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SIGNATURE TANYA LODEN
TITLE CONTROLLER
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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[DESCRIPTION] Price Waterhouse LLP
<PAGE> 1
[LOGO]
[PRICE WATERHOUSE LLP LETTERHEAD]
February 16, 1995
To the Board of Trustees of
American Capital Federal Mortgage Trust
In planning and performing our audit of the financial statements of the
American Capital Federal Mortgage Trust (the Fund) for the year
ended December 31, 1994, we considered its internal control structure,
including procedures for safeguarding securities, in order to determine our
auditing procedures for the purposes of expressing our opinion on the financial
statements and to comply with the requirements of Form N-SAR, and not to
provide assurance on the internal control structure.
The management of the Fund is responsible for establishing and maintaining an
internal control structure. In fulfilling this responsibility, estimates and
judgments by management are required to assess the expected benefits and
related costs of internal control structure policies and procedures. Two of the
objectives of an internal control structure are to provide management with
reasonable, but not absolute, assurance that assets are appropriately
safeguarded against loss from unauthorized use or disposition and that
transactions are executed in accordance with management's authorization and
recorded properly to permit preparation of financial statements in conformity
with generally accepted accounting principles.
Because of inherent limitations in any internal control structure, errors or
irregularities may occur and not be detected. Also, projection of any
evaluation of the structure to future periods is subject to the risk that it
may become inadequate because of changes in conditions or that the degree of
effectiveness of the design and operation may deteriorate.
Our consideration of the internal control structure would not necessarily
disclose all matters in the internal control structure that might be material
weaknesses under standards established by the American Institute of Certified
Public Accountants. A material weakness is a condition in which the design or
operation of the specific internal control structure elements does not reduce
to a relatively low level the risk that errors or irregularities in amounts
that would be material in relation to the financial statements being audited
may occur and not be detected within a timely period by employees in the normal
course of performing their assigned functions.
<PAGE> 2
[LOGO]
February 16, 1995
Page 2
However, we noted no matters involving the internal control structure,
including procedures for safeguarding securities, that we consider to be
material weaknesses as defined above as of December 31, 1994.
This report is intended solely for the information and use of management and
the Securities and Exchange Commission.
Price Waterhouse LLP
<PAGE> 3
[PRICE WATERHOUSE LLP LETTERHEAD]
[LOGO]
February 16, 1995
To the Board of Trustees and Management of the
American Capital Federal Mortgage Trust
We have examined the accompanying description of the specific control
objectives and the control procedures that achieve those objectives of the
American Capital Federal Mortgage Trust (the Fund) relating to that
segment of its system for allocating the results of operations of the Fund to
separate classes of shares and calculating the respective net asset values and
dividends and distributions (the Multiple Class System) as of December 31,
1994. Our examination included procedures to obtain reasonable assurance about
whether (1) the accompanying description presents fairly, in all material
respects, the aspects of the Fund's policies and procedures that may be
relevant to understanding the internal control structure relating to the
Multiple Class System and review, (2) the control structure policies and
procedures included in the description were suitably designed to achieve the
control objectives specified in the description, if those policies and
procedures were complied with satisfactorily, and (3) such policies and
procedures had been placed in operation as of December 31, 1994. The control
objectives were specified by management of the Fund. Our examination was
performed in accordance with standards established by the American Institute of
Certified Public Accountants and included those procedures we considered
necessary in the circumstances to obtain a reasonable basis for rendering our
opinion.
In our opinion, the accompanying description of the Multiple Class System
presents fairly, in all material respects, the relevant aspects of the Fund's
policies and procedures that had been placed in operation as of December 31,
1994. Also, in our opinion, the policies and procedures, as described, are
suitably designed to provide reasonable assurance that the specified control
objectives would be achieved if the described policies and procedures were
complied with satisfactorily.
In addition to the procedures we considered necessary to render our opinion as
expressed in the previous paragraph, we applied tests to specific policies and
procedures in the Multiple Class System as listed in the Appendix (Price
Waterhouse LLP Tests of Operating Effectiveness) to obtain evidence about the
effectiveness of such policies and procedures in meeting the control objectives
during the year ended December 31, 1994. The specific policies and procedures
and the nature, timing, extent, and results of the tests are listed in the
Appendix of this report. In our
<PAGE> 4
[LOGO]
February 16, 1995
Page 2
opinion, the policies and procedures that were tested were operating with
sufficient effectiveness to provide reasonable, but not absolute, assurance that
the control objectives specified were achieved during the period indicated.
The description of specific policies and procedures of the Fund's Multiple
Class System is as of December 31, 1994, and information about tests of the
operating effectiveness of specified policies and procedures covered the period
from January 1, 1994 to December 31, 1994. Any projection of such information
to the future is subject to the risk that, because of change, the description
may no longer portray the system in existence. The potential effectiveness of
specific policies and procedures from the Fund's system under review is subject
to inherent limitations and, accordingly, errors or irregularities may occur
and not be detected. Furthermore, the projection of any conclusions, based on
our findings, to future periods is subject to the risk that changes may alter
the validity of such conclusions.
This report is intended solely for use by the Trustees and management of the
Fund and the Securities and Exchange Commission and should not be used for any
other purpose.
PRICE WATERHOUSE LLP
[DESCRIPTION] Multiple Class Funds
<PAGE> 1
AMERICAN CAPITAL MUTUAL FUNDS
MULTIPLE CLASS FUNDS
SECTION I
DESCRIPTION OF THE ALTERNATE PURCHASE PLANS
Mutual Funds that adopt a multiple class of share structure are required to
maintain records that account for each class of shares of the fund. Shares
which are subject to contingent deferred sales load (CDSL) versus paying only a
front-end sales load (FESL) are charged with a higher distribution fee (12b-1
fee) on a daily basis. Since the 12b-1 fees charged will be higher for CDSL
shares and multiple classes of shares exist, separate Net Asset Values (NAV)
and dividend/distributions must be calculated for each class of shares.
NAV CALCULATIONS
Income: Income of the Fund (all classes combined) will be allocated to the
individual classes based on the relative adjusted net assets of each class or
the relative value of adjusted dividend qualifying shares of each class (the
net assets at the beginning of the day after reflecting the prior day's capital
share transactions) as appropriate, depending on the type of fund.
Expenses: Expenses of the Fund not specific to one or more classes will be
allocated to all classes based on the adjusted net assets of each class or the
relative value of adjusted dividend qualifying shares of each class. Expenses
attributable to a particular class will be charged only to that class. Expenses
attributable to a particular class may include the following:
o Rule 12b-1 fees
o Transfer agent cost
UNREALIZED APPRECIATION/DEPRECIATION AND REALIZED GAINS/LOSSES
The change in the market value of investments will be allocated each day based
on the relative adjusted net assets of each class or the relative value of
adjusted dividend qualifying shares of each class as appropriate, depending on
the type of fund. Realized gains and losses will be allocated to the classes on
the same basis.
DIVIDEND/DISTRIBUTIONS PAID TO SHAREHOLDERS
The amount of dividends and distribution of gains paid to shareholders of each
class will be determined by the dividend/distribution calculation methodology
described below. The actual amounts paid to each class will be used to
calculate the net asset value of each class.
<PAGE> 2
PRICING WORKSHEET
The Multiple Shares NAV Worksheet (Exhibit III) will be used in the daily net
asset value calculation. Utilizing data reviewed by the fund accountant, the
computer system generates the above worksheet for the total fund and each
respective class.
For non-daily dividend funds, the class allocation is based on the relative
adjusted net assets of each class. The allocation is derived by taking prior
day's net assets plus the actual dollars booked from prior day capital stock
activity for each class compared to the total fund. For daily dividend funds,
the class allocation is based on the relative value of adjusted dividend
qualifying shares of each class. The allocation is derived by using dividend
shares times prior day's NAV compared to the fund total.
This class allocation is used to allocate income, non-class-specific expenses,
and realized and unrealized gains and losses. Class specific expenses and
dividend/distributions are applied to the apprpriate class. This determines the
net assets for the current day which is divided by outstanding shares for the
NAV per share for each class.
DIVIDEND/DISTRIBUTIONS CALCULATION METHODOLOGY
The amount available for dividends, or the projected amount available, will be
based on the combined undistributed net investment income of the Fund. The per
share dividend rates for each class will differ by approximately the expense
rate differential, based on average daily NAV, between the classes of shares
for the applicable period, i.e. daily, monthly, etc.
The maximum distribution rate per share for net realized gains will be
determined by dividing the total fund shares outstanding on the ex-dividend
date into the undistributed net realized gains of the fund (all classes
combined) for the applicable period.
SECTION II
SPECIFIED CONTROL OBJECTIVES
The following are the specific control objectives of the system of internal
accounting control relating to the allocation of income and expenses and the
calculation of net asset values and dividend distribution amounts for the
multiple classes of shares contemplated above:
1. That the expenses attributable to a particular class are properly recorded
for that class.
2. That income, other operating expenses, and realized and unrealized gains
and losses are allocated properly to each class as described in Section I.
3. That capital share transactions, including dividends and distributions,
are properly allocated as described in Section I.
4. That net asset value is properly calculated as described in Section I.
- 2 -
<PAGE> 3
SECTION III
POLICIES AND PROCEDURES TO ACHIEVE SPECIFIED CONTROL OBJECTIVES
The following procedures are designed to account for the various classes of
shares in each fund. From time to time, policies and procedures may be revised
to improve or enhance operations and maintain adherence to specified control
objectives.
1. On a daily basis, the fund accountant completes the "Daily Net Asset
Reconciliation and NAV Proof" (proof sheet) on Exhibit II.
2. Using the proof sheet, the fund accountant reviews the allocation of daily
income and expenses and realized and unrealized gains and losses of each
class.
3. The fund accountant verifies the shares outstanding on the proof sheet to
the amounts supplied by the Transfer Agent.
4. On a daily basis, the fund supervisor reviews the allocations and the net
asset value calculation. On a test basis, the supervisor verifies the
amounts entered by the fund accountant on the proof sheet by agreeing the
amounts entered to source documents and reviewing for reasonableness. The
supervisor initials the worksheet to evidence this review.
5. On a monthly basis, the fund supervisor reviews the monthly financial
statement including the calculations of all income and expense items.
6. For periodic distributions (monthly, quarterly or annually, as applicable),
the calculation is performed by the fund accountant according to the
methodology described in Section I. The calculation is verified by a
supervisor by agreeing the amounts to the source documents. This review is
documented by the supervisor's initials on the calculation.
SECTION IV
FINANCIAL STATEMENT DISCLOSURE FOR FUNDS WITH MULTIPLE CLASSES OF SHARES
Portfolio of Investments
o Will be shown in accordance with standard reporting practices.
Statement of Assets and Liabilities
o Assets and liabilities will be disclosed on a combined basis.
o Net asset value and offering price per share data will be presented for
each class.
o The composition of net assets (Summary of Shareholders Equity) will be
presented on a combined basis, but will include a description of each class
(par, outstanding shares, etc.).
Statement of Operations
o A standard reporting format will be used.
-3-
<PAGE> 4
Statement of Changes in Net Assets
o A standard reporting format will be used with separate disclosure of
dividends and capital gain distributions to shareholders and dollar value
of capital share transactions for each class.
Financial Highlights
o A standard reporting format will be used and the per share data and ratios
will be shown for each class (portfolio turnover which will be shown in
total).
Notes to Financial Statements
The notes to the financial statements will include the following additional
disclosures in the footnotes:
o Description of each class of shares and the related class-specific
expenses.
o Information on the 12b-1 fee arrangements for each class.
o Capital shares transactions for each class for the most recent period and
the prior year.
-4-
[DESCRIPTION] Price Waterhouse LLP Tests Of Operating Effectiven
<PAGE> 1
APPENDIX
(Page 1 of 2)
PRICE WATERHOUSE LLP TESTS OF OPERATING EFFECTIVENESS
AMERICAN CAPITAL MUTUAL FUNDS
NET ASSET VALUE ("NAV") AND DIVIDEND/DISTRIBUTION
DETERMINATION FOR MULTIPLE CLASS OF SHARES
The following are the tests of operating effectiveness which we performed with
respect to the Fund's use of the Multiple Class System. We randomly selected
days throughout the year ended December 31, 1994, in which to test the
operating effectiveness of the Fund's policies and procedures. In addition, we
tested the net investment income and capital gain distributions for the Fund.
Finally, we reviewed the disclosure of the Fund as included in the December 31,
1994 financial statements. Our performance of the tests of operating
effectiveness, described below, did not result in any exceptions.
<TABLE>
<CAPTION>
Price Waterhouse LLP
Control Objective Tests of Operating Effectivenes
----------------- --------------------------------
<S> <C>
1. That the direct expenses attributable For the days selected, we obtained the Worksheet and related
to each class of shares are correctly trial balances and noted full completion and performed the
recorded in the Fund accounting following procedures:
records as charged to each class of
shares. o We recalculated the relative class allocation
percentages (i.e., "% of Net Assets by Class" and "% of
2. That income, other operating expenses Dividend Share Value by Class"). To arrive at these
and realized and unrealized allocation percentages, we agreed the components of the
gains/losses are allocated properly calculation to the Fund's primary accounting records.
to each class of shares based upon
the relative "% of Net Assets by o We agreed income, fund-level operating expenses, and
Class", or the relative "% of realized and unrealized gain/loss amounts, as listed on
Dividend Share Value by Class", as the Worksheet, to the Fund's primary accounting records.
appropriate.
o We recomputed the allocation of income, fund-level
operating expenses and realized and unrealized
gain/loss amounts to each share class based upon the
relative "% of Net Assets by Class" or the relative "%
of Dividend Share Value by Class", as appropriate.
</TABLE>
<PAGE> 2
APPENDIX
(Page 2 of 2)
<TABLE>
<CAPTION>
Price Waterhouse LLP
Control Objective Tests of Operating Effectiveness
----------------- --------------------------------
<S> <C>
o We recalculated the Advisor's fee for the Fund by using
the beginning of the day's total net assets of the Fund
multiplied by the daily rate per the Fund's prospectus.
o We recalculated the class-level 12b-1 fees for the Fund
which represented the current-day accrual calculated
using the beginning of day's net assets attributable to
each class based on the respective class rate per the
Fund's prospectus.
o We agreed the capital stock activity for each respective
class to the Fund's primary accounting records.
o We recalculated NAV per share by class by dividing the
ending total net assets applicable to a class by the
number of shares outstanding relating to that class.
3. That the capital share transactions, o For the net investment income and capital gain
including dividends and distributions, distributions selected for testing, we recalculated the
are properly based on the combined distribution rates for each class of shares and
undistributed net investment income, determined that they reflected the proper net
gain and loss amounts and the proper investment income and capital gain allocation.
amount of any direct expenses charged
to each class of shares.
4. That the asset value is properly o We tested the multiple shares NAV worksheet generated by
calculated based on capital stock the American Capital computer system for correct
activity, income, expense and gain calculation of NAV for each respective class.
and loss amounts.
</TABLE>
[DESCRIPTION] Daily Net Asset Reconciliation and NAV Proof
<PAGE> 1
Exhibit II
DAILY NET ASSET RECONCILIATION AND NAV PROOF Page 1
FUND: ________________ DATE: _________________
DAILY NAV PROOF
<TABLE>
<CAPTION>
________________________________________________________________________________
Line Activity CLASS A CLASS B CLASS C TOTAL FUND
________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Current Shares Outstanding _______ ________ _______ _________
1 Prior Day's NAV (4 decimals) _______ ________ _______ _________
PER SHARE IMPACT ON NAV
CAPITAL SHARE TRANSACTIONS
2 Capital Share Transactions _______ ________ _______ _________
(from Page 3) _______ ________ _______ _________
NET INVESTMENT INCOME
3 Today's Net Investment Income* $_______ $________ $_______
*(from R707 Cost-P)
4 Net Investment Income _______ ________ _______ _________
_______ ________ _______ _________
EX-DIVIDEND/DISTRIBUTION
5 Income Dividend (from Page 3) (_______) (________) (_______) (_________)
(_______) (________) (_______) (_________)
Capital Gain Distribution
per class (_______) (________) (_______) (_________)
(_______) (________) (_______) (_________)
MARKET VALUE ACTION
7 Per Class Allocation
(9 DECIMALS FROM R707) _______ ________ _______
8 Total impact (line 23 x
line 7) $_______ $________ $_______
9 Per Share Effect of Market
Change _______ ________ _______ _________
_______ ________ _______ _________
10 Calculated Price Per Share _______ ________ _______ _________
(SUM OF LNES 1,2,4,5,6,&9)
11 System Generated Price (_______) (________) (_______) (_________)
12 Difference should not exceed
.0002 _______ ________ _______ _________
_______ ________ _______ _________
MARKET VALUE ACTION
13 R403 Current Market Value of
all Investments _______
14 R403 Today's Mark-to Market
on Futures _______
15 P/D R403 Prior Day's Market Value (________)
16 R314 Today's Discount Earned (________)
17 R314 Today's Accretion of OID (________)
18 R314 Today's Amortization of
Premium ________
19 R309 Investments purchased - at c (________)
20 R309 Investments sold - at proceeds ________
21 R810 P I K / I O Adjustments (________)
R309 Adjusting Marks on Futures
Trades ________
Subtotal (_______)
23 Change in Market Value _______
_______
</TABLE>
<PAGE> 2
Exhibit II
DAILY NET ASSET RECONCILIATION AND NAV PROOF Page 1
FUND: ______________________________ DATE: _______________
DAILY NET ASSET RECONCILIATION
<TABLE>
<CAPTION>
________________________________________________________________________________________________________________
G/L PRIOR Percentage
Line Report Activity ACCT DAY Amount of change
________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
DAILY ACCRUALS
INCOME
1 R303 Dividend Income CP05 _______________ _______________ ___________%
2 R810 Bond Interest Income Non-taxable CP10 _______________ _______________ ___________%
3 R810 Bond Interest Income Taxable CP13 _______________ _______________ ___________%
4 R810 Short-term Interest Income Non-taxable CP16 _______________ _______________ ___________%
5 R810 Short-term Interest Income Taxable CP19 _______________ _______________ ___________%
6 R314 Acquisition Discount Earned CP31 _______________ _______________ ___________%
7 R314 Accretion of OID - Taxable CP34 _______________ _______________ ___________%
8 R314 Accretion of OID - Non-taxable CP35 _______________ _______________ ___________%
9 R314 Amortization of Premium - Taxable CP37 (_______________) (_______________) ___________%
10 R314 Amortization of Premium - Non-taxable CP38 (_______________) (_______________) ___________%
11 Other Income CP45 _______________ _______________ ___________%
12 Interim Income Adjustments CP46 _______________ _______________ ___________%
13 GROSS INVESTMENT INCOME _______________
_______________
EXPENSES
14 Operating Expense Accrual CP5095 (_______________)
15 12-b 1 Expense Accrual CP53/CP54B/CP54C +\-_______________
Direct Expense Payments +\-_______________
16 NET INVESTMENT INCOME TODAY _______________
_______________
To Page 1, line 3 TF
To Page 2, Line 18
NET ASSETS AT COST RECONCILIATION
17 R701 Prior Day's Net Assets at Cost _______________
18 Today's Net Investment Income (Line 16, page 2) _______________
19 Today's Total Net Share Activity (Line 6, page 3) _______________
20 R302 Today's Net Gain/Loss (excl. Futures) _______________
21 R309 Mark-to-Market on Futures _______________
22 R810 PIK/IO Adjustments _________________________ (_______________)
23 Today's Distributions (Line 31, page 3 or amounts from
Line 5 & 6, page 1) (_______________)
24 Below Adjustments *_______________
25 R701 TODAY'S NET ASSETS AT COST _______________
_______________
(Pre-priced)
* DETAIL OF ADJUSTMENTS
$ ____________________________
$ ____________________________
$ ____________________________
$ ____________________________
</TABLE>
<PAGE> 3
EXHIBIT II
DAILY NET ASSET RECONCILIATION AND NAV PROOF Page 3
FUND: ______________________________ DATE: ________________
<TABLE>
<CAPTION>
___________________________________________________________________________________________________________________
Line Report Activity Amount
___________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Current Shares Outstanding
__________________________
CAPITAL SHARE TRANSACTIONS-IMPACT ON NAV
CLASS A CLASS B CLASS C
1 S/R Today's Net Dollars to Fund ________________ ________________ ________________
2 Est. Today's Net Est. Dollars ________________ ________________ ________________
3 P/D Reverse P/D Net Est. Dollars ________________ ________________ ________________
4 Reinvestment Dollars to Fund ________________ ________________ ________________
5 Today's Dollar Impact = ________________ = ________________ = ________________
6 TODAY'S TOTAL DOLLAR IMPACT +A+B+C = ________________
7 S/R Today's Net Shares to Fund ________________ ________________ ________________
8 Est. Today's Net Est. Shares ________________ ________________ ________________
9 P/D Reverse P/D Net Est. Shares ________________ ________________ ________________
10 Reinvestment Shares to Fund ________________ ________________ ________________
11 Today's Share Impact per ( = ________________ = ________________ = ________________
12 Prior Day's NAV x ________________ x ________________ x ________________
13 = (________________) = (________________) = (________________)
15 Change in Capital Shares (L5 - L13) ________________ = ________________ = ________________
________________ ________________ ________________
PER SHARE EFFECT ** ________________ ________________ ________________
________________ ________________ ________________
+A+B+C = ________________
18 **IF ANSWER EXCEEDS +/- .0005 NOTIFY SUPERVISOR PER SHARE TF ________________
________________
Equalization Factor ________________ ________________ ________________
CLASS A CLASS B CLASS C
19 S/R Current Shares Outstanding ________________ ________________ ________________
20 Est. Share Estimates - Sales ________________ ________________ ________________
21 Est. Share Est - Redemptions (________________) (________________) (________________)
22 Est. Share Est - Reinvestments ________________ ________________ ________________
23 Adj Shares Outstanding GL Total = ________________ ________________ ________________
24 S/R Unsettled Sales CS80A (________________)CS80B(________________)CS80C(________________)
25 S/R Unsettled Redemptions CS90A ________________ CS90B ________________ CS90C ________________
26 Current Distribution Shares GL Total________________ ________________ ________________
TOTAL OUTSTANDING SHARES A+B+C ______________________________
______________________________
DIVIDENDS AND DISTRIBUTIONS
27 S/R T/A Reported Amount ________________ ________________ ________________
28 P/D Estimate Div ________________ ________________ ________________
29 Tie-in Adjustment Needed ________________ ________________ ________________
30 Current Day's Total Dividend ** ________________ ________________ ________________
________________ ________________ ________________
** Line 23 or 26 x Line 31
31 Dividend Rate ________________ ________________ ________________
</TABLE>
[DESCRIPTION] Multiple Shares NAV Worksheet
<PAGE> 1
EXHIBIT III
AMERICAN CAPITAL
REPORT # R707
NAV-P MULTIPLE SHARES NAV WORKSHEET - PERIODIC DIVIDEND FUND
FOR THE PERIOD 10/12/93 THROUGH 10/13/93
REPORT IDENTIFIER NAV-P
NAV WORKSHEET FOR TOTAL FUND
- ----------------------------
NET ASSETS - PRIOR DAY
CAPITAL STOCK ACTIVITY AS OF PRIOR DAY
ADJUSTED NET ASSETS
CLASS ALLOCATION ON ADJUSTED NET ASSETS
NET INVESTMENT INCOME:
GROSS INVESTMENT INCOME
EXPENSES:
DISTRIBUTION FEES
SERVICE FEES
OTHER EXPENSES
NET ADJUSTMENT TO EXPENSES
NET EXPENSES
NET INVESTMENT INCOME
UNDISTRIBUTED INCOME - PRIOR DAY
INCOME AVAILABLE FOR DISTRIBUTION
INCOME AVAILABLE PER SHARE
DIVIDENDS DECLARED
GAINS DISTRIBUTIONS DECLARED
GAINS/LOSSES - ALLOCATED ON ADJUSTED NET ASSETS:
NET REALIZED GAINS/LOSSES
NET UNREALIZED GAINS/LOSSES
INCREASE/DECREASE IN NET ASSETS
NET ASSETS - CURRENT DAY
CAPITAL SHARES OUTSTANDING CURRENT DAY
FOR STATISTICAL USE ONLY
------------------------
NAV PER SHARE:
UNROUNDED
ROUNDED
PRIOR DAY NAV - ROUNDED
CHANGE IN NAV (CENTS)
NET ASSETS FOR TOTAL FUND PER NAV WORKSHEET
NET ASSETS FOR TOTAL FUND PER R403
-) DIFFERENCE
<PAGE> 2
EXHIBIT III
AMERICAN CAPITAL
REPORT # R707
NAV-P MULTIPLE SHARES NAV WORKSHEET - PERIODIC DIVIDEND FUND
FOR THE PERIOD 10/12/93 THROUGH 10/13/93
NAV WORKSHEET FOR CLASS A SHARES
- --------------------------------
NET ASSETS - PRIOR DAY
CAPITAL STOCK ACTIVITY AS OF PRIOR DAY
ADJUSTED NET ASSETS
CLASS ALLOCATION ON ADJUSTED NET ASSETS
NET INVESTMENT INCOME:
GROSS INVESTMENT INCOME
EXPENSES:
SERVICE FEES
OTHER EXPENSES
NET ADJUSTMENT TO CLASS A EXPENSES
NET EXPENSES
NET INVESTMENT INCOME
UNDISTRIBUTED INCOME - PRIOR DAY
INCOME AVAILABLE FOR DISTRIBUTION
INCOME AVAILABLE PER SHARE
DIVIDENDS DECLARED
GAINS DISTRIBUTIONS DECLARED
GAINS/LOSSES - ALLOCATED ON ADJUSTED NET ASSETS:
NET REALIZED GAINS/LOSSES
NET UNREALIZED GAINS/LOSSES
INCREASE/DECREASE IN NET ASSETS
NET ASSETS - CURRENT DAY
CAPITAL SHARES OUTSTANDING CURRENT DAY
NAV PER SHARE:
UNROUNDED
ROUNDED
PRIOR DAY NAV - ROUNDED
CHANGE IN NAV (CENTS)
CLASS A FRONT-END LOAD FACTOR (1 - LOAD)
MAXIMUM OFFERING PRICE (CLASS A)
NET ASSETS FOR CLASS A PER NAV WORKSHEET
NET ASSETS FOR CLASS A PER R403
-) DIFFERENCE
<PAGE> 3
EXHIBIT III
AMERICAN CAPITAL
REPORT # R707
NAV-P MULTIPLE SHARES NAV WORKSHEET - PERIODIC DIVIDEND FUND
FOR THE PERIOD 10/12/93 THROUGH 10/13/93
NAV WORKSHEET FOR CLASS B SHARES
- --------------------------------
NET ASSETS - PRIOR DAY
CAPITAL STOCK ACTIVITY AS OF PRIOR DAY
ADJUSTED NET ASSETS
CLASS ALLOCATION ON ADJUSTED NET ASSETS
NET INVESTMENT INCOME:
GROSS INVESTMENT INCOME
EXPENSES:
DISTRIBUTION FEES
SERVICE FEES
OTHER EXPENSES
NET EXPENSES
NET INVESTMENT INCOME
UNDISTRIBUTED INCOME - PRIOR DAY
INCOME AVAILABLE FOR DISTRIBUTION
INCOME AVAILABLE PER SHARE
DIVIDENDS DECLARED
GAINS DISTRIBUTIONS DECLARED
GAINS/LOSSES - ALLOCATED ON ADJUSTED NET ASSETS:
NET REALIZED GAINS/LOSSES
NET UNREALIZED GAINS/LOSSES
INCREASE/DECREASE IN NET ASSETS
NET ASSETS - CURRENT DAY
CAPITAL SHARES OUTSTANDING CURRENT DAY
NAV PER SHARE:
UNROUNDED
ROUNDED
PRIOR DAY NAV - ROUNDED
CHANGE IN NAV (CENTS)
CLASS B FRONT-END LOAD FACTOR (1 - LOAD)
MAXIMUM OFFERING PRICE (CLASS B)
NET ASSETS FOR CLASS B PER NAV WORKSHEET
NET ASSETS FOR CLASS B PER R403
-) DIFFERENCE
<PAGE> 4
EXHIBIT III
AMERICAN CAPITAL
REPORT # R707
NAV-P MULTIPLE SHARES NAV WORKSHEET - PERIODIC DIVIDEND FUND
FOR THE PERIOD 10/12/93 THROUGH 10/13/93
NAV WORKSHEET FOR CLASS C SHARES
- --------------------------------
NET ASSETS - PRIOR DAY
CAPITAL STOCK ACTIVITY AS OF PRIOR DAY
ADJUSTED NET ASSETS
CLASS ALLOCATION ON ADJUSTED NET ASSETS
NET INVESTMENT INCOME:
GROSS INVESTMENT INCOME
EXPENSES:
DISTRIBUTION FEES
SERVICE FEES
OTHER EXPENSES
NET EXPENSES
NET INVESTMENT INCOME
UNDISTRIBUTED INCOME - PRIOR DAY
INCOME AVAILABLE FOR DISTRIBUTION
INCOME AVAILABLE PER SHARE
DIVIDENDS DECLARED
GAINS DISTRIBUTIONS DECLARED
GAINS/LOSSES - ALLOCATED ON ADJUSTED NET ASSETS:
NET REALIZED GAINS/LOSSES
NET UNREALIZED GAINS/LOSSES
INCREASE/DECREASE IN NET ASSETS
NET ASSETS - CURRENT DAY
CAPITAL SHARES OUTSTANDING CURRENT DAY
NAV PER SHARE:
UNROUNDED
ROUNDED
PRIOR DAY NAV - ROUNDED
CHANGE IN NAV (CENTS)
CLASS C FRONT-END LOAD FACTOR (1 - LOAD)
MAXIMUM OFFERING PRICE (CLASS C)
NET ASSETS FOR CLASS C PER NAV WORKSHEET
NET ASSETS FOR CLASS C PER R403
-) DIFFERENCE
[DESCRIPTION] N-SAR Item 77C
<PAGE> 1
N-SAR ITEM 77C
a) A Special Meeting of Shareholders was held on December 16, 1994.
b) Inapplicable
c) The following was voted on at the meeting:
1) Approval of a new investment advisory agreement between the Registrant
and American Capital Asset Management, Inc. to take effect upon the
closing of the proposed acquisition of American Capital Management &
Research, Inc. by The Van Kampen Merritt Companies, Inc.
For 3,949,216.006 Against 102,255.017
d) Inapplicable
[DESCRIPTION] Investment Advisory Agreement
<PAGE> 1
INVESTMENT ADVISORY AGREEMENT
AGREEMENT (herein so called) made this 20th day of December, 1994, by and
between AMERICAN CAPITAL FEDERAL MORTGAGE TRUST, a Massachusetts Business Trust
(hereinafter referred to as the "FUND"), and AMERICAN CAPITAL ASSET MANAGEMENT,
INC., a Delaware corporation (hereinafter referred to as the "ADVISER").
The FUND and the ADVISER agree as follows:
(1) Services Rendered and Expenses Paid by ADVISER
The ADVISER, subject to the control, direction and supervision of the FUND's
Trustees and in conformity with applicable laws, the FUND's Agreement and
Declaration of Trust ("Declaration of Trust"), By-laws, registration
statements, prospectus and stated investment objectives, policies and
restrictions, shall:
a. manage the investment and reinvestment of the FUND's assets including, by
way of illustration, the evaluation of pertinent economic, statistical,
financial and other data, determination of the industries and companies to be
represented in the FUND's portfolio, and formulation and implementation of
investment programs;
b. maintain a trading desk and place all orders for the purchase and sale of
portfolio investments for the FUND's account with brokers or dealers selected
by the ADVISER;
c. conduct and manage the day-to-day operations of the FUND including, by way
of illustration, the preparation of registration statements, prospectuses,
reports, proxy solicitation materials and amendments thereto, the furnishing
of routine legal services except for services provided by outside counsel to
the FUND selected by the Trustees, and the supervision of the FUND's Treasurer
and the personnel working under his direction; and
d. furnish to the FUND office space, facilities, equipment and personnel
adequate to provide the services described in paragraphs a., b., and c. above
and pay the compensation of each FUND trustee and FUND officer who is an
affiliated person of the ADVISER, except the compensation of the FUND's
Treasurer and related expenses as provided below.
In performing the services described in paragraph b. above, the ADVISER shall
use its best efforts to obtain for the FUND the most favorable price and
execution available and shall maintain records adequate to demonstrate
compliance with this requirement. Subject to prior authorization by the FUND's
Trustees of appropriate policies and procedures, the ADVISER may, to the extent
authorized by law, cause the FUND to pay a broker or dealer that provides
brokerage and research services to the ADVISER an amount of
<PAGE> 2
commission for effecting a portfolio investment transaction in excess of the
amount of commission another broker or dealer would have charged for effecting
that transaction. In the event of such authorization and to the extent
authorized by law, the ADVISER shall not be deemed to have acted unlawfully or
to have breached any duty created by this Agreement or otherwise solely by
reason of such action.
Except as otherwise agreed, or as otherwise provided herein, the FUND shall
pay, or arrange for others to pay, all its expenses other than those expressly
stated to be payable by the ADVISER hereunder, which expenses payable by the
FUND shall include (i) interest and taxes; (ii) brokerage commissions and other
costs in connection with the purchase and sale of portfolio investments; (iii)
compensation of its trustees and officers other than those who are affiliated
persons of the ADVISER; (iv) compensation of its Treasurer, compensation of
personnel working under the Treasurer's direction, and expenses of office
space, facilities, and equipment used by the Treasurer and such personnel in
the performance of their normal duties for the FUND which consist of
maintenance of the accounts, books and other documents which constitute the
record forming the basis for the FUND's financial statements, preparation of
such financial statements and other FUND documents and reports of a financial
nature required by federal and state laws, and participation in the production
of the FUND's registration statement, prospectuses, proxy solicitation
materials and reports to shareholders; (v) fees of outside counsel to and of
independent accountants of the FUND selected by the Trustees; (vi) custodian,
registrar and shareholder service agent fees and expenses; (vii) expenses
related to the repurchase or redemption of its shares including expenses
related to a program of periodic repurchases or redemptions; (viii) expenses
related to the issuance of its shares against payment therefor by or on behalf
of the subscribers thereto; (ix) fees and related expenses of registering and
qualifying the FUND and its shares for distribution under state and federal
securities laws; (x) expenses of printing and mailing of registration
statements, prospectuses, reports, notices and proxy solicitation materials of
the FUND; (xi) all other expenses incidental to holding meetings of the FUND's
shareholders including proxy solicitations therefor; (xii) expenses for
servicing shareholder accounts; (xiii) insurance premiums for fidelity coverage
and errors and omissions insurance; (xiv) dues for the FUND's membership in
trade associations approved by the Trustees; and (xv) such nonrecurring
expenses as may arise, including those associated with actions, suits or
proceedings to which the FUND is a party and the legal obligation which the
FUND may have to indemnify its officers and trustees with respect thereto. To
the extent that any of the foregoing expenses are allocated between the FUND
and any other party, such allocations shall be pursuant to methods approved by
the Trustees.
2
<PAGE> 3
(2) Role of ADVISER
The ADVISER, and any person controlled by or under common control with the
ADVISER, shall be free to render similar services to others and engage in other
activities, so long as the services rendered to the FUND are not impaired.
Except as otherwise required by the Investment Company Act of 1940 (the "1940
Act"), any of the shareholders, trustees, officers and employees of the FUND
may be a shareholder, trustee, director, officer or employee of, or be
otherwise interested in, the ADVISER, and in any person controlled by or under
common control with the ADVISER, and the ADVISER, and any person controlled by
or under common control with the ADVISER, may have an interest in the FUND.
Except as otherwise agreed, in the absence of willful misfeasance, bad faith,
negligence or reckless disregard of obligations or duties hereunder on the part
of the ADVISER, the ADVISER shall not be subject to liability to the FUND, or
to any shareholder of the FUND, for any act or omission in the course of, or
connected with, rendering services hereunder or for any losses that may be
sustained in the purchase, holding or sale of any security.
(3) Compensation Payable to ADVISER
The FUND shall pay to the ADVISER, as compensation for the services rendered,
facilities furnished and expenses paid by the ADVISER, a monthly fee computed
at the following annual rates:
.50% on the first $1 billion of the FUND's average daily net assets; .475% on
the next $1 billion of the FUND's average daily net assets; .45% on the next $1
billion of the FUND's average daily net assets; .40% on the next $1 billion of
the FUND's average daily net assets; and .35% of any excess over $4 billion.
Average daily net assets shall be determined by taking the average calendar
month calculated in the manner provided in the FUND's Declaration of Trust.
Such fee shall be payable for each calendar month as soon as practicable after
the end of that month.
The fees payable to the ADVISER by the FUND pursuant to this Section 3 shall be
reduced by any commissions, tender solicitation and other fees, brokerage or
similar payments received by the ADVISER, or any other direct or indirect
majority owned subsidiary of American Capital Management & Research, Inc., or
its successor, in connection with the purchase and sale of portfolio
investments of the FUND, less any direct expenses incurred by such person, in
connection with obtaining such commissions, fees, brokerage or similar
payments. The ADVISER shall use its best efforts to recapture all available
tender offer solicitation fees and exchange offer fees in connection with the
FUND's portfolio transactions and shall advise the Trustees of any other
commissions, fees, brokerage
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or similar payments which may be possible for the ADVISER or any other direct
or indirect majority owned subsidiary of American Capital Management &
Research, Inc., or its successor, to receive in connection with the FUND's
portfolio transactions or other arrangements which may benefit the FUND.
In the event that the ordinary business expenses of the FUND for any fiscal
year should exceed 1.5% of the first $30 million of the FUND's average daily
net assets plus 1% of any excess over $30 million, the compensation due the
ADVISER for such fiscal year shall be reduced by the amount of such excess. The
ADVISER's compensation shall be so reduced by a reduction or a refund thereof,
at the time such compensation is payable after the end of each calendar month
during such fiscal year of the FUND, and if such amount should exceed such
monthly compensation, the ADVISER shall pay the FUND an amount sufficient to
make up the deficiency, subject to readjustment during the FUND's fiscal year.
For purposes of this paragraph, all ordinary business expenses of the FUND
shall include the investment advisory fee and other operating expenses paid by
the FUND except (i) for interest and taxes; (ii) brokerage commissions; (iii)
as a result of litigation in connection with a suit involving a claim for
recovery by the FUND; (iv) as a result of litigation involving a defense
against a liability asserted against the FUND, provided that, if the ADVISER
made the decision or took the actions which resulted in such claim, it acted in
good faith without negligence or misconduct; (v) any indemnification paid by
the FUND to its officers and trustees and the ADVISER in accordance with
applicable state and federal laws as a result of such litigation; and (vi)
amounts paid to American Capital Marketing, Inc., the distributor of the FUND's
shares, in connection with a distribution plan adopted by the FUND's Trustees
pursuant to Rule 12b-1 under the Investment Company Act of 1940.
If the ADVISER shall serve for less than the whole of any month, the foregoing
compensation shall be prorated.
(4) Books and Records
In compliance with the requirements of Rule 31a-3 under the 1940 Act, the
ADVISER hereby agrees that all records which it maintains for the FUND are the
property of the FUND and further agrees to surrender promptly to the FUND any
of such records upon the FUND's request. The ADVISER further agrees to preserve
for the periods prescribed by Rule 31a-2 under the 1940 Act the records
required to be maintained by Rule 31a-1 under the Act.
(5) Duration of Agreement
This Agreement shall have an initial term of 2 years from the date hereof, and
shall continue in force from year to year thereafter, but only so long as such
continuance is approved at least annually by the vote of a majority of the
FUND's Trustees who are not
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parties to this Agreement or interested persons of any such parties, cast in
person at a meeting called for the purpose of voting on such approval, and by a
vote of a majority of the FUND's Trustees or a majority of the FUND's
outstanding voting securities.
This Agreement shall terminate automatically in the event of its assignment.
The Agreement may be terminated at any time by the FUND's Trustees, by vote of
a majority of the FUND's outstanding voting securities, or by the ADVISER, on
60 days' written notice, or upon such shorter notice as may be mutually agreed
upon. Such termination shall be without payment of any penalty.
(6) Miscellaneous Provisions
For the purposes of this Agreement, the terms "affiliated person,"
"assignment," "interested person," and "majority of the outstanding voting
securities" shall have their respective meanings defined in the 1940 Act and
the Rules and Regulations thereunder, subject, however, to such exemptions as
may be granted to either the ADVISER or the FUND by the Securities and Exchange
Commission (the "Commission"), or such interpretive positions as may be taken
by the Commission or its staff, under the 1940 Act, and the term "brokerage and
research services" shall have the meaning given in the Securities Exchange Act
of 1934 and the Rules and Regulations thereunder.
The execution of this Agreement has been authorized by the FUND's Trustees and
shareholders. A copy of the Agreement and Declaration of Trust of the FUND is
on file with the Secretary of State of The Commonwealth of Massachusetts, and
it is hereby agreed that this Agreement is executed on behalf of the Trustees
of the FUND as Trustees and not individually and that the obligations of this
Agreement are not binding upon any of the Trustees, officers or shareholders of
the FUND individually but are binding only upon the assets and property of the
FUND.
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The parties hereto each have caused this Agreement to be signed in duplicate on
its behalf by its duly authorized officer on the above date.
AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
/s/ CURTIS W. MORELL
By:________________________________________
Curtis W. Morell
Name:______________________________________
Vice President
Its:_______________________________________
AMERICAN CAPITAL ASSET MANAGEMENT, INC.
/s/ NORI L. GABERT
By:________________________________________
Nori L. Gabert
Name:______________________________________
Vice President
Its:_______________________________________
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