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<PAGE> PAGE 2
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<PAGE> PAGE 3
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<PAGE> PAGE 4
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<PAGE> PAGE 7
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SIGNATURE TANYA LODEN
TITLE CONTROLLER
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000005099
<NAME> AC CONV SECURITIES
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 71533
<INVESTMENTS-AT-VALUE> 70462
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<REALIZED-GAINS-CURRENT> 894
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<NET-CHANGE-IN-ASSETS> (10593)
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[DESCRIPTION] Report of Independent Auditors
<PAGE> 1
[ERNST & YOUNG LLP LETTERHEAD]
REPORT OF INDEPENDENT AUDITORS
ON INTERNAL CONTROL STRUCTURE
Board of Directors
of American Capital Convertible Securities, Inc.
In planning and performing our audit of the financial statements of American
Capital Convertible Securities, Inc. 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
purpose of expressing our opinion on the financial statements and to comply
with the requirements of Form N-SAR, not to provide assurance on the internal
control structure.
The management of American Capital Convertible Securities, Inc. 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 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
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. 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.
/s/ ERNST & YOUNG LLP
-------------------------
ERNST & YOUNG LLP
January 27, 1995
[DESCRIPTION] N-SAR Item 77C
<PAGE> 1
N-SAR ITEM 77C
a) The Annual Meeting of Shareholders was held on December 16, 1994.
b) The election of Directors included:
R. Richard Pettit
Steven Muller
Allen B. Shepard
Benjamin N. Woodson
Other Directors now in office include:
Donald M. Carlton, Ph.D.
A. Benton Cocanougher, Ph.D.
Stephen R. Gross
Norman Hackerman, Ph.D.
Robert D. Harvey
Jeffrey B. Lane
Alan G. Merten, Ph.D.
F. Robert Paulsen, Ph.D.
Don G. Powell
Miller Upton
c) The following were additional items 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 2,340,100.758 Against 50,276.388
2) Ratification of the selection of Ernst & Young as Independent
accountants for the Fund's current fiscal year:
For 2,445,899.391 Against 14,645.209
d) Inapplicable
[DESCRIPTION] N-SAR Item 77 0
<PAGE> 1
EXHIBIT 77 0
AMERICAN CAPITAL CONVERTIBLE SECURITIES, INC.
Underwritings Pursuant to Rule 10f-3
<TABLE>
<S> <C> <C>
1. Name of Issuer: Doubletree Corporation
Securities Acquired from: Montgomery Securities
Syndicate Members: (See attached)
Principal Amount in Offering: 3,000,000
Principal Amount Purchased: 700
Price Per Share: $13.000
Purchase Date: 07/01/94
2. Name of Issuer: Atlantic Richfield Company
Securities Acquired from: Goldman, Sachs & Co.
Syndicate Members: (See attached)
Principal Amount in Offering: 35,000,000
Principal Amount Purchased: 3,500
Price Per Share: $24.750
Purchase Date: 08/01/94
3. Name of Issuer: Hospitality Franchise Systems, Inc.
Securities Acquired from: Merrill Lynch & Co.
Syndicate Members: (See attached)
Principal Amount in Offering: 100,000,000
Principal Amount Purchased: 375,000
Price Per Share: $1.000
Purchase Date: 09/29/94
4. Name of Issuer: Central European Media Enterprises, Ltd.
Securities Acquired from: Wertheim Schroder & Co. Incorporated
Syndicate Members: (See attached)
Principal Amount in Offering: 4,000,000
Principal Amount Purchased: 800
Price Per Share: $14.000
Purchase Date: 10/13/94
5. Name of Issuer: Isolyser Company, Inc.
Securities Acquired from: Montgomery Securities
Syndicate Members: (See attached)
Principal Amount in Offering: 3,900,000
Principal Amount Purchased: 200
Price Per Share: $18.000
Purchase Date: 10/20/94
</TABLE>
<PAGE> 2
<TABLE>
<S> <C> <C>
6. Name of Issuer: Ortel Corporation
Securities Acquired from: Morgan Stanley & Co. Incorporated
Syndicate Members: (See attached)
Principal Amount in Offering: 3,800,000
Principal Amount Purchased: 400
Price Per Share: $13.000
Purchase Date: 10/20/94
</TABLE>
<PAGE> 3
DOUBLETREE CORPORATION
----------------------
Montgomery Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wertheim Schroder & Co. Incorporated . . . . . . . . . . . . . . . . . . . . .
Alex. Brown & Sons Incorporated . . . . . . . . . . . . . . . . . . . . . . . .
Dean Witter Reynolds Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dillon, Read & Co. Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Donaldson, Lufkin & Jenrette Securities Corporation . . . . . . . . . . . . . .
Goldman, Sachs & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lehman Brothers Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Natwest Securities Corporation . . . . . . . . . . . . . . . . . . . . . . . .
Oppenheimer & Co., Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prudential Securities Incorporated . . . . . . . . . . . . . . . . . . . . . .
Salomon Brothers Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Smith Barney Shearson Inc. . . . . . . . . . . . . . . . . . . . . . . . . . .
Arnhold and S. Bleichroeder, Inc. . . . . . . . . . . . . . . . . . . . . . . .
J.C. Bradford & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
McDonald & Company Securities, Inc. . . . . . . . . . . . . . . . . . . . . . .
Morgan, Keegan & Company, Inc. . . . . . . . . . . . . . . . . . . . . . . . .
Rauscher Pierce Refsnes, Inc. . . . . . . . . . . . . . . . . . . . . . . . . .
Raymond James & Associates, Inc. . . . . . . . . . . . . . . . . . . . . . . .
Sutro & Co. Incorporated . . . . . . . . . . . . . . . . . . . . . . . . . . .
Robert W. Baird & Co. Incorporated . . . . . . . . . . . . . . . . . . . . . .
The Chicago Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Crowell, Weedon & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equitable Securities Corporation . . . . . . . . . . . . . . . . . . . . . . .
Fahnestock & Co., Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
First Albany Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ladenburg, Thalmann & Co., Inc. . . . . . . . . . . . . . . . . . . . . . . . .
ScotiaMcLeod (USA) Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Van Kasper & Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
<PAGE> 4
ATLANTIC RICHFIELD COMPANY
--------------------------
Goldman, Sachs & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Merrill Lynch, Pierce, Fenner & Smith
Incorporated . . . . . . . . . . . . . . . . . . . . . . . . . . .
Salomon Brothers Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advest Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Robert W. Baird & Co. Incorporated . . . . . . . . . . . . . . . . . . . . . .
Bear, Stearns & Co. Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sanford C. Bernstein & Co., Inc. . . . . . . . . . . . . . . . . . . . . . . .
William Blair & Company . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Alex. Brown & Sons Incorporated . . . . . . . . . . . . . . . . . . . . . . . .
The Buckingham Research Group Incorporated . . . . . . . . . . . . . . . . . .
CS First Boston Corporation . . . . . . . . . . . . . . . . . . . . . . . . . .
Dain Bosworth Incorporated . . . . . . . . . . . . . . . . . . . . . . . . . .
Dean Witter Reynolds Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . .
A. G. Edwards & Sons, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . .
J.J.B. Hilliard, W.L. Lyons, Inc. . . . . . . . . . . . . . . . . . . . . . . .
Howard, Weil, Labouisse, Friedrichs Incorporated . . . . . . . . . . . . . . .
Janney Montgomery Scott Inc. . . . . . . . . . . . . . . . . . . . . . . . . .
Kemper Securities, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Kidder, Peabody & Co. Incorporated . . . . . . . . . . . . . . . . . . . . . .
C.J. Lawrence/Deutsche Bank Securities Corporation . . . . . . . . . . . . . .
Legg Mason Wood Walker Incorporated . . . . . . . . . . . . . . . . . . . . . .
Lehman Brothers Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Luther, Smith & Small, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . .
McDonald & Company Securities, Inc. . . . . . . . . . . . . . . . . . . . . . .
J.P. Morgan Securities Inc. . . . . . . . . . . . . . . . . . . . . . . . . . .
Morgan Stanley & Co. Incorporated . . . . . . . . . . . . . . . . . . . . . . .
Oppenheimer & Co., Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Parker/Hunter Incorporated . . . . . . . . . . . . . . . . . . . . . . . . . .
Rauscher Pierce Refsnes, Inc. . . . . . . . . . . . . . . . . . . . . . . . . .
Scott & Stringfellow, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . .
Smith Barney Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stifel, Nicolaus & Company, Incorporated . . . . . . . . . . . . . . . . . . .
Sutro & Co. Incorporated . . . . . . . . . . . . . . . . . . . . . . . . . . .
UBS Securities Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wertheim Schroder & Co. Incorporated . . . . . . . . . . . . . . . . . . . . .
Wheat, First Securities, Inc. . . . . . . . . . . . . . . . . . . . . . . . . .
<PAGE> 5
HOSPITALITY FRANCHISE SYSTEMS, INC.
-----------------------------------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Donaldson, Lufkin & Jenrette Securities Corporation . . . . . . . . . . . . . .
Montgomery Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Morgan Stanley & Co. Incorporated . . . . . . . . . . . . . . . . . . . . . . .
Smith Barney Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
<PAGE> 6
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
---------------------------------------
(PRELIMINARY LIST)
------------------
Wertheim Schroder & Co. Incorporated
Prudential Securities Incorporated
<PAGE> 7
ISOLYSER COMPANY, INC
---------------------
Morgan Keegan & Company, Inc. . . . . . . . . . . . . . . . . . . . . . . . . .
Montgomery Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bear, Stearns & Co. Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Donaldson, Lufkin & Jenrette Securities Corporation . . . . . . . . . . . . . .
A.G. Edwards & Sons, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Kemper Securities, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lehman Brothers Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prudential Securities Incorporated . . . . . . . . . . . . . . . . . . . . . .
Salomon Brothers Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Smith Barney Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advest, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Robert W. Baird & Co. Incorporated . . . . . . . . . . . . . . . . . . . . . .
J.C. Bradford & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Brean Murray, Foster Securities, Inc. . . . . . . . . . . . . . . . . . . . . .
The Chicago Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cowen & Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Crowell, Weedon & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dain Bosworth Incorporated . . . . . . . . . . . . . . . . . . . . . . . . . .
Davenport & Co. of Virginia, Inc. . . . . . . . . . . . . . . . . . . . . . . .
Dominick & Dominick, Incorporated . . . . . . . . . . . . . . . . . . . . . . .
Equitable Securities Corporation . . . . . . . . . . . . . . . . . . . . . . .
Fahnestock & Co. Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
First of Michigan Corporation . . . . . . . . . . . . . . . . . . . . . . . . .
Hanifen, Imhoff Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
J.J.B. Hilliard, W.L. Lyons, Inc. . . . . . . . . . . . . . . . . . . . . . . .
Interstate/Johnson Lane Corporation . . . . . . . . . . . . . . . . . . . . . .
Janney Montgomery Scott Inc. . . . . . . . . . . . . . . . . . . . . . . . . .
Johnston, Lemon & Co. Incorporated . . . . . . . . . . . . . . . . . . . . . .
Ladenburg, Thalmann & Co. Inc. . . . . . . . . . . . . . . . . . . . . . . . .
Legg Mason Wood Walker, Incorporated . . . . . . . . . . . . . . . . . . . . .
McDonald & Company Securities, Inc. . . . . . . . . . . . . . . . . . . . . . .
Needham & Company, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Neuberger & Berman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Ohio Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pennsylvania Merchant Group Ltd . . . . . . . . . . . . . . . . . . . . . . . .
Piper Jaffray Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal Financial Securities, Inc. . . . . . . . . . . . . . . . . . . . . .
Ragen MacKenzie Incorporated . . . . . . . . . . . . . . . . . . . . . . . . .
Rauscher Pierce Refsnes, Inc. . . . . . . . . . . . . . . . . . . . . . . . . .
Raymond James & Associates, Inc. . . . . . . . . . . . . . . . . . . . . . . .
The Robinson-Humphrey Company, Inc. . . . . . . . . . . . . . . . . . . . . . .
Roney & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Scott & Stringfellow, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . .
The Seidler Companies Incorporated . . . . . . . . . . . . . . . . . . . . . .
Stephens Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sterne, Agee & Leach, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . .
Stifel, Nicolaus & Company, Incorporated . . . . . . . . . . . . . . . . . . .
Sutro & Co. Incorporated . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tucker Anthony Incorporated . . . . . . . . . . . . . . . . . . . . . . . . . .
Van Kasper & Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wessels, Arnold & Henderson . . . . . . . . . . . . . . . . . . . . . . . . . .
Wheat First Butcher Singer . . . . . . . . . . . . . . . . . . . . . . . . . .
<PAGE> 8
ORTEL CORPORATION
-----------------
U.S. Underwriters:
Morgan Stanley & Co. Incorporated . . . . . . . . . . . . . . . . . . . . . .
Smith Barney Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cowen & Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Donaldson, Lufkin & Jenrette Securities Corporation . . . . . . . . . . . . .
Goldman, Sachs & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Hambrecht & Quist Incorporated . . . . . . . . . . . . . . . . . . . . . . .
WR Lazard, Laidlaw & Mead Incorporated . . . . . . . . . . . . . . . . . . .
Merrill Lynch, Pierce, Fenner & Smith Incorporated . . . . . . . . . . . . .
Needham & Company, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Oppenheimer & Co., Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Piper Jaffray Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Robertson, Stephens & Company, L.P. . . . . . . . . . . . . . . . . . . . . .
The Robinson-Humphrey Company, Inc. . . . . . . . . . . . . . . . . . . . . .
Salomon Brothers Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Soundview Financial Group, Inc. . . . . . . . . . . . . . . . . . . . . . . .
Sutro & Co. Incorporated . . . . . . . . . . . . . . . . . . . . . . . . . .
Wedbush Morgan Securities . . . . . . . . . . . . . . . . . . . . . . . . . .
International Underwriters:
Morgan Stanley & Co. International Limited . . . . . . . . . . . . . . . . .
Smith Barney Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
[DESCRIPTION] Investment Advisory Agreement
<PAGE> 1
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made this 20th day of December, 1994, by and between AMERICAN CAPITAL
CONVERTIBLE SECURITIES, INC., a Maryland corporation, 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
Board of Directors and in conformity with applicable laws, the FUND's Articles
of Incorporation, Bylaws, 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 Board of Directors, 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 director 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
Board of Directors 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
<PAGE> 2
of 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 directors 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 stockholders; (v) fees of outside counsel to and of
independent accountants of the FUND selected by the Board of Directors; (vi)
custodian, registrar and transfer agent fees and expenses; (vii) expenses
related to the repurchase or redemption of its shares including expenses
relating to a program of periodic repurchase 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
stockholders including proxy solicitations therefor; (xii) expenses for
servicing stockholder 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 Board of Directors; 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 directors 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 Board of Directors.
2. Role of ADVISER
2
<PAGE> 3
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 any of the
stockholders, directors, officers and employees of the FUND may be a
stockholder, 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 stockholder 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:
a. on the first $150 million of the FUND's average weekly net assets, .50%;
b. on the next $100 million of the FUND's average weekly net assets, .45%;
c. on the next $100 million of the FUND's average weekly net assets, .40%; and
d. on the excess over $350 million of the FUND's average weekly net assets,
.35%.
Such average weekly net assets shall be determined by taking the average of the
net assets made in the manner provided in the FUND's Articles of Incorporation
for each week during a calendar month. 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
3
<PAGE> 4
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 Board of Directors of any
other commissions, fees, brokerage 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 1/2% of the first $30 million of the FUND's average weekly
net assets determined in the manner described in this Section 3, plus 1% of any
excess over $30 million of such average weekly net assets so taken, 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 exclude expenses incurred by the FUND (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; and (v) any indemnification paid by the FUND to its officers and
directors and the ADVISER in accordance with applicable state and federal laws
as a result of such litigation.
If the ADVISER shall serve for less than the whole of any month, the foregoing
compensation shall be prorated.
4. Duration of Agreement
This Agreement shall have an initial term of two 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 directors who are not 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 Board of Directors
or a majority of the FUND's outstanding voting securities.
This Agreement shall terminate automatically in the event of its
4
<PAGE> 5
assignment. The Agreement may be terminated at any time by the FUND's Board of
Directors, by vote of a majority of the FUND's outstanding voting securities,
or by the ADVISER, on not more than 60 days', nor less than 30 days' written
notice, or upon such shorter notice as may be mutually agreed upon. Such
termination shall be without payment of any penalty.
5. 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 Investment
Company Act of 1940 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, or such interpretive positions as may be
taken by the Commission or its staff, under said 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 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 CONVERTIBLE SECURITIES, INC.
By: /s/ CURTIS W. MORELL
___________________________________
Name: Curtis W. Morell
___________________________________
Its: Vice President
___________________________________
AMERICAN CAPITAL ASSET MANAGEMENT, INC.
By: /s/ NORI L. GABERT
___________________________________
Name: Nori L. Gabert
___________________________________
Its: Vice President
___________________________________
5
