE CAP VALUE MILEAGE FUND
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] OCT-31-1998
[PERIOD-START] NOV-01-1997
[PERIOD-END] OCT-31-1998
[INVESTMENTS-AT-COST] 0
[INVESTMENTS-AT-VALUE] 10,037
[RECEIVABLES] 8
[ASSETS-OTHER] 4
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 10,049
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 34
[TOTAL-LIABILITIES] 34
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 7,343
[SHARES-COMMON-STOCK] 427
[SHARES-COMMON-PRIOR] 528
[ACCUMULATED-NII-CURRENT] 127
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 1,591
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 954
[NET-ASSETS] 10,015
[DIVIDEND-INCOME] 250
[INTEREST-INCOME] 17
[OTHER-INCOME] 1
[EXPENSES-NET] 107
[NET-INVESTMENT-INCOME] 161
[REALIZED-GAINS-CURRENT] 1,124
[APPREC-INCREASE-CURRENT] (469)
[NET-CHANGE-FROM-OPS] 816
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 156
[DISTRIBUTIONS-OF-GAINS] 510
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 395
[NUMBER-OF-SHARES-REDEEMED] 523
[SHARES-REINVESTED] 28
[NET-CHANGE-IN-ASSETS] (2,498)
[ACCUMULATED-NII-PRIOR] 122
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 0
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 99
[AVERAGE-NET-ASSETS] 11,036
[PER-SHARE-NAV-BEGIN] 23.72
[PER-SHARE-NII] .45
[PER-SHARE-GAIN-APPREC] .92
[PER-SHARE-DIVIDEND] .39
[PER-SHARE-DISTRIBUTIONS] 1.27
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 23.43
[EXPENSE-RATIO] .98
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 3
[ARTICLE] 6
[SERIES]
[NUMBER] 160
[NAME] AMERICAN AADVANTAGE INTERMEDIATE BOND MILEAGE FUND
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] OCT-31-1998
[PERIOD-START] NOV-01-1997
[PERIOD-END] OCT-31-1998
[INVESTMENTS-AT-COST] 0
[INVESTMENTS-AT-VALUE] 54
[RECEIVABLES] 6
[ASSETS-OTHER] 0
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 60
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 2
[TOTAL-LIABILITIES] 2
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 56
[SHARES-COMMON-STOCK] 6
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 0
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 0
[NET-ASSETS] 58
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 1
[OTHER-INCOME] 0
[EXPENSES-NET] 0
[NET-INVESTMENT-INCOME] 1
[REALIZED-GAINS-CURRENT] 1
[APPREC-INCREASE-CURRENT] 1
[NET-CHANGE-FROM-OPS] 3
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 1
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 18
[NUMBER-OF-SHARES-REDEEMED] 13
[SHARES-REINVESTED] 0
[NET-CHANGE-IN-ASSETS] 58
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 0
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 25
[AVERAGE-NET-ASSETS] 15
[PER-SHARE-NAV-BEGIN] 10.00
[PER-SHARE-NII] .38
[PER-SHARE-GAIN-APPREC] .40
[PER-SHARE-DIVIDEND] .38
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 10.40
[EXPENSE-RATIO] .87
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 4
[ARTICLE] 6
[SERIES]
[NUMBER] 150
[NAME] AMERICAN AADVANTAGE INTERNATIONAL EQUITY MILEAGE FUND
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] OCT-31-1998
[PERIOD-START] NOV-01-1997
[PERIOD-END] OCT-31-1998
[INVESTMENTS-AT-COST] 0
[INVESTMENTS-AT-VALUE] 5,370
[RECEIVABLES] 1
[ASSETS-OTHER] 5
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 5,376
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 20
[TOTAL-LIABILITIES] 20
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 4,662
[SHARES-COMMON-STOCK] 305
[SHARES-COMMON-PRIOR] 295
[ACCUMULATED-NII-CURRENT] 54
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 212
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 428
[NET-ASSETS] 5,356
[DIVIDEND-INCOME] 128
[INTEREST-INCOME] 19
[OTHER-INCOME] 3
[EXPENSES-NET] 79
[NET-INVESTMENT-INCOME] 71
[REALIZED-GAINS-CURRENT] 150
[APPREC-INCREASE-CURRENT] (207)
[NET-CHANGE-FROM-OPS] 14
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 76
[DISTRIBUTIONS-OF-GAINS] 118
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 879
[NUMBER-OF-SHARES-REDEEMED] 880
[SHARES-REINVESTED] 11
[NET-CHANGE-IN-ASSETS] 137
[ACCUMULATED-NII-PRIOR] 59
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 0
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 60
[AVERAGE-NET-ASSETS] 5,144
[PER-SHARE-NAV-BEGIN] 17.67
[PER-SHARE-NII] .25
[PER-SHARE-GAIN-APPREC] .33
[PER-SHARE-DIVIDEND] .27
[PER-SHARE-DISTRIBUTIONS] .42
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 17.56
[EXPENSE-RATIO] 1.47
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 5
[ARTICLE] 6
[SERIES]
[NUMBER] 130
[NAME] AMERICAN AADVANTAGE MONEY MARKET MILEAGE FUND-MILEAGE CLASS
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] OCT-31-1998
[PERIOD-START] NOV-01-1997
[PERIOD-END] OCT-31-1998
[INVESTMENTS-AT-COST] 0
[INVESTMENTS-AT-VALUE] 189,011
[RECEIVABLES] 115
[ASSETS-OTHER] 4
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 189,130
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 412
[TOTAL-LIABILITIES] 412
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 188,718
[SHARES-COMMON-STOCK] 114,844<F1>
[SHARES-COMMON-PRIOR] 104,947
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 0
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 0
[NET-ASSETS] 188,718
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 9,865
[OTHER-INCOME] 0
[EXPENSES-NET] 1,416
[NET-INVESTMENT-INCOME] 8,449
[REALIZED-GAINS-CURRENT] 3
[APPREC-INCREASE-CURRENT] 0
[NET-CHANGE-FROM-OPS] 8,452
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 5,460
[DISTRIBUTIONS-OF-GAINS] 2
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 235,466
[NUMBER-OF-SHARES-REDEEMED] 230,939
[SHARES-REINVESTED] 5,369
[NET-CHANGE-IN-ASSETS] 34,587
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 0
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 1,203
[AVERAGE-NET-ASSETS] 172,166
[PER-SHARE-NAV-BEGIN] 1.00
[PER-SHARE-NII] .05
[PER-SHARE-GAIN-APPREC] 0
[PER-SHARE-DIVIDEND] .05
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 1.00
[EXPENSE-RATIO] .66
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
<FN>
<F1>MILEAGE CLASS. PER SHARE AMOUNTS ARE BY CLASS.
</FN>
</TABLE>
<PAGE> 6
[ARTICLE] 6
[SERIES]
[NUMBER] 134
[NAME] AMERICAN AADVANTAGE MONEY MARKET MILEAGE FUND-PLATINUM CLASS
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] OCT-31-1998
[PERIOD-START] NOV-01-1997
[PERIOD-END] OCT-31-1998
[INVESTMENTS-AT-COST] 0
[INVESTMENTS-AT-VALUE] 189,011
[RECEIVABLES] 115
[ASSETS-OTHER] 4
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 189,130
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 412
[TOTAL-LIABILITIES] 412
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 188,718
[SHARES-COMMON-STOCK] 73,875<F1>
[SHARES-COMMON-PRIOR] 49,184
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 0
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 0
[NET-ASSETS] 188,718
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 9,865
[OTHER-INCOME] 0
[EXPENSES-NET] 1,416
[NET-INVESTMENT-INCOME] 8,449
[REALIZED-GAINS-CURRENT] 3
[APPREC-INCREASE-CURRENT] 0
[NET-CHANGE-FROM-OPS] 8,452
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 2,989
[DISTRIBUTIONS-OF-GAINS] 1
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 224,413
[NUMBER-OF-SHARES-REDEEMED] 202,646
[SHARES-REINVESTED] 2,924
[NET-CHANGE-IN-ASSETS] 34,587
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 0
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 1,203
[AVERAGE-NET-ASSETS] 172,166
[PER-SHARE-NAV-BEGIN] 1.00
[PER-SHARE-NII] .05
[PER-SHARE-GAIN-APPREC] 0
[PER-SHARE-DIVIDEND] .05
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 1.00
[EXPENSE-RATIO] 1.09
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
<FN>
<F1>PLATINUM CLASS. PER SHARE AMOUNTS ARE BY CLASS.
</FN>
</TABLE>
<PAGE> 7
[ARTICLE] 6
[SERIES]
[NUMBER] 180
[NAME] AMERICAN AADVANTAGE MUNICIPAL MONEY MARKET MILEAGE FUND
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] OCT-31-1998
[PERIOD-START] NOV-01-1997
[PERIOD-END] OCT-31-1998
[INVESTMENTS-AT-COST] 0
[INVESTMENTS-AT-VALUE] 24,754
[RECEIVABLES] 138
[ASSETS-OTHER] 4
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 24,896
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 154
[TOTAL-LIABILITIES] 154
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 24,742
[SHARES-COMMON-STOCK] 24,742
[SHARES-COMMON-PRIOR] 26,564
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 0
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 0
[NET-ASSETS] 24,742
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 998
[OTHER-INCOME] 0
[EXPENSES-NET] 173
[NET-INVESTMENT-INCOME] 825
[REALIZED-GAINS-CURRENT] 2
[APPREC-INCREASE-CURRENT] 0
[NET-CHANGE-FROM-OPS] 827
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 825
[DISTRIBUTIONS-OF-GAINS] 2
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 53,818
[NUMBER-OF-SHARES-REDEEMED] 56,422
[SHARES-REINVESTED] 782
[NET-CHANGE-IN-ASSETS] (1,822)
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 0
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 168
[AVERAGE-NET-ASSETS] 52,849
[PER-SHARE-NAV-BEGIN] 1.00
[PER-SHARE-NII] .03
[PER-SHARE-GAIN-APPREC] 0
[PER-SHARE-DIVIDEND] .03
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 1.00
[EXPENSE-RATIO] .65
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 8
[ARTICLE] 6
[SERIES]
[NUMBER] 140
[NAME] AMERICAN AADVANTAGE SHORT-TERM BOND MILEAGE FUND
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] OCT-31-1998
[PERIOD-START] NOV-01-1997
[PERIOD-END] OCT-31-1998
[INVESTMENTS-AT-COST] 0
[INVESTMENTS-AT-VALUE] 1,493
[RECEIVABLES] 17
[ASSETS-OTHER] 4
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 1,514
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 20
[TOTAL-LIABILITIES] 20
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 1,530
[SHARES-COMMON-STOCK] 156
[SHARES-COMMON-PRIOR] 128
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (27)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] (9)
[NET-ASSETS] 1,494
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 93
[OTHER-INCOME] 0
[EXPENSES-NET] 11
[NET-INVESTMENT-INCOME] 82
[REALIZED-GAINS-CURRENT] (6)
[APPREC-INCREASE-CURRENT] 8
[NET-CHANGE-FROM-OPS] 84
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 82
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 72
[NUMBER-OF-SHARES-REDEEMED] 52
[SHARES-REINVESTED] 8
[NET-CHANGE-IN-ASSETS] 268
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 0
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 32
[AVERAGE-NET-ASSETS] 1,317
[PER-SHARE-NAV-BEGIN] 9.60
[PER-SHARE-NII] .60
[PER-SHARE-GAIN-APPREC] 0
[PER-SHARE-DIVIDEND] .60
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 9.60
[EXPENSE-RATIO] .85
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 9
[ARTICLE] 6
[SERIES]
[NUMBER] 170
[NAME] AMERICAN AADVANTAGE US GOVERNMENT MONEY MARKET MILEAGE FUND
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] OCT-31-1998
[PERIOD-START] NOV-01-1997
[PERIOD-END] OCT-31-1998
[INVESTMENTS-AT-COST] 0
[INVESTMENTS-AT-VALUE] 33,707
[RECEIVABLES] 42
[ASSETS-OTHER] 4
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 33,753
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 40
[TOTAL-LIABILITIES] 40
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 33,713
[SHARES-COMMON-STOCK] 33,713
[SHARES-COMMON-PRIOR] 28,791
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 0
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 0
[NET-ASSETS] 33,713
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 1,828
[OTHER-INCOME] 0
[EXPENSES-NET] 201
[NET-INVESTMENT-INCOME] 1,627
[REALIZED-GAINS-CURRENT] 0
[APPREC-INCREASE-CURRENT] 0
[NET-CHANGE-FROM-OPS] 1,627
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 1,627
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 26,451
[NUMBER-OF-SHARES-REDEEMED] 23,010
[SHARES-REINVESTED] 1,481
[NET-CHANGE-IN-ASSETS] 4,922
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 0
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 157
[AVERAGE-NET-ASSETS] 64,859
[PER-SHARE-NAV-BEGIN] 1.00
[PER-SHARE-NII] .05
[PER-SHARE-GAIN-APPREC] 0
[PER-SHARE-DIVIDEND] .05
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 1.00
[EXPENSE-RATIO] .62
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 10
[ARTICLE] 6
[SERIES]
[NUMBER] 100
[NAME] AMERICAN AADVANTAGE S&P500 INDEX MILEAGE FUND
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] 10-MOS
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-START] MAR-02-1998
[PERIOD-END] DEC-31-1998
[INVESTMENTS-AT-COST] 0
[INVESTMENTS-AT-VALUE] 2,551
[RECEIVABLES] 44
[ASSETS-OTHER] 0
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 2,595
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 44
[TOTAL-LIABILITIES] 44
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 2,669
[SHARES-COMMON-STOCK] 216,507
[SHARES-COMMON-PRIOR] 47,554
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (513)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 395
[NET-ASSETS] 2,551
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 0
[OTHER-INCOME] 0
[EXPENSES-NET] 7
[NET-INVESTMENT-INCOME] 14
[REALIZED-GAINS-CURRENT] 3
[APPREC-INCREASE-CURRENT] 395
[NET-CHANGE-FROM-OPS] 412
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 0
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 1,055,816
[NUMBER-OF-SHARES-REDEEMED] 840,486
[SHARES-REINVESTED] 1,177
[NET-CHANGE-IN-ASSETS] 2,551
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 0
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 46
[AVERAGE-NET-ASSETS] 1,631
[PER-SHARE-NAV-BEGIN] 10.86
[PER-SHARE-NII] .10
[PER-SHARE-GAIN-APPREC] 1.78
[PER-SHARE-DIVIDEND] 0
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 11.78
[EXPENSE-RATIO] .55
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
