<PAGE> 1
AMERICAN CAPITAL
FEDERAL MORTGAGE
TRUST
[Photo of Man, Woman and Child
ANNUAL REPORT
December 31, 1994
[AMERICAN CAPITAL LOGO]
THIS BROCHURE INCLUDES A PROSPECTUS WHICH DESCRIBES IN DETAIL THE FUND'S
OBJECTIVES, INVESTMENT POLICIES, RISKS, SALES CHARGES, FEES AND OTHER MATTERS
OF INTEREST. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE YOU INVEST OR
SEND MONEY.
<PAGE> 2
AMERICAN CAPITAL FEDERAL MORTGAGE TRUST HIGHLIGHTS
[Photo of Child]
FOR INVESTORS SEEKING HIGH CURRENT INCOME AND RELATIVE SAFETY OF
CAPITAL THROUGH AN INVESTMENT IN MORTGAGE-RELATED SECURITIES.
American Capital's Quality Commitment
[Photo of 2 DALBAR Awards]
American Capital has been recognized for providing the highest
quality service in the mutual fund industry in 1994. For the
second consecutive year, DALBAR Surveys, Inc., an independent
research firm in the mutual fund industry, awarded
American Capital its coveted crystal pyramid for
ranking number one in service. This ranking is based
on evaluations by investment professionals across the
country.
American Capital also has received the DALBAR
Quality Tested Service Seal for outstanding customer
service five years in a row.
Not a part of the Prospectus
<PAGE> 3
SHAREHOLDERS' MESSAGE
February 14, 1995
Dear Shareholder, [Photo of Don G. Powell]
For more than six decades, American Capital has helped investors achieve their
financial goals. As a shareholder, you know that American Capital's goal is to
provide you with consistent, competitive returns and outstanding customer
service. Those goals will remain unchanged as we embark on a new era as Van
Kampen American Capital.
In December, shareholders of American Capital funds approved new
agreements with the funds' manager that cleared the way for completion of the
merger between American Capital Management & Research, Inc., the company that
owns your Fund's manager, and The Van Kampen Merritt Companies, Inc. on
December 20, 1994. While this merger will have no direct impact on your Fund
shares, it will create a stronger company that will be able to provide
shareholders with a broader range of investment options and nearly 100 years of
combined investment experience.
The strength and experience of Van Kampen American Capital is enhanced
further by the international and emerging markets expertise of John Govett &
Co. Limited. Last fall, Van Kampen American Capital Distributors, Inc.,
formerly American Capital Marketing, Inc., became the exclusive U.S.
distributor of The Govett Funds, Inc. This relationship will provide six
additional fund options for Van Kampen American Capital shareholders who want
to add an international or global component to their portfolios.
Although 1994 was a year of significant change for American Capital,
one thing has not changed: our belief in investing for the long term. The past
year was extremely challenging for both the stock and bond market, as concerns
about rising inflation prompted repeated increases in short-term interest rates
that made many investors nervous. While the markets did not perform as well in
1994 as in previous years, investing in a stock mutual fund still is the one of
the best ways to achieve long-term capital appreciation and bond funds are an
excellent option for investors who need regular income.
We will continue to communicate with you on a regular basis as we go
forward, providing information about both market conditions and new investment
opportunities. We appreciate your continued confidence in your Fund and Van
Kampen American Capital.
Sincerely,
/s/ DON G. POWELL
Don G. Powell
President
Not a part of the Prospectus 1
<PAGE> 4
PORTFOLIO PERSPECTIVE
THE FOLLOWING IS AN INTERVIEW WITH THE MANAGEMENT TEAM OF AMERICAN CAPITAL
FEDERAL MORTGAGE TRUST. THE TEAM IS LED BY PORTFOLIO MANAGER TED MUNDY AND
ROBERT PECK, EXECUTIVE VICE PRESIDENT.
Q. WHAT FACTORS HAD THE GREATEST IMPACT ON THE FUND'S PERFORMANCE IN
1994?
A. The Federal Reserve Board last year decided the economy was growing
too quickly, which could cause an increase in the inflation rate. As
part of its effort to slow economic growth to a rate that is more
sustainable, the Fed raised short-term interest rates six times in
1994, from 3% to 5.50%. As a result, the yield on two-year Treasury
notes rose almost 4 percentage points to 7.70%. Although yields
increased, the inverse relationship between yield and price meant that
bond prices dropped significantly. The result was mostly negative
total returns for the year.
Q. HOW DID YOU RESPOND TO THE INTEREST-RATE HIKES?
A. We increased the Fund's exposure to issues with variable interest
rates to capture the additional yields that became available with each
subsequent increase. At December 31, about 33% of the portfolio was
invested in variable-rate securities. In addition, we reduced the
average duration of the Fund from 2.1 years at the beginning of the
year to 1.8 years on November 30. Duration is a measure of the impact
any change in interest rates will have on the value of a bond; the
lower the duration, the less a bond's price should change in value as
rates change.
In the fourth quarter of 1994, we increased the Fund's exposure to
adjustable-rate mortgages, with the view that this sector had been
undervalued by the market. The Fund's diversification is illustrated
by the chart at left.
[Pie Chart showing Securities by Type]
Q. HOW DID THE FUND PERFORM IN 1994?
A. Class A shares achieved a total return at net asset value (without a
sales charge) of 0.16%, including reinvestment of dividends totalling
$.5383 per share. Class B shares achieved a total return at net asset
value of -0.62%, including reinvestment of dividends totalling $.4423
per share. Class C shares achieved a total return at net asset value
of -0.55%, including reinvestment of dividends totalling $.4423 per
share. During the period covered by this report, Van Kampen American
Capital Asset Management, Inc., the Adviser, subsidized a portion of
the Fund's expenses. Without this subsidy, the total returns would
have been lower.
Not a part of the Prospectus 2
<PAGE> 5
Q. HOW DID THAT COMPARE TO GOVERNMENT SECURITIES IN GENERAL?
A. The Lehman Brothers Mutual Fund U.S. Government Index -- 1&2 Year
achieved a total return of 1.39%. The Index is a broad-based,
unmanaged index that reflects the general performance of U.S.
Government agency and Treasury securities. It does not reflect any
commissions or fees that would be paid by an investor purchasing the
securities it represents.
[Photo of Man and Woman looking at Computer Screen]
Q. WHAT'S THE OUTLOOK FOR THE NEXT SIX MONTHS?
A. We expect economic activity to remain brisk through the first half of
1995 and then start to slow in response to at least one more increase
in short-term interest rates. When investors believe the Fed has
completed the current round of rate hikes, the investment climate
should stabilize, which means the volatility experienced in 1994
should diminish.
Our strategy for the Fund will be to increase the duration to
a point where any additional change in interest rates would have
little or no impact on the Fund's portfolio. In doing so, we hope to
capture the additional yields available from longer-maturity issues.
We will continue to look for opportunities in adjustable-rate
mortgages and structured products such as collateralized mortgage
obligations and asset-backed securities.
/s/ ROBERT C. PECK, JR. /s/ TED V. MUNDY
Robert C. Peck, Jr. Ted V. Mundy
EXECUTIVE VICE PRESIDENT PORTFOLIO MANAGER
TAXABLE FIXED-INCOME INVESTMENTS
Not a part of the Prospectus 3
<PAGE> 6
AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
MORTGAGE-RELATED SECURITIES:
INVESTING IN AMERICAN NEIGHBORHOODS
You know that American Capital Federal Mortgage Trust invests in
mortgage-related securities and U.S. Treasury securities. But if you're like
many investors, you may be uncertain as to what a mortgage-backed security
really is.
A mortgage-backed security is a pool, or group, of individual
mortgages. When an individual buys a house, the mortgage is held by a bank,
savings institution, or mortgage company. That mortgage originator arranges to
have the mortgage combined with other, similar mortgages (same interest rate,
same terms) into a package totalling a minimum of $1 million. When your
portfolio management team buys a mortgage-backed security, it is buying a
portion of one of these pools.
The principal and interest payments made by the homeowner are passed
through by the mortgage originator to the issuer of the pool. Investors such as
American Capital Federal Mortgage Trust receive their share of these payments
each month until every mortgage in the pool has been paid off.
Ginnie, Freddie, and Fannie
All of the mortgage-backed securities held in your Fund are backed by agencies
associated with the U.S. Government. Three of the best known agencies are
referred to colloquially as Ginnie Mae, Freddie Mac, and Fannie Mae.
o Ginnie Mae, the Government National Mortgage Association (GNMA), is
the original agency created to insure mortgage-backed securities. GNMA
payments are guaranteed as a direct obligation of the U.S. Government.
All mortgages in a Ginnie Mae pool are VA or FHA loans, which are
themselves insured by the Veterans Administration or Federal Housing
Administration.
o Freddie Mac, the Federal Home Loan Mortgage Corporation, also
guarantees timely payment of both interest and principal. While
Freddie Mac debts are not a direct obligation of the U.S. Government,
their credit quality is so high that they are unrated. Freddie Mac
mortgage pools are very similar to GNMA pools.
o Fannie Mae, the Federal National Mortgage Association (FNMA), is a
corporation loosely tied to the U.S. Government. FNMA securities are
guaranteed based on insurance obtained by Fannie Mae.
Not a part of the Prospectus 4
<PAGE> 7
AMERICAN CAPITAL'S
GOVERNMENT FUND FAMILY
As a shareholder in American Capital Federal Mortgage Trust, you are part of
American Capital's family of four funds which invest in government securities:
American Capital
Government Securities
A convenient way to own a portfolio of U.S. Government securities, this Fund is
for investors seeking total return. The Fund invests in U.S. Treasury
securities, federal agency securities, and mortgage-backed securities.
[Photo of U.S. Capital Dome]
American Capital Global
Government Securities
For investors seeking income opportunities worldwide, this Fund invests in a
portfolio of high quality international and U.S. Government bonds. The Fund's
primary objective is a high level of current income, with capital appreciation
and protection of capital as important secondary objectives.
American Capital U.S.
Government Trust for Income
For investors seeking high current income, this Fund invests in debt securities
issued or guaranteed by the U.S. Government*, its agencies or
instrumentalities. This Fund is especially designed for investors who desire a
monthly check.
American Capital Federal Mortgage Trust
This U.S. Government bond fund is designed for conservative investors seeking
price stability and high current return compared to other investments. The Fund
invests in a portfolio of mortgage-related securities, including
adjustable-rate securities (ARMs), and U.S. Treasury securities.
For more complete information about any American Capital Fund, including
charges and expenses, obtain a prospectus from your investment professional or
call Van Kampen American Capital Distributors, Inc. Read the prospectus
carefully before you invest or send money.
*Of course, the U.S. Government guarantee applies only to the timely payment of
the principal and interest on the underlying securities and does not apply to
the Fund's shares.
Not a part of the Prospectus 5
<PAGE> 8
AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
THE AMERICAN CAPITAL ADVANTAGE
As a shareholder in an American Capital fund you have the option of
automatically investing your dividends and capital gains into most other
American Capital funds without a sales charge. This fund-to-fund privilege,
which can help you create a diversified portfolio, is just one of the many
shareholder services available to you at no charge.
[5 Dalbar Quality Tested Service Seals dated 1990 to 1995]
Van Kampen American Capital is extremely proud of its shareholder
services, and is committed to continuing to provide outstanding service. For
the fifth consecutive year, American Capital received the Quality Tested
Service Seal awarded by DALBAR Surveys, Inc., a well-respected independent
research firm in the mutual fund industry. American Capital was one of only
five mutual fund groups in the nation in 1994 to receive this prestigious award
for consistent, quality service, and one of only two fund groups to receive the
award every year since its inception. In addition, our shareholder services
agent, ACCESS, won the 1993 Missouri Quality Award. TO EXPERIENCE OUR
AWARD-WINNING CUSTOMER SERVICE CALL 1-800-421-5666 BETWEEN 7 A.M. AND 7 P.M.
CENTRAL TIME MONDAY THROUGH FRIDAY.
Service When To help meet the needs of busy shareholders, American Capital
You Want It offers 24-hour account information through ACCESS PLUS, our
automated telephone service. Just call 1-800-847-2424 from a
Touch-Tone phone to check your account balance, obtain current
fund prices, exchange between funds and more.
Variety of Dividends from net investment income for American Capital
Distribution Federal Mortgage Trust are paid monthly and capital gains, if
Options any, are distributed at least annually. You may automatically
reinvest these distributions into additional shares to build
your account value, take them in cash, or have them
automatically invested into any other American Capital fund.
Low Subsequent You can make additional investments in American Capital
Investments Federal Mortgage Trust for as little as $25.
Automatic An automatic investment plan can help you carry out a
Investment Plan disciplined financial plan by allowing you to invest regularly
into your mutual fund account through automatic deductions
from your personal bank account. With our Step Up option, you
also can increase your investment amount on a pre-established
schedule.
Not a part of the Prospectus 6
<PAGE> 9
INVESTMENT PORTFOLIO
December 31, 1994
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Agency and Government Obligations 97.5%
ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES 33.3%
Federal Home Loan Mortgage Corp.
$ 247,899 5.38% Pool, 11/1/17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 250,225
*3,754,317 5.47% Pool, 7/1/24 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,702,095
3,884,792 6.11% Pool, 6/1/24 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,873,876
1,316,779 6.13% Pool, 8/1/20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,318,425
275,279 6.14% Pool, 5/1/19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 272,441
348,447 6.28% Pool, 3/1/16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 345,071
310,407 7.50% Pool, 9/1/18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307,399
194,402 8.35% Pool, 2/1/18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191,183
Federal National Mortgage Association
933,709 5.83% Pool, 2/1/15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 910,366
449,130 5.84% Pool, 10/1/19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 443,516
2,021,664 5.86% Pool, 12/1/24 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,980,604
3,500,000 6.25% Pool, 1/1/25 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,456,250
934,491 6.47% Pool, 8/1/19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 941,500
3,825,693 6.64% Pool, 9/1/19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,838,853
----------------
TOTAL ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES
(Cost $22,343,917) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,831,804
----------------
COLLATERALIZED MORTGAGE OBLIGATIONS 46.5%
Federal Home Loan Mortgage Corp.
2,531,962 5.00%, 5/15/99 (PAC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,486,082
3,911,926 5.88%, 4/15/20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,892,366
2,897,537 6.18%, 2/15/16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,897,537
5,000,000 6.50%, 6/15/97 (PAC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,932,050
Federal National Mortgage Association
3,237,300 4.75%, 1/25/05 (PAC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,160,414
*3,136,000 5.50%, 3/25/03 (PAC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,909,612
940,233 6.05%, 2/25/16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 935,532
848,015 6.08%, 3/25/22 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 839,798
7,684,628 6.33%, 6/25/18 to 2/25/21 . . . . . . . . . . . . . . . . . . . . . . . . . 7,665,878
737,092 6.75%, 8/25/20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 712,215
----------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $30,824,257) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,431,484
----------------
FIXED-RATE MORTGAGE-BACKED SECURITIES 6.8%
Federal National Mortgage Association
*909,615 9.50% Pools, 7/1/11 to 8/1/21 . . . . . . . . . . . . . . . . . . . . . . . 934,630
*780,884 10.00% Pool, 5/1/21 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 819,194
Government National Mortgage Association
220,366 8.50% Pools, 12/15/16 to 1/15/17 . . . . . . . . . . . . . . . . . . . . . . 216,441
514,313 9.50% Pools, 3/15/16 to 1/15/19 . . . . . . . . . . . . . . . . . . . . . . 530,710
956,921 10.00% Pools, 4/15/16 to 4/15/19 . . . . . . . . . . . . . . . . . . . . . . 1,005,963
494,314 10.50% Pools, 5/15/13 to 2/15/18 . . . . . . . . . . . . . . . . . . . . . . 527,833
381,751 11.00% Pool, 11/15/18 . . . . . . . . . . . . . . . . . . . . . . . . . . . 413,363
----------------
TOTAL FIXED-RATE MORTGAGE-BACKED SECURITIES
(Cost $4,370,127) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,448,134
----------------
</TABLE>
Not a part of the Prospectus 7
<PAGE> 10
INVESTMENT PORTFOLIO, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
UNITED STATES TREASURY OBLIGATIONS 10.9%
United States Treasury Notes
$ 3,500,000 7.50%, 12/31/96 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,487,435
3,500,000 8.875%, 2/15/99 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,621,415
---------------
TOTAL UNITED STATES TREASURY OBLIGATIONS
(Cost $7,131,578) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,108,850
---------------
TOTAL UNITED STATES AGENCY AND GOVERNMENT OBLIGATIONS
(Cost $64,669,879) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63,820,272
---------------
ASSET BACKED SECURITIES 11.2%
4,000,000 ITT, 5.58%, 2/15/01 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,998,760
3,447,388 Premier Auto, 4.95%, 2/2/99 . . . . . . . . . . . . . . . . . . . . . . . . . . 3,323,489
---------------
TOTAL ASSET BACKED SECURITIES (Cost $7,378,872) . . . . . . . . . . . . . . . . 7,322,249
---------------
REPURCHASE AGREEMENT 2.3%
1,495,000 Salomon Brothers, Inc., dated 12/30/94, 5.75%, due 1/3/95
(Collateralized by U.S. Government obligations in a pooled cash
account) repurchase proceeds $1,495,955 (Cost $1,495,000) . . . . . . . . . 1,495,000
---------------
TOTAL INVESTMENTS (Cost $73,543,751) 111.0% . . . . . . . . . . . . . . . . . . 72,637,521
Other assets and liabilities, net (11.0%) . . . . . . . . . . . . . . . . . . . (7,204,502)
---------------
NET ASSETS 100% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 65,433,019
===============
</TABLE>
* SECURITIES WITH A MARKET VALUE OF APPROXIMATELY $7.4 MILLION WERE
PLACED AS COLLATERAL FOR FORWARD COMMITMENTS (SEE NOTE 1B).
PAC -- Planned Amortization Class
SEE NOTES TO FINANCIAL STATEMENTS
Not a part of the Prospectus 8
<PAGE> 11
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1994
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $73,543,751) . . . . . . . . . . . . . . . . . . . . . . $ 72,637,521
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,698
Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 444,370
Receivable for Fund shares sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,978
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,647
------------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,100,214
------------
LIABILITIES
Investments purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,026,257
Payable for Fund shares redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 355,460
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,981
Due to Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,424
Due to Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,515
Due to shareholder service agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,830
Unrealized depreciation of forward purchase commitment . . . . . . . . . . . . . . . . . . 12,510
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 58,218
------------
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,667,195
------------
NET ASSETS, equivalent to $11.90 per share for Class A shares,
$11.91 per share for Class B shares and $11.90 per share
for Class C shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 65,433,019
============
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par; 3,465,620 Class A,
1,541,528 Class B and 491,408 Class C shares outstanding . . . . . . . . . . . . . . . . $ 54,986
Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82,620,185
Accumulated net realized loss on securities . . . . . . . . . . . . . . . . . . . . . . . (16,372,918)
Net unrealized depreciation of securities
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (906,230)
Forward purchase commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,510)
Undistributed net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,506
------------
NET ASSETS at December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 65,433,019
============
</TABLE>
See Notes to Financial Statements.
Not a part of the Prospectus 9
<PAGE> 12
STATEMENTS OF OPERATIONS
Year Ended December 31, 1994
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,960,588
-----------
EXPENSES
Management fees (net of waiver of $140,000 -- see Note 2) . . . . . . . . . . . . . . . . . 280,713
Service fees -- Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132,613
Distribution and service fees -- Class B . . . . . . . . . . . . . . . . . . . . . . . . . 222,471
Distribution and service fees -- Class C . . . . . . . . . . . . . . . . . . . . . . . . . 76,165
Shareholder services agent's fees and expenses . . . . . . . . . . . . . . . . . . . . . . 191,813
Registration and filing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111,736
Accounting services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,309
Reports to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,115
Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,522
Trustees' fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,185
Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,084
Custodian fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,565
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,523
-----------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,191,814
-----------
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,768,774
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized loss on securities
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,162,092)
Forward commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (349,453)
Net unrealized appreciation (depreciation) during the year
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,409,115)
Forward commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,871
-----------
Net realized and unrealized loss on securities . . . . . . . . . . . . . . . . . . . . . (3,916,789)
-----------
Decrease in net assets resulting from operations . . . . . . . . . . . . . . . . . . . . $ (148,015)
===========
</TABLE>
See Notes to Financial Statements.
Not a part of the Prospectus 10
<PAGE> 13
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1994 1993
--------------- ---------------
<S> <C> <C>
NET ASSETS, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . $ 98,293,251 $ 142,091,079
--------------- ---------------
OPERATIONS
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,768,774 6,362,397
Net realized loss on securities (net of
reimbursement -- see Note 2). . . . . . . . . . . . . . . . . . . . . . . (2,511,545) (1,880,081)
Net unrealized depreciation of securities
during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,405,244) (868,537)
---------------- ----------------
Increase (decrease) in net assets resulting
from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (148,015) 3,613,779
--------------- ---------------
DIVIDENDS TO SHAREHOLDERS FROM NET
INVESTMENT INCOME
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,394,001) (4,123,348)
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (806,734) (1,347,132)
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (276,067) (91,349)
--------------- ---------------
(3,476,802) (5,561,829)
--------------- ---------------
NET EQUALIZATION DEBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . (169,962) (620,002)
--------------- ---------------
FUND SHARES TRANSACTIONS
Proceeds from shares sold
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,201,023 32,894,798
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,104,254 5,703,339
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,694,179 7,970,180
--------------- ---------------
28,999,456 46,568,317
--------------- ---------------
Proceeds from shares issued for dividends reinvested
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,576,391 2,898,790
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 547,208 863,542
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122,460 46,435
--------------- ---------------
2,246,059 3,808,767
--------------- ---------------
Cost of shares redeemed
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (41,385,868) (73,362,626)
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,217,467) (17,349,831)
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,707,633) (894,403)
--------------- ---------------
(60,310,968) (91,606,860)
--------------- ---------------
Decrease in net assets resulting from Fund
shares transactions . . . . . . . . . . . . . . . . . . . . . . . . . . (29,065,453) (41,229,776)
--------------- ---------------
DECREASE IN NET ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . (32,860,232) (43,797,828)
--------------- ---------------
NET ASSETS, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 65,433,019 $ 98,293,251
=============== ===============
</TABLE>
See Notes to Financial Statements.
Not a part of the Prospectus 11
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
Note 1 - Significant Accounting Policies
American Capital Federal Mortgage Trust (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The following is a summary of significant
accounting policies consistently followed by the Fund in the preparation of its
financial statements.
A. Investment Valuations
U.S. Agency and Government obligations and related forward commitments
are valued at the last reported bid price. Listed options are valued
at the last reported sale price on the exchange on which such option
is traded, or, if no sales are reported, at the mean between the last
reported bid and asked prices. Securities for which market quotations
are not readily available are valued at a fair value under a method
approved by the Board of Trustees.
Short-term investments with a maturity of 60 days or less when
purchased are valued at amortized cost, which approximates market
value. Short-term investments with a maturity of more than 60 days
when purchased are valued based on market quotations, until the
remaining days to maturity become less than 61 days. From such time,
until maturity, such investments are valued at amortized cost.
B. Forward Commitments
The fund trades certain securities under the terms of forward
commitments, whereby the settlement for payment and delivery occurs at
a specified future date. Forward commitments are privately negotiated
transactions between the Fund and dealers. Transactions in forward
commitments are utilized in strategies to manage the market risk of
the Fund's investments. Investing in such instruments increases the
impact on net asset value of changes in the market price of
investments. Forward commitments have a risk of loss due to
nonperformance of counterparties. There is also a risk that the
market movement of such instruments may not be in the direction
forecasted. Upon executing a forward commitment and during the period
of obligation, the Fund maintains collateral of cash or securities in
a segregated account with its custodian in an amount sufficient to
relieve the obligation. If the intent of the Fund is to accept
delivery of a security traded under a forward purchase commitment, the
commitment is recorded as a ling-term purchase. For forward purchase
commitments and for forward sale commitments, which security
settlement is not intended by the Fund, changes in the value of the
commitment are recognized by marking the commitment to market on a
daily basis. During the period of the commitment, the Fund may either
resell or repurchase the forward commitment and enter into a new
forward commitment, the effect of which is to extend the settlement
date. In addition, the Fund may occasionally close such forward
commitments prior to delivery. Gains or losses are realized upon the
ultimate closing or cash settlement of forward commitments. Note 3 -
Investment activity contains additional information.
C. Repurchase Agreements
A repurchase agreement is a short-term investment in which the Fund
acquires ownership of a debt security and the seller agrees to
repurchase the security at a future time and specified price. The
Fund may invest independently in repurchase agreements, or transfer
uninvested cash balances into a pooled cash account along with other
investment companies advised or subadvised by the Van Kampen American
Capital Asset Management, Inc. (the "Adviser"), the daily aggregate of
which is invested in repurchase agreements. Repurchase agreements are
collateralized by the underlying debt security. The Fund will make
payment for such securities only upon physical delivery or evidence of
book entry transfer to the account of the custodian bank. The seller
is required to maintain the value of the underlying security at not
less than the repurchase proceeds due the Fund.
D. Federal Income Taxes
No provision for federal income taxes is required because the Fund has
elected to be taxed as a "regulated investment company" under the
Internal Revenue Code and intends to maintain this qualification by
annually distributing all of its taxable net investment income and
taxable net realized capital gains to its shareholders. It is
anticipated that no distributions of capital gains will be made until
tax basis capital loss carryforwards expire or are offset by net
realized capital gains.
E. Investment Transactions and Related Investment Income
Investment transactions are accounted for on the trade date. Realized
gains and losses on investments are determined on the basis of
identified cost. Interest income is accrued daily.
Not a part of the Prospectus 12
<PAGE> 15
F. Dividends and Distributions
The Fund declares dividends on each business day. Dividends and
distributions are recorded on the record dates. The Fund distributes
tax basis earnings in accordance with the minimum distribution
requirements of the Internal Revenue Code, which may differ from
generally accepted accounting principles. Such dividends or
distributions may exceed financial statement earnings.
G. Equalization
At December 31, 1994, the Fund discontinued the accounting practice of
equalization, which it had used since its inception. Equalization is
a practice whereby a portion of the proceeds from sales and costs of
redemptions of Fund shares, equivalent on a per-share basis to the
amount of the undistributed net investment income, is charged or
credited to undistributed net investment income.
The balance of equalization included in undistributed net investment
income at the date of change, which was $311,791, was reclassified to
capital surplus. Such reclassification had no effect on net assets,
results of operations, or net asset value per share of the Fund.
H. Debt Discount and Premium
For financial reporting purposes, debt discounts and premiums are
accounted for on the same basis as is followed for federal income tax
reporting. Accordingly, original issue discounts on debt securities
purchased are amortized over the life of the security. Premiums on
debt securities are not amortized. Market discounts are recognized at
the time of sale as realized gains for book purposes and ordinary
income for tax purposes.
Note 2 - Management Fees and Other Transactions with Affiliates
The Adviser serves as investment manager of the Fund. Management fees are paid
monthly, based on the average daily net assets of the Fund at an annual rate of
.50% of the first $1 billion, .475% of the next $1 billion, .45% of the next $1
billion, .40% of the next $1 billion and .35% of the amount in excess of $4
billion. From time to time, the Adviser may elect to waive a portion of its
management fee. The waiver is voluntary and may be discontinued at any time
without prior notice.
Accounting services include the salaries and overhead expenses of the Fund's
Treasurer and the personnel operating under his direction. Charges are
allocated among all investment companies advised or subadvised by the Adviser.
For the year ended December 31, 1994, these charges included $6,936 as the
Fund's share of the employee costs attributable to the Fund's accounting
officers. A portion of the accounting services expense was paid to the Adviser
in reimbursement of personnel, facilities and equipment costs attributable to
the provision of accounting services to the Fund. The services provided by the
Adviser are at cost.
Van Kampen American Capital Shareholder Services, Inc., an affiliate of the
Adviser, serves as the Fund's shareholder service agent. These services are
provided at cost plus a profit. For the year ended December 31, 1994, the fees
for such services aggregated $150,547.
The Fund was advised that Van Kampen American Capital Distributor, Inc. (the
"Distributor") and Advantage Capital Corp. (the "Retail Dealer"), both
affiliates of the Adviser, received $2,321 and $6,301, respectively, as their
portion of the commissions charged on sales of Fund shares during the year.
Under the Distribution Plans, each class of shares pays up to .25% per annum of
its average net assets to the Distributor for expenses and service fees
incurred. Class B shares and Class C shares pay an additional fee of up to
.75% per annum of their average net assets to reimburse the Distributor for its
distribution expenses. Actual distribution expenses incurred by the
Distributor for Class B shares and Class C shares may exceed the amounts
reimbursed to the Distributor by the Fund. At December 31, 1994, the
unreimbursed expenses incurred by the Distributor under the Class B and Class C
plans aggregated approximately $1.1 million and $130,000, respectively, and may
be carried forward and reimbursed through either the collection of the
contingent deferred sales charges from share redemptions or, subject to the
annual renewal of the plans, future Fund reimbursements of distribution fees.
Not a part of the Prospectus 13
<PAGE> 16
Legal fees of $7,034 were for services rendered by O'Melveny & Myers, counsel
for the Fund. Lawrence J. Sheehan, of counsel to that firm, is a director of
the Fund.
Certain officers and trustees of the Fund are officers and trustees or
directors of the Adviser, the Distributor, the Retail Dealer and the
shareholder service agent.
During 1993, certain securities held by the Fund were mispriced. The Adviser
reimbursed the Fund approximately $6.9 million to eliminate any loss to
shareholders incurred during the year of mispricing of such securities. The
reimbursement has been recorded as a reduction of the realized loss recognized
on the sale of the related securities. Without the reimbursement, the Adviser
estimates that the total return for the year ended December 31, 1993 would have
been lower by approximately 6.25 percentage points.
Note 3 -- Investment Activity
During the year, the cost of purchases and proceeds from sales of investments,
excluding short-term investments and forward commitments, were $129,178,297 and
$151,188,189, respectively.
The identified cost of investments owned at December 31, 1994 was the same for
federal income tax and financial reporting purposes. Net unrealized
depreciation of investments aggregated $906,230, gross unrealized appreciation
of investments aggregated $108,819 and gross unrealized depreciation of
investments aggregated $1,015,049.
The net realized capital loss carryforward of approximately $15.4 million for
federal income tax purposes at December 31, 1994 may be utilized to offset
future capital gains until expiration in 1995 through 2002, of which
approximately 21% will expire in 1995. Additionally, approximately $900,000 in
realized losses are being deferred for tax purposes to the 1995 fiscal year.
At December 31, 1994, the Fund held the following forward purchase commitment
settling January 1995.
<TABLE>
<CAPTION>
VALUE AT
PRINCIPAL DECEMBER 31, UNREALIZED
AMOUNT SECURITY 1994 DEPRECIATION
---------- ----------------------------------------------------- ------------ ------------
<S> <C> <C> <C>
$4,000,000 Federal National Mortgage Association,
8.00% Pools . . . . . . . . . . . . . . . . . . . . $ 3,831,240 $ 12,510
=========== ============
</TABLE>
Note 4 -- Trustee Compensation
Trustees who are not affiliated with the Adviser are compensated by the Fund at
the annual rate of $810 plus a fee of $20 per day for Board and Committee
meetings attended. The Chairman receives additional fees from the Fund at an
annual rate of $310. During the year, such fees aggregated $9,556.
The trustees may participate in a voluntary Deferred Compensation Plan (the
"Plan"). The Plan is not funded, and obligations under the Plan will be paid
solely out of the Fund's general accounts. The Fund will not reserve or set
aside funds for the payment of its obligations under the Plan by any form of
trust or escrow. At December 31, 1994, the liability for the Plan aggregated
$16,118. Each trustee covered under the Plan elects to be credited with an
earning component on amounts deferred equal to the income earned by the Fund on
its short-term investments or equal to the total return of the Fund.
Note 5 -- Capital
The Fund offers three classes of shares at their respective net asset values
per share, plus a sales charge which is imposed either at the time of purchase
(the Class A shares) or at the time of redemption on a contingent deferred
basis (the Class B shares and Class C shares). All classes of shares have the
same rights, except that Class B shares and Class C shares bear the cost of
distribution fees and certain other class specific expenses. Realized and
unrealized gains or looses, investment income and expenses (other than class
specific expenses) are allocated daily to each class of shares based upon the
relative proportion of net assets or paid shares of each class. Class B shares
and Class C shares automatically convert to Class A shares six years and ten
years after purchase, respectively, subject to certain conditions. The Fund
has suspended sales of Class B shares to the public, and these shares are now
available only to a limited group of investors.
Not a part of the Prospectus 14
<PAGE> 17
The Fund has an unlimited number of shares of $.01 par value beneficial
interest authorized. Transactions in shares of beneficial interest were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------
1994 1993
--------- ---------
<S> <C> <C>
Shares sold
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,589,204 2,652,339
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . 340,243 454,922
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . 469,667 636,387
---------- ----------
2,399,114 3,743,648
---------- ----------
Shares issued for dividends reinvested
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130,048 230,580
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,121 68,673
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,116 3,723
---------- ----------
185,285 302,976
---------- ----------
Shares redeemed
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,431,958) (5,915,573)
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,010,900) (1,391,506)
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . (556,549) (71,936)
---------- ----------
(4,999,407) (7,379,015)
---------- ----------
Decrease in shares outstanding . . . . . . . . . . . . . . . . . . (2,415,008) (3,332,391)
========== ==========
</TABLE>
Not a part of the Prospectus 15
<PAGE> 18
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated.
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
------------------------------------------------------------------------
1994 1993 1992 1991 1990
---------- ---------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value, beginning of year ........... $ 12.42 $ 12.63 $ 12.99 $ 12.85 $ 12.88
---------- ---------- -------- --------- ---------
INCOME FROM OPERATIONS
Investment income ............................ .62 .64 .93 1.15 1.32
Expenses ..................................... (.14) (.11) (.14) (.17) (.173)
Expense waiver(2) ............................ .02 .01 .025 .025 --
---------- ---------- -------- --------- ---------
Net investment income ........................ .50 .54 .815 1.005 1.147
Net realized and unrealized gains or
losses on securities ....................... (.4817) (.1485)(1) (.417) .206 (.004)
---------- ---------- -------- --------- ---------
Total from investment operations ............. .0183 .3915 .398 1.211 1.143
---------- ---------- -------- --------- ---------
DIVIDENDS FROM NET INVESTMENT INCOME ......... (.5383) (.6015) (.758) (1.071) (1.173)
---------- ---------- -------- --------- ---------
Net asset value, end of year ................. $ 11.90 $ 12.42 $ 12.63 $ 12.99 $ 12.85
========== ========== ======== ========= =========
TOTAL RETURN(3) .............................. .16% 3.15%(1) 3.15% 9.78% 9.50%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (millions) ........... $ 41.2 $ 64.3 $103.7 $ 95.8 $ 32.3
Average net assets (millions) ................ $ 54.3 $ 85.7 $112.7 $ 47.5 $ 33.4
Ratios to average net assets(2)
Expenses ............................... 1.15% 1.03% 0.91% 1.16% 1.38%
Expenses, without waiver ............... 1.31% 1.15% 1.12% 1.36% --
Net investment income .................. 4.75% 5.49% 6.36% 7.96% 9.11%
Net investment income,
without waiver ....................... 4.58% 5.37% 6.15% 7.66% --
Portfolio turnover rate ...................... 161% 102% 254% 293% 341%
</TABLE>
(1) NET OF REIMBURSEMENT-- SEE NOTE 2.
(2) SEE NOTE 2.
(3) TOTAL RETURN DOES NOT CONSIDER THE EFFECT OF SALES CHARGES.
SEE NOTES TO FINANCIAL STATEMENTS.
NOT A PART OF THE PROSPECTUS 16
<PAGE> 19
FINANCIAL HIGHLIGHTS, CONTINUED
Selected data for a share of beneficial interest outstanding throughout
each of the periods indicated.
<TABLE>
<CAPTION>
CLASS B CLASS C
-------------------------------------------------- --------------------------
NOVEMBER 5 MAY 10,
1991(2) YEAR 1993(2)
YEAR ENDED DECEMBER 31 THROUGH ENDED THROUGH
------------------------------------ DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1992 1991(3) 1994 1993(3)
--------- ---------- -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value, beginning of period ............ $ 12.43 $ 12.64 $ 12.99 $ 12.99 $ 12.41 $ 12.60
--------- ---------- -------- --------- ---------- ----------
INCOME FROM OPERATIONS
Investment income ............................... .62 .67 .935 .12 .67 .44
Expenses ........................................ (.22) (.20) (.24) (.03) (.24) (.14)
Expense waiver(6) ............................... .02 .01 .03 .02 .02 .02
--------- ---------- -------- --------- ---------- ----------
Net investment income ........................... .42 .48 .725 .11 .45 .32
Net realized and unrealized gains or
losses on securities .......................... (.4977) (.1845)(1) (.413) .036 (.5177) (.1914)
--------- ---------- -------- --------- ---------- ----------
Total from investment operations ................ (.0777) .2955 .312 .146 (.0677) .1286
--------- ---------- -------- --------- ---------- ----------
DIVIDENDS FROM NET INVESTMENT
INCOME ........................................ (.4423) (.5055) (.662) (.146) (.4423) (.3186)
--------- ---------- -------- --------- ---------- ----------
Net asset value, end of period .................. $ 11.91 $ 12.43 $ 12.64 $ 12.99 $ 11.90 $ 12.41
========= ========== ======== ========= ========== ==========
TOTAL RETURN(4) ................................. (.62%) 2.37% (1) 2.46% 1.13% (.55%) 1.03%(1)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions) ............ $18.4 $26.9 $38.4 $9.4 $5.8 $7.1
Average net assets (millions) ................... $22.2 $33.3 $32.3 $4.1 $7.6 $4.0
Ratios to average net assets(6)
Expenses .................................. 1.91% 1.79% 1.60% .59%(5) 1.90% 1.47%(5)
Expenses, without waiver .................. 2.08% 1.91% 1.81% 1.84%(5) 2.07% 1.64%(5)
Net investment income ..................... 3.99% 4.70% 5.44% 5.73%(5) 3.98% 3.79%(5)
Net investment income,
without waiver .......................... 3.82% 4.58% 5.23% 4.48%(5) 3.81% 3.62%(5)
Portfolio turnover rate ......................... 161% 102% 254% 293% 161% 102%
</TABLE>
(1) NET OF REIMBURSEMENT -- SEE NOTE 2.
(2) COMMENCEMENT OF OFFERING OF SALES
(3) BASED ON AVERAGE MONTH-END SHARES OUTSTANDING
(4) TOTAL RETURN FOR PERIODS OF LESS THAN ONE FULL YEAR ARE NOT
ANNUALIZED. TOTAL RETURN DOES NOT CONSIDER THE EFFECT OF SALES
CHARGES.
(5) ANNUALIZED
(6) SEE NOTE 2.
SEE NOTES TO FINANCIAL STATEMENTS.
NOT A PART OF THE PROSPECTUS 17
<PAGE> 20
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
In our opinion, the accompanying statement of assets and liabilities, including
the investment portfolio, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of American Capital Federal Mortgage
Trust at December 31, 1994, and the results of its operations, the changes in
its net assets and the selected per share data and ratios for each of the
fiscal periods presented, in conformity with generally accepted accounting
principles. These financial statements and selected per share data and ratios
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1994 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Houston, Texas
February 16, 1995
Not a Part of the Prospectus 18
<PAGE> 21
FUND PERFORMANCE DATA
MANAGEMENT DISCUSSION
American Capital Federal Mortgage Trust invests primarily in mortgage-related
securities issued or guaranteed by an agency or instrumentality of the U.S.
Government, with the objective of seeking high current return and relative
safety of capital.
During 1994, the Fund's performance was negatively impacted by
repeated increases in short-term interest rates. In response, the Fund's
management team increased the percentage of the portfolio invested in
adjustable-rate securities.
For more information on the market conditions and the Fund's
performance in 1994, see pages 2-3 of this report.
[Graph showing Change in Value of a $10,000 Investment]
Past performance is not indicative of future performance. Performance of other
classes of the Fund will be greater or less than the lines shown based on the
differences in loads or fees paid by shareholders investing in different
classes.
*The Lehman Brothers Mutual Fund U.S. Government Index 1 and 2 year is a
board-based managed index of U.S. Government agency and Treasury securities
with maturities of one to two years. The index does not reflect any commissions
or fees which would be incurred by an investor purchasing the bonds it
represents. All sales charges and other fees and expenses are included in the
performance shown for American Capital Federal Mortgage Trust Class A shares
with ending value of $15,593. In addition, since investors purchase shares of
the Fund with varying sales charges depending primarily on volume purchased,
the fund's Class A performance at net asset value also is shown.
<TABLE>
<CAPTION>
TOTAL RETURN NUMBERS -- CLASS A (AS OF 12/31/94) 1 YEAR 5 YEARS SINCE INCEPTION (6/16/86)
- ----------------------------------------------- ------ ------- -------------------------
<S> <C> <C> <C>
At Net Asset Value 0.16% 5.08% 5.65%
With Maximum 5.75% Sales Charge -2.12% 4.59% 5.36%
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN -- CLASS B (AS OF 12/31/94) 1 YEAR SINCE INCEPTION (11/5/91)
- ------------------------------------------------------ ------ -------------------------
<S> <C> <C>
At Net Asset Value -0.62% 1.68%
With Applicable Contingent Deferred Sales Charge
Upon Redemption (Maximum 5%) -3.50% 1.40%
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN -- CLASS C (AS OF 12/31/94) 1 YEAR SINCE INCEPTION (5/10/93)
- ------------------------------------------------------ ------ -------------------------
<S> <C> <C>
At Net Asset Value -0.55% 0.29%
With Applicable Contingent Deferred Sales Charge
Upon Redemption (Maximum 1%) -1.50% 0.29%
</TABLE>
Not a Part of the Prospectus 19
<PAGE> 22
AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
BOARD OF TRUSTEES
J. Miles Branagan
Richard E. Caruso
Roger Hilsman
Don G. Powell
David Rees
Lawrence J. Sheehan
Fernando Sisto*
William S. Woodside
*Chairman of the Board
- -------------------------------------------------------
OFFICERS
Don G. Powell
President
Curtis W. Morell
Vice President
and Treasurer
Ted Mundy
Robert C. Peck, Jr.
John R. Reynoldson
Paul R. Wolkenberg
Vice Presidents
Tanya M. Loden
Vice President and Controller
Nori L. Gabert
Vice President and
Secretary
J. David Wise
Vice President and
Assistant Secretary
Perry F. Farrell
M. Robert Sullivan
Assistant Treasurers
Huey P. Falgout, Jr.
Assistant Secretary
- -------------------------------------------------------
INVESTMENT ADVISER
Van Kampen American Capital Asset Management, Inc.
2800 Post Oak Blvd., Houston, Texas 77056
- -------------------------------------------------------
DISTRIBUTOR
Van Kampen American Capital Distributors, Inc.
2800 Post Oak Blvd., Houston, Texas 77056
- -------------------------------------------------------
SHAREHOLDER SERVICE AGENT
Van Kampen American Capital Shareholder Services, Inc.
P.O. Box 418256, Kansas City, Missouri 64141-9256
- -------------------------------------------------------
CUSTODIAN
State Street Bank and Trust Co.
225 Franklin Street, Boston, Massachusetts 02110
- -------------------------------------------------------
COUNSEL
O'Melveny & Myers
400 South Hope Street, Los Angeles, California 90071
- -------------------------------------------------------
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1201 Louisiana, Houston, Texas 77002
- --------------------------------------------------------------------------------
This report is submitted for the general information of the shareholders of the
Trust. It is not authorized for distribution to prospective investors unless it
has been preceded or is accompanied by an effective prospectus of the Fund
which contains additional information on how to purchase shares, the sales
charge and other pertinent data. If used for distribution to prospective
investors after 3/31/95, this annual report must be accompanied by an American
Capital Federal Mortgage Trust performance data update for the most recent
calendar quarter.
- --------------------------------------------------------------------------------
Not a Part of the Prospectus 20
<PAGE> 23
AMERICAN CAPITAL FAMILY OF FUNDS
EMERGING GROWTH FUND
American Capital Emerging Growth Fund, Inc.
MIDCAP FUND
American Capital Enterprise Fund, Inc.
CORE GROWTH FUNDS
American Capital Pace Fund, Inc.
American Capital Global Equity Fund
REAL ESTATE FUND
American Capital Real Estate Securities Fund, Inc.
GROWTH-INCOME FUNDS
American Capital Comstock Fund, Inc.
American Capital Growth and Income Fund, Inc.
American Capital Equity Income Fund, Inc.
American Capital Global Managed Assets Fund, Inc.
American Capital Harbor Fund, Inc.
INCOME-GROWTH FUND
American Capital Utilities Income Fund, Inc.
CORPORATE BOND FUNDS
American Capital High Yield Investments, Inc.
American Capital Corporate Bond Fund, Inc.
GOVERNMENT SECURITIES FUNDS
American Capital Global Government Securities Fund
American Capital U.S. Government Trust for Income
American Capital Government Securities, Inc.
American Capital Federal Mortgage Trust
TAX-FREE FUNDS
American Capital Tax-Exempt Trust
High Yield Municipal Portfolio
American Capital Texas Municipal Securities, Inc.
American Capital Municipal Bond Fund, Inc.
American Capital Tax-Exempt Trust
Insured Municipal Portfolio
MONEY MARKET FUND
American Capital Reserve Fund, Inc.
THE GOVETT FUNDS, INC.
Nationally distributed by Van Kampen American Capital Distributors, Inc.
(formerly American Capital Marketing, Inc.)
Govett Latin America Fund
Govett Pacific Strategy Fund
Govett Emerging Markets Fund
Govett Smaller Companies Fund
Govett International Equity Fund
Govett Global Government Income Fund
For more complete information about any American Capital or Govett Fund,
including charges and expenses, obtain a prospectus from your investment
professional or write Van Kampen American Capital Distributors, Inc., P.O. Box
1411, Houston, TX 77251-1411. Read the prospectus carefully before you invest
or send money.
American Capital
Federal Mortgage Trust
C/O ACCESS
P.O. Box 418256
Kansas City, MO 64141-9256
Bulk Rate
U.S. Postage
PAID
Houston, Texas
Permit No. 3736
PRINTED MATTER
Printed in U.S.A./030RPT-001
