<PAGE> 1
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>
EXCH ANR 2/99
<PAGE> 2
LETTER TO PARTNERS
January 20, 1999
Dear Partner,
The past decade has been a remarkable time for investors. Together, we've
witnessed one of the greatest bull markets in investment history, unprecedented
growth in mutual fund investing, and a surge in personal retirement planning.
The coming millennium promises to hold even more opportunities.
To lead us into this new era of investing, Richard F. Powers III has joined
Van Kampen as Chairman and Chief Executive Officer. He comes to us from our
parent company, Morgan Stanley Dean Witter & Co., where he served as Executive
Vice President and Director of Marketing. He brings 27 years of experience in
the financial services industry, including an extensive background in product
management, strategic planning and brand development.
Although former Chairman Don G. Powell retired on January 1, he will remain
active in the industry and the community. Mr. Powell plans to continue his
service as a member of the board of directors of the Investment Company
Institute, the leading mutual fund industry association, and he will remain a
managing general partner of your fund.
ECONOMIC OVERVIEW
Despite a stormy year in the global economy, the United States ended 1998
with only a moderate slowdown in growth. The nation's gross domestic product, a
measure of economic health, grew 3.9 percent during the year, matching 1997's
growth rate and indicating that our nation's economy remains strong. A
continuation of low inflation--only a 1.6 percent increase in the consumer price
index over the last 12 months--also helped sustain the domestic economy and kept
inflation-adjusted interest rates attractive.
Although the year ended on a positive note, the economic environment was
quite unsettled in the third quarter, with the Asian financial crisis
contributing to slowing corporate profits in the United States. Given the
uncertainty surrounding emerging market nations and the near-collapse of a major
U.S. hedge fund, the stock and bond markets experienced significant volatility
during this period. With instability as a backdrop, American and foreign
investors alike pursued a flight to quality--seeking the relative safety of
large-company stocks and government bonds.
In the last few months of the year the global financial situation improved
in conjunction with the Federal Reserve's interest rate decreases. In response
to declining corporate profits and mounting international concerns, the Fed
lowered interest rates three times, with 0.25 percent cuts in September,
October, and November. These rate cuts, coupled with a wave of corporate mergers
and cost-cutting measures, lent the support needed to keep the economy growing.
Dozens of foreign central banks also reduced interest rates in an effort to
stimulate their economies. These actions gave a boost to investor confidence and
encouraged a return to a more diversified range of investments in the last few
months of the year.
Continued on page 2
1
<PAGE> 3
MARKET REVIEW
Despite bouts of volatility, the stock market experienced impressive returns
during 1998. Large-company stocks were responsible for much of this as investors
favored the perceived stability of established, high-quality companies. The Dow
Jones Industrial Average rose more than 16 percent during the year and hit a
record high of 9374 in November before falling back to more moderate levels.
Technology companies generally fared well during the year, with the
technology-heavy Nasdaq composite index up almost 40 percent for the year. On
the other hand, commodity-based stocks--especially those of oil
companies--suffered from declining commodity prices. Small-company stocks also
significantly underperformed the rest of the market, with the Russell 2000 index
actually losing 3.45 percent during the 12-month period.
OUTLOOK
Our outlook for the domestic economy is positive, and we anticipate
continued low inflation and healthy economic growth. However, the aftereffects
of the global economic slowdown may continue to put pressure on corporate
earnings in the first half of the year. Internationally, we anticipate that low
interest rates and declining inflation will lead to improvements in troubled
areas such as Asia and Latin America. With the successful launch of the euro,
the new European transnational currency, we believe that many foreign markets
will become increasingly attractive in 1999.
In the long term, we are optimistic that the stock market will continue its
record growth, although we could experience additional volatility in the months
ahead if concerns about high stock valuations and increasing earnings pressure
become more pronounced. Combined with growing questions about corporate and
government reactions to the Year 2000 computer problem, we could see an
increasingly cautious market by mid-year.
Additional details about your fund, including a question-and-answer section
with your portfolio management team, are provided in this report. As always, we
are pleased to have the opportunity to share with you the progress of your
investment.
Sincerely,
[SIG.]
Richard F. Powers III
Chairman
Van Kampen Asset Management Inc.
[SIG.]
Dennis J. McDonnell
President
Van Kampen Asset Management Inc.
2
<PAGE> 4
PERFORMANCE RESULTS FOR THE PERIOD ENDED DECEMBER 31, 1998
VAN KAMPEN EXCHANGE FUND
<TABLE>
<S> <C>
TOTAL RETURNS
One-year total return(1)................................... 29.36%
Five-year average total return(1).......................... 23.96%
Ten-year average total return(1)........................... 18.77%
Life-of-Fund average total return(1)....................... 15.18%
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. An investment
should be made with an understanding of the risks that an investment in equity
securities entails. These include the risk that the financial condition of the
issuers of the securities in the portfolio, or the condition of the stock market
in general, may worsen and therefore, the value of Fund shares may decline. Past
performance does not guarantee future results. Investment return and net asset
value will fluctuate with market conditions. Market volatility may have
adversely affected fund performance since December 31, 1998. Fund shares, when
redeemed, may be worth more or less than their original cost.
Because the prices of common stocks and other securities fluctuate, the value of
an investment in the Fund will vary upon the Fund's investment performance.
Foreign securities may magnify volatility due to changes in foreign exchange
rates, the political and economic uncertainties in foreign countries, and the
potential lack of liquidity, government supervision, and regulation.
Market forecasts provided in this report may not necessarily come to pass.
3
<PAGE> 5
PUTTING YOUR FUND'S PERFORMANCE IN PERSPECTIVE
As you evaluate your progress toward achieving your financial goals, it is
important to track your investment performance at regular intervals. A
comparison of your Fund's performance to an applicable benchmark can:
- Illustrate the market environment in which your Fund is being managed.
- Reflect the impact of favorable market trends or difficult market
conditions.
- Help you evaluate how your Fund's management team has responded to
opportunities and challenges.
The following graph compares your Fund's performance to that of the Standard
& Poor's 500-Stock Index over time. This index is a broad-based, statistical
composite that does not include any commissions or sales charges that would be
paid by an investor purchasing the securities it represents.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
Van Kampen Exchange Fund vs. the Standard & Poor's 500-Stock Index (December
31, 1988, through December 31, 1998)
INVESTMENT PERFORMANCE CHART
<TABLE>
<CAPTION>
VAN KAMPEN EXCHANGE FUND STANDARD & POOR'S 500-STOCK INDEX
------------------------ ---------------------------------
<S> <C> <C>
Dec 1988 10000.00 10000.00
10572.00 10711.00
10442.00 10401.00
10733.00 10708.00
11286.00 11244.00
11529.00 11639.00
11362.00 11651.00
12295.00 12680.00
12674.00 12877.00
12628.00 12896.00
12207.00 12572.00
12593.00 12780.00
Dec 1989 12805.00 13159.00
11977.00 12253.00
12050.00 12358.00
12473.00 12761.00
12171.00 12418.00
13540.00 13560.00
13620.00 13560.00
13839.00 13489.00
12532.00 12217.00
12097.00 11705.00
11965.00 11627.00
12887.00 12324.00
Dec 1990 13091.00 12749.00
13594.00 13278.00
14769.00 14172.00
14820.00 14594.00
14843.00 14599.00
15446.00 15162.00
14635.00 14562.00
15388.00 15216.00
15836.00 15515.00
15479.00 15340.00
15972.00 15522.00
15218.00 14840.00
Dec 1991 16947.00 16617.00
16794.00 16286.00
16886.00 16442.00
16424.00 16199.00
16786.00 16651.00
16985.00 16667.00
16374.00 16507.00
17041.00 17157.00
16790.00 16745.00
16729.00 17027.00
17096.00 17063.00
17497.00 17580.00
Dec 1992 17689.00 17881.00
17582.00 18007.00
17974.00 18196.00
18226.00 18659.00
18321.00 18185.00
18814.00 18598.00
18369.00 18748.00
17936.00 18648.00
18948.00 19290.00
18559.00 19230.00
18803.00 19603.00
18715.00 19350.00
Dec 1993 19086.00 19675.00
19595.00 20314.00
19261.00 19704.00
18407.00 18935.00
18448.00 19153.00
19048.00 19391.00
18675.00 19016.00
19446.00 19615.00
20451.00 20353.00
19854.00 19946.00
20082.00 20362.00
19632.00 19558.00
Dec 1994 20001.00 19942.00
20716.00 20426.00
21650.00 21163.00
22514.00 21878.00
23388.00 22490.00
24099.00 23306.00
25178.00 23959.00
25802.00 24721.00
25326.00 24713.00
25862.00 25858.00
26374.00 25729.00
26713.00 26785.00
Dec 1995 26592.00 27409.00
28788.00 28303.00
27444.00 28500.00
27973.00 28879.00
29403.00 29267.00
30348.00 29936.00
29338.00 30172.00
28196.00 28791.00
29214.00 29333.00
31781.00 31097.00
33322.00 31910.00
36524.00 34251.00
Dec 1996 36220.00 33686.00
40423.00 35752.00
38583.00 35964.00
37055.00 34595.00
38814.00 36616.00
40585.00 38761.00
41498.00 40622.00
47117.00 43795.00
44886.00 41279.00
46096.00 43660.00
43475.00 42154.00
44023.00 44034.00
Dec 1997 43186.00 44909.00
45645.00 45365.00
48807.00 48560.00
48929.00 51160.00
49501.00 51624.00
47529.00 50652.00
48437.00 52844.00
49106.00 52230.00
43002.00 44615.00
48184.00 47598.00
50404.00 51419.00
53616.00 54460.00
Dec 1998 55866.00 57717.00
</TABLE>
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> 6
PORTFOLIO OF INVESTMENTS
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Description Shares Market Value
------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 95.5%
CONSUMER DISTRIBUTION 1.2%
IKON Office Solutions, Inc. ................................ 86,993 $ 744,878
Unisource Worldwide, Inc. .................................. 43,496 315,346
-----------
1,060,224
-----------
CONSUMER DURABLES 1.2%
Dana Corp. ................................................. 13,677 559,047
SPX Corp. (a)............................................... 6,824 457,208
-----------
1,016,255
-----------
CONSUMER NON-DURABLES 4.4%
International Flavors & Fragrances, Inc. ................... 49,712 2,196,649
McCormick & Co., Inc. ...................................... 48,259 1,631,757
-----------
3,828,406
-----------
CONSUMER SERVICES 0.2%
Luby's Cafeterias, Inc. .................................... 13,367 206,353
-----------
ENERGY 10.1%
Amerada Hess Corp. ......................................... 21,200 1,054,700
Amoco Corp. ................................................ 25,600 1,545,600
Apache Corp. ............................................... 11,406 288,714
Baker Hughes, Inc. ......................................... 25,634 453,402
Halliburton Co. ............................................ 30,320 898,230
Kerr-McGee Corp. ........................................... 10,900 416,925
Mobil Corp. ................................................ 40,262 3,507,827
Schlumberger, Ltd. ......................................... 16,080 741,690
-----------
8,907,088
-----------
FINANCE 3.4%
American International Group, Inc. ......................... 22,234 2,148,360
Household International, Inc. .............................. 21,372 846,866
-----------
2,995,226
-----------
HEALTHCARE 37.3%
Allegiance Corp. ........................................... 2,000 93,250
American Home Products Corp. ............................... 56,000 3,153,500
Baxter International, Inc. ................................. 5,000 321,562
Johnson & Johnson, Inc. .................................... 54,432 4,565,484
Merck & Co., Inc. .......................................... 25,188 3,719,953
Schering-Plough Corp. ...................................... 205,216 11,338,184
Warner-Lambert Co. ......................................... 127,290 9,570,617
-----------
32,762,550
-----------
</TABLE>
See Notes to Financial Statements
5
<PAGE> 7
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Description Shares Market Value
------------------------------------------------------------------------------------
<S> <C> <C>
PRODUCER MANUFACTURING 1.2%
AlliedSignal, Inc. ......................................... 12,528 $ 555,147
Fluor Corp. ................................................ 12,831 546,119
-----------
1,101,266
-----------
RAW MATERIALS/PROCESSING INDUSTRIES 8.7%
Air Products & Chemicals, Inc. ............................. 109,090 4,363,600
Alcan Aluminum, Ltd. ....................................... 10,774 291,571
Georgia Pacific Corp. ...................................... 18,688 1,094,416
Georgia Pacific Corp.--Timber Group......................... 18,688 445,008
Louisiana Pacific Corp. .................................... 25,970 475,576
Lubrizol Corp. ............................................. 37,620 966,364
-----------
7,636,535
-----------
TECHNOLOGY 27.8%
Intel Corp. ................................................ 194,478 23,057,798
International Business Machines Corp. ...................... 7,508 1,387,103
-----------
24,444,901
-----------
TOTAL LONG-TERM INVESTMENTS 95.5%
(Cost $7,411,346)................................................ 83,958,804
SHORT-TERM INVESTMENTS 4.5%
(Cost $3,972,792)................................................ 3,972,792
-----------
TOTAL INVESTMENTS 100.0%
(Cost $11,384,138)............................................... 87,931,596
LIABILITIES IN EXCESS OF OTHER ASSETS 0.0%.......................... (14,864)
-----------
NET ASSETS 100.0%................................................... $87,916,732
===========
</TABLE>
(a) Non-income producing security as this stock currently does not declare
dividends.
See Notes to Financial Statements
6
<PAGE> 8
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $11,384,138)........................ $87,931,596
Cash........................................................ 6,155
Dividends Receivable........................................ 81,145
Other....................................................... 97,133
-----------
Total Assets.......................................... 88,116,029
-----------
LIABILITIES:
Payables:
Investment Advisory Fee................................... 36,677
Affiliates................................................ 6,498
Income Distributions...................................... 1,486
Managing General Partners' Retirement Plan.................. 123,280
Accrued Expenses............................................ 31,356
-----------
Total Liabilities..................................... 199,297
-----------
NET ASSETS.................................................. $87,916,732
===========
NET ASSETS WERE COMPRISED OF:
276,745 units of limited partnership interest............... $86,783,448
3,395 units of non-managing general partnership interest.... 1,064,618
219 units of managing general partnership interest.......... 68,666
-----------
NET ASSETS.................................................. $87,916,732
===========
NET ASSET VALUE PER UNIT ($87,916,732 divided by 280,359
units of partnership interest outstanding)................ $ 313.59
===========
</TABLE>
See Notes to Financial Statements
7
<PAGE> 9
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends................................................... $ 964,747
Interest.................................................... 194,093
-----------
Total Income............................................ 1,158,840
-----------
EXPENSES:
Investment Advisory Fee..................................... 392,398
Managing General Partners' Fees and Expenses................ 51,282
Shareholder Reports......................................... 41,550
Accounting.................................................. 37,424
Custody..................................................... 15,764
Legal....................................................... 5,553
Other....................................................... 41,312
-----------
Total Expenses.......................................... 585,283
-----------
NET INVESTMENT INCOME....................................... $ 573,557
===========
REALIZED AND UNREALIZED GAIN/LOSS
Net Realized Gain........................................... $ 2,475,843
-----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 59,358,909
End of the Period......................................... 76,547,458
-----------
Net Unrealized Appreciation During the Period............... 17,188,549
-----------
NET REALIZED AND UNREALIZED GAIN............................ $19,664,392
===========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $20,237,949
===========
</TABLE>
See Notes to Financial Statements
8
<PAGE> 10
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended December 31, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1998 December 31, 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income................................. $ 573,557 $ 564,318
Net Realized Gain..................................... 2,475,843 5,272,722
Net Unrealized Appreciation During the Period......... 17,188,549 6,023,602
----------- -----------
Change in Net Assets from Operations.................. 20,237,949 11,860,642
Distributions from Net Investment Income.............. (366,286) (379,623)
----------- -----------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES... 19,871,663 11,481,019
----------- -----------
FROM PARTNERSHIP UNIT TRANSACTIONS:
Proceeds from Units Issued Through Dividend
Reinvestment........................................ 49,579 50,220
Cost of Units Repurchased............................. (2,278,503) (3,024,080)
----------- -----------
NET CHANGE IN NET ASSETS FROM
PARTNERSHIP UNIT TRANSACTIONS....................... (2,228,924) (2,973,860)
----------- -----------
TOTAL INCREASE IN NET ASSETS.......................... 17,642,739 8,507,159
NET ASSETS:
Beginning of the Period............................... 70,273,993 61,766,834
----------- -----------
End of the Period (Including accumulated undistributed
net investment income of $2,825,384 and $2,618,113,
respectively)....................................... $87,916,732 $70,273,993
=========== ===========
CHANGE IN PARTNERSHIP UNITS OUTSTANDING:
Units Issued Through Dividend Reinvestment............ 180 210
Units Repurchased..................................... (8,376) (12,445)
----------- -----------
Decrease in Partnership Units Outstanding......... (8,196) (12,235)
=========== ===========
</TABLE>
See Notes to Financial Statements
9
<PAGE> 11
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)
--------------------------------------------------
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period............................. $243.538 $205.349 $ 151.88 $115.36 $111.32
-------- -------- -------- ------- -------
Net Investment Income.............. 2.010 1.908 1.488 1.62 1.62
Net Realized and Unrealized Gain... 69.318 37.561 53.261 36.18 3.70
-------- -------- -------- ------- -------
Total from Investment Operations..... 71.328 39.469 54.749 37.80 5.32
Less Distributions from Net
Investment Income.................. 1.280 1.280 1.280 1.28 1.28
-------- -------- -------- ------- -------
Net Asset Value, End of the Period... $313.586 $243.538 $205.349 $151.88 $115.36
======== ======== ======== ======= =======
Total Return......................... 29.36% 19.23% 36.21% 32.89% 4.82%
Net Assets at End of the Period (In
millions).......................... $ 87.9 $ 70.3 $ 61.8 $ 47.8 $ 37.7
Ratio of Expenses to Average Net
Assets............................. .74% .75% .93% .88% .89%
Ratio of Net Investment Income to
Average Net Assets................. .73% .80% .87% 1.16% 1.45%
Portfolio Turnover................... 0% 0% 0% 0% 0%
</TABLE>
(a) Based on average units outstanding.
See Notes to Financial Statements
10
<PAGE> 12
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen 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
Managing General Partners. 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 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.
11
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998
- --------------------------------------------------------------------------------
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. Discounts are amortized over
the life of each applicable security. Premiums on debt securities are not
amortized.
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, 1998, for federal income tax purposes the cost of long- and
short-term investments is $7,048,595; the aggregate gross unrealized
appreciation is $80,883,001 and the aggregate gross unrealized depreciation is
$0, resulting in net unrealized appreciation of $80,883,001.
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, 1998, the Fund recognized expenses of
approximately $2,000 representing legal services provided by Skadden, Arps,
Slate, Meagher & Flom (Illinois), counsel to the Fund, of which a trustee of the
Fund is an affiliated person.
For the year ended December 31, 1998, the Fund recognized expenses of
approximately $37,400 representing Van Kampen Inc.'s or its affiliates'
(collectively "Van Kampen") cost of providing accounting services to the Fund.
Van Kampen Investor Services Inc. ("VKIS"), an affiliate of the Adviser,
serves as the shareholder servicing agent for the Fund. For the year ended
December 31, 1998, the Fund recognized expenses of approximately $14,700.
Beginning in 1998, the transfer
12
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998
- --------------------------------------------------------------------------------
agency fees are determined through negotiations with the Fund's Managing General
Partners and are based on competitive benchmarks.
Managing general partners of the Fund who are not affiliated with the
Adviser are compensated by the Fund at the annual rate of approximately $500
plus a fee of $250 per Board meeting attended.
The Managing General 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.
At December 31, 1998, the Adviser and Van Kampen Exchange Corp., as non-
managing general partners of the Fund, owned 354 and 3,019 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 $262,500 and $2,753,629, respectively.
13
<PAGE> 15
REPORT OF INDEPENDENT ACCOUNTANTS
THE PARTNERS OF VAN KAMPEN EXCHANGE FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
We have audited the accompanying statement of assets and liabilities of Van
Kampen Exchange Fund (a California Limited Partnership), including the portfolio
of investments, as of December 31, 1998, 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, 1998, 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 Van
Kampen Exchange Fund as of December 31, 1998, 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 LLP
Chicago, Illinois
February 11, 1999
14
<PAGE> 16
VAN KAMPEN 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
DON G. POWELL*
HUGO F. SONNENSCHEIN
WAYNE W. WHALEN*
OFFICERS
DENNIS J. MCDONNELL*
Chairman and Chief Executive Officer
JOHN L. SULLIVAN*
Vice President, Treasurer and
Chief Financial Officer
CURTIS W. MORELL*
Vice President and Chief Accounting Officer
PETER W. HEGEL*
RONALD A. NYBERG*
EDWARD C. WOOD, III*
Vice Presidents
TANYA M. LODEN*
Financial Officer
INVESTMENT ADVISER
VAN KAMPEN ASSET MANAGEMENT INC.
1 Parkview Plaza
P.O. Box 5555
Oakbrook Terrace, IL 60181-5555
SHAREHOLDER SERVICE AGENT
VAN KAMPEN 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 EXCHANGE CORP.
1 Parkview Plaza
P.O. Box 5555
Oakbrook Terrace, IL 60181-5555
VAN KAMPEN ASSET MANAGEMENT INC.
1 Parkview Plaza
P.O. Box 5555
Oakbrook Terrace, IL 60181-5555
INDEPENDENT ACCOUNTANTS
KPMG LLP
303 East Wacker Drive
Chicago, Illinois 60601
LEGAL COUNSEL
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, Illinois 60606
* "Interested" persons of the Fund, as defined in the
Investment Company Act of 1940.
(C) Van Kampen Funds Inc., 1999. All rights reserved.
(SM) denotes a service mark of Van Kampen Funds Inc.
15
<PAGE> 17
RESULTS OF PARTNER VOTES
The Annual Meeting of Partners of the Fund was held on December 9, 1998, where
partners voted on the election of managing general partners whose terms expired
in 1998, the election of independent public accountants and to approve the
amendment to the restated certificate and agreement of limited partnership
changing the name of the Fund to Van Kampen Exchange Fund.
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 ...................................... 203,601 0
Rod Dammeyer........................................ 203,601 0
Howard J Kerr....................................... 203,601 0
Dennis J. McDonnell ................................ 203,601 0
Steven Muller....................................... 203,601 0
Theodore A. Myers .................................. 203,601 0
Don G. Powell....................................... 203,601 0
Hugo F. Sonnenschein................................ 203,601 0
Wayne W. Whalen..................................... 203,601 0
</TABLE>
2) With regard to the ratification of KPMG LLP as independent public
accountants for its current fiscal year, 203,601 units voted for the proposal, 0
units voted against and 0 units abstained.
3) With regard to the approval of the amendment to the restated certificate
and agreement of limited partnership changing the name of the Fund to Van Kampen
Exchange Fund, 203,601 units voted in favor of the proposal, 0 units voted
against and 0 units abstained.
16
<PAGE> 18
YEAR 2000 READINESS DISCLOSURE
Like other mutual funds, financial and business organizations and individuals
around the world, the Fund could be adversely affected if the computer systems
used by the Fund's investment adviser and other service providers do not
properly process and calculate date-related information and data from and after
January 1, 2000. This is commonly known as the "Year 2000 Problem." The Fund's
investment adviser is taking steps that it believes are reasonably designed to
address the Year 2000 Problem with respect to computer systems that it uses and
to obtain reasonable assurances that comparable steps are being taken by the
Fund's other major service providers. At this time, there can be no assurances
that these steps will be sufficient to avoid any adverse impact to the Fund. In
addition, the Year 2000 Problem may adversely affect the markets and the issuers
of securities in which the Fund may invest that, in turn, may adversely affect
the net asset value of the Fund. Improperly functioning trading systems may
result in settlement problems and liquidity issues. In addition, corporate and
governmental data processing errors may result in production problems for
individual companies or issuers and overall economic uncertainty. Earnings of
individual issuers will be affected by remediation costs, which may be
substantial and may be reported inconsistently in U.S. and foreign financial
statements. Accordingly, the Fund's investments may be adversely affected. The
statements above are subject to the Year 2000 Information and Readiness
Disclosure Act, which may limit the legal rights regarding the use of such
statements in the case of dispute.
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 11,384,138
<INVESTMENTS-AT-VALUE> 87,931,596
<RECEIVABLES> 81,145
<ASSETS-OTHER> 97,133
<OTHER-ITEMS-ASSETS> 6,155
<TOTAL-ASSETS> 88,116,029
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 199,297
<TOTAL-LIABILITIES> 199,297
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> (41,764,557)
<SHARES-COMMON-STOCK> 280,359
<SHARES-COMMON-PRIOR> 288,555
<ACCUMULATED-NII-CURRENT> 2,825,384
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 50,308,448
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 76,547,458
<NET-ASSETS> 87,916,732
<DIVIDEND-INCOME> 964,747
<INTEREST-INCOME> 194,093
<OTHER-INCOME> 0
<EXPENSES-NET> (585,283)
<NET-INVESTMENT-INCOME> 573,557
<REALIZED-GAINS-CURRENT> 2,475,843
<APPREC-INCREASE-CURRENT> 17,188,549
<NET-CHANGE-FROM-OPS> 20,237,949
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (366,286)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> (8,376)
<SHARES-REINVESTED> 180
<NET-CHANGE-IN-ASSETS> 17,642,739
<ACCUMULATED-NII-PRIOR> 2,618,113
<ACCUMULATED-GAINS-PRIOR> 47,832,605
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 392,398
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 585,283
<AVERAGE-NET-ASSETS> 78,591,689
<PER-SHARE-NAV-BEGIN> 243,538
<PER-SHARE-NII> 2,010
<PER-SHARE-GAIN-APPREC> 69,318
<PER-SHARE-DIVIDEND> (1,280)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 313,586
<EXPENSE-RATIO> 0.74
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
