<PAGE> 1
CHESTNUT STREET EXCHANGE FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
ROBERT R. FORTUNE
Chairman and President
August 2, 2000
Fellow Partner:
Our Fund earned $1.68 per share of net investment income in the six months
ended June 30, 2000. Earnings in the same period of 1999 were $1.76 per share.
As I noted in my last letter to you, the reduction in net investment income is
primarily attributable to reduced dividend income. Philip Morris Cos. stock,
which paid a large dividend, was sold in 1999 because of deteriorating
fundamentals. Also, portfolio additions were made where growth is emphasized but
dividends are not currently being paid.
After providing for the $0.85 per share distribution to partners of record
on June 29, 2000, the net asset value per partnership share at June 30, 2000 was
$409.76, again a record quarter-end high.
Mr. G. Willing Pepper, a Managing General Partner since inception of the
Fund, retired in June 2000. We thank him for his long and faithful service.
Since our last report the following securities were sold, as explained in
the Adviser's letter:
<TABLE>
<CAPTION>
SHARES SHARES
------ ------
<C> <S> <C> <C>
53,400 Alltel Corp. 97,500 Hershey Foods Corp.
45,130 Armstrong Holdings, Inc. 17,100 Lowe's Companies, Inc.
49,826 BANC ONE CORPORATION 35,000 Staples, Inc.
20,795 Burlington Resources, Inc. 61,600 WORLDCOM, Inc.
</TABLE>
The holding of Atlantic Richfield Co. was replaced by BP Amoco, PLC
pursuant to a merger. Hewlett-Packard Company distributed shares of Agilent
Technologies, Inc. and Baxter International, Inc., distributed shares of Edwards
Lifesciences Corp. Stock splits increased the shares in American Express Co.,
General Electric Co. and Motorola, Incorporated.
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
Volatility was once again the overriding story of domestic equity markets
during the second quarter of 2000. The Russell 3000 Index, a gauge of the broad
US market, finished the quarter down 3.5% yet is still up 1.0% year to date.
Continued interest rate concerns and the potential impact of recent rate hikes
on corporate earnings kept many investors on the sidelines. Lower trading
volumes during the quarter were a major contributor to the wild market swings.
Leading economic indicators began to show signs late in the quarter that
interest rate increases by the Federal Reserve are having their desired effect
in slowing down the economy. A hoped-for soft landing may lead to renewed
investor optimism that an end to the increases is near.
Health care stocks led the market during the quarter with a 27.8% return in
the S&P 500 Index; the Fund's significant overweight in this sector helped
performance. This performance is in sharp contrast with the sector's last place
finish among the 12 industry sectors for calendar year 1999. The consumer
staples sector also saw a reversal of fortunes, moving from the worst first
quarter of 2000 sector to the second best performing sector during the second
quarter with a 12.6% gain. Technology stocks within the S&P 500 dropped 7.0% as
investors continued to be more cautious about names with extended P/E ratios and
negative earnings. The basic materials sector, down 12.7%, was the S&P 500's
worst performer in the quarter; the Fund's modest overweight in this sector hurt
performance.
Large cap stocks slightly outperformed small caps as the Russell 1000 Index
finished the quarter down 3.4%, just ahead of the -3.8% return posted by the
Russell 2000. Small caps closed the performance gap during June, as the Russell
2000 returned 8.7% versus 2.6% for the large caps. Style was a factor in the
small cap market during the quarter. The Russell 2000 Value Index handily
outperformed its growth counterpart, returning 2.0% versus a -7.4% return for
the Russell 2000 Growth Index. In the large cap universe, however, growth
outperformed value as the Russell 1000 Growth Index was down only 2.7% for the
quarter versus the -4.7% return for the Value Index.
The Fund has both growth and value characteristics. The stocks within the
Fund show revenue and earnings growth of 10% and 26% versus the S&P's 6% and
18%, respectively, over the last twelve months, which are growth
characteristics. However the stocks in the Fund trade at a discount to the
market on average and yield more than the market, which are value
characteristics. Overall in the second quarter, the Fund benefited from the
relatively better performance of larger growth stocks versus larger value
stocks.
Fund-specific negative developments in two telecommunications stocks and
the severe underperformance which has characterized the retail sector over the
last three quarters recently combined to create losses in several of the Fund's
holdings. The Fund's investment manager took advantage of the opportunity to use
these losses to offset the gains in some long term Fund holdings which, in the
judgment of the Fund's investment manager, no longer offer growth or positive
performance characteristics. Thus the Fund liquidated its holdings in Alltel,
Armstrong Holdings, BANC ONE, Burlington Resources, Hershey Foods, Lowe's
Companies and Staples and significantly reduced its holdings in WORLDCOM during
the second quarter.
2
<PAGE> 3
INVESTMENT ADVISER'S REPORT (CONTINUED)
PERFORMANCE SUMMARY
<TABLE>
<CAPTION>
CHESTNUT STREET DJIA S&P 500
EXCHANGE FUND INDEX INDEX
--------------- -------- --------
<S> <C> <C> <C>
2nd Quarter..................................... 2.38% (0.59)% (2.66)%
1 Year.......................................... 11.26% 0.10% 7.38%
3 Years......................................... 14.49% 13.99% 19.74%
5 Years......................................... 19.78% 21.13% 23.89%
10 Years........................................ 17.27% 16.99% 17.83%
Inception**
Annualized.................................... 16.00% 14.95% 15.74%
Cumulative.................................... 3,213.49% 2,541.63% 3,003.68%
</TABLE>
**Inception December 29, 1976
Returns are as of June 30, 2000
August 1, 2000 BLACKROCK INSTITUTIONAL MANAGEMENT CORPORATION
3
<PAGE> 4
CHESTNUT STREET EXCHANGE FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENT OF NET ASSETS
JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
----------- ------------
<C> <S> <C>
COMMON STOCKS--96.0%
BASICS--3.9 %
193,400 Air Products & Chemicals,
Inc. ................... $ 5,959,138
208,000 Cabot Corporation......... 5,668,000
49,638 Consolidated Papers,
Inc. ................... 1,814,889
67,148 Crown Cork & Seal Company,
Inc. ................... 1,007,220
55,033 Westvaco Corp. ........... 1,365,506
45,830 Weyerhaeuser Company...... 1,970,690
------------
17,785,443
------------
CAPITAL EQUIPMENT--6.9%
202,185 Emerson Electric
Company................. 12,206,919
384,000 General Electric Co. ..... 19,584,000
------------
31,790,919
------------
CONSUMER CYCLICALS--4.9%
204,000 Disney (Walt) Company..... 7,917,750
50,647 Dun & Bradstreet
Corporation............. 1,449,770
61,948 Genuine Parts Co. ........ 1,238,960
68,416 Harland (John H.) Co. .... 1,021,964
202,468 McDonald's Corporation.... 6,668,790
52,000 Minnesota Mining &
Manufacturing Company... 4,290,000
------------
22,587,234
------------
ENERGY--3.0%
44,280 BP Amoco, Plc, ADR........ 2,504,588
77,648 Exxon Mobil Corp. ........ 6,100,221
60,432 Schlumberger, Ltd. ....... 4,509,738
11,699 Transocean Sedco Forex,
Inc. ................... 625,165
------------
13,739,712
------------
FINANCIAL--10.8%
131,790 American Express Co. ..... 6,869,554
208,286 Bank Of America Corp. .... 8,956,298
118,953 *Cendant Corp. ........... 1,665,342
36,084 CIGNA Corp. .............. 3,373,854
70,000 Fannie Mae................ 3,653,125
97,200 First Union Corp. ........ 2,411,775
58,176 Marsh & McLennan
Companies, Inc. ........ 6,075,756
40,000 Morgan (J.P.) Co.,
Inc. ................... 4,405,000
314,532 Wells Fargo & Co. ........ 12,188,115
------------
49,598,819
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
----------- ------------
<C> <S> <C>
HEALTHCARE--19.6%
243,928 Abbott Laboratories,
Inc. ................... $ 10,870,042
44,000 Aetna, Inc. .............. 2,824,250
39,177 Baxter International,
Inc. ................... 2,754,633
7,835 *Edwards Lifesciences
Corp. .................. 149,844
96,599 IMS Health, Inc. ......... 1,738,782
379,208 Johnson & Johnson, Inc. .. 38,631,815
407,990 Merck & Company, Inc. .... 31,262,234
28,696 Smithkline Beecham, Plc,
ADR..................... 1,870,621
------------
90,102,221
------------
RETAIL--1.9%
116,772 Albertson's, Inc. ........ 3,882,669
117,200 CVS Corp. ................ 4,688,000
------------
8,570,669
------------
STAPLES--3.5%
283,411 Coca Cola (The) Company... 16,278,419
------------
TECHNOLOGY--38.6%
17,008 *Agilent Technologies,
Inc. ................... 1,254,340
12,577 *Gartner Group, Inc. Class
B....................... 124,198
44,596 Hewlett-Packard Company... 5,568,926
41,884 International Business
Machines Corporation.... 4,588,916
1,042,946 Intel Corp. .............. 139,428,843
84,260 Lucent Technologies,
Inc. ................... 4,992,405
55,400 *Microsoft Corp. ......... 4,432,000
357,354 Motorola, Incorporated.... 10,385,601
138,212 Tyco International,
Ltd. ................... 6,547,794
------------
177,323,023
------------
TRANSPORTATION--0.9%
119,796 Burlington Northern Santa
Fe Corp. ............... 2,747,821
40,000 Union Pacific Corp. ...... 1,487,500
------------
4,235,321
------------
UTILITIES--1.9%
124,355 GTE Corp. ................ 7,741,099
24,200 *WORLDCOM, Inc. .......... 1,110,175
------------
8,851,274
------------
Total Common Stocks
(Cost:
$38,064,596)............ 440,863,052
------------
</TABLE>
See Accompanying Notes to Financial Statements.
4
<PAGE> 5
STATEMENT OF NET ASSETS (CONCLUDED)
<TABLE>
<CAPTION>
PAR VALUE
----------- ------------
<C> <S> <C>
SHORT-TERM OBLIGATIONS--4.1%
$19,070,000 Federal Home Loan Mortgage
Corp. Discount Note
07/03/00, 6.6% (Cost:
$19,063,039)............ $ 19,063,039
------------
TOTAL INVESTMENT IN SECURITIES
(Cost: $57,127,635)............ 100.1% 459,926,091
Distributions payable........... (0.4%) (1,909,854)
Other assets in excess of other
liabilities....................... 0.3% 1,394,541
----- -------------
NET ASSETS (Applicable to
1,121,168 partnership
shares outstanding)....... 100.0% $459,410,778
===== ============
NET ASSET VALUE PER SHARE............... $ 409.76
============
</TABLE>
<TABLE>
<CAPTION>
PAR VALUE
----------- ------------
<C> <S> <C>
NET ASSETS APPLICABLE TO SHARES OWNED BY:
Limited partners (1,116,660 shares)... $457,563,576
Managing general partners (4,508
shares)................................. 1,847,202
------------
Total net assets (1,121,168 shares)... $459,410,778
============
</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, 2000
(UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends............................... $ 2,487,583
Interest................................ 220,357
-----------
Total investment income............. 2,707,940
-----------
EXPENSES
Investment advisory fee................. 701,634
Managing general partners' compensation
and officer's salary.................. 39,530
Legal................................... 22,439
Audit................................... 19,512
Custodian............................... 11,734
Transfer agent.......................... 10,523
Miscellaneous expenses.................. 10,423
Printing................................ 8,377
Insurance............................... 3,636
-----------
Total expenses...................... 827,808
-----------
Net investment income............... 1,880,132
-----------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS:
Realized gain from security
transactions: distributed upon
redemption of partnership shares...... 8,098,408
Realized loss on investment securities
not distributed to partnership
shares................................ (807,688)
Unrealized appreciation of
investments:
Beginning of period..... $365,102,179
End of period........... 402,798,455
------------
37,696,276
-----------
Net realized and unrealized gain
on investments.................. 44,986,996
-----------
Net increase in net assets resulting
from operations..................... $46,867,128
===========
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 2000 DECEMBER 31,
(UNAUDITED) 1999
------------- ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.. $ 1,880,132 $ 4,200,405
Net realized
gain/(loss) from
security transactions
(for federal income
tax purposes net loss
is $17,054 (in 2000)
and net gain is
$4,251,255 (in
1999)................ (807,688) 4,102,369
Excess of market value
over book value of
securities
distributed upon
redemption of
partnership shares... 8,098,408 10,195,920
Federal income tax on
realized gains not
distributed to
partnership shares... 0 (1,487,939)
Increase in unrealized
appreciation of
investments.......... 37,696,276 13,330,772
------------ ------------
Increase in net assets
resulting from
operations........... 46,867,128 30,341,527
------------ ------------
DISTRIBUTIONS TO PARTNERS
FROM:
Net investment
income............... (1,909,854) (4,210,357)
Net realized gains..... 0 (63,747)
------------ ------------
Total distributions to
partners............. (1,909,854) (4,274,104)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Net asset value of 643
and 1,058 shares
issued in lieu of
cash distributions... 252,816 375,854
Cost of 22,171 and
35,352 shares
repurchased.......... (8,403,150) (12,858,304)
------------ ------------
Decrease in net assets
from capital share
transactions......... (8,150,334) (12,482,450)
------------ ------------
Total increase in net
assets............... 36,806,940 13,584,973
NET ASSETS:
Beginning of period.... 422,603,838 409,018,865
------------ ------------
End of period.......... $459,410,778 $422,603,838
============ ============
</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, YEARS ENDED DECEMBER 31,
2000 ----------------------------------------------------
(UNAUDITED) 1999 1998 1997 1996 1995
----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period......................... $ 369.83 $ 347.51 $ 293.03 $ 242.91 $ 194.26 $ 144.43
-------- -------- -------- -------- -------- --------
Income From Investment
Operations:
Net investment income.......... 1.68 3.64 3.76 3.29 3.36 3.22
Net gains on securities (both
realized and unrealized)..... 39.95 22.39 54.49 50.27 51.18 49.82
-------- -------- -------- -------- -------- --------
Total from investment
operations.............. 41.63 26.03 58.25 53.56 54.54 53.04
-------- -------- -------- -------- -------- --------
Less Distributions:
From net investment income..... (1.70) (3.65) (3.77) (3.28) (3.36) (3.21)
From realized gains............ 0.00 (0.06) 0.00 (0.16) (2.53) 0.00
-------- -------- -------- -------- -------- --------
Total distributions....... (1.70) (3.71) (3.77) (3.44) (5.89) (3.21)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period... $ 409.76 $ 369.83 $ 347.51 $ 293.03 $ 242.91 $ 194.26
======== ======== ======== ======== ======== ========
Total Return..................... 22.52%* 7.52% 20.25% 22.11% 28.09% 36.88%
Ratios/Supplemental Data:
Net Assets, End of Period
(000's)...................... $459,411 $422,604 $409,019 $351,582 $303,195 $251,995
Ratios to average net assets:
Operating expenses........... 0.38%* 0.38% 0.38% 0.50% 0.51% 0.52%
Net investment income........ 0.87%* 1.00% 1.18% 1.17% 1.55% 1.84%
Portfolio Turnover Rate........ 0.00% 2.48% 0.76% 1.26% 3.92% 0.00%
</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, 2000. 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, shareholders will be entitles to a
proportionate credit of such tax payments, and their basis for the 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.
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 date 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 an investment 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 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.
8
<PAGE> 9
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
(C) The aggregate cost of investments for federal income tax purposes at June
30, 2000 was $48,774,806. The aggregate gross unrealized appreciation
(depreciation) for all securities is as follows: excess of value over tax
cost was $411,266,235; excess of tax cost over value was ($114,950).
(D) For the six months ended June 30, 2000 purchases and sales of investment
securities (Excluding short-term obligations) were $0.00 and $15,135,571,
respectively.
(E) At June 30, 2000, net assets consisted of:
<TABLE>
<S> <C>
Overdistribution of net investment income................... $ (33,953)
Net unrealized appreciation of investments.................. 402,798,455
Other capital--paid-in or reinvested........................ 56,646,276
------------
$459,410,778
============
</TABLE>
9
<PAGE> 10
---------------------------------------------------
---------------------------------------------------
MANAGING GENERAL PARTNERS
Richard C. Caldwell
Robert R. Fortune
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, 2000
Chestnut Street Exchange
Fund
400 Bellevue Parkway
Wilmington, Delaware 19809
(302) 792-2555
Edward J. Roach, Treasurer
---------------------------------------------------
---------------------------------------------------
