<PAGE> 1
CHESTNUT STREET EXCHANGE FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
ROBERT R. FORTUNE
Chairman and President
July 24, 1998
Fellow Partner:
Our Fund earned $1.82 per share of net investment income in the six months
ended June 30, 1998. Earnings in the same period of 1997 were $1.58 per share.
No capital gains were realized in the first six months of 1998.
After providing for the $0.75 per share distribution to partners of record
on June 30, 1998, the net asset value per partnership share, as shown in the
enclosed report, was $319.67.
Since our last report, 97,200 shares of First Union Corp. were received as
a result of the merger of CoreStates Financial Corp. Stock splits added the
following shares to the portfolio:
<TABLE>
<C> <S>
121,964 Abbott Laboratories, Inc.
96,700 Air Products & Chemicals, Inc.
24,056 CIGNA Corp.
24,819 Consolidated Papers, Inc.
58,600 CVS Corp.
21,065 Lucent Technologies, Inc.
19,392 Marsh & McLennan Companies, Inc.
</TABLE>
You will notice a change in the names of the Fund's co-investment advisers.
As described in the footnotes to the financial statements, this change is the
result of internal restructuring. No change has occurred in the day-to-day
management of our portfolio.
Your questions or comments concerning Chestnut Street Exchange Fund are
welcomed.
Sincerely,
/s/ ROBERT R. FORTUNE
Robert R. Fortune
<PAGE> 2
INVESTMENT ADVISER'S REPORT
The second quarter was a good quarter for large stocks, but a lot more
difficult for mid-capitalization and smaller stocks. Large stocks continued to
benefit from the low inflation, low interest rate environment which continued
from the first quarter. For the quarter the market advanced 3.3% on a total
return basis. The average portfolio manager underperformed the market in the
second quarter, losing 0.29%.
The market corrected early in the quarter and then recovered. Wage
inflation has been largely checked by productivity growth while wholesale
inflation has been consistently low. Oil prices have dropped to a four-year low,
in part because of lower Asian demand stemming from the financial crises there,
although recent voluntary production cuts suggest a firming of oil prices later
this year. The Dow Jones outperformed the broader market in the quarter, rising
4.8% versus the S&P 500's 2.9%. Chestnut Street Exchange Fund lost 2.9% for the
quarter.
COMPARATIVE PERFORMANCE
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
6/30/98 6/30/97
------------ ------------
<S> <C> <C>
Chestnut Street Exchange Fund............................ -2.9% 14.1%
Dow Jones Industrial Average............................. 4.8% 16.5%
Standard & Poor's 500 Index.............................. 2.9% 16.9%
</TABLE>
In the second quarter, both small and mid-capitalization stocks
underperformed large capitalization stocks, with the smaller stocks performing
the worst.
Growth stocks outperformed the broader market in the second quarter in
large and mid-capitalization stocks, but underperformed value stocks among small
capitalization stocks. The Russell 2000 Growth returned -5.74% versus -3.61% for
the Russell 2000 Value and -4.66% for the overall index. Large capitalization
growth stocks, represented by the Russell 1000 Growth, returned 4.54% versus
0.45% for the Russell 1000 Value and 2.50% for the overall index, while the
Russell MidCap Growth returned -.06% versus -2.57% for the Russell MidCap Value
Index and -1.51% for the overall index.
Chestnut Street Exchange Fund's overweights in consumer cyclicals and
healthcare continued to help performance, since those again were two of the best
performing sectors in this quarter. Also, the Fund's underweight in utilities
helped performance, as this was one of the weakest sectors in the quarter.
However, the Fund's performance was hurt by its overweights in basic materials
and capital equipment, two of the weaker sectors in the quarter and its
underweight in consumer non-cyclicals, one of the stronger sectors in the
quarter.
July 14, 1998 BLACKROCK INSTITUTIONAL MANAGEMENT CORPORATION
2
<PAGE> 3
CHESTNUT STREET EXCHANGE FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENT OF NET ASSETS
JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ------------
<S> <C>
COMMON STOCKS--98.6%
AUTO & AUTO PARTS--0.6 %
61,948 Genuine Parts Company..... $ 2,141,078
------------
BANKS--10.8 %
97,200 First Union Corp. ........ 5,661,900
30,757 First Chicago NBD
Corp. .................. 2,725,839
40,000 Morgan (J.P.) & Co.,
Inc. ................... 4,685,000
208,287 NationsBank Corp. ........ 15,933,917
314,532 Norwest Corp. ............ 11,755,634
------------
40,762,290
------------
BUILDING MATERIALS &
FOREST PRODUCTS--1.4%
45,130 Armstrong World
Industries, Inc. ....... 3,040,634
45,830 Weyerhaeuser Company...... 2,116,773
------------
5,157,407
------------
BUSINESS PRODUCTS &
SERVICES--2.7%
4,355* ACNielsen Corporation..... 109,964
50,647 Cognizant Corporation..... 3,190,761
50,647 Dun & Bradstreet
Corporation............. 1,829,623
68,416 Harland (John H.) Co. .... 1,158,796
52,000 Minnesota Mining &
Manufacturing Company... 4,273,750
------------
10,562,894
------------
CAPITAL GOODS--0.0%
4,800 Newport News Shipbuilding,
Inc. ................... 128,400
------------
CHEMICALS--4.4%
193,400 Air Products & Chemicals,
Inc. ................... 7,736,000
52,100 BetzDearborn, Inc. ....... 2,197,969
208,000 Cabot Corporation......... 6,721,000
------------
16,654,969
------------
CONSUMER NON-DURABLES &
SERVICES--7.1%
118,953* Cendant Corp. ............ 2,483,144
283,411 Coca-Cola (The) Company... 24,231,641
------------
26,714,785
------------
CONTAINERS--0.8%
67,148 Crown Cork & Seal Company,
Inc. ................... 3,189,530
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ------------
<S> <C>
DIVERSIFIED
COMPANIES--0.8%
157,190 Ikon Office Solutions,
Inc. ................... $ 2,289,079
72,720 Unisource Worldwide,
Inc. ................... 786,285
------------
3,075,364
------------
DRUGS & MEDICAL--20.3%
243,928 Abbott Laboratories,
Inc. ................... 9,970,557
39,177 Baxter International,
Inc. ................... 2,108,212
403,668 Johnson & Johnson,
Inc. ................... 29,770,515
203,995 Merck & Company, Inc. .... 27,284,331
124,000 SmithKline Beecham p.l.c.
ADR..................... 7,502,000
------------
76,635,615
------------
ELECTRICAL EQUIPMENT--6.3%
202,185 Emerson Electric Company.. 12,206,919
128,000 General Electric Company.. 11,648,000
------------
23,854,919
------------
ELECTRONICS--17.3%
105,538 AMP, Inc. ................ 3,627,869
44,596 Hewlett-Packard Company... 2,670,186
539,676 Intel Corp. .............. 40,003,484
42,130 Lucent Technologies,
Inc. ................... 3,504,689
119,118 Motorola, Incorporated.... 6,261,140
159,207 Raytheon Company.......... 9,413,114
------------
65,480,481
------------
ENTERTAINMENT--1.9%
68,000 Walt Disney Company....... 7,144,250
------------
FOOD PROCESSING &
DISTRIBUTION--3.6%
97,500 Hershey Foods Corp. ...... 6,727,500
174,000 Philip Morris Cos.,
Inc. ................... 6,851,250
------------
13,578,750
------------
INSURANCE &
FINANCIAL--4.9%
44,000 Aetna, Inc. .............. 3,349,500
43,930 American Express
Company................. 5,008,020
36,084 CIGNA Corp. .............. 2,489,796
70,000 Fannie Mae................ 4,252,500
58,176 Marsh & McLennan
Companies, Inc. ........ 3,516,012
------------
18,615,828
------------
</TABLE>
See Accompanying Notes to Financial Statements
3
<PAGE> 4
STATEMENT OF NET ASSETS (CONCLUDED)
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ------------
<S> <C>
COMMON STOCKS (CONTINUED)
LODGING & RESTAURANT--1.9%
101,234 McDonald's Corporation.... $ 6,985,146
------------
NATURAL GAS
TRANSMISSION--0.2%
24,000 Tenneco, Inc. ............ 913,500
------------
OFFICE EQUIPMENT--0.6%
20,942 International Business
Machines Corporation.... 2,404,403
------------
PAPER--0.8%
49,638 Consolidated Papers,
Inc. ................... 1,352,636
55,432 Westvaco Corp............. 1,565,954
------------
2,918,590
------------
PETROLEUM--2.4%
27,000 Atlantic Richfield Co. ... 2,109,375
35,886 Burlington Resources,
Inc. ................... 1,545,341
77,648 Exxon Corp. .............. 5,537,273
------------
9,191,989
------------
PETROLEUM EQUIPMENT &
SERVICES--1.1%
60,432 Schlumberger, Ltd. ....... 4,128,261
------------
POLLUTION CONTROL--1.1%
114,556 Browning Ferris
Industries, Inc. ....... 3,980,821
------------
RETAIL--GENERAL &
SPECIALTY--4.2%
116,772 Albertson's, Inc. ........ 6,050,249
117,200 CVS Corp. ................ 4,563,475
16,870* Footstar, Inc. ........... 809,760
60,000 Penney (J.C.)
Company, Inc. .......... 4,338,750
------------
15,762,234
------------
TELEPHONE UTILITIES--1.8%
124,355 GTE Corp. ................ 6,917,247
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ------------
<S> <C>
TRANSPORTATION--1.6%
39,932 Burlington Northern,
Inc. ................... $ 3,920,823
40,000 Union Pacific Corp. ...... 1,765,000
------------
5,685,823
------------
Total Common Stocks
(Cost $50,275,743).. 372,584,574
------------
<CAPTION>
PAR
- ----------
<S> <C>
SHORT-TERM OBLIGATIONS--1.4%
$5,200,000 General Electric Capital
Credit Corp.,
Commercial Paper,
5.53712%, 07/06/98
(Cost $5,200,000)...... 5,200,000
------------
TOTAL INVESTMENT IN SECURITIES
(Cost $55,475,743)..................100.0% 377,784,574
Distributions payable................. (0.5)% (1,779,969)
Other assets in excess of other
liabilities......................... 0.5% 1,873,197
----- ------------
NET ASSETS (Applicable to 1,182,082
partnership shares outstanding).....100.0% $377,877,802
===== ============
NET ASSET VALUE PER SHARE............. $ 319.67
============
NET ASSETS APPLICABLE TO SHARES OWNED BY:
Limited partners (1,176,707 shares)... $376,159,576
Managing general partners (5,375
shares)............................. 1,718,226
------------
Total net assets (1,182,082 shares)... $377,877,802
============
</TABLE>
- ---------------
* Non-Income Producing
See Accompanying Notes to Financial Statements
4
<PAGE> 5
CHESTNUT STREET EXCHANGE FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends............................... $ 2,714,612
Interest................................ 138,719
-----------
Total Income........................ 2,853,331
-----------
Expenses:
Investment advisory fee................. 610,601
Managing general partners' compensation
and officer's salary.................. 13,885
Legal................................... 19,836
Custodian fees.......................... 12,858
Audit................................... 12,496
Transfer agent.......................... 7,417
Insurance............................... 550
Printing................................ 8,183
Miscellaneous........................... 3,968
-----------
Total expenses...................... 689,794
-----------
Net investment income............. 2,163,537
-----------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS:
Realized gain from security
transactions: distributed upon
redemption of partnership shares...... 3,827,366
Unrealized appreciation of investments:
Beginning of period..... $294,570,111
End of period........... 322,308,831
------------
27,738,720
-----------
Net realized and unrealized gains
on investments.................. 31,566,086
-----------
Net increase in net assets resulting
from operations..................... $33,729,623
===========
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997
------------- ------------
<S> <C> <C>
INCREASE IN NET ASSETS:
OPERATIONS:
Net investment income.. $ 2,163,537 $ 3,998,930
Net realized gain from
security transactions
(for federal income
tax purposes net gain
is $0 and
$635,794)............ 0 635,807
Excess of market value
over book value of
securities
distributed upon
redemption of
partnership shares... 3,827,366 11,356,550
Increase in unrealized
appreciation of
investments.......... 27,738,720 50,408,603
------------ ------------
Increase in net assets
resulting from
operations........... 33,729,623 66,399,890
------------ ------------
DISTRIBUTIONS TO PARTNERS
FROM:
Net investment income.. (1,779,969) (3,987,287)
Net realized gains
(federal income tax
basis)............... 0 (191,984)
------------ ------------
Total distributions to
partners............. (1,779,969) (4,179,271)
------------ ------------
CAPITAL SHARE
TRANSACTIONS:
Net asset value of 762
and 3,501 shares
subscribed or issued
in lieu of cash
distributions........ 231,114 872,908
Cost of 18,490 and
51,856 shares
repurchased.......... (5,885,378) (14,706,454)
------------ ------------
Decrease in net assets
from capital share
transactions......... (5,654,264) (13,833,546)
------------ ------------
Total increase in net
assets............... 26,295,390 48,387,073
NET ASSETS:
Beginning of period.... 351,582,412 303,195,339
------------ ------------
End of period.......... $377,877,802 $351,582,412
============ ============
</TABLE>
See Accompanying Notes to Financial Statements
5
<PAGE> 6
CHESTNUT STREET EXCHANGE FUND
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF THE FUND OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
1998 ----------------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993
----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period......................... $ 293.03 $ 242.91 $ 194.26 $ 144.43 $ 142.79 $ 134.44
-------- -------- -------- -------- -------- --------
Income From Investment
Operations:
Net investment income.......... 1.82 3.29 3.36 3.22 3.07 2.62
Net gains on securities (both
realized and unrealized)..... 26.32 50.27 51.18 49.82 4.27 8.35
-------- -------- -------- -------- -------- --------
Total from investment
operations.............. 28.14 53.56 54.54 53.04 7.34 10.97
-------- -------- -------- -------- -------- --------
Less Distributions:
Distributions from net
investment income............ (1.50) (3.28) (3.36) (3.21) (3.07) (2.62)
Distributions from realized
gains (federal income tax
basis)....................... 0.00 (0.16) (2.53) 0.00 (2.63) 0.00
-------- -------- -------- -------- -------- --------
Total distributions....... (1.50) (3.44) (5.89) (3.21) (5.70) (2.62)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period... $ 319.67 $ 293.03 $ 242.91 $ 194.26 $ 144.43 $ 142.79
======== ======== ======== ======== ======== ========
Total Return..................... 20.30%* 22.11% 28.09% 36.88% 5.19% 8.19%
Ratios/Supplemental Data:
Net Assets, End of Period
(000's)...................... $377,878 $351,582 $303,195 $251,995 $191,348 $196,748
Ratios to average net assets:
Operating expenses........... 0.37%* 0.50% 0.51% 0.52% 0.54% 0.54%
Net investment income........ 1.16%* 1.17% 1.55% 1.84% 2.11% 1.87%
Portfolio Turnover Rate........ 0.00% 1.26% 3.92% 0.00% 3.88% 0.00%
</TABLE>
- ---------------
* Annualized
See Accompanying Notes to Financial Statements.
6
<PAGE> 7
NOTES TO FINANCIAL STATEMENTS
(A) Chestnut Street Exchange Fund (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as a diversified open-end
management company. Significant accounting policies are as follows:
Investments are stated at value in the accompanying financial statements.
Securities listed on a securities exchange are valued at the last reported
sales price on June 30, 1998 for each security. Securities not so listed or
not traded on that date are valued at the latest bid price. Short-term
obligations are valued at amortized cost which approximates market. Security
transactions are accounted for on the trade date. The cost of investments
sold or redeemed in kind is determined by the use of the specific
identification method for both financial reporting and income tax purposes.
For securities received in the Exchange at inception of the Fund in 1976,
cost for financial reporting purposes is the value of the securities as used
in the Exchange and for income tax purposes, the tax basis of the individual
investor. Interest income is recorded on an accrual basis; dividend income
is recorded on the ex-dividend date. No provision is made for federal income
taxes as it is the Fund's policy to continue to qualify as a regulated
investment company and to make the requisite distribution of taxable income
to its shareholders which will relieve it from all or substantially all
federal income and excise taxes. Commencing in 1998, taxes on capital gains,
if any, will be paid by the Fund and a proportionate credit will be
allocated to each shareholder.
The preparation of financial statements in conformity with generally
accepted principles requires management to make estimates and assumptions
that affect the reported amounts of 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 these
estimates.
(B) Effective January 1, 1998, the Fund changed its tax status from a
partnership to a regulated investment company. The change results from the
enactment of the "Publicly Traded Partnership" rules to the Internal Revenue
Code in 1987, which first applied to the Fund after 1997. In connection with
the change in tax status, effective January 1, 1998, PNC Bank N.A. ("PNC
Bank") is no longer obligated to provide a non-managing general partner. A
new Advisory Agreement, approved by the partners on December 18, 1997,
effective January 1, 1998, provides for an advisory fee at the annual rate
of 4/10ths of 1% of the first $100,000,000 of the Fund's average daily net
assets plus 3/10ths of 1% of net assets exceeding $100,000,000. The annual
rate of the advisory fee was formerly 5/10ths of 1% of the first
$100,000,000 of the average daily net assets plus 4/10ths of 1% of net
assets exceeding $100,000,000.
PNC Bank and BlackRock Institutional Management Corporation ("BIMC")
(formerly PNC Institutional Management Corporation), a majority-owned
subsidiary of PNC Bank, are co-investment advisers to the Fund pursuant to
an Advisory Agreement dated January 1, 1998. In June 1998, PNC Bank and BIMC
restructured their operations and BlackRock Financial Management ("BFM"), a
majority-owned subsidiary of PNC Bank, assumed the rights and obligations of
PNC Bank under the Advisory Agreement. The Fund pays BIMC the investment
advisory fee stated above for the services of BIMC and BFM. The managing
general partners each receive a fixed fee as compensation for their
services. PFPC Inc., an affiliate of PNC Bank, is the Fund's transfer agent.
7
<PAGE> 8
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
(C) The aggregate cost of investments for federal income tax purposes at June
30, 1998 was $43,811,880. The aggregate gross unrealized appreciation for
all securities is as follows: excess of value over tax cost $333,972,694.
(D) During the six months ended June 30, 1998 there were no purchases or sales
of investment securities (excluding short-term obligations).
(E) At June 30, 1998, net assets consisted of:
<TABLE>
<S> <C>
Undistributed net investment income.................... $ 401,879
Unrealized gain on investments......................... 322,308,831
Other capital--paid-in or reinvested................... 55,167,092
------------
$377,877,802
============
</TABLE>
8
<PAGE> 9
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<PAGE> 10
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<PAGE> 11
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<PAGE> 12
================================================================================
MANAGING GENERAL PARTNERS
Richard C. Caldwell
Robert R. Fortune
G. Willing Pepper
Langhorne B. Smith
David R. Wilmerding, Jr.
INVESTMENT ADVISERS
BlackRock Financial Management
and
BlackRock Institutional
Management Corporation
400 Bellevue Parkway
Wilmington, Delaware 19809
TRANSFER AGENT
PFPC Inc.
P.O. Box 8950
Wilmington, Delaware 19899
(800) 852-4750
(302) 791-1043 (Delaware)
================================================================================
================================================================================
[CHESTNUT STREET EXCHANGE FUND LOGO]
Semiannual Report
June 30, 1998
Chestnut Street Exchange
Fund
400 Bellevue Parkway
Wilmington, Delaware 19809
(302) 792-2555
Edward J. Roach, Treasurer
================================================================================
