American Capital Management, Inc.

4th Quarter 1998 Mutual Fund Report

Good morning. Today is Wednesday, January 6th and this is Tim Peoples with American Capital Management. For the next 10 minutes or so I will be discussing our investment results for the 4^th quarter of 1998 as well as the year overall. As before, there are two reports on this tape, this one for the mutual fund accounts with the report for the short term stock trading accounts on the other side.

The markets came back strong during the last 3 months and turned what had been a fairly lousy year into one we can live with. The Volatility that we have discussed before continued, but the overall trend was upward.

For the last quarter our conservative accounts were up in the 7 to 8% range, our moderate accounts were up 11 to 12% and our more aggressive accounts were up around 12 to 13%. Considering that we have continued to take a very conservative stance, with a fair amount in cash reserves, the funds we are holding did very well.

For the year, our conservative accounts were up around 8%, moderate accounts were up in the 12% range, with the more aggressive ones coming in around 16%. As a comparison, the Dow Jones Industrial Average and the New York Composite were both up around 16%. What was really surprising was that the Russell 2000 and the Value Line Index, two of the most commonly used indexes as a benchmark for mutual funds, both had negative returns for the year of over 3%. The big winner for the year among the indexes was the S&P 500 with a return for the year of 26%.

Considering our risk levels were less than half that of the market overall, we did pretty well.

With a fresh interest rate cut by the Federal Reserve, October started out with a bang and within 3 weeks had brought back most of the gains lost during August. This strong uptrend started to slow down by the 2^nd week of November when the Fed lowered interest rates for the 3^rd time that year. This acted like rocket fuel for the markets. By the end of the month the indexes were as high as they would go for the rest of the year. December was still fairly volatile but the markets did not really go anywhere.

For the quarter, about the only change made to our portfolios was the sale of the remaining international funds. Back in July I had sold our more aggressive U.S. and International funds. The remaining more conservative international funds were not performing as I had hoped with the continued turmoil overseas, so I thought it best to sell them.

We still have a fair amount of cash in the money markets, on average about 35%, and if you are newer investor, say the last year or so, our cash level may be even higher since we have been moving slowly into the investments and then moved some back out during the summer turmoil last year.

This more conservative stance served us well during the 2^nd and 3^rd quarters, but hurt returns during the 4^th quarter. I never expected the big gain that we had and did not expect it to continue while it was happening. Still, we avoided some losses and missed out on some gains, but I would prefer to be safe than sorry.

I think the funds we are investing in are giving us a good mix for stability and returns.

We performed very well last quarter and did not have to use up all our cash to do it.

Going into the New Year, so far things are looking good and our accounts are up about another half percent already. Will this continue? I don’t think so. I am looking for a profitable year and we are taking a hard look at each mutual fund we hold as well as looking at alternatives. At current levels, I thing a pull back is a real possibility and we are working on some changes to our portfolios in anticipation. This is to hopefully lower our risk further and take advantage of any drops if and when they come. If the market just keeps going up and up from here, we are going to under-perform since we are not fully invested, but I think that anyone who expects that is being unrealistic. For the year overall I do expect good returns. Interest rates are at their lowest levels in many years and that is and will continue to drive the markets up.

Another area I have been asked about is the year 2000 problem, or Y2K as it is called. This is the glitch in some computers and programs that does not allow them to read the year 2000. Here we are less than one year away from the end of the century. The Y2K may be bigger than we expect or it may be a non-event. I think it will most likely cause some problems in some areas but I don’t see much problem in the investment area. Even our small firm has been required to test our equipment and file two multi page reports this past year. We have replaced 2 computers and tested our software for compliance. Schwab and Waterhouse continue to report their compliance and have finished most of their testing. It is an area we are watching, especially in regard to overseas markets, but I am not expecting any real problems.

In closing, let me again thank you for your business and the faith you have put in me to manage your investments. I am looking forward to good things in the New Year and wish you all the best. For those of you that are interested, our ADV form has been updated for the New Year and is available for any of you that want a copy. This is the form that I used to send out each year. Now it is not required to send it, just let you know that it is available. This is good since most don’t read it anyway. We all get enough paper in the mail as it is.

If you have any questions about your account , please give me a call. If it has been a while since we have had a face to face meeting, at the start of a new year might be a good time to review you account. 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 4th 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, Inc.

4^th Quarter 1998 Short Term Trading Report

Good morning. Today is Wednesday, January 6th and this is Tim Peoples reporting to you on the results of the short-term stock trading strategy for the 4th quarter of 1998. As before, there are two reports on this tape, with the mutual fund report on the other side.

We made some very positive changes for the last quarter and the results have paid off.

During my last report, I stated that the 3^rd quarter was a real challenge, actually I think the term I used was like a baptism with fire. Anyway, one of the areas I said we were trying to improve was in the quickness of our trades. We were holding the stocks for several days and with the increased volatility that has become the norm in this market, we sometimes got caught with a surprise announcement that caused a stock to go down.

The answer to this problem was faster and better information. I have now installed a new real-time stock monitoring system that helps solve this problem. We now have the capability to watch each trade in a stock as it happens, see the size of trades, whether there are more buyers or sellers and see instant trends. The information can also be charted for easier view. This system was put in place in November. Even with learning how to use the system, which I am still doing, our results increased dramatically. Our number of profitable daily trades went way up. You could probably tell by the increase in trade confirmations that clog up your mailbox. By trading much faster, market downturns like we had this past summer should not pose near the problems they caused us then. In fact, our best trades have been on days when the market was down since it is easier to follow the trend and move into the stock as it starts to turn back up.

Depending on the size of the account, our results were a return of between 6 to 21% for the quarter. Results were highest in accounts around $100,000. In the larger accounts, over $250,000 in size, we trade larger blocks of a stock and I am having a problem in getting our orders filled. This is something I am working with Waterhouse on and will have taken care of soon, one way or another. I think the results are good, especially considering that we are in an insured money market account with no risk for over half the time in between trade settlements.

Since Waterhouse sends confirmations on each trade I am not going to list all the stocks we held, there are just too many and we had multiple trades in some of them.

Going into the New Year, our trades are continuing well. The areas that still need attention are in order fill and speed of execution, both of which Waterhouse promises to improve soon.

We are also moving to a new client reporting system. The next statement you receive from me will be much more modern and complete. I had hoped to use the new system for this statement, but we are not quite through learning and testing it. I will be using it to send a capital gain statement to each of you who are not invested in a retirement account. Remember, if your account is not an IRA, each of our trades is reportable on your tax return. The statement I will be sending you should be able to be included with your tax return to keep you from manually listing each of these trades on the IRS form.

I am looking forward to the new year and continuing to improve our results. For those of you that are interested, our ADV form has been updated for the New Year and is available for any of you that want a copy. This is the form that I used to send out each year. Now it is not required to send it, just let you know that it is available. This is good since most don’t read it anyway. We all get enough paper in the mail as it is.

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.

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