<PAGE> 1
CHESTNUT STREET EXCHANGE FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
ROBERT R. FORTUNE
Chairman and President
August 2, 1999
Fellow Partner:
Our Fund earned $1.76 per share of net investment income in the six months
ended June 30, 1999. Earnings in the same period of 1998 were $1.82 per share.
The lower earnings per share results in part from (1) the replacement of higher
dividend earning stocks lost through corporate acquisitions by stocks considered
to have larger growth potential and (2) higher investment management fees,
linked to the higher market value of the portfolio.
No capital gains were realized in the first six months of 1999.
After providing for the $0.85 per share distribution to partners of record
on June 29, 1999, the net asset value per partnership share, as shown in the
enclosed report, was $371.00, another record quarter-end high.
Since our last report AMP, Inc. merged into Tyco International, Inc. Stock
splits added the following shares to the portfolio: 42,130 shares of Lucent
Technologies, Inc., 535,566 shares of Intel Corp., and 20,942 shares of
International Business Machines Corporation.
Steven P. Ralston, who joined BlackRock Financial Management in 1998, has
become co-manager of the Fund's portfolio. Mr. Ralston is a Chartered Financial
Analyst and has extensive experience with varied financial institutions.
Your comments or questions about Chestnut Street Exchange Fund are
welcomed.
Yours sincerely,
Signature
Robert R. Fortune
<PAGE> 2
INVESTMENT ADVISER'S REPORT
US MARKET OVERVIEW
US equity markets turned in strong positive returns once again during the
second quarter, despite higher interest rates. Healthier markets throughout the
world and strong domestic economic news combined to support the U.S. equity
markets. Early in the second quarter, higher than expected producer and consumer
price data, together with tight labor market conditions and increased demand
from foreign markets, led to inflationary fears. In June, the Federal Reserve
boosted interest rates by 0.25% and stated that the bias has moved away from
higher rates and is now neutral. The Fed's activity seems to have quelled
inflationary fears for the present time and to have created renewed confidence
in both the economy and equity securities.
The second quarter saw a distinct shift in market favor. Small cap stocks
(as measured by the Russell 2000 Growth index at 14.75% and the Russell 2000
Value index at 16.56%), which had been underperforming for well over a year,
outperformed large cap stocks (as measured by the Russell 1000 Growth index at
3.85% and the Russell 1000 Value index at 11.28%). Given the early inflationary
fears, investors may have believed that the significantly lower valuations seen
at the small end of the market would provide some protection. Increased
confidence in future economic growth also contributed to the renewed interest in
small caps. Finally, better than expected first quarter earnings reports by many
small companies moved them into a more favorable light.
Value stocks, which had lagged as investors focused on growth stocks, also
moved into the spotlight. While value stocks performance was most significant at
the larger end of the market, the trend held across all market capitalizations.
Fears of higher interest rates contributed here as well since value stocks
traditionally outperform in rising interest rate environments. Growth stocks,
particularly at the large end of the market, began the quarter with lofty
valuations. Fears of a less favorable economic environment led many investors to
shift their emphasis away from these names, leading to the underperformance of
growth stocks. Cyclical stocks within the value indices, including industrial
stocks such as those in the materials and processing and producer durables
sectors, were the best performing sectors.
The Fund's overweight in the best performing basics sector helped, as did
an overweight in the number two capital goods sector. Underweight in the number
three performing utilities sector hurt as did an overweight in the worst
performing staples sector.
2
<PAGE> 3
INVESTMENT ADVISER'S REPORT (CONTINUED)
PERFORMANCE SUMMARY
<TABLE>
<CAPTION>
DJIA S&P 500
CSEF INDEX INDEX
-------- -------- --------
<S> <C> <C> <C>
2nd Quarter 1999..................................... 6.26% 12.54% 6.92%
1st Half 1999........................................ 7.26% 20.44% 12.22%
1 Year............................................... 17.41% 24.66% 22.70%
3 Years.............................................. 22.13% 27.04% 29.16%
5 Years.............................................. 23.99% 27.48% 27.93%
10 Years............................................. 17.89% 19.39% 18.78%
Inception**
Annualized......................................... 16.20% 15.63% 16.13%
Cumulative......................................... 2,871.00% 2,527.20% 2,790.45%
</TABLE>
Inception December 29, 1976
**Returns are as of December 31, 1998
The Adviser has adopted a new performance methodology recommended by the
Association for Investment Management and Research, which is the industry
standard. This change in methodology produces different numbers for performance
but the comparative performance is unaffected.
July 26, 1999 BLACKROCK INSTITUTIONAL MANAGEMENT CORPORATION
3
<PAGE> 4
CHESTNUT STREET EXCHANGE FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENT OF NET ASSETS
JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ------------
<C> <S> <C>
COMMON STOCKS--99.4%
AUTO & AUTO PARTS--0.5 %
61,948 Genuine Parts Company..... $ 2,168,180
------------
BANKS--9.8 %
49,826 BANC ONE CORPORATION...... 2,967,761
208,286 BankAmerica Corp. ........ 15,269,967
97,200 First Union Corp. ........ 4,568,400
40,000 Morgan (J.P.) Co.,
Inc. ................... 5,620,000
314,532 Wells Fargo & Co. ........ 13,446,243
------------
41,872,371
------------
BUILDING MATERIALS &
FOREST PRODUCTS--1.6%
45,130 Armstrong World
Industries, Inc. ....... 2,609,078
17,100 Lowe's Companies, Inc. ... 969,356
45,830 Weyerhaeuser Company...... 3,150,813
------------
6,729,247
------------
BUSINESS PRODUCTS &
SERVICES--1.9%
50,647 Dun & Bradstreet
Corporation............. 1,794,803
68,416 Harland (John H.) Co. .... 1,364,044
52,000 Minnesota Mining &
Manufacturing Company... 4,520,750
16,882 Nielsen Media Research,
Inc. ................... 493,798
------------
8,173,395
------------
CHEMICALS--3.0%
193,400 Air Products & Chemicals,
Inc. ................... 7,784,350
208,000 Cabot Corporation......... 5,031,000
------------
12,815,350
------------
CONSUMER NON-DURABLES &
SERVICES--4.7%
118,953* Cendant Corp. ............ 2,438,537
283,411 Coca-Cola (The) Company... 17,713,188
------------
20,151,725
------------
CONTAINERS--0.4%
67,148 Crown Cork & Seal Company,
Inc. ................... 1,913,718
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ------------
<C> <S> <C>
DRUGS & MEDICAL--21.5%
243,928 Abbott Laboratories,
Inc..................... $ 11,098,724
39,177 Baxter International,
Inc. ................... 2,375,106
96,599 IMS Health, Inc. ......... 3,018,719
379,597 Johnson & Johnson,
Inc. ................... 37,200,506
407,990 Merck & Company, Inc. .... 30,191,260
124,000 SmithKline Beecham p.l.c.
ADR..................... 8,191,750
------------
92,076,065
------------
ELECTRICAL EQUIPMENT--6.3%
202,185 Emerson Electric
Company................. 12,712,382
128,000 General Electric Company.. 14,464,000
------------
27,176,382
------------
ELECTRONICS--25.1%
44,596 Hewlett-Packard Company... 4,481,898
1,063,833 Intel Corp. .............. 63,298,064
84,260 Lucent Technologies,
Inc. ................... 5,682,284
55,400* Microsoft Corp. .......... 4,996,388
119,118 Motorola, Incorporated.... 11,286,431
159,207 Raytheon Company, Class
B....................... 11,204,192
69,106 Tyco International,
Ltd. ................... 6,547,793
------------
107,497,050
------------
ENTERTAINMENT--1.5%
204,000 Walt Disney Company....... 6,285,750
------------
FOOD PROCESSING &
DISTRIBUTION--3.0%
97,500 Hershey Foods Corp. ...... 5,789,062
174,000 Philip Morris Cos.,
Inc. ................... 6,992,625
------------
12,781,687
------------
INSURANCE &
FINANCIAL--5.1%
44,000 Aetna, Inc. .............. 3,935,250
43,930 American Express
Company................. 5,716,391
36,084 CIGNA Corp................ 3,211,476
70,000 Fannie Mae................ 4,786,250
58,176 Marsh & McLennan
Companies, Inc.......... 4,392,288
------------
22,041,655
------------
</TABLE>
See Accompanying Notes to Financial Statements
4
<PAGE> 5
STATEMENT OF NET ASSETS (CONCLUDED)
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ------------
<C> <S> <C>
COMMON STOCKS (CONTINUED)
LODGING & RESTAURANT--1.9%
202,468 McDonald's Corporation.... $ 8,364,459
------------
NATURAL GAS
TRANSMISSION--0.1%
24,000 Tenneco, Inc. ............ 573,000
------------
OFFICE EQUIPMENT--1.3%
41,884.... International Business
Machines Corporation.... 5,413,507
------------
PAPER--0.7%
49,638 Consolidated Papers,
Inc. ................... 1,327,816
55,432 Westvaco Corp. ........... 1,607,528
------------
2,935,344
------------
PETROLEUM--2.1%
27,000 Atlantic Richfield Co. ... 2,256,187
20,795 Burlington Resources,
Inc. ................... 899,384
77,648 Exxon Corp. .............. 5,988,602
------------
9,144,173
------------
PETROLEUM EQUIPMENT &
SERVICES--0.9%
60,432 Schlumberger, Ltd. ....... 3,848,763
------------
POLLUTION CONTROL--1.1%
114,556 Browning Ferris
Industries, Inc. ....... 4,925,908
------------
RETAIL--GENERAL &
SPECIALTY--3.1%
116,772 Albertson's, Inc. ........ 6,021,056
117,200 CVS Corp. ................ 5,991,850
35,000* Staples, Inc. ............ 1,082,813
------------
13,095,719
------------
TELEPHONE UTILITIES--2.4%
124,355 GTE Corp. ................ 9,419,891
12,500* MCI WORLDCOM, Inc. ....... 1,078,125
------------
10,498,016
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ------------
<C> <S> <C>
TRANSPORTATION--1.6%
119,796 Burlington Northern,
Inc. ................... $ 3,713,676
40,000 Union Pacific Corp. ...... 2,332,500
------------
6,046,176
------------
Total Common Stocks
(Cost
$53,447,921)............ 426,527,640
------------
PAR
- ----------
<C> <S> <C>
SHORT-TERM OBLIGATIONS--0.7%
$3,000,000 Federal Home Loan Bank
Discount Note, 4.6%
07/01/99 (Cost
$3,000,000)............. 3,000,000
------------
TOTAL INVESTMENT IN SECURITIES
(Cost $56,447,921).............100.1% 429,527,640
Distributions payable........... (0.2)% (983,118)
Other assets in excess of other
liabilities...................... 0.1% 554,174
----- ------------
NET ASSETS (Applicable to 1,156,592
partnership shares
outstanding).....................100.0% $429,098,696
===== ============
NET ASSET VALUE PER SHARE.............. $ 371.00
============
NET ASSETS APPLICABLE TO SHARES OWNED BY:
</TABLE>
<TABLE>
SHARES VALUE
- ---------- ------------
<C> <S> <C>
Limited partners (1,151,175 shares) $427,089,150
Managing general partners (5,417
shares)................................ 2,009,546
------------
Total net assets (1,156,592 shares) $429,098,696
============
</TABLE>
- ---------------
* Non-Income Producing
See Accompanying Notes to Financial Statements
5
<PAGE> 6
CHESTNUT STREET EXCHANGE FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends............................... $ 2,819,394
Interest................................ 77,842
-----------
Total income........................ 2,897,236
-----------
Expenses:
Investment advisory fee................. 669,061
Managing general partners' compensation
and officer's salary.................. 38,053
Legal................................... 22,028
Custodian fees.......................... 14,412
Audit................................... 15,180
Transfer agent.......................... 9,665
Insurance............................... 550
Printing................................ 8,406
Miscellaneous........................... 9,802
-----------
Total expenses...................... 787,157
-----------
Net investment income............. 2,110,079
-----------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS:
Realized gain from security
transactions: distributed upon
redemption of partnership shares...... 6,016,273
Unrealized appreciation of investments:
Beginning of period..... $351,771,407
End of period........... 373,079,719
------------
21,308,312
-----------
Net realized and unrealized gain
on investments.................. 27,324,585
-----------
Net increase in net assets resulting
from operations..................... $29,434,664
===========
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 1999 DECEMBER 31,
(UNAUDITED) 1998
------------- ------------
<S> <C> <C>
INCREASE IN NET ASSETS:
OPERATIONS:
Net investment income.. $ 2,110,079 $ 4,440,558
Net realized gain from
security transactions
(for federal income
tax purposes net gain
is $0 and
$3,538,300).......... 0 3,474,553
Excess of market value
over book value of
securities
distributed upon
redemption of
partnership shares... 6,016,273 5,281,796
Federal income tax on
realized gain not
distributed to
partnership shares... 0 (1,216,094)
Increase in unrealized
appreciation of
investments.......... 21,308,312 57,201,296
------------ ------------
Increase in net assets
resulting from
operations........... 29,434,664 69,182,109
------------ ------------
DISTRIBUTIONS TO PARTNERS
FROM:
Net investment
income............... (1,976,289) (4,453,148)
Net realized gains
(federal income tax
basis)............... (63,747) 0
------------ ------------
Total distributions to
partners............. (2,040,036) (4,453,148)
------------ ------------
CAPITAL SHARE
TRANSACTIONS:
Net asset value of 646
and 1,206 shares
subcribed or issued
in lieu of cash
distributions........ 225,903 365,991
Cost of 21,044 and
24,026 shares
repurchased.......... (7,540,700) (7,658,499)
------------ ------------
Decrease in net assets
from capital share
transactions......... (7,314,797) (7,292,508)
------------ ------------
Total increase in net
assets............... 20,079,831 57,436,453
NET ASSETS:
Beginning of period.... 409,018,865 351,582,412
------------ ------------
End of period.......... $429,098,696 $409,018,865
============ ============
</TABLE>
See Accompanying Notes to Financial Statements
6
<PAGE> 7
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,
1999 ----------------------------------------------------
(UNAUDITED) 1998 1997 1996 1995 1994
----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period......................... $ 347.51 $ 293.03 $ 242.91 $ 194.26 $ 144.43 $ 142.79
-------- -------- -------- -------- -------- --------
Income From Investment
Operations:
Net investment income.......... 1.76 3.76 3.29 3.36 3.22 3.07
Net gains on securities (both
realized and unrealized)..... 23.49 54.49 50.27 51.18 49.82 4.27
-------- -------- -------- -------- -------- --------
Total from investment
operations.............. 25.25 58.25 53.56 54.54 53.04 7.34
-------- -------- -------- -------- -------- --------
Less Distributions:
Distributions from net
investment income............ (1.70) (3.77) (3.28) (3.36) (3.21) (3.07)
Distributions from realized
gains (federal income tax
basis)....................... (0.06) 0.00 (0.16) (2.53) 0.00 (2.63)
-------- -------- -------- -------- -------- --------
Total distributions....... (1.76) (3.77) (3.44) (5.89) (3.21) (5.70)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period... $ 371.00 $ 347.51 $ 293.03 $ 242.91 $ 194.26 $ 144.43
======== ======== ======== ======== ======== ========
Total Return..................... 7.26% 20.25% 22.11% 28.09% 36.88% 5.19%
Ratios/Supplemental Data:
Net Assets, End of Period
(000's)...................... $429,099 $409,019 $351,582 $303,195 $251,995 $191,348
Ratios to average net assets:
Operating expenses........... 0.38%* 0.38% 0.50% 0.51% 0.52% 0.54%
Net investment income........ 1.02%* 1.18% 1.17% 1.55% 1.84% 2.11%
Portfolio Turnover Rate........ 0.00% 0.76% 1.26% 3.92% 0.00% 3.88%
</TABLE>
- ---------------
* Annualized
See Accompanying Notes to Financial Statements.
7
<PAGE> 8
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 close of
trading on June 30, 1999 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 ex-dividend date. It is the Fund's policy to continue to
comply with the requirements of the Internal Revenue Code applicable to
regulated investment companies and to make the requisite distribution of
taxable investment income and capital gains to its shareholders which will
relieve it from all or substantially all federal income and excise taxes.
However, commencing in 1998, the Fund does not intend to distribute
long-term capital gains, but expects instead to retain such gains
($3,474,553 in 1998), if any, and to pay the corporate income tax rate then
applicable to net long-term capital gains (35% in 1998). On the last day of
the year, common shareholders will be entitled to a proportionate credit of
such tax payments, and their basis for the common shares will be increased
by the amount of the undistributed gains less the tax paid by the Fund. The
1998 accrued Federal income tax of $1,216,094 was paid during the period
ended June 30, 1999.
In a variance from the above-stated policy, additional 1998 capital gains of
$63,747, equivalent to $0.06 per share, were distributed to the partners (or
reinvested if applicable) and treated as taxable in 1999.
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 known as 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, Inc. ("BFM"), a
majority-owned subsidiary of PNC Bank, assumed the rights and obligations of
8
<PAGE> 9
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
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.
(C) The aggregate cost of investments for federal income tax purposes at June
30, 1999 was $45,979,394. The aggregate unrealized appreciation for all
securities was $383,548,246.
(D) For the six month period ended June 30, 1999, purchases of investment
securities (Excluding short-term obligations) were $3,034,632. There were no
sales of investment securities during the period.
(E) At June 30, 1999, net assets consisted of:
<TABLE>
<S> <C>
Undistributed net investment income......................... $ 139,481
Net unrealized appreciation on investments.................. 373,079,719
Other capital--paid-in or reinvested........................ 55,879,496
------------
$429,098,696
============
</TABLE>
9
<PAGE> 10
- ---------------------------------------------------
- ---------------------------------------------------
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, 1999
CHESTNUT STREET EXCHANGE
Fund
400 Bellevue Parkway
Wilmington, Delaware 19809
(302) 792-2555
Edward J. Roach, Treasurer
- ---------------------------------------------------
- ---------------------------------------------------
