American Capital Management, Inc.

3rd Quarter 1997 Report

Good morning. This is Tim Peoples with American Capital Management, it’s Saturday October 4^th and I am taking this opportunity to sit down and record the audio portion of your quarterly report.

I want to start out today with some general information and house keeping. For those of you who have Internet access or are using the NET, we now have a new Internet site. Now keep in mind that this is a work in progress and if you access it now, it is basically a multi page advertisement where we converted a company brochure to a web sight. In the next few weeks, expect some more useful information to appear. We are working on several additions to it, such as an area highlighting retirement issues as well as weekly market commentaries. A written transcript of these wonderful quarterly reports I send you will be available too. In time we may even be able to post more detailed mutual fund investment information, time will tell. To access our site, the address is "www.amercap.com". To reach me by e-mail, I can be accessed at "tim@amercap.com".

Next item.

If you call into our office and reach the voice mail, you will hear a reference to American Capital Management and American Equity Investment Corp. American Equity is a investment broker-dealer we formed last year as a affiliated with American Capital. This really doesn’t affect most of you, but it does help us service clients with smaller accounts that really don’t qualify for a active management. I am also happy to announce a new addition to our staff. Mark Burnside has joined me as a principal with the new company. Mark’s primary duties will be in the compliance and management of the broker dealer, as well as mutual fund research. Mark’s background includes10 years in the banking industry as a compliance and loan officer followed by a 2 year stint with prudential securities. Happily he saw the light and is now a part of our team. If you are by the office or call in and Mark answers, tell him hello and act like you know him, it will keep him on his toes.

Now for our review of the past quarter. As you can see from your enclosed statement, it was a positive continuation of the 2^nd quarter. Our Conservative accounts were up 3 to 4 %, our Moderate accounts were up in the 5 to 6% range, and the more aggressive accounts were up 6.5 to 8% and the RYDEX account was up 1.7%. On an annualized basis, our Conservative accounts were up 13 to 15%, our Moderate accounts were up 22 to 24%, and our more Aggressive accounts were up 28 to 32%. This was even a little better than last quarter.

On a comparison basis to the Indexes, we did quite well, the Dow Jones Industrial average was up 3.6%, the S&P 500 was up 7%, both of which are made up of larger stocks, while the Russell 2000 was up 14.6% and the NASDAQ composite was up 16.9% both of which are made up of smaller stocks.

What can I say, Superman defies gravity. A jumbo jet defies gravity. And most assuredly, the stock market defies gravity. Overall, the market has performed as I expected with continued volatility and strong upward and downward moves. I am somewhat surprised with the magnitude of the gains that we have seen. But if we look at the rotation of returns so far this year, the markets may be healthier than they would appear at first glance. Earlier this year the strong gains were in the larger stocks of the Dow. Over the past 3 months that trend has reversed, with the smaller stocks coming out of their slump and now performing well. On a sector by sector basis, Energy has performed extremely well and has been our largest sector holding. So far we have seen corrections of around 10% in each of the market sectors at different times, and this is probably the biggest reason the markets have avoided a large overall drop.

The 3^rd quarter started with the long bond below 7%, which has been the magic area for the market to advance for the last 2 years. July gave us more big market moves, both up and down, and a new milestone for the DOW. On the 16^th of the month the DOW broke through the 8000 level, just 5 months after flying past 7000. The month ended with nice gains in all of the indexes, nice gains in our accounts, and a new Tax package from Washington that we are still trying to figure out.

August started with the long bond all the way down to 6.3%, a low for the year. Unfortunately, these low rates started back up, and with them the markets, especially larger stocks started to become volatile again. By the end of the month all of the indexes were lower. In fact, the S&P 500 had it’s worst month in 7 years. Most of the funds we were invested in were down slightly.

September on the other hand started out with a bang. The first half of the month saw almost all markets heading back toward their highs as the long bond went back below 6.5%. In fact, the DOW had a record day gain on the 2^nd day of the month. Volatility increased, but the general trend was up as the long bond rate fell below 6.4%. The smaller company stocks did especially well, making for a nice end for the quarter.

As far as my current outlook, I still see more of the same, although I really don’t expect returns to be as great as this past quarter. Some of our funds have done exceptional, such as the energy funds, and I will be keeping a watch on these areas, but at this time I don’t see any big changes in our investment makeup.

If you have any questions about the subjects I have just covered, or would like more detailed information on the funds in your account, please give me a call. If it has been a while since we have had a face to face meeting, I would appreciate it if you could find time that we could get together. Situations change, and the investment style we are currently using may need to be changed to better fit your goals and objectives. I would also welcome any comments or ideas that you may have that could make our service better.

This will conclude my report for the 3rd quarter of 1997. Again, please call me if you have any questions about your account.

Thank you very much for your time and I’ll talk to you again in 90 days.

Send mail to amercap@aye.net with questions or comments about this web site.