American Capital Management, Inc.

3rd Quarter 1998 Mutual Fund Report

Good morning. Today is Thursday, October 8th and this is Tim Peoples reporting to you on the results of the 3^rd quarter of 1998. As before, there are two reports on this tape, this one for the mutual fund accounts and the report for the short term stock trading accounts on the other side.

As most of you have probably noticed, investments and the market in general have made front page news about every day for the past few months. As you know from my last report, the 2^nd quarter saw a general deterioration in the relative strength of the market and we liquidated several funds we were holding and moved some cash in to the money market. This proved to be a very good move as cash was king during the 3^rd quarter. In the 15 + years I have been in this business, this seemed like the most difficult quarter in which to make a profit.

Overall our results were very good compared to the indexes, but still a disappointment to me. Our conservative accounts were off by 3 to 4% for the quarter. Our moderate accounts were down by 5 to 6% and the aggressive accounts by 6 TO 7%. The similarity in all account types was due to our large cash position in all accounts plus the fact that I sold the more aggressive funds during the 2^nd quarter.

By contrast the indexes did pretty bad. The Dow Jones Industrial Average was down by 12%, the S&P 500 was off by 10% and the Russell 2000 was down by an amazing 20%.

In comparison, the average U.S. stock mutual fund was down by 15% and the funds that invest in smaller companies were off even more at around 21%. Like I said, it was a very tough quarter. In fact the last time the markets performed this bad was the 3^rd quarter of 1990.

July started the quarter out with broad swings and record high levels in the indexes. Within the first two weeks the DOW and the NASDAQ were at record high levels. This all changed by the 3^rd week of the month when the general trend started downward. By the end of the month all the talk was about the Clinton - Lewinski situation and continued problems in Asia.

August started out right from the start to show that it was not going to be a good month for the markets with the largest one day drop for the year on the 4^th. I guess I should say the largest one day drop for the year so far. Bad news from Japan, Russia and Washington was the norm for most of the month and with each news report the markets would move lower. By the middle of the month, their appeared to be some good buys in the market and we actually had some very large up days. I mentioned last month that I had several funds picked out that I would like to invest in, and we started buying small amounts of these funds on the down days. August continued it’s jittery way until the last 3 days of the month when it just got hammered. The last day of the month even saw the DOW give up it’s biggest point drop in one day.

Now not to be out done, September followed that up on the first day of the month with the biggest one day point gain. The DOW was up over 288 points. The month continued with the market see-sawing back and forth with some of the largest one day moves in history becoming almost every day occurrences. Overall, the month ended with slight gains.

So where does that leave us? Well we still have a fair amount of cash, on average about 40%, - more in newer accounts. So far this month the markets are still having large swings and the trend looks to be down. Also, we are in the middle of companies giving reports on their earnings for the quarter and so far their have been both good and bad surprises.

Our new investments have been small and at this time I can not say when we will invest further. In fact, a couple of the funds we have continued to hold are starting to look suspect, so we may even raise cash levels further. The problems in Japan look like they may possibly start to get better, but it is going to take a little more time. There problems in the rest of Asia are also going to take time. And on top of everything else, we may have to look forward to impeachment proceedings with the President. As I said last quarter, caution is the wisest course of action.

The flip side to all this is, once we get through this, and the markets bottom out where ever it is that they are going to bottom out, we should be in for a nice rally as has happened in the past.

In the meantime, I plan to keep a cautious stance, and raise additional cash if needed.

If you have any questions about your account or the subjects I have just covered, please give me a call. If it has been a while since we have had a face to face meeting, lets 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 1998. 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.

American Capital Management

3rd Quarter 1998 Short Term Trading Report

Good morning. Today is Thursday, October 8th and this is Tim Peoples reporting to you on the results of the short-term stock trading strategy for the 3^rd quarter of 1998. As before, there are two reports on this tape, with the mutual fund report on the other side.

During my last report, I stated that the 2^nd quarter was more of a challenge. Well this quarter was more like a baptism with fire. Our objective is to take advantage of small price fluctuations in individual stocks. This quarter we had big, sometimes real big price fluctuations. As most of you have probably noticed, investments and the market in general have made front-page news about every day for the past few months.

Overall I am not very pleased with our results, although this has been a great learning experience and our frequency of profitable trades has increased dramatically in the last 45 days. For the quarter, we were down about 5 to 6% if everything was liquidated. On completed trades we were up around 1%. Larger accounts did a little better.

In comparison to the indexes, the Dow Jones Industrial Average was down by 12%, the S&P 500 was off by 10% and the Russell 2000 was down by an amazing 20%. Now this strategy does not track any index, but it does show how tough a quarter this was.

July started the quarter out with broad swings and record high levels in the indexes. Within the first two weeks the DOW and the NASDAQ were at record high levels. This all changed by the 3^rd week of the month when the general trend started downward. By the end of the month all the talk was about the Clinton - Lewinski situation and continued problems in Asia. During July we had profitable trades in Alcoa, Chrysler, Cellstar, General Dynamics, Onsale and Oracle. Our completed trades gave us a return for the month of around 2%, but the overall return was less because of some down positions we were left at the end of the month.

August started out right from the start to show that it was not going to be a good month for the markets with the largest one day drop for the year on the 4^th. I guess I should say the largest one day drop for the year so far. Bad news from Japan, Russia and Washington was the norm for most of the month and with each news report the markets would move lower. The month was very difficult since everytime I made a buy that appeared to be at a good level, it would move lower immediately. We only had 1 completed trade for the month but bought into many positions. August continued it’s jittery way until the last 3 days of the month when it just got hammered. The last day of the month even saw the DOW give up its biggest point drop ever in one day. By then we were fairly well invested and our results were not good. Accounts on average were down around 20% for the month, most of which came in the last 2 days.

September changed all that by following up on the first day of the month with the biggest one day point gain in the DOW ever. The DOW was up over 288 points. The month continued with the market seesawing back and forth with some of the largest one day moves in history becoming almost every day occurrences. By this time we were looking for much quicker profits, trying to get in and out quickly so as to not get surprised like in August. We had profitable trades in Bell South, Humana, IDT Corp, Mellon Bank, and others. We also finally sold Sunrise Assist at a profit. Our accounts on average were up around 20%.

So far this month we have already had profitable trades in Wal-Mart, Onsale, Office Depot, Travelers, EMC Corp, and Compaq Computers, with many of these being trades where we bought and sold the same day. It takes a lot of time and work, but given the market conditions, this is the only way to make money.

Overall, for the markets, this was the worst quarter since the 3^rd quarter of 1990. The good news is this wont last forever, and we are becoming better traders.

I will continue to work on getting better results and moving to cash quicker during the worse days. In the meantime, look your statement over, and if you have any questions, just give me a call. If you are a newer investor with us, and are not familiar with your statement, I have recorded a detailed explanation of its content at the end of the mutual fund report on the other side of the tape.

Thank you again for your time, and I will talk to you again in 90 days.

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