<PAGE>
Van Kampen American Capital
EXCHANGE FUND
ANNUAL REPORT
DECEMBER 31, 1997
[PHOTO APPEARS HERE]
______ A Wealth of Knowledge *A Knowledge of Wealth* ______
VAN KAMPEN AMERICAN CAPITAL
<PAGE>
Table of Contents
<TABLE>
<S> <C>
Letter to Partners........................................ 1
Performance Results....................................... 3
Performance in Perspective................................ 4
Portfolio of Investments.................................. 5
Statement of Assets and Liabilities....................... 7
Statement of Operations................................... 8
Statement of Changes in Net Assets........................ 9
Financial Highlights...................................... 10
Notes to Financial Statements............................. 11
Report of Independent Accountants........................ 14
</TABLE>
<PAGE>
Letter to Partners
February 1, 1998
Dear Partner,
The new year ushers in what promises to be an exciting and challenging time
for investors. The Taxpayer Relief Act of 1997 signed into law by President
Clinton in August creates many new opportunities for you and your family to take
a more active role in achieving your long-term financial goals.
Most Americans will benefit from the bill's
$95 billion in tax cuts over five years. The so-called Kiddie Credit gives
parents $400 in immediate tax relief for every child under age 17, and families
will find it easier to save for their children's college expenses through the
new Education IRA. The bill also cuts capital gains tax rates for the first time
in over a decade and loosens restrictions on tax-deductible IRA contributions.
Perhaps the most exciting feature of all is the new Roth IRA, which allows
investment earnings to grow tax free, not just tax deferred.
This year more than ever, it could be important for you to talk with your
financial adviser about how to make the tax code work to your advantage. At Van
Kampen American Capital, we have prepared a variety of publications to help you
understand your choices under the new tax legislation. And with the help of your
adviser, we'll help you locate the many benefits hidden among the changing tax
landscape.
Economic Overview
These continue to be the best of times for the U.S. economy. Growth is strong,
consumers are optimistic, unemployment is low, the budget is headed for surplus,
and our nation's currency is rising around the world.
Despite the strength in the economy, there is no indication of troublesome
inflation. In fact, the producer price index fell by 1.2 percent during the
year, the largest annual decline in wholesale prices since 1986. Inflation at
the consumer level was also virtually nonexistent, with the consumer price index
rising by only 1.7 percent during 1997. A strong dollar and significant
productivity gains helped offset inflationary pressures caused by rising wages.
After increasing short-term interest rates by 0.25 percent in March, the
Federal Reserve Board left monetary policy unchanged for the remainder of the
year. In addition to signs that the economy was slowing modestly from its
breakneck pace of early 1997, Fed policy-makers were concerned about the impact
that higher U.S. interest rates might have on the struggling economies of
Southeast Asia. Generally, higher U.S. interest rates cause the dollar to rise
relative to other currencies. With nearly all Asian currencies already down
significantly, a hike in U.S. rates would force monetary authorities in Asia to
choose between letting their currencies decline further or matching the rate
increase, thereby slowing their already-sluggish economies.
[PHOTO OF DENNIS J. MCDONNELL AND DON G. POWELL APPEARS HERE]
1 Continued on page two
<PAGE>
Market Overview
Bolstered by solid economic growth and low inflation, stock prices continued
their advance during the reporting period. Over the 12 months through December,
the Wilshire 5000 Index, which measures the performance of all publicly traded
U.S. companies, gained 29.17 percent. And with its 22.64 percent advance in
1997, the Dow Jones Industrial Average completed its third consecutive year of
20 percent-plus gains for the first time in the history of the index.
But while U.S. stocks kept rising, volatility also picked up. During the
spring, stronger-than-expected economic growth and a subsequent hike in short-
term interest rates caused stock prices to fall by 10 percent. Later in the
year, investors were unnerved by the spreading economic crisis in Asia. Between
early August and late October, the DJIA fell by 16 percent before rebounding
sharply to close the reporting period near record-high territory.
Within the equity market, large stocks continued to outperform their small-cap
cousins. For the year, the Russell 1000 Index of large-cap companies returned
30.49 percent, compared to 20.52 percent for the Russell 2000 Index of small
stocks. A wave of consolidations helped make Financial Services the top-
performing industry group. The Dow Jones Financial Index soared 48.44 percent
during 1997.
Outlook
We expect that the recent upheavals in Southeast Asia will have a mixed impact
on the U.S. economy and financial markets. Sales of American goods overseas are
likely to decline in coming months, and competition from relatively inexpensive
imports could pinch profit margins. However, lower currency values in Asia will
likely result in less inflation in the U.S. and a greater likelihood of stable
or falling interest rates. Such a scenario usually benefits stock prices, and we
believe that a portfolio of high-quality domestic stocks should continue to
perform well. We also anticipate that stock selection will play a larger role in
generating investment performance due to the uneven impact of the Asian crisis
on individual companies.
As we noted earlier, the Taxpayer Relief Act of 1997 provides attractive new
vehicles through which investors can save for a variety of goals, including
higher education and retirement. We encourage you to work with your financial
adviser to consider how the tax changes can work to your benefit.
Additional details about your Fund are provided in this report. As always, we
are pleased to have the opportunity to serve you and your family through our
diverse menu of quality investments.
Sincerely,
/s/ Don G. Powell /s/ Dennis J. McDonnell
Don G. Powell Dennis J. McDonnell
Chairman President
Van Kampen American Capital Van Kampen American Capital
Asset Management, Inc. Asset Management, Inc.
2
<PAGE>
Performance Results for the Period Ended December 31, 1997
VAN KAMPEN AMERICAN CAPITAL EXCHANGE FUND
<TABLE>
<CAPTION>
Total Returns
<S> <C>
One-year total return/1/........................................... 19.23%
Five-year average annual total return/1/........................... 19.54%
Ten-year average annual total return/1/............................ 17.77%
Life-of-Fund average annual total return/1/........................ 14.54%
Commencement Date 12/16/76
</TABLE>
/1/Total return based on net asset value (NAV) assumes an investment at the
beginning of the period indicated, reinvestment of all distributions for the
period, and sale of all units of partnership interest at the end of the
period, all at NAV.
See the Prior Performance section of the current prospectus. Past performance
does not guarantee future results. Investment return and net asset value will
fluctuate with market conditions. This performance was achieved during
generally rising stock prices. Units of partnership interest, when redeemed,
may be worth more or less than their original cost.
Market forecasts provided in this report may not necessarily come to pass.
3
<PAGE>
Putting Your Fund's Performance in Perspective
As you evaluate your progress toward achieving your financial goals, it is
important to track your investment portfolio's performance at regular intervals.
A good starting point is a comparison of your investment holdings to an
applicable benchmark, such as a broad-based market index. Such a comparison can:
. Illustrate the general market environment in which your investments are
being managed
. Reflect the impact of favorable market trends or difficult market
conditions
. Help you evaluate the extent to which your Fund's management team has
responded to the opportunities and challenges presented to them over the period
measured
For these reasons, you may find it helpful to review the chart below, which
compares your Fund's performance to that of the Standard and Poor's 500-Stock
Index over time. As a broad-based, unmanaged statistical composite, and does not
reflect any commissions or fees which would be incurred by an investor
purchasing the securities it represents. Similarly, its performance does not
reflect any sales charges or other costs which would be applicable to an
actively managed portfolio, such as that of the Fund.
Growth of a Hypothetical $10,000 Investment Van Kampen American Capital
Exchange Fund vs. Standard & Poor's 500-Stock Index (December 31, 1987 through
December 31, 1997)
[LINE GRAPH APPEARS HERE.]
<TABLE>
<S> <C>
Fund's Total Return
1 Year Avg. Annual = 19.23%
5 Year Avg Annual = 19.54%
10 Year avg. Annual = 17.77%
Inception Avg. Annual = 14.54%
</TABLE>
<TABLE>
<S> <C> <C>
American Capital S&P 500 Stock
- ---------------------------------------------
12/31/87 $10,000 $10,000
1/31/88 $10,477 $10,404
2/29/88 $11,080 $10,839
3/31/88 $10,910 $10,569
4/30/88 $10,950 $10,669
5/31/88 $11,120 $10,703
6/30/88 $11,482 $11,269
7/31/88 $11,452 $11,208
8/31/88 $11,168 $10,776
9/30/88 $11,318 $11,305
10/31/88 $11,657 $11,599
11/30/88 $11,496 $11,379
12/31/88 $11,881 $11,650
1/31/89 $12,561 $12,478
2/28/89 $12,406 $12,117
3/31/89 $12,752 $12,474
4/30/89 $13,408 $13,099
5/31/89 $13,698 $13,559
6/30/89 $13,500 $13,573
7/31/89 $14,608 $14,772
8/31/89 $15,058 $15,001
9/30/89 $15,003 $15,024
10/31/89 $14,503 $14,646
11/30/89 $14,962 $14,888
12/31/89 $15,213 $15,330
1/31/90 $14,230 $14,275
2/28/90 $14,317 $14,397
3/31/90 $14,819 $14,866
4/30/90 $14,461 $14,466
5/31/90 $16,087 $15,797
6/30/90 $16,182 $15,797
7/31/90 $16,443 $15,715
8/31/90 $14,889 $14,232
9/30/90 $14,373 $13,636
10/31/90 $14,216 $13,545
11/30/90 $15,311 $14,357
12/31/90 $15,553 $14,852
1/31/91 $16,152 $15,469
2/28/91 $17,547 $16,510
3/31/91 $17,608 $17,002
4/30/91 $17,635 $17,008
5/31/91 $18,351 $17,664
6/30/91 $17,388 $16,965
7/31/91 $18,282 $17,726
8/31/91 $18,815 $18,074
9/30/91 $18,390 $17,871
10/31/91 $18,976 $18,083
11/30/91 $18,080 $17,289
12/31/91 $20,135 $19,358
1/31/92 $19,953 $18,973
2/29/92 $20,064 $19,154
3/31/92 $19,514 $18,871
4/30/92 $19,943 $19,937
5/31/92 $20,180 $19,416
6/30/92 $19,454 $19,230
7/31/92 $20,246 $19,988
8/31/92 $19,948 $19,508
9/30/92 $19,876 $19,836
10/31/92 $20,312 $19,878
11/30/92 $20,788 $20,480
12/31/92 $21,015 $20,831
1/31/93 $20,889 $20,977
2/28/93 $21,354 $21,197
3/31/93 $21,653 $21,738
4/30/93 $21,766 $21,185
5/31/93 $22,353 $21,666
6/30/93 $21,824 $21,841
7/31/93 $21,310 $21,724
8/31/93 $22,512 $22,472
9/30/93 $22,049 $22,403
10/31/93 $22,340 $22,837
11/30/93 $22,235 $22,542
12/31/93 $22,675 $22,921
1/31/94 $23,280 $23,666
2/28/94 $22,884 $22,955
3/31/94 $21,869 $22,059
4/30/94 $21,918 $22,313
5/31/94 $22,630 $22,590
6/30/94 $22,188 $22,153
7/31/94 $23,103 $22,851
8/31/94 $24,297 $23,710
9/30/94 $23,588 $23,236
10/31/94 $23,859 $23,721
11/30/94 $23,324 $22,784
12/31/94 $23,763 $23,232
1/31/95 $24,612 $23,796
2/28/95 $25,721 $24,654
3/31/95 $26,748 $25,487
4/30/95 $27,787 $26,200
5/31/95 $28,632 $27,151
6/30/95 $29,913 $27,912
7/31/95 $30,655 $28,799
8/31/95 $30,089 $28,790
9/30/95 $30,726 $30,123
10/31/95 $31,334 $29,973
11/30/95 $31,737 $31,204
12/31/95 $31,593 $31,931
1/31/96 $31,826 $32,973
2/29/96 $32,605 $33,201
3/31/96 $33,234 $33,643
4/30/96 $34,933 $34,095
5/31/96 $36,056 $34,874
6/30/96 $34,856 $35,149
7/31/96 $33,499 $33,541
8/31/96 $34,709 $34,172
9/30/96 $37,759 $36,228
10/31/96 $39,589 $37,174
11/30/96 $43,393 $39,902
12/31/96 $43,032 $39,243
1/31/97 $48,026 $41,650
2/28/97 $45,839 $41,896
3/31/97 $44,024 $40,302
4/30/97 $46,114 $42,656
5/31/97 $48,218 $45,155
6/30/97 $49,303 $47,323
7/31/97 $55,979 $51,020
8/31/97 $53,328 $48,089
9/30/97 $54,765 $50,862
10/31/97 $51,651 $49,109
11/30/97 $52,303 $51,298
12/31/97 $51,309 $52,317
</TABLE>
______ VKAC Exchange Fund
______ Standard & Poor's 5000-Stock Index
The above chart reflects the performance of the Fund. The Fund's performance
assumes reinvestment of all distributions and is shown at net asset value.
While past performance is not indicative of future performance, the above
information provides a broader vantage point from which to evaluate the
discussion of the Fund's performance found in the following pages.
4
<PAGE>
PORTFOLIO OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Security Number
Description of Shares Market Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 95.0%
CONSUMER DISTRIBUTION 4.4%
Ikon Office Solutions, Inc............................................. 86,993 $ 2,446,678
Unisource Worldwide, Inc............................................... 43,496 619,818
-----------
3,066,496
-----------
CONSUMER DURABLES 0.9%
Dana Corp.............................................................. 13,677 649,658
-----------
CONSUMER NON-DURABLES 5.6%
International Flavours & Fragrances, Inc............................... 49,712 2,560,168
McCormick & Co., Inc................................................... 48,259 1,351,252
-----------
3,911,420
-----------
CONSUMER SERVICES 0.3%
Luby's Cafeterias, Inc................................................. 13,367 234,758
-----------
ENERGY 14.1%
Amerada Hess Corp...................................................... 21,200 1,163,350
Amoco Corp............................................................. 12,800 1,089,600
Apache Corp............................................................ 11,406 399,923
Baker Hughes, Inc...................................................... 25,634 1,118,283
Dresser Industries, Inc................................................ 30,320 1,271,545
Kerr McGee Corp........................................................ 10,900 690,106
Mobil Corp............................................................. 40,262 2,906,413
Schlumberger, Ltd...................................................... 16,080 1,294,440
-----------
9,933,660
-----------
FINANCE 3.6%
American International Group, Inc...................................... 14,823 1,612,002
Household International, Inc........................................... 7,124 908,755
-----------
2,520,757
-----------
HEALTHCARE 28.9%
Allegiance Corp........................................................ 1,000 35,438
American Home Products Corp............................................ 28,000 2,142,000
Baxter International, Inc.............................................. 5,000 252,187
Johnson & Johnson, Inc................................................. 54,432 3,585,708
Merck & Co., Inc....................................................... 25,188 2,676,225
</TABLE>
5 See Notes to Financial Statements
<PAGE>
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
Security Number
Description of Shares Market Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
HEALTHCARE (CONTINUED)
Schering-Plough Corp................................................... 102,608 $ 6,374,522
Warner-Lambert Co...................................................... 42,430 5,261,320
-----------
20,327,400
-----------
PRODUCER MANUFACTURING 1.4%
AlliedSignal, Inc...................................................... 12,528 487,809
Fluor Corp............................................................. 12,831 479,559
-----------
967,368
-----------
RAW MATERIALS/PROCESSING INDUSTRIES 11.7%
Air Products & Chemicals, Inc.......................................... 54,545 4,486,326
Alcan Aluminum, Ltd.................................................... 10,774 297,632
Georgia Pacific Corp................................................... 18,688 1,135,296
Georgia Pacific - Timber Group (a)..................................... 18,688 423,984
Louisiana-Pacific Corp................................................. 25,970 493,430
Lubrizol Corp.......................................................... 37,620 1,387,237
-----------
8,223,905
-----------
TECHNOLOGY 24.1%
General Signal Corp.................................................... 20,000 843,750
Intel Corp............................................................. 218,097 15,321,314
International Business Machines Corp................................... 7,508 785,055
-----------
16,950,119
-----------
TOTAL LONG-TERM INVESTMENTS 95.0%
(Cost $7,426,632)................................................................. 66,785,541
-----------
SHORT-TERM INVESTMENTS 5.0%
Federal National Mortgage Assn. ($1,000,000 par, yielding 5.68%, 01/16/98 maturity) 997,489
General Electric Capital Corp. ($2,515,000 par, yielding 6.70%, 01/02/98 maturity).. 2,514,064
-----------
TOTAL SHORT-TERM INVESTMENTS
(Cost $3,511,553)................................................................. 3,511,553
-----------
TOTAL INVESTMENTS 100.0%
(Cost $10,938,185)................................................................ 70,297,094
LIABILITIES IN EXCESS OF OTHER ASSETS 0.0%.......................................... (23,101)
-----------
NET ASSETS 100.0%................................................................... $70,273,993
===========
</TABLE>
(a) Non-income producing security as this stock currently does not declare
dividends.
6 See Notes to Financial Statements
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Total Investments (Cost $10,938,185).......................................... $70,297,094
Cash.......................................................................... 5,523
Receivables:
Dividends................................................................... 75,498
Investments Sold............................................................ 19,459
Other......................................................................... 120,406
-----------
Total Assets............................................................. 70,517,980
-----------
LIABILITIES:
Payables:
Investment Advisory Fee..................................................... 29,697
Fund Units Repurchased...................................................... 19,483
Affiliates.................................................................. 3,100
Income Distributions........................................................ 2,805
Managing General Partners' Retirement Plan.................................... 165,614
Accrued Expenses.............................................................. 23,288
-----------
Total Liabilities........................................................ 243,987
-----------
NET ASSETS.................................................................... $70,273,993
===========
NET ASSETS WERE COMPRISED OF:
284,518 units of limited partnership interest................................. $69,290,862
3,541 units of non-managing general partnership interest...................... 862,452
496 units of managing general partnership interest............................ 120,679
-----------
NET ASSETS.................................................................... $70,273,993
===========
NET ASSET VALUE PER UNIT
($70,273,993 divided by 288,555 units of partnership interest outstanding).... $ 243.54
===========
</TABLE>
7 See Notes to Financial Statements
<PAGE>
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends................................................. $ 904,653
Interest.................................................. 186,389
-----------
Total Income......................................... 1,091,042
-----------
EXPENSES:
Investment Advisory Fee................................... 351,434
Managing General Partners' Fees and Expenses.............. 72,143
Custody................................................... 16,558
Shareholder Services...................................... 15,711
Legal..................................................... 10,524
Other..................................................... 60,354
-----------
Total Expenses....................................... 526,724
-----------
NET INVESTMENT INCOME..................................... $ 564,318
===========
REALIZED AND UNREALIZED GAIN/LOSS
Net Realized Gain......................................... $ 5,272,722
-----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................. 53,335,307
End of the Period....................................... 59,358,909
-----------
Net Unrealized Appreciation During the Period............. 6,023,602
-----------
NET REALIZED AND UNREALIZED GAIN.......................... $11,296,324
===========
NET INCREASE IN NET ASSETS FROM OPERATIONS................ $11,860,642
===========
</TABLE>
8 See Notes to Financial Statements
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
For the Year Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1997 December 31, 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income....................................... $ 564,318 $ 457,374
Net Realized Gain........................................... 5,272,722 1,864,174
Net Unrealized Appreciation During the Period............... 6,023,602 14,427,053
----------- -----------
Change in Net Assets from Operations........................ 11,860,642 16,748,601
Distributions from Net Investment Income.................... (379,623) (393,524)
----------- -----------
NET CHANGE IN NET ASSETS FROM
INVESTMENT ACTIVITIES....................................... 11,481,019 16,355,077
----------- -----------
FROM PARTNERSHIP UNIT TRANSACTIONS:
Proceeds from Units Issued Through
Dividend Reinvestment..................................... 50,220 52,164
Cost of Units Repurchased................................... (3,024,080) (2,395,079)
----------- -----------
NET CHANGE IN NET ASSETS FROM
PARTNERSHIP UNIT TRANSACTIONS............................. (2,973,860) (2,342,915)
----------- -----------
TOTAL INCREASE IN NET ASSETS................................ 8,507,159 14,012,162
NET ASSETS:
Beginning of the Period..................................... 61,766,834 47,754,672
----------- -----------
End of the Period
(Including accumulated undistributed net investment
income of $2,618,113 and $2,433,418, respectively)........ $70,273,993 $61,766,834
=========== ===========
CHANGE IN PARTNERSHIP UNITS OUTSTANDING:
Units Issued Through Dividend Reinvestment.................. 210 313
Units Repurchased........................................... (12,445) (13,938)
----------- -----------
Decrease in Partnership Units Outstanding................. (12,235) (13,625)
=========== ===========
</TABLE>
9 See Notes to Financial Statements
<PAGE>
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one unit of
partnership interest outstanding throughout the periods indicated
<TABLE>
<CAPTION>
Year Ended December 31 (a)
----------------------------------------------------
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period....................... $205.349 $ 151.88 $115.36 $111.32 $104.40
-------- -------- ------- ------- -------
Net Investment Income........................................ 1.908 1.488 1.62 1.62 1.49
Net Realized and Unrealized Gain............................. 37.561 53.261 36.18 3.70 6.71
-------- -------- ------- ------- -------
Total from Investment Operations............................... 39.469 54.749 37.80 5.32 8.20
Less Distributions from Net Investment Income.................. 1.280 1.280 1.28 1.28 1.28
-------- -------- ------- ------- -------
Net Asset Value, End of the Period............................. $243.538 $205.349 $151.88 $115.36 $111.32
======== ======== ======= ======= =======
Total Return................................................... 19.23% 36.21% 32.89% 4.82% 7.91%
Net Assets at End of the Period (In millions).................. $ 70.3 $ 61.8 $ 47.8 $ 37.7 $ 38.5
Ratio of Expenses to Average Net Assets........................ .75% .93% .88% .89% .93%
Ratio of Net Investment Income to..............................
Average Net Assets........................................... .80% .87% 1.16% 1.45% 1.38%
Portfolio Turnover............................................. 0% 0% 0% 0% 0%
</TABLE>
(a) Based on average units outstanding.
During the years ended December 31, 1997 and 1996, the Fund incurred no
brokerage commissions on equity share trades. This disclosure was not required
in fiscal years prior to 1996.
10 See Notes to Financial Statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
1. Significant Accounting Policies
Van Kampen American Capital Exchange Fund (the "Fund"), a California limited
partnership is a partnership registered under the Investment Company Act of
1940, as amended, as a diversified open-end investment management company. The
Fund seeks capital appreciation in a portfolio of common stock. The Fund
commenced investment operations on December 16, 1976.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
A. SECURITY VALUATION-Investments in securities listed on a securities exchange
are valued at their sale price as of the close of such securities exchange.
Fixed income investments are stated at value using market quotations. Unlisted
securities and listed securities for which the last sales price is not available
are valued at the mean between the last reported bid and ask price. For those
securities where quotations or prices are not available, valuations are
determined in accordance with procedures established in good faith by the Board
of Trustees. Short-term securities with remaining maturities of 60 days or less
are valued at amortized cost.
B. SECURITY TRANSACTIONS-Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis.
The Fund may invest in repurchase agreements which are short-term investments
whereby the 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 by Van Kampen American Capital Asset Management, Inc. (the "Adviser")
or its affiliates, the daily aggregate of which is invested in repurchase
agreements. Repurchase agreements are fully collateralized by the underlying
debt security. 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. INVESTMENT INCOME-Dividend income is recorded on the ex-dividend date and
interest income is recorded on an accrual basis. Original issue discount is
amortized over the life of each applicable security. Premiums on debt securities
are not amortized.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
D. 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.
At December 31, 1997, for federal income tax purposes the cost of long- and
short-term investments is $6,587,400; the aggregate gross unrealized
appreciation is $63,709,694 and the aggregate gross unrealized depreciation is
$0, resulting in net unrealized appreciation of$63,709,694.
E. DISTRIBUTION OF INCOME AND GAINS-Quarterly 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.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Fund's Investment Advisory Agreement, the Adviser will
provide facilities and investment advice to the Fund for an annual fee payable
monthly of .50% based on the average daily net assets of the Fund.
For the year ended December 31, 1997, the Fund recognized expenses of
approximately $15,300 representing Van Kampen American Capital, Inc.'s or its
affiliates' (collectively "VKAC") cost of providing accounting services to the
Fund. These services are provided by VKAC at cost.
ACCESS Investor Services, Inc. ("ACCESS"), an affiliate of the Adviser,
serves as the shareholder servicing agent for the Fund. For the year ended
December 31, 1997, the Fund recognized expenses of approximately $15,000,
representing ACCESS' cost of providing transfer agency and shareholder services
plus a profit.
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.
The Partners of the Fund instituted a Retirement Plan effective April 1, 1996.
The Plan is not funded, and obligations under the Plan will be paid solely out
of the Fund's general accounts. The Fund will not reserve or set aside funds for
the payment of its obligations under the Plan by any form of trust or escrow.
For the current Managing General Partners not affiliated with the Adviser, the
annual retirement benefit payable per year for a ten year period is based upon
the highest total annual compensation received in any of the three calendar
years preceding retirement. Managing General Partners with more than five but
less than ten years service at retirement will receive a prorated reduced
benefit. Under the Plan, for the Managing General Partners retiring with the
effectiveness of the Plan, the annual retirement benefit payable per year for a
ten year period is equal to 75% of the total compensation received from the Fund
during the 1995 calendar year.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1997
At the Annual Meeting of Partners held on December 18, 1997, eight new
Managing General Partners were elected to replace the four Managing General
Partners that resigned, with the effective date of their resignation being
December 31, 1997. In connection with their resignation from services as
Managing General Partners of the Fund, each resigning Managing General Partner
will receive the vested portion of their retirement benefits under the Fund's
retirement plan. In addition, in recognition of their years of service, VKAC
will pay each resigning Managing General Partner an amount equal to the non-
vested portion of their retirement benefits. These retirement benefits are being
paid in lieu of receiving benefit payments over a ten-year period and will not
be paid to a resigning Managing General Partner who is an affiliated person of
the Adviser.
At December 31, 1997, the Adviser and Van Kampen American Capital Exchange
Corp., as non-managing general partners of the Fund, owned 354 and 3,180 units
of partnership interest, respectively.
3. PARTNERSHIP UNIT TRANSACTIONS
Partners of the Fund may redeem units at any time. The net asset value of
units redeemed, other than redemptions under a systematic withdrawal plan, may
be paid in cash or securities, at the option of the Fund, and will ordinarily be
paid in whole or in part in securities. The Fund's valuation will determine the
quantity of securities tendered. The Fund will select securities for tender in
redemptions based on tax or investment considerations.
4. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales of
investments, excluding short-term investments, were $-0- and $5,498,482,
respectively.
13
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
THE PARTNERS OF VAN KAMPEN AMERICAN CAPITAL EXCHANGE FUND (A CALIFORNIA
LIMITED PARTNERSHIP):
We have audited the accompanying statement of assets and liabilities of Van
Kampen American Capital Exchange Fund (a California Limited Partnership),
including the portfolio of investments, as of December 31, 1997, and the related
statement of operations for the year then ended, the statement of changes in net
assets for each of the two years in the period then ended, and the financial
highlights for each of the periods presented. 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, 1997, by correspondence with the custodian and by application of
alternative auditing procedures. 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 Van
Kampen American Capital Exchange Fund as of December 31, 1997, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended, and the financial highlights for each
of the periods presented, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Chicago, Illinois
February 4, 1998
14
<PAGE>
FUNDS DISTRIBUTED BY VAN KAMPEN AMERICAN CAPITAL
EQUITY FUNDS
Domestic
MS Aggressive Equity
VKAC Aggressive Growth
MS American Value
VKAC Comstock
VAKC Emerging Growth
VKAC Enterprise
VKAC Equity Income
VKAC Growth
VKAC Growth and Income
VKAC Harbor
VKAC Pace
VKAC Real Estate Securities
MS U.S. Real Estate
VKAC Utility
MS Value
INTERNATIONAL /GLOBAL
MS Asian Growth
MS Emerging Markets
MS Global Equity
VKAC Global Equity
MS Global Equity Allocation
VKAC Global Managed Assets
MS International Magnum
MS Latin American
FIXED-INCOME FUNDS
INCOME
VKAC Corporate Bond
MS Global Fixed Income
VKAC Global Government Securities
VKAC Government Securities
VKAC High Income Corporate Bond
MS High Yield
VKAC High Yield
VKAC Short-Term Global Income
VKAC Strategic Income
VKAC U.S. Government
VKAC U.S. Government Trust for Income
MS Worldwide High Income
TAX EXEMPT INCOME
VKAC California Insured Tax Free
VKAC Florida Insured Tax Free Income
VKAC High Yield Municipal
VKAC Insured Tax Free Income
VKAC Intermediate Term
Municipal Income
VKAC Municipal Income
VKAC New York Tax Free Income
VKAC Pennsylvania Tax Free Income
VKAC Tax Free High Income
CAPITAL PRESERVATION
VKAC Limited Maturity Government
VKAC Prime Rate Income Trust
VKAC Reserve
VKAC Senior Floating Rate
VKAC Tax Free Money
To find out more about any of these funds, ask your financial adviser for a
prospectus, which contains more complete information, including sales charges,
risks, and expenses. Please read it carefully before you invest or send money.
To view a current Van Kampen American Capital or Morgan Stanley fund prospectus
or to receive additional fund information, choose from one of the following:
. visit our web site at WWW.VKAC.COM- to view prospectuses, select Investorso
Place, then Download a Prospectus
. call us at 1-800-341-2911 weekdays from 7:00 a.m. to 7:00 p.m. Central Time
(Telecommunications Device for the Deaf users, call 1-800-421-2833)
. e-mail us by visiting WWW.VKAC.COM and selecting Investorso Place
15
<PAGE>
RESULTS OF PARTNER VOTES
The Annual Meeting of Partners of the Fund was held on December 18, 1997,
where partners voted on the election of managing general partners whose terms
expired in 1997 and independent public accountants.
1) With regard to the election of the following managing general partners by
the partners of the Fund:
<TABLE>
<CAPTION>
# of Units
----------------------------
In Favor Withheld
- ------------------------------------------------------------------------
<S> <C> <C>
David C. Arch 169,988 0
Rod Dammeyer 169,988 0
Howard J Kerr 169,988 0
Dennis J. McDonnell 169,988 0
Steven Muller 169,988 0
Theodore A. Myers 169,988 0
Hugo F. Sonnenschein 169,988 0
Wayne W. Whalen 169,988 0
</TABLE>
2) With regard to the ratification of KPMG Peat Marwick LLP as independent
public accountants for its current fiscal year, 169,988 units voted for the
proposal, 0 units voted against and 0 units abstained.
16
<PAGE>
VAN KAMPEN AMERICAN CAPITAL EXCHANGE FUND
(A California Limited Partnership)
Managing General Partners
DAVID C. ARCH
ROD DAMMEYER
HOWARD J KERR
DENNIS J. MCDONNELL*-CHAIRMAN
STEVEN MULLER
THEODORE A. MYERS
HUGO F. SONNENSCHEIN
WAYNE W. WHALEN*
Officers
DON G. POWELL*
Chairman and Chief Executive Officer
DENNIS J. MCDONNELL*
Executive Vice President
ALAN T. SACHTLEBEN*
Chief Investment Officer
EDWARD C. WOOD, III*
Vice President and Chief Financial Officer
CURTIS W. MORELL*
Vice President and Chief Accounting Officer
PETER W. HEGEL*
RONALD A. NYBERG*
Vice Presidents
JOHN L. SULLIVAN*
Treasurer
TANYA M. LODEN*
Financial Officer
Investment Adviser
VAN KAMPEN AMERICAN CAPITAL
ASSET MANAGEMENT, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Shareholder Service Agent
ACCESS INVESTOR
SERVICES, INC.
P.O. Box 418256
Kansas City, Missouri 64141-9256
Custodian
STATE STREET BANK AND TRUST CO.
225 Franklin Street
Boston, Massachusetts 02105
Non-Managing General Partners
VAN KAMPEN AMERICAN CAPITAL
EXCHANGE CORP.
One Parkview Plaza
Oakbrook Terrace, IL 60181
VAN KAMPEN AMERICAN CAPITAL
ASSET MANAGEMENT, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Independent Accountants
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, Illinois 60601
Legal Counsel
SULLIVAN & WORCESTER LLP
1025 Connecticut Ave., NW
Washington, DC 20036
* "Interested" persons of the Fund, as defined in the Investment Company Act
of 1940.
(C) Van Kampen American Capital Distributors, Inc., 1998 All rights reserved.
/SM/ denotes a service mark of Van Kampen American Capital Distributors, Inc.
<PAGE>
Bulk Rate
U.S. Postage
PAID
VAN KAMPEN
AMERICAN CAPITAL
Van Kampen American Capital Distributors, Inc.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 11
<NAME> EXCHANGE
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 10,938,185
<INVESTMENTS-AT-VALUE> 70,297,094
<RECEIVABLES> 94,957
<ASSETS-OTHER> 120,406
<OTHER-ITEMS-ASSETS> 5,523
<TOTAL-ASSETS> 70,517,980
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 243,987
<TOTAL-LIABILITIES> 243,987
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> (39,535,635)
<SHARES-COMMON-STOCK> 288,555
<SHARES-COMMON-PRIOR> 300,790
<ACCUMULATED-NII-CURRENT> 2,618,113
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 47,832,606
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 59,358,909
<NET-ASSETS> 70,273,993
<DIVIDEND-INCOME> 904,653
<INTEREST-INCOME> 186,389
<OTHER-INCOME> 0
<EXPENSES-NET> (526,724)
<NET-INVESTMENT-INCOME> 564,318
<REALIZED-GAINS-CURRENT> 5,272,722
<APPREC-INCREASE-CURRENT> 6,023,602
<NET-CHANGE-FROM-OPS> 11,860,642
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (379,623)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> (12,445)
<SHARES-REINVESTED> 210
<NET-CHANGE-IN-ASSETS> 8,507,159
<ACCUMULATED-NII-PRIOR> 2,433,418
<ACCUMULATED-GAINS-PRIOR> 42,559,884
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 351,434
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 526,724
<AVERAGE-NET-ASSETS> 70,280,581
<PER-SHARE-NAV-BEGIN> 205,349
<PER-SHARE-NII> 1.908
<PER-SHARE-GAIN-APPREC> 37.561
<PER-SHARE-DIVIDEND> (1.280)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 243.538
<EXPENSE-RATIO> 0.75
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
