<PAGE> 1
American Capital
Exchange Fund
- ----------------------
Annual Report
December 31, 1994
- ----------------------
[AMERICAN CAPITAL LOGO]
<PAGE> 2
PARTNERS' MESSAGE
January 20, 1995
Dear Partner,
[Photo of Don G. Powell]
I am pleased to report that American Capital Exchange Fund achieved a total
return of 4.82% for the year ended December 31, 1994. Your Fund's broad
diversification helped its performance in a year that proved challenging for
the broader stock market.
Market Review
During the past year, the stock market - as reflected in the unmanaged
Standard & Poor's 500-Stock Index - declined by 1.5% because of the impact of
repeated increases in short-term interest rates. The Federal Reserve Board
raised short-term rates six times during the year in an effort to slow
economic growth to a rate that would not cause inflation to rise. With each
increase in short-term rates, investors became increasingly concerned about
the impact the Fed's action would have on corporate profits and whether
further increases were likely. This uncertainty overwhelmed generally
positive economic indicators.
The most recent figures released by various federal agencies appear to
indicate that the economy is growing with subdued inflation. Industrial
production rose 0.5% in November, while consumer prices increased just 0.3%.
Additionally, while personal income declined 0.1% in November, consumer
spending increased 0.6%, meaning consumers felt confident to increase
spending by more than the growth of their income. This was mirrored by the
Conference Board's consumer confidence index, which hit a four-and-a-half-year
high in December. Nevertheless, many observers expect the Fed to raise
interest rates again in early 1995.
Portfolio Review
At the end of the year, your Fund had holdings in 10 broad industry groupings.
Health care stocks were among the best performers in the portfolio, enjoying a
resurgence that accompanied the declining likelihood of health care reform. The
largest portion of your Fund's net assets as of December 31, 1994 was in the
raw materials/processing industries sector. Your Fund is structured to
maintain its current holdings. No new investments are made for the Fund, and
assets are sold only to meet redemption requests. Your Fund's diversification
at the end of the reporting period is illustrated by the chart at right.
Holdings by Industry
Percentage of Net Assets
As of 12/31/94
Consumer Services......................... 1%
Consumer Distribution..................... 8%
Consumer Durables......................... 2%
Consumer Non-Durables.....................10%
Energy....................................15%
Finance................................... 4%
Health Care...............................19%
Producer Manufacturing.................... 2%
Raw Materials/Processing Industries.......23%
Technology................................13%
Other..................................... 3%
1
<PAGE> 3
American Capital Exchange Fund achieved a total return of 4.82% for the
year ended December 31, 1994, including reinvestment of dividends totalling
$1.28 per share. By comparison, the Standard & Poor's 500-Stock Index achieved
a total return of 1.36% during the reporting period. The Index is a
broad-based, unmanaged index that reflects general stock market performance. It
does not reflect any commissions or fees that would be paid by an investor
purchasing the securities it represents.
Outlook
Although short-term interest rates may rise again in early 1995, we expect
the economy to continue to grow at a moderate pace that will not cause
inflation to rise. As economic growth continues, investor confidence should
increase and help the performance of stocks. Your Fund is positioned to
capitalize on these economic and market trends.
We appreciate your continued confidence in American Capital Exchange
Fund.
Sincerely,
/s/ Don G. Powell
Don G. Powell
Chairman and Chief Executive Officer
2
<PAGE> 4
INVESTMENT PORTFOLIO
December 31, 1994
<TABLE>
<CAPTION>
Number of Market
Shares Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK 97.6%
CONSUMER DISTRIBUTION 7.4%
44,404 Alco Standard Corp. ............................................................ $ 2,786,350
------------
CONSUMER DURABLES 2.3%
36,654 Dana Corp. .................................................................... 856,786
------------
CONSUMER NON-DURABLES 10.1%
54,366 International Flavors & Fragrances, Inc. ....................................... 2,514,428
64,000 McCormick & Co., Inc. .......................................................... 1,168,000
21,000 RJR Nabisco Holdings Corp., Inc. ............................................... 115,500
------------
TOTAL CONSUMER NON-DURABLES............................................. 3,797,928
------------
CONSUMER SERVICES 1.3%
22,500 Luby's Cafeterias, Inc. ........................................................ 503,438
------------
ENERGY 15.3%
21,200 Amerada Hess Corp. ............................................................. 967,250
12,800 Amoco Corp. .................................................................... 756,800
25,634 Baker Hughes, Inc. ............................................................. 467,821
*15,000 Dekalb Energy Co., Class B ..................................................... 318,750
30,320 Dresser Industries, Inc. ....................................................... 572,290
10,900 Kerr-McGee Corp. ............................................................... 501,400
20,131 Mobil Corp. .................................................................... 1,696,037
*6,318 Oryx Energy Co. ................................................................ 75,026
8,040 Schlumberger, Ltd. ............................................................. 405,015
------------
TOTAL ENERGY............................................................ 5,760,389
------------
FINANCE 4.0%
6,588 American International Group, Inc. ............................................. 645,624
22,800 Household International, Inc. .................................................. 846,450
------------
TOTAL FINANCE .......................................................... 1,492,074
------------
HEALTH CARE 18.9%
14,000 American Home Products Corp. ................................................... 878,500
5,000 Baxter International, Inc. ..................................................... 141,250
1,250 Caremark International, Inc. ................................................... 21,406
29,360 Johnson & Johnson ............................................................. 1,607,460
25,188 Merck & Co., Inc. .............................................................. 960,293
25,652 Schering-Plough Corp. .......................................................... 1,898,248
21,215 Warner-Lambert Co. ............................................................. 1,633,555
------------
TOTAL HEALTH CARE....................................................... 7,140,712
------------
PRODUCER MANUFACTURING 2.0%
6,264 Allied-Signal, Inc. ............................................................ 212,976
12,831 Fluor Corp. .................................................................... 553,337
------------
TOTAL PRODUCER MANUFACTURING ........................................... 766,313
------------
RAW MATERIALS/PROCESSING INDUSTRIES 22.9%
54,545 Air Products & Chemicals, Inc. ................................................. 2,434,071
27,441 Alcan Aluminium, Ltd. .......................................................... 696,315
18,688 Georgia-Pacific Corp. .......................................................... 1,336,192
43,400 Loctite Corp. .................................................................. 2,018,100
30,000 Louisiana Pacific Corp. ........................................................ 817,500
39,714 Lubrizol Corp. ................................................................. 1,345,312
------------
TOTAL RAW MATERIALS/PROCESSING INDUSTRIES............................... 8,647,490
------------
</TABLE>
3
<PAGE> 5
INVESTMENT PORTFOLIO, CONTINUED
<TABLE>
<CAPTION>
Number of Market
Shares Value
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TECHNOLOGY 13.4%
20,000 General Signal Corp. ............................................................. $ 637,500
64,937 Intel Corp. ....................................................................... 4,147,851
3,754 International Business Machines Corp. ............................................. 275,919
------------
TOTAL TECHNOLOGY........................................................... 5,061,270
------------
TOTAL COMMON STOCK (Cost $8,480,847)....................................... 36,812,750
------------
<CAPTION>
Principal
Amount
- ---------
<S> <C> <C>
REPURCHASE AGREEMENT 2.3%
$880,000 Lehman Government Securities, Inc., dated 12/30/94, 5.35%,
due 1/3/95 (collateralized by U.S. Government obligations
in a pooled cash account) repurchase proceeds $880,523
(Cost $880,000)................................................................. 880,000
------------
TOTAL INVESTMENTS (Cost $9,360,847) 99.9%......................................... 37,692,750
Other assets and liabilities, net 0.1% ........................................... 46,320
------------
NET ASSETS 100%................................................................... $37,739,070
============
</TABLE>
* Non-income producing security.
See Notes to Financial Statements.
4
<PAGE> 6
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1994
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $9,360,847)................ $ 37,692,750
Cash.......................................................... 3,671
Dividends and interest receivable............................. 84,152
Other assets.................................................. 679
------------
TOTAL ASSETS............................................ 37,781,252
------------
LIABILITIES
Accrued expenses.............................................. 21,145
Due to Adviser................................................ 15,580
Payable for Fund shares purchased............................. 5,457
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TOTAL LIABILITIES....................................... 42,182
------------
NET ASSETS, equivalent to $115.36 per unit on 327,142 units of
partnership interest outstanding............................ $ 37,739,070
============
NET ASSETS WERE COMPRISED OF:
322,150 units of limited partnership interest................. 37,163,193
4,459 units of non-managing general partnership interest...... 514,390
533 units of managing general partnership interest............ 61,487
------------
NET ASSETS at December 31, 1994............................... $ 37,739,070
============
</TABLE>
See Notes to Financial Statements.
5
<PAGE> 7
STATEMENT OF OPERATIONS
Year ended December 31, 1994
<TABLE>
<S> <C>
INVESTMENT INCOME
Dividends.......................................................... $ 842,362
Interest........................................................... 36,661
----------
Investment income............................................ 879,023
----------
EXPENSES
Management fees.................................................... 187,807
Accounting services................................................ 48,431
Managing general partners' fees and expenses....................... 35,704
Shareholder service agent's fees and expenses...................... 21,396
Reports to partners................................................ 15,475
Audit fees......................................................... 13,650
Custodian fees..................................................... 6,161
Legal fees......................................................... 4,224
Miscellaneous...................................................... 3,015
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Total expenses............................................... 335,863
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Net investment income........................................ 543,160
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REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized gain on securities.................................... 1,518,082
Net unrealized depreciation of securities during the year.......... (294,738)
----------
Net realized and unrealized gain on securities............... 1,223,344
----------
Increase in net assets resulting from operations............. $1,766,504
</TABLE> ==========
See Notes to Financial Statements.
6
<PAGE> 8
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1994 1993
----------- ----------
<S> <C> <C>
NET ASSETS, beginning of year ........................ $38,532,413 $38,690,624
----------- -----------
OPERATIONS
Net investment income............................. 543,160 538,472
Net realized gain on securities................... 1,518,082 1,868,245
Net unrealized appreciation (depreciation) of
securities during the year...................... (294,738) 536,247
----------- -----------
Increase in net assets resulting from
operations.................................... 1,766,504 2,942,964
----------- -----------
DISTRIBUTIONS TO PARTNERS FROM NET INVESTMENT INCOME.. (429,153) (464,282)
----------- -----------
PARTNERSHIP UNIT TRANSACTIONS
Proceeds from units issued for distributions
reinvested ..................................... 54,187 56,864
Cost of units redeemed............................ (2,184,881) (2,693,757)
----------- -----------
Decrease in net assets resulting from partnership
unit transactions............................... (2,130,694) (2,636,893)
----------- -----------
DECREASE IN NET ASSETS ............................... (793,343) (158,211)
----------- -----------
NET ASSETS, end of year (including undistributed net
investment income of $2,262,091 and $2,148,084)...... $37,739,070 $38,532,413
=========== ===========
CHANGE IN PARTNERSHIP UNITS OUTSTANDING
Units issued for distributions reinvested............. 483 531
Units redeemed........................................ (19,486) (24,999)
----------- -----------
Decrease in partnership units outstanding......... (19,003) (24,468)
=========== ===========
</TABLE>
See Notes to Financial Statements.
7
<PAGE> 9
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
American Capital Exchange Fund, a California limited partnership (the "Fund"),
is a partnership registered under the Investment Company Act of 1940, as
amended, as a diversified, open-end management investment company. The
following is a summary of the significant accounting policies consistently
followed by the Fund in the preparation of its financial statements.
A. Investment Valuations
Securities listed or traded on a national securities exchange are
valued at the last sale price. Unlisted securities and listed securities
for which the last sale price is not available are valued at the mean
between the last reported bid and asked price.
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
becomes less than 61 days. From such time, until maturity, the investments
are valued at amortized cost.
B. Repurchase Agreements
A repurchase agreement is a short-term investment in which a 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 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 securities. 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.
C. Federal Income Taxes
The Fund has met the qualifications to be classified as a partnership
for federal income tax purposes and intends to maintain this qualification
in the future. A partnership is not subject to federal income tax.
D. 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. Dividend income is recorded on the ex-dividend date. Interest income
is accrued daily.
E. Distributions and Tax Allocations
Distributions to partners are recorded on the record date. Net
investment income is allocated daily to each partner, relative to the
total number of units held. Capital gains or losses will be allocated
equally among units outstanding on the day recognized.
F. Debt Discount and Premium
For financial reporting purposes, debt discounts or premiums are
accounted for on the same basis as is used for federal income tax
reporting. Accordingly, original issue debt discounts are amortized over
the life of the security. Premiums 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 the investment manager of the Fund. Management fees are
calculated monthly, based on the average daily net assets of the Fund at an
annual rate of .50%.
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 $6,355 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 provisions of accounting services to the Fund. The services provided by the
Adviser are at cost.
8
<PAGE> 10
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, such fees
aggregated $18,000.
Certain officers and managing general partners of the Fund are officers and
directors of the Adviser and the shareholder service agent.
The Adviser and Van Kampen American Capital Exchange Corp., as non-managing
general partners of the Fund, owned 349 and 4,110 units of partnership
interest, respectively, at December 31, 1994.
NOTE 3 -- INVESTMENT ACTIVITY
During the year, proceeds from sales of investments, excluding short-term
investments, was $2,004,240 which were for securities returned to various
partners as consideration for their partnership units redeemed by the Fund.
Such transactions, resulting in a realized gain of $1,518,082 for financial
reporting purposes, are not considered taxable transactions for federal income
tax purposes. There were no purchases during the year.
For federal income tax purposes, the identified cost of investments owned at
December 31, 1994 was $4,128,537. Net unrealized appreciation of investments
aggregated $33,564,212, gross unrealized appreciation of investments aggregated
$33,744,682 and gross unrealized depreciation of investments aggregated
$180,470.
NOTE 4 -- MANAGING GENERAL PARTNER COMPENSATION
Managing general partners of the Fund who are not affiliated with the Adviser
are compensated by the Fund at the annual rate of $5,000 plus a fee of $750 per
Board meeting attended. During the year, such fees aggregated $34,250.
9
<PAGE> 11
FINANCIAL HIGHLIGHTS
Selected data for a unit of partnership interest outstanding throughout
each of the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE(1)
Net asset value, beginning of year..... $111.32 $104.40 $101.56 $ 80.29 $ 82.32
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Investment income ..................... 2.62 2.49 2.48 2.56 2.54
Expenses............................... (1.00) (1.00) (.88) (.755) (.62)
-------- -------- -------- -------- --------
Net investment income.................. 1.62 1.49 1.60 1.805 1.92
Net realized and unrealized gains or
losses on securities................. 3.70 6.71 2.83 21.515 (.35)
-------- -------- -------- -------- --------
Total from investment operations....... 5.32 8.20 4.43 23.32 1.57
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment income... (1.28) (1.28) (1.59) (1.77) (1.96)
Distributions from taxable net
realized capital gains............... -- -- -- (.28) (1.64)
-------- -------- -------- -------- --------
Total distributions.................... (1.28) (1.28) (1.59) (2.05) (3.60)
-------- -------- -------- -------- --------
Net asset value, end of year........... $115.36 $111.32 $104.40 $101.56 $ 80.29
======== ======== ======== ======== ========
TOTAL RETURN........................... 4.82% 7.91% 4.42% 29.39% 2.23%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (millions)..... $37.7 $38.5 $38.7 $42.0 $34.7
Average net assets (millions).......... $37.6 $38.9 $40.0 $38.6 $38.4
Ratios to average net assets
Expenses......................... .89% .93% .87% .83% .78%
Net investment income............ 1.45% 1.38% 1.59% 1.98% 2.42%
Portfolio turnover rate................ 0% 0% 0% 0% 1%
</TABLE>
(1) Based on average month-end shares outstanding.
See Notes to Financial Statements.
10
<PAGE> 12
INDEPENDENT AUDITORS' REPORT
TO THE PARTNERS OF AMERICAN CAPITAL EXCHANGE FUND
(A California Limited Partnership)
We have audited the accompanying statement of assets and liabilities including
the investment portfolio of American Capital Exchange Fund (a California
Limited Partnership), as of December 31, 1994, and the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the years in the two-year period then ended, and financial highlights
for each of the years in the five-year period then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1994, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
American Capital Exchange Fund as of December 31, 1994, the results of its
operations for the year then ended, the changes in its net assets for each of
the years in the two-year period then ended, and the financial highlights for
each of the years in the five-year period then ended, in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Houston, Texas
January 20, 1995
11
<PAGE> 13
FUND PERFORMANCE DATA
Management Discussion
American Capital Exchange Fund is a limited partnership that invests in common
stocks or convertible securities with a principal investment objective of
achieving long-term growth of capital and a secondary objective of providing
current income. For a description of market conditions, the Fund's investment
limitations and an analysis of the Fund's performance during the fiscal year,
see pages 1-2 of this report.
Change in Value of a $10,000 Investment in
American Capital Exchange Fund vs.
the Standard & Poor's 500-Stock Index*
12/31/84-12/31/94
[Graph showing Change in Value of a $10,000 Investment]
Past performance is not indicative of future performance. Performance of
American Capital Exchange Fund is shown at net asset value. No shares of the
Fund have been offered for sale during the time period shown.
* THE STANDARD & POOR'S 500-STOCK INDEX IS A BROAD-BASED, UNMANAGED INDEX
THAT REFLECTS GENERAL STOCK MARKET PERFORMANCE. IT DOES NOT REFLECT ANY
COMMISSIONS OR FEES THAT WOULD BE PAID BY AN INVESTOR PURCHASING THE
SECURITIES IT REPRESENTS.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (AS OF 12/31/94) ONE YEAR FIVE YEARS 10 YEARS
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
At Net Asset Value 4.82% 9.75% 13.97%
- -------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 14
AMERICAN CAPITAL EXCHANGE FUND
(A California Limited Partnership)
MANAGING GENERAL PARTNERS
Dr. Norman Hackerman Alan B. Shepard, Jr.
F. Robert Paulsen Miller Upton
Don G. Powell
OFFICERS
Don G. Powell
Chairman and
Chief Executive
Officer
Alan T. Sachtleben
Chief Investment
Officer
Curtis W. Morell
Principal Financial
and Accounting
Officer
Tanya M. Loden
Financial Officer
Stephen L. Boyd
Investment Officer
Nori L. Gabert
Legal Officer and
Secretary
J. David Wise
Assistant Secretary
Perry F. Farrell
M. Robert Sullivan
Assistant Financial
Officers
- -----------------------------------------------------
INVESTMENT ADVISER
Van Kampen American Capital Asset Management, 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
- -----------------------------------------------------
NON-MANAGING GENERAL PARTNERS
Van Kampen American Capital Exchange Corp.
2800 Post Oak Blvd., Houston, Texas 77056
Van Kampen American Capital Asset Management, Inc.
2800 Post Oak Blvd., Houston, Texas 77056
- -----------------------------------------------------
INDEPENDENT AUDITORS
KPMG Peat Marwick
NationsBank Center
700 Louisiana
Houston, Texas 77210-4545
- -----------------------------------------------------
Nationally distributed by Van Kampen American Capital
Distributors, Inc.
<PAGE> 15
American Capital ----------------
Exchange Fund Bulk Rate
U.S. Postage
PAID
C/O ACCESS Houston, Texas
P.O. Box 418256 Permit No. 3736
Kansas City, MO 64141-9256 ---------------
