<PAGE> 1
CHESTNUT STREET EXCHANGE FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
ROBERT R. FORTUNE
Chairman and President
February 5, 2000
Fellow Partner:
Enclosed is the Annual Report of Chestnut Street Exchange Fund for the year
ended December 31, 1999.
Our Fund earned $3.64 per share from net investment income for a share
outstanding throughout 1999, compared to $3.76 per share earned in 1998.
Expenses were somewhat higher in 1999, principally the advisory fee, which is
tied to the value of the portfolio. (See Note B to the financial statements).
Total distributions from net investment income, applicable to 1999, amounted to
$3.65 per share, including $1.10 per share distributed in January 2000. A
distribution of 1998 capital gains of approximately $.06 per share was also made
in 1999.
Long-term capital gains (federal income tax basis) realized in 1999
amounted to $3.72 per share. It is our policy, effective when the Fund adopted
regulated investment company status for federal income tax purposes as of
January 1, 1998, not to make cash distributions of capital gains. Instead, the
gains would be allocated to partners of record at year-end, together with a tax
credit representing the federal tax on the gains paid by the Fund. The tax basis
of each partner's interest in the Fund is increased by the retained capital gain
and reduced by the tax credit. Although capital gains must still be reported as
income in a partner's federal income tax return, the federal tax credit for the
taxes paid by the Fund can be used to reduce any income tax due.
After providing for the January 2000 distribution, the net asset value per
partnership share at the end of 1999 was $369.83.
Since our last report the shares of Philip Morris Cos., Inc. were sold as
were the shares of Nielsen Media Research, Inc.; the latter because of the
pending acquisition of that company. Stock splits added 28,600 shares of MCI
WORLDCOM, Inc. and 69,106 shares of Tyco International, Ltd. Schlumberger, Ltd.
spun off 11,700 shares of TransOcean Sedco Forex, Inc. and 53,400 shares of
Alltel Corp. were purchased.
Data on the performance of our Fund since inception and comparisons to
leading stock market indices appear in the accompanying Investment Adviser's
Report.
Your comments or questions concerning Chestnut Street Exchange Fund are
welcomed.
Yours sincerely,
/s/ Robert R. Fortune
Robert R. Fortune
<PAGE> 2
INVESTMENT ADVISER'S REPORT
US MARKET OVERVIEW
After a brief pause during the third quarter, US stocks regained their
momentum during the last three months of 1999. The Russell 3000 Index,
representing the broad market, jumped 16.2%, resulting in a 20.9% increase for
the year. However, not all segments of the market participated in the rally.
While technology stocks within the Russell 3000 gained 38.2% during the fourth
quarter alone (78.2% for the year), traditional value sectors such as consumer
staples and transportation lost value during the year; financial stocks were
relatively flat. The Russell 3000 Growth Index return for the year of 33.8% was
more than five times that of the Russell 3000 Value Index, up only 6.7%.
The Federal Reserve's recent rate hikes are one reason for the growth
versus value performance disparity. Higher interest rates have had a
disproportionate impact on finance stocks, a major component of the value
universe. In addition, an active IPO market, again dominated by technology and
Internet stocks, attracted investors' cash and media attention. Market
participants demonstrated a willingness to pay for growth and earnings momentum
as well as a strong appetite for risk. Among the few bright spots in the value
universe were energy stocks, benefiting from higher energy prices and strong
demand, and the basic materials sector, particularly at the large end of the
market.
Style was a bigger determinant of performance than size during both the
quarter and the year, as growth outperformed value at all sizes. Small cap
stocks held a 35 basis point advantage over large caps for the year as measured
by the Russell 2000 and 1000 Indices, respectively, for the first time in six
years, mainly due, predictably, to the larger concentration of tech stocks at
the smaller end of the market. The technology sector is now the largest
component of the Russell 2000 Index, comprising 26.9% of the total. It was mid
cap stocks, however, that were the best performing segment of the growth
universe over the quarter and the year. The mid cap universe is heavily weighted
towards companies participating in the "new age" economy created by the
emergence of the Internet. On the value side, larger companies continued to
outperform their small and mid cap counterparts.
PERFORMANCE SUMMARY
<TABLE>
<CAPTION>
CSEF DJIA INDEX S&P 500 INDEX
-------- ---------- -------------
<S> <C> <C> <C>
1 Year......................................... 7.52% 22.20% 21.04%
3 Years........................................ 16.35% 23.37% 27.56%
5 Years........................................ 22.55% 27.08% 28.56%
10 Years....................................... 16.77% 18.38% 18.21%
Inception**
Annualized................................... 15.83% 15.57% 16.81%
Cumulative................................... 2878.10% 2687.34% 3050.33%
</TABLE>
** Inception December 29, 1976
Returns are as of December 31, 1999
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.
January 28, 2000 BLACKROCK INSTITUTIONAL MANAGEMENT CORPORATION
2
<PAGE> 3
CHESTNUT STREET EXCHANGE FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENT OF NET ASSETS
DECEMBER 31, 1999
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ------------
<C> <S> <C>
COMMON STOCKS--98.7%
AUTO & AUTO PARTS--0.4%
61,948 Genuine Parts Company..... $ 1,537,085
------------
BANKS--7.8%
49,826 BANC ONE CORPORATION...... 1,597,546
208,286 BankAmerica Corp.......... 10,453,354
97,200 First Union Corp.......... 3,189,375
40,000 Morgan (J.P.) Co., Inc.... 5,065,000
314,532 Wells Fargo & Co.......... 12,718,888
------------
33,024,163
------------
BUILDING MATERIALS &
FOREST PRODUCTS--1.4%
45,130 Armstrong World
Industries, Inc. ....... 1,506,214
17,100 Lowe's Companies, Inc. ... 1,021,725
45,830 Weyerhaeuser Company...... 3,291,167
------------
5,819,106
------------
BUSINESS PRODUCTS &
SERVICES--1.8%
50,647 Dun & Bradstreet
Corporation............. 1,494,087
68,416 Harland (John H.) Co...... 1,252,868
52,000 Minnesota Mining &
Manufacturing Company... 5,089,500
------------
7,836,455
------------
CHEMICALS--2.5%
193,400 Air Products &
Chemicals, Inc.......... 6,490,988
208,000 Cabot Corporation......... 4,238,000
------------
10,728,988
------------
CONSUMER NON-DURABLES &
SERVICES--4.6%
118,953* Cendant Corp. ............ 3,159,689
283,411 Coca-Cola (The) Company... 16,508,691
------------
19,668,380
------------
CONTAINERS--0.4%
67,148 Crown Cork & Seal Company,
Inc..................... 1,502,437
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ------------
<C> <S> <C>
DRUGS & MEDICAL--19.9%
243,928 Abbott Laboratories,
Inc..................... $ 8,857,636
39,177 Baxter International,
Inc..................... 2,460,805
96,599 IMS Health, Inc........... 2,626,285
379,208 Johnson & Johnson, Inc.... 35,313,745
407,990 Merck & Company, Inc...... 27,360,829
124,000 SmithKline Beecham p.l.c.
ADR..................... 7,990,250
------------
84,609,550
------------
ELECTRICAL EQUIPMENT--7.4%
202,185 Emerson Electric
Company................. 11,600,364
128,000 General Electric
Company................. 19,808,000
------------
31,408,364
------------
ELECTRONICS--31.4%
53,400 Alltel Corp............... 4,415,513
44,596 Hewlett-Packard Company... 5,081,157
1,061,102 Intel Corp................ 87,341,958
84,260 Lucent Technologies,
Inc..................... 6,303,701
55,400* Microsoft Corp............ 6,467,950
119,118 Motorola, Incorporated.... 17,540,126
41,144 Raytheon Company, Class
B....................... 1,092,887
138,212 Tyco International,
Ltd..................... 5,372,991
------------
133,616,283
------------
ENTERTAINMENT--1.4%
204,000 Walt Disney Company....... 5,967,000
------------
FOOD PROCESSING &
DISTRIBUTION--1.1%
97,500 Hershey Foods Corp........ 4,631,250
------------
INFORMATION
TECHNOLOGY--0.1%
12,577* Gartner Group, Inc. Class
B....................... 173,720
------------
INSURANCE &
FINANCIAL--5.3%
44,000 Aetna, Inc................ 2,455,750
43,930 American Express
Company................. 7,303,363
36,084 CIGNA Corp................ 2,907,017
70,000 Fannie Mae................ 4,370,625
58,176 Marsh & McLennan
Companies, Inc.......... 5,566,716
------------
22,603,471
------------
</TABLE>
See Accompanying Notes to Financial Statements.
3
<PAGE> 4
STATEMENT OF NET ASSETS (CONCLUDED)
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ------------
<C> <S> <C>
COMMON STOCKS (CONTINUED)
LODGING & RESTAURANT--1.8%
202,468 McDonald's Corporation.... $ 8,161,991
------------
OFFICE EQUIPMENT--1.1%
41,884 International Business
Machines Corporation.... 4,523,472
------------
PAPER--0.8%
49,638 Consolidated Papers,
Inc. ................... 1,579,109
55,033 Westvaco Corp. ........... 1,795,452
------------
3,374,561
------------
PETROLEUM--2.3%
27,000 Atlantic Richfield Co. ... 2,335,500
20,795 Burlington Resources,
Inc. ................... 687,535
77,648 Exxon Mobil Corp. ........ 6,255,517
11,700 TransOcean Sedco Forex,
Inc. ................... 394,131
------------
9,672,683
------------
PETROLEUM EQUIPMENT &
SERVICES--0.8%
60,432 Schlumberger, Ltd. ....... 3,399,300
------------
RETAIL & SPECIALTY--2.2%
116,772 Albertson's, Inc. ........ 3,765,897
117,200 CVS Corp. ................ 4,680,675
35,000* Staples, Inc. ............ 726,250
------------
9,172,822
------------
TELEPHONE UTILITIES--3.1%
124,355 GTE Corp. ................ 8,774,800
85,800* MCI WORLDCOM, Inc. ....... 4,552,761
------------
13,327,561
------------
TRANSPORTATION--1.1%
119,796 Burlington Northern Santa
Fe Corp. ............... 2,905,052
40,000 Union Pacific Corp. ...... 1,745,000
------------
4,650,052
------------
Total Common Stocks
(Cost
$54,306,515)............ 419,408,694
------------
</TABLE>
<TABLE>
<CAPTION>
PAR VALUE
- ---------- ------------
<C> <S> <C>
SHORT-TERM OBLIGATIONS--1.3%
$1,700,000 Federal Home Loan Bank
Discount Note, 1.50%
01/3/00................. $ 1,699,859
------------
3,800,000 World Bank
Discount Note, 5.60%
01/18/00................ 3,789,951
------------
Total Short-Term
Obligations
(Cost $5,489,810)......... 5,489,810
------------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENT IN SECURITIES
(Cost $59,796,325)............. 100.5% 424,898,504
Distribution payable............. (0.3%) (1,256,987)
Other liabilities in excess of
other assets................... (0.2%) (1,037,679)
----- ------------
NET ASSETS (Applicable to
1,142,696 partnership shares
outstanding)................... 100.0% $422,603,838
===== ============
NET ASSET VALUE PER SHARE........ $ 369.83
============
NET ASSETS APPLICABLE TO SHARES
OWNED BY:
Limited partners (1,137,259
shares)........................ $420,593,070
Managing general partners
(5,437 shares)................. 2,010,768
------------
Total net assets (1,142,696
shares)........................ $422,603,838
============
</TABLE>
- ---------------
* Non-Income Producing
See Accompanying Notes to Financial Statements.
4
<PAGE> 5
CHESTNUT STREET EXCHANGE FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends............................... $ 5,598,767
Interest................................ 207,580
-----------
Total Income...................... 5,806,347
-----------
Expenses:
Investment advisory fee................. 1,363,401
Managing general partners' compensation
and officer's salary.................. 78,018
Legal................................... 44,713
Custodian fees.......................... 26,275
Audit................................... 34,906
Transfer Agent.......................... 20,304
Insurance............................... 1,109
Printing................................ 16,876
Miscellaneous........................... 20,340
-----------
Total Expenses...................... 1,605,942
-----------
Net Investment Income............. 4,200,405
-----------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS:
Realized gain from security
transactions: distributed upon
redemption of partnership shares...... 10,195,920
Realized gain on investment securities
not distributed to partnership
shares................................ 4,102,369
Unrealized appreciation of investments:
Beginning of year....... $351,771,407
End of year............. 365,102,179
------------
13,330,772
-----------
Net realized and unrealized gain
on investments.................. 27,629,061
Federal income tax on realized gain
not distributed to partnership
shares.............................. (1,487,939)
-----------
Net increase in net assets resulting
from operations..................... $30,341,527
===========
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
INCREASE IN NET ASSETS:
OPERATIONS:
Net investment income.. $ 4,200,405 $ 4,440,558
Net realized gain from
security transactions
(for federal income
tax purposes net gain
is $4,251,255 and
$3,538,300).......... 4,102,369 3,474,553
Excess of market value
over book value of
securities
distributed upon
redemption of
partnership shares... 10,195,920 5,281,796
Federal income tax on
realized gains not
distributed to
partnership shares... (1,487,939) (1,216,094)
Increase in unrealized
appreciation of
investments.......... 13,330,772 57,201,296
------------ ------------
Increase in net assets
resulting from
operations........... 30,341,527 69,182,109
------------ ------------
DISTRIBUTIONS TO PARTNERS
FROM:
Net investment income.. (4,210,357) (4,453,148)
Net realized gains..... (63,747) 0
------------ ------------
Total distributions to
partners............. (4,274,104) (4,453,148)
------------ ------------
CAPITAL SHARE
TRANSACTIONS:
Net asset value of
1,058 and 1,206
shares subscribed or
issued in lieu of
cash distributions... 375,854 365,991
Cost of 35,352 and
24,026 shares
repurchased.......... (12,858,304) (7,658,499)
------------ ------------
Decrease in net assets
from capital share
transactions......... (12,482,450) (7,292,508)
------------ ------------
Total increase in net
assets............... 13,584,973 57,436,453
NET ASSETS:
Beginning of year...... 409,018,865 351,582,412
------------ ------------
End of year............ $422,603,838 $409,018,865
============ ============
</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 YEAR)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year........... $ 347.51 $ 293.03 $ 242.91 $ 194.26 $ 144.43
-------- -------- -------- -------- --------
Income From Investment Operations:
Net investment income...................... 3.64 3.76 3.29 3.36 3.22
Net gains on securities (both realized and
unrealized).............................. 22.39 54.49 50.27 51.18 49.82
-------- -------- -------- -------- --------
Total from investment operations...... 26.03 58.25 53.56 54.54 53.04
-------- -------- -------- -------- --------
Less Distributions:
From net investment income................. (3.65) (3.77) (3.28) (3.36) (3.21)
From realized gains........................ (0.06) 0.00 (0.16) (2.53) 0.00
-------- -------- -------- -------- --------
Total distributions................... (3.71) (3.77) (3.44) (5.89) (3.21)
-------- -------- -------- -------- --------
Net Asset Value, End of Year................. $ 369.83 $ 347.51 $ 293.03 $ 242.91 $ 194.26
======== ======== ======== ======== ========
Total Return................................. 7.52% 20.25% 22.11% 28.09% 36.88%
Ratios/Supplemental Data:
Net Assets, End of Year (000's)............ $422,604 $409,019 $351,582 $303,195 $251,995
Ratios to average net assets:
Operating expenses....................... 0.38% 0.38% 0.50% 0.51% 0.52%
Net investment income.................... 1.00% 1.18% 1.17% 1.55% 1.84%
Portfolio Turnover Rate.................... 2.48% 0.76% 1.26% 3.92% 0.00%
</TABLE>
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 close of
trading on December 31, 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 will retain such gains ($4,251,255 in 1999), if
any, and pay the corporate income tax rate then applicable to net long-term
capital gains (35% in 1999). 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 undistributed gains less the tax paid by the Fund. Federal income
taxes of $1,487,939 were accrued for the year ended December 31, 1999.
In a variance from the above-stated policy of retention of gains, a capital
gain distribution of $63,747 representing additional 1998 capital gains and
equivalent to approximately $0.06 per share was paid (or reinvested if
applicable) in 1999 and reported 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. A new Advisory
Agreement, 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.
PNC Bank and BlackRock Institutional Management Corporation ("BIMC"), 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 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
(C) The aggregate cost of investments for federal income tax purposes at
December 31, 1999 was $50,363,410. The aggregate gross unrealized
appreciation (depreciation) for all securities is as follows: excess of
value over tax cost was $375,186,110; excess of tax cost over value was
($651,016).
(D) For the year ended December 31, 1999 purchases and sales of investment
securities (Excluding short-term obligations) were $11,188,067 and
$10,270,358, respectively.
(E) At December 31, 1999, net assets consisted of:
<TABLE>
<S> <C>
Net unrealized appreciation of investments............. $365,102,179
Other capital--paid-in or reinvested................... 57,501,659
------------
$422,603,838
============
</TABLE>
8
<PAGE> 9
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners
of Chestnut Street Exchange Fund:
In our opinion, the accompanying statement of net assets, and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Chestnut Street Exchange Fund (the "Fund") at December 31, 1999, 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 five years in the period then ended, in conformity with accounting
principles generally accepted in the United States. These financial statements
and financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits, which included confirmation of securities at December
31, 1999 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
2400 Eleven Penn Center
Philadelphia, Pennsylvania
January 28, 2000
9
<PAGE> 10
[This Page Intentionally Left Blank.]
<PAGE> 11
[This Page Intentionally Left Blank.]
<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, Inc.
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]
ANNUAL REPORT
DECEMBER 31, 1999
CHESTNUT STREET EXCHANGE
FUND
400 Bellevue Parkway
Wilmington, Delaware 19809
(302) 792-2555
Edward J. Roach, Treasurer
- ---------------------------------------------------
- ---------------------------------------------------
