UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-02631
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Chestnut Street Exchange Fund
--------------------------------------------------
(Exact name of registrant as specified in charter)
103 Bellevue Parkway
Wilmington, DE 19809
---------------------------------------------------
(Address of principal executive offices) (Zip code)
Edward J. Roach
Chestnut Street Exchange Fund
103 Bellevue Parkway
Wilmington, DE 19809
---------------------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code: (302) 791-1112
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Date of fiscal year end: December 31
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Date of reporting period: December 31, 2006
-----------------
Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. Section 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
CHESTNUT STREET EXCHANGE FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
David R. Wilmerding, Jr.
Chairman
February 1, 2007
Fellow Partner:
Enclosed is the Annual Report of Chestnut Street Exchange Fund for the year
ended December 31, 2006.
Our Fund earned $6.88 per share of net investment income for a share
outstanding throughout 2006, compared to $6.19 per share earned in 2005. The
increase in dividends paid by portfolio securities of over $358,000, minus a
small reduction in interest income and an increase in expenses distributed over
a smaller number of shares outstanding, account for the increase in per share
earnings in 2006. Increases in expenses are largely attributable to insurance
and the costs of the partners meeting.
After providing for the January 2007 distribution, the net asset value per
partnership share at December 31, 2006 was $377.68. The net asset value at
September 30, 2006, the date of our last report, was $367.62.
During the fourth quarter of 2006, a stock split by Emerson Electric Co.
added 90,556 shares and 7,191 shares of Idearc, Inc. were distributed by Verizon
Communications, Inc.
Additional information required by Securities and Exchange Commission
regulations is enclosed.
Data on the equity markets, on certain holdings and on the performance of
our Fund since inception, including 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- David R. Wilmerding, Jr.
David R. Wilmerding, Jr.
INVESTMENT ADVISER'S REPORT
U.S. EQUITY MARKET REVIEW
U.S. equity markets continued their steady advance from July lows to close
out 2006 on a very positive note. All broad indices appreciated substantially
during the fourth quarter, with the small cap Russell 2000(R) Index (+8.9%) once
again outperforming indices comprised of larger companies. The Dow Jones
Industrial Average rose 7.4%, hitting its all-time high during the period, and
the S&P 500(R) Index gained 6.7%. Corporate profit growth, significant share
buybacks, low interest rates and active private equity funds were all major
catalysts that contributed to the impressive gains generated by the US stock
markets. 2006 marks the fourth straight year of gains for US equities following
the bear market of 2000 through 2002.
The Federal Reserve continued to hold rates unchanged at its two meetings
during the fourth quarter. This policy continues to be validated as moderating
economic fundamentals and falling crude oil prices have eased investor concern
over potentially accelerating inflationary pressures. In its most recent
statement, the Federal Reserve indicated some further policy firming may be
needed to address inflation risks but emphasized that the extent and timing of
any such tightening will be data dependent.
Standard & Poor's recently reported that fourth quarter operating earnings
are on pace to produce the lowest year-over-year gain in more than four and a
half years. This quarter could potentially mark the first single digit
year-over-year earnings increase since the first quarter of 2002, indicating
that economic growth may be slowing. Investors will keep a watchful eye on this
prospective development as softening economic numbers and weaker pricing power
could play a major role in the Federal Reserve's decision to begin easing rates.
Large cap stocks underperformed both small and mid cap stocks during the
final quarter of 2006. For the year, large caps finished behind both small caps
and mid caps. The performance gap between large cap value and large cap growth
widened again during the fourth quarter and the Russell 1000 Value(R) Index
finished the year up 22.2% compared to a gain of 9.1% for the Russell 1000
Growth(R) Index.
At the sector level, materials and energy were the best performing sectors
in the quarter, gaining 11.5% and 11.2%, respectively. In contrast, health care
was the notable laggard, gaining only 1.3%. Weakness in health care resulted
from a number of members of the incoming Democratic congress listing health care
reform as a top issue. The party's new position of power has created uncertainty
among health care investors as many Democrats are eager to give the government
more control over the drug industry. Materials outperformed the broader market
in the fourth quarter after posting a slight loss during the third quarter. The
reversal among materials was led by momentum in earnings expectations and strong
product demand among key names within the industry.
With the Federal Reserve currently on the sidelines, the market will likely
continue to take its cue from inflation data reports and forward-looking
guidance issued by companies. At the same time, although the housing market
appears to be stabilizing, investors remain concerned as to the potential
spill-over effects from the recent housing market recession. Although November
housing data was encouraging, it is far from certain that the housing slump is
over. Looking forward to 2007, the biggest question now facing the market is not
whether the economy will slow, but to what degree.
2
INVESTMENT ADVISER'S REPORT (CONTINUED)
PERFORMANCE SUMMARY
Chestnut Street Exchange Fund returned 3.47% in the fourth quarter, and
finished the year up 14.13%. Despite the solid absolute performance, the Fund
was unable to keep pace with the S&P 500(R), which gained 6.69% in the fourth
quarter, and 15.79% for the year. Sector allocation and the Fund's sizable
overweight position in Intel accounted for the majority of the benchmark
relative underperformance for the year. The largest individual contributors on a
relative basis included Merck and Abbott Laboratories in health care, Bank of
America in financials, and Schlumberger in the energy sector.
PORTFOLIO REVIEW
The source of the portfolio's absolute gains continues to be diverse, as a
number of names posted healthy gains during the fourth quarter. Nine of the ten
major sectors in the portfolio produced positive returns during the quarter,
with the exception being information technology. Exxon Mobil was the top
absolute contributor to performance during the quarter as shares gained 14.2% in
response to better-than expected earnings, which topped $10 billion, or $1.77
per share. On a relative basis, top performers included specialty chemicals and
materials manufacturer Cabot Corp in the materials sector and Comcast Corp in
consumer discretionary. Cabot has benefited from strong demand in all of its
business units and from the positive effect of high plant utilization, while
Comcast shares have been bolstered by demand for the firm's bundled subscription
package, which includes Cable TV, Internet and telephone service all under one
bill.
In contrast, notable detractors from relative performance during the fourth
quarter included Intel, Wells Fargo and Johnson & Johnson. Large positions in
these stocks hurt the portfolio's active return. With average active weights of
approximately 6.8%, 6.4%, and 9.1% respectively, these three positions tend to
have a major impact on Fund results. While Wells Fargo and Intel did not
experience dramatic price declines, their position sizes in the portfolio made
them the top two detractors. Similarly, Johnson & Johnson posted a positive
gain, but like other health care stocks, could not keep pace with some of the
more cyclical groups.
Activity within the portfolio was limited during the fourth quarter. We
continued to use positions in Freescale Semiconductor and Johnson & Johnson to
meet redemptions in kind. Shares of Intel, the cell-phone chipmaker surged after
the company agreed to be bought by a private equity consortium led by Blackstone
Group for $17.6 billion. The deal's size surpassed that of previous buyouts in
the technology sector, making it the biggest ever. We have continued to reduce
our position in Johnson & Johnson to enhance diversification in the portfolio.
At year end, shares of Johnson & Johnson accounted for approximately 10.0% of
the overall portfolio. While shares of Johnson & Johnson posted mid single digit
gains in 2006, we continue to believe the firm faces a number of headwinds
moving into 2007. Lastly, there is one new stock in the portfolio as the result
of a spinoff. Verizon Communications completed the spinoff of its U.S. yellow
pages business during November. The new firm, named Idearc, began trading on
November 20th.
3
INVESTMENT ADVISER'S REPORT (CONCLUDED)
PERFORMANCE COMPARISON
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN CHESTNUT STREET
EXCHANGE FUND(1) VS. S&P 500(R) INDEX AND DOW JONES INDUSTRIAL AVERAGE INDEX(2)
(PERFORMANCE GRAPH)
<Table>
<Caption>
CSEF VALUE S&P VALUE DJIA VALUE
---------- --------- ----------
1/1/1997 10000.00 10000.00 10000.00
10812.20 10625.00 10570.00
10737.30 10707.90 10701.10
10209.50 10267.80 10260.20
10884.00 10880.80 10931.20
11333.90 11543.40 11462.50
11676.50 12060.50 12010.40
12633.00 13020.60 12878.70
11826.20 12291.40 11968.20
12260.60 12965.00 12491.20
11472.00 12532.00 11705.50
12104.30 13112.20 12337.60
12211.30 13337.70 12489.30
12/31/1997 12533.80 13485.80 12490.60
13528.50 14458.10 13536.10
13756.90 15198.30 13957.00
13583.20 15351.80 14381.30
13069.80 15087.80 14155.50
13383.10 15700.40 14256.00
13277.60 15532.40 14153.40
11549.80 13286.40 12043.10
12430.20 14138.00 12547.70
13404.40 15287.50 13753.60
14350.40 16213.90 14631.00
12/31/1998 14649.30 17147.80 14754.00
15032.90 17864.60 15046.10
14564.50 17309.00 14997.90
14790.30 18001.40 15792.80
15541.70 18698.00 17417.90
14853.20 18256.70 17087.00
15715.80 19270.00 17773.90
15518.90 18668.80 17270.90
15978.90 18575.40 17593.80
14890.60 18066.40 16816.20
15721.70 19210.10 17463.60
15759.40 19600.00 17737.80
12/31/1999 15751.00 20754.50 18768.30
15926.80 19712.60 17865.60
15420.90 19340.00 16570.30
17118.10 21231.50 17889.30
17028.50 20592.40 17592.40
17238.90 20170.30 17279.20
17524.80 20668.50 17177.30
17514.10 20346.00 17309.50
18518.80 21609.50 18491.80
15842.30 20468.60 17583.80
16597.20 20382.60 18123.70
15738.60 18776.40 17230.20
12/31/2000 15598.80 18868.40 17859.10
15919.30 19538.30 18041.20
14721.90 17756.40 17431.40
13799.30 16630.60 16422.20
14855.80 17922.80 17860.70
14714.80 18042.90 18200.10
14497.50 17604.50 17528.50
14647.10 17431.10 17582.80
14213.90 16339.90 16670.30
13164.60 15019.60 14836.60
13551.70 15306.50 15235.70
14847.60 16480.50 16585.50
12/31/2001 14810.80 16625.60 16889.10
14792.90 16382.80 16737.10
14391.30 16066.60 17090.20
14996.50 16670.70 17609.80
14346.60 15660.00 16850.80
14328.30 15544.10 16862.60
12517.70 14437.40 15722.70
12212.30 13312.70 14879.90
12068.00 13400.60 14792.10
10911.60 11943.90 12980.10
11916.80 12995.00 14387.10
12633.10 13760.40 15286.30
12/31/2002 11664.00 12951.30 14355.40
11447.30 12612.00 13877.40
11386.80 12422.80 13637.30
11564.60 12543.30 13832.30
12279.90 13576.80 14696.80
12741.40 14292.30 15390.50
12836.70 14475.30 15647.50
13170.80 14730.00 16104.40
13455.60 15017.30 16461.90
13369.00 14858.10 16238.10
14008.60 15699.10 17191.20
14010.80 15837.20 17205.00
12/31/2003 14671.10 16667.10 18412.80
14695.80 16973.00 18497.50
14714.10 17208.90 18708.40
14224.10 16949.10 18334.20
14253.80 16683.00 18125.20
14666.10 16911.50 18099.80
14815.80 17240.50 18561.30
14282.20 16669.80 18062.10
14315.10 16736.50 18168.60
13993.10 16917.30 18023.30
14190.10 17176.10 17958.40
14568.20 17871.70 18728.80
12/31/2004 15193.10 18479.40 19391.80
14869.40 18028.50 18889.60
15247.80 18407.10 19441.10
15131.50 18081.30 18992.00
15077.00 17737.70 18458.40
15462.00 18301.80 19006.60
15219.30 18327.40 18685.40
15489.00 19009.20 19380.50
15216.50 18836.20 19149.80
15166.70 18988.80 19329.80
15173.10 18671.70 19119.10
15829.00 19377.40 19868.60
12/31/2005 15666.40 19383.30 19729.50
15742.10 19896.90 20025.50
15841.50 19950.60 20321.80
16010.30 20200.00 20565.70
16328.90 20470.70 21075.80
15918.00 19881.20 20768.00
16027.10 19909.00 20759.70
16368.40 20032.40 20853.20
16760.80 20509.20 21289.00
17280.40 21038.30 21872.30
17725.10 21724.20 22653.10
17775.30 22136.90 23004.30
17879.70 22446.80 23489.70
</Table>
The performance data represent past performance and should not be
considered indicative of future performance which will fluctuate with changes in
market conditions. These performance fluctuations will cause an investor's
shares, when redeemed, to be worth more or less than their original cost.
In addition, the data does not reflect the deduction of taxes that a
shareholder would pay on distributions or redemption of Fund shares.
FOR THE PERIOD ENDED DECEMBER 31, 2006
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURNS
-----------------------------------------------------------
SINCE
3 MONTH 1 YEAR 3 YEAR 5 YEAR 10 YEAR INCEPTION(3)
------- ------ ------ ------ ------- ------------
Chestnut Street Exchange Fund..... 3.47% 14.13% 6.82% 3.84% 5.98% 12.41%
S&P 500(R) Index.................. 6.69% 15.79% 10.44% 6.19% 8.42% 12.48%
Dow Jones Industrial Average
Index........................... 7.39% 19.11% 8.47% 6.83% 8.92% 12.64%
</Table>
- ---------------
(1) The chart assumes a hypothetical $10,000 initial investment in the Fund made
on January 1, 1997 and reflects Fund expenses. Investors should note that
the Fund is an aggressively managed fund while the indices are unmanaged, do
not incur expenses and are not available for investment.
(2) Results of index performance are presented for general comparative purposes.
(3) Cumulative since inception total returns were 3,280.59%, 3,307.37% and
3,451.48% for the Chestnut Street Exchange Fund, the S&P 500(R) Index and
the Dow Jones Industrial Average Index, respectively for the period December
29, 1976 (inception) to December 31, 2006.
February 1, 2007 BLACKROCK CAPITAL MANAGEMENT INC.
4
FUND EXPENSE EXAMPLE
(UNAUDITED)
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, and (2) ongoing costs, including management fees; and other Fund
expenses. The example is intended to help you understand your ongoing costs (in
dollars) of investing in the Fund and to compare these costs with the ongoing
costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning
of the six-month period from July 1, 2006 through December 31, 2006, and held
for the entire period.
ACTUAL EXPENSES
The first line of the accompanying table provides information about actual
account values and actual expenses. You may use the information in this line,
together with the amount you invested, to estimate the expenses that you paid
over the period. Simply divide your account value by $1,000 (for example, an
$8,600 account value divided by $1,000 = 8.6), then multiply the result by the
number in the first line under the heading entitled "Expenses Paid During
Period" to estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line of the accompanying table provides information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before expenses,
which is not your Fund's actual return. The hypothetical account values and
expenses may not be used to estimate the actual ending account balance or
expenses you paid for the period. You may use this information to compare the
ongoing costs of investing in the Fund and other funds. To do so, compare this
5% hypothetical example with the 5% hypothetical examples that appear in the
shareholder reports of other funds.
Please note that the expenses shown in the accompanying table are meant to
highlight your ongoing costs only and do not reflect any transactional costs.
Therefore, the second line of the accompanying table is useful in comparing
ongoing costs only, and will not help you determine the relative total costs of
owning different funds. In addition, if these transactional costs were included,
your costs would have been higher.
CHESTNUT STREET EXCHANGE FUND
<Table>
<Caption>
EXPENSES PAID
BEGINNING ENDING DURING SIX
ACCOUNT VALUE ACCOUNT VALUE MONTHS ENDING
JULY 1, 2006 DECEMBER 31, 2006 DECEMBER 31, 2006*
------------- ----------------- ------------------
Actual............................... $1,000.00 $1,115.60 $2.40
Hypothetical (5% return before
expenses).......................... $1,000.00 $1,022.91+ $2.30
</Table>
- ---------------
* Expenses are equal to the Fund's annualized six-month expense ratio of 0.45%,
multiplied by the average account value over the period, multiplied by the
number of days (184) in the most recent fiscal half-year, then divided by 365
to reflect the one-half year period. The Fund's ending account value on the
first line of the table is based on the actual total return of 11.56% for the
six month period ending December 31, 2006.
+ Hypothetical expenses are based on the Fund's actual annualized six-month
expense ratio and an assumed rate of return of 5% per year before expenses.
5
PORTFOLIO HOLDINGS SUMMARY TABLE
<Table>
<Caption>
% OF NET
SECURITY TYPE/INDUSTRY ASSETS VALUE
- ----------------------------- -------- ------------
COMMON STOCK:
Basics..................... 4.3% $ 12,257,354
Capital Equipment.......... 8.0% 23,340,014
Consumer Cyclicals......... 8.8% 25,556,360
Energy..................... 7.3% 21,335,921
Financial.................. 25.4% 73,856,835
Healthcare................. 22.1% 64,143,569
Retail..................... 0.5% 1,539,924
Staples.................... 4.0% 11,556,591
Technology................. 13.0% 37,865,481
Transportation............. 4.1% 11,872,331
Utilities.................. 1.9% 5,356,229
SHORT-TERM INVESTMENTS....... 1.2% 3,499,533
LIABILITIES IN EXCESS OF
OTHER ASSETS............... (0.6%) (1,599,708)
----- ------------
Net Assets................. 100.0% $290,580,434
===== ============
</Table>
6
CHESTNUT STREET EXCHANGE FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENT OF NET ASSETS
DECEMBER 31, 2006
<Table>
<Caption>
SHARES VALUE
- ---------- ------------
COMMON STOCKS--99.4%
BASICS--4.3%
100,609 Air Products & Chemicals,
Inc. ............................ $ 7,070,800
86,032 Cabot Corp. ....................... 3,748,414
42,373 Cabot Microelectronics Corp.*...... 1,438,140
------------
12,257,354
------------
CAPITAL EQUIPMENT--8.0%
181,112 Emerson Electric Co. .............. 7,985,228
364,049 General Electric Co. .............. 13,546,263
39,154 Pitney Bowes, Inc. ................ 1,808,523
------------
23,340,014
------------
CONSUMER CYCLICALS--8.8%
99,829 Comcast Corp., Class A*............ 4,225,762
129,129 Walt Disney Co. (The).............. 4,425,251
85,100 Procter & Gamble Co. (The)......... 5,469,377
7,191 Idearc Inc. ....................... 206,023
144,103 3M Co. ............................ 11,229,947
------------
25,556,360
------------
ENERGY--7.3%
41,979 BP plc ADR......................... 2,816,791
147,227 Exxon Mobil Corp. ................. 11,282,005
114,584 Schlumberger, Ltd. ................ 7,237,125
------------
21,335,921
------------
FINANCIAL--25.4%
111,332 American Express Co. .............. 6,754,512
22,266 Ameriprise Financial, Inc. ........ 1,213,497
28,441 American International Group,
Inc. ............................ 2,038,082
394,928 Bank of America Corp. ............. 21,085,206
48,853 Fannie Mae......................... 2,901,380
140,310 JP Morgan Chase & Co. ............. 6,776,973
96,032 Moody's Corp. ..................... 6,631,970
92,150 Wachovia Corp. .................... 5,247,942
596,380 Wells Fargo & Co. ................. 21,207,273
------------
73,856,835
------------
</Table>
<Table>
<Caption>
SHARES VALUE
- ---------- ------------
HEALTHCARE--22.1%
231,254 Abbott Laboratories, Inc. ......... $ 11,264,382
64,986 Baxter International, Inc. ........ 3,014,701
23,125 Hospira, Inc.*..................... 776,538
75,385 IMS Health, Inc. .................. 2,071,580
444,226 Johnson & Johnson.................. 29,327,801
45,931 Medco Health Solutions, Inc.*...... 2,454,553
349,404 Merck & Company, Inc. ............. 15,234,014
------------
64,143,569
------------
RETAIL--0.5%
44,558 Safeway, Inc. ..................... 1,539,924
------------
STAPLES--4.0%
5,688 Hanesbrands, Inc. ................. 134,351
164,147 Coca Cola Co. (The)................ 7,920,093
43,600 PepsiCo Inc. ...................... 2,727,180
45,506 Sara Lee Corp. .................... 774,967
------------
11,556,591
------------
TECHNOLOGY--13.0%
57,923 Hewlett-Packard Co. ............... 2,385,848
39,708 International Business Machines
Corp. ........................... 3,857,632
1,078,028 Intel Corp. ....................... 21,830,067
139,643 Microsoft Corp. ................... 4,169,740
273,453 Motorola, Inc. .................... 5,622,194
------------
37,865,481
------------
TRANSPORTATION--4.1%
113,572 Burlington Northern Santa Fe
Corp. ........................... 8,382,749
37,922 Union Pacific Corp. ............... 3,489,582
------------
11,872,331
------------
UTILITIES--1.9%
143,830 Verizon Communications, Inc. ...... 5,356,229
------------
Total Common Stocks
(Cost: $41,153,849).......... 288,680,609
------------
</Table>
See Accompanying Notes to Financial Statements.
7
STATEMENT OF NET ASSETS (CONCLUDED)
<Table>
<Caption>
PAR VALUE
- ---------- ------------
SHORT-TERM OBLIGATIONS--1.2%
$3,500,000 Federal Home Loan Mortgage Corp.
01/02/07, 4.80%
(Cost: $3,499,533)............... $ 3,499,533
------------
</Table>
<Table>
TOTAL INVESTMENT IN SECURITIES
(Cost: $44,653,382)............ 100.6% 292,180,142
Other assets in excess of other
liabilities.................... 0.1% 443,383
Distributions payable............ (0.6%) (1,870,928)
Payable to:
Investment Advisers (Note C)... (0.1%) (163,638)
Managing General Partners (Note
C)........................... (0.0%) (1,524)
Custodian (Note C)............. (0.0%) (3,576)
Transfer Agent (Note C)........ (0.0%) (3,425)
----- ------------
NET ASSETS (Applicable to 769,373
partnership shares
outstanding)................... 100.0% $290,580,434
===== ============
NET ASSET VALUE PER SHARE........ $ 377.68
============
NET ASSETS APPLICABLE TO SHARES
OWNED BY:
Limited partners
(769,280 shares)............... $290,545,309
Managing general partners
(93 shares).................... 35,125
------------
Total net assets
(769,373 shares)............... $290,580,434
============
</Table>
- ---------------
* Non-Income Producing
ADR-American Depositary Receipt
See Accompanying Notes to Financial Statements.
8
CHESTNUT STREET EXCHANGE FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2006
<Table>
INVESTMENT INCOME
Dividends............................... $ 6,486,124
Interest................................ 107,480
-----------
Total investment income........... 6,593,604
-----------
EXPENSES
Investment advisory fees................ 935,304
Managing general partners' compensation
and officer's salary.................. 90,264
Legal fees.............................. 81,643
Custodian fees.......................... 25,425
Printing expense........................ 23,673
Insurance expense....................... 23,332
Audit fees.............................. 22,000
Transfer agent fees..................... 17,000
Miscellaneous........................... 10,400
-----------
Total expenses...................... 1,229,041
-----------
Net investment income............. 5,364,563
-----------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS:
Realized gain on sale of investment
securities (for federal tax purposes
net gain is $2,787,979)............... 2,725,832
Realized gain from security
transactions: distributed upon
redemption of partnership shares...... 11,490,446
Unrealized appreciation of investments
Beginning of year....... $230,165,274
End of year............. 247,526,760
------------
Net change in unrealized
appreciation.................... 17,361,486
-----------
Net realized and unrealized gain
on Investments.................. 31,577,764
-----------
Net increase in net assets resulting
from operations..................... $36,942,327
===========
</Table>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
<Table>
<Caption>
2006 2005
------------ ------------
INCREASE/(DECREASE) IN NET
ASSETS
OPERATIONS:
Net investment income.. $ 5,364,563 $ 5,071,488
Net realized gain from
security
transactions, for
federal income tax
purposes net gain is
$2,787,979 and
$928,780............. 2,725,832 928,780
Excess of market value
over book value of
securities
distributed upon
redemption of
partnership shares... 11,490,446 28,437,435
Increase/(decrease) in
unrealized
appreciation of
investments.......... 17,361,486 (25,974,026)
------------ ------------
Increase in net assets
resulting from
operations........... 36,942,327 8,463,677
------------ ------------
DISTRIBUTIONS TO PARTNERS
FROM:
Net investment
income............... (5,368,169) (5,069,859)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Net asset value of 10
and 0 shares
subscribed........... 3,546 --
Net asset value of
1,974 and 1,500
shares issued in lieu
of cash
distributions........ 702,719 494,407
Cost of 37,261 and
91,748 shares
repurchased.......... (13,089,756) (30,657,931)
------------ ------------
Decrease in net assets
from capital share
transactions......... (12,383,491) (30,163,524)
------------ ------------
Total
increase/(decrease)
in net assets........ 19,190,667 (26,769,706)
NET ASSETS:
Beginning of year...... 271,389,767 298,159,473
------------ ------------
End of year*........... $290,580,434 $271,389,767
============ ============
</Table>
- ---------------
* Includes undistributed net investment income of $4,230 and $7,837
respectively.
See Accompanying Notes to Financial Statements.
9
CHESTNUT STREET EXCHANGE FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF THE FUND OUTSTANDING THROUGHOUT EACH YEAR)
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
2006 2005 2004 2003 2002
-------- -------- -------- -------- --------
Net Asset Value, Beginning of Year....... $ 337.28 $ 333.18 $ 327.39 $ 264.29 $ 340.39
-------- -------- -------- -------- --------
Income From Investment Operations:
Net investment income.................. 6.88 6.19 5.65 4.61 3.99
Net gain (loss) on securities (both
realized and unrealized)............. 40.40 4.10 5.80 63.09 (76.09)
-------- -------- -------- -------- --------
Total from investment
operations...................... 47.28 10.29 11.45 67.70 (72.10)
-------- -------- -------- -------- --------
Less Distributions:
From net investment income............. (6.88) (6.19) (5.66) (4.60) (4.00)
From realized gains.................... -- -- -- -- --
-------- -------- -------- -------- --------
Total distributions............... (6.88) (6.19) (5.66) (4.60) (4.00)
-------- -------- -------- -------- --------
Net Asset Value, End of Year............. $ 377.68 $ 337.28 $ 333.18 $ 327.39 $ 264.29
======== ======== ======== ======== ========
Total Return............................. 14.13% 3.12% 3.56% 25.78% (21.25)%
======== ======== ======== ======== ========
Ratios/Supplemental Data:
Net Assets, End of Year (000's)........ $290,580 $271,390 $298,159 $299,583 $267,987
Ratios to average net assets:
Operating expenses................... 0.44% 0.43% 0.42% 0.43% 0.41%
Net investment income................ 1.93% 1.82% 1.75% 1.57% 1.31%
Portfolio Turnover Rate................ 0.99% 0.82% 0.47% 1.18% 0.98%
</Table>
See Accompanying Notes to Financial Statements.
10
NOTES TO FINANCIAL STATEMENTS
(A) ORGANIZATION
Chestnut Street Exchange Fund (the "Fund"), a California Limited
Partnership, is registered under the Investment Company Act of 1940, as
amended, as a diversified open-end investment management company. The
Fund's investment objective is to seek long-term growth of capital and,
secondarily, current income. Effective January 1, 1998, the Fund changed
its status for tax purposes from a partnership to a regulated investment
company. The change resulted from the enactment of the "Publicly Traded
Partnership" rules to the Internal Revenue Code in 1987, which first
applied to the Fund after 1997.
(B) SIGNIFICANT ACCOUNTING PRINCIPLES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 those estimates. The following is
a summary of significant accounting policies followed by the Fund in the
preparation of its financial statements.
SECURITY VALUATIONS
Securities listed or traded on an exchange are valued generally at the
last sales price as of the close of the customary trading session on the
exchange where the security is principally traded, or lacking any sales
on a particular day, valued at the closing bid price on that day. Each
security reported on the NASDAQ Stock Market, Inc. is valued at the
NASDAQ Official Close Price. Securities for which market quotations are
not readily available or are believed to be unreliable are valued at
fair value as determined in good faith using methods approved by the
Managing General Partners. Short-term obligations having 60 days or less
to maturity are valued at amortized cost which approximates market
value.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are accounted for on a trade date basis.
Realized gains and losses on sales and redemptions in kind are computed
on the basis of specific identification for both financial reporting and
income tax purposes. For securities exchanged into the Fund at the
Fund's inception in 1976, the cost for financial reporting purposes is
the value of those securities as used in the Exchange. The cost, for
income tax purposes, of securities exchanged into the Fund is the tax
basis of the individual investor. Interest income is recorded on the
accrual basis. Dividend income is recorded on the ex-dividend date.
DISTRIBUTIONS
Distributions from net investment income are paid quarterly and recorded
on the ex-dividend date. Distributions of capital gains, if any, are
paid annually and recorded on the ex-dividend date.
11
FEDERAL INCOME TAXES
The Fund intends to comply with the requirements of the Internal Revenue
Code necessary to qualify as a regulated investment company and, as
such, will not be subject to federal income taxes on otherwise taxable
income which is distributed to shareholders. The Fund may elect not to
distribute long-term capital gains to shareholders, but retain these
gains and pay the income tax at the applicable corporate income tax
rate. If the Fund elects to pay the tax on long-term capital gains, on
the last day of the year the tax is paid, the partners are entitled to a
proportionate credit for the tax payment and the tax basis of their
shares is increased by the amount of undistributed gains less the tax
paid by the Fund. At December 31, 2006, the Fund had a capital loss
carryforward of $2,498,103, of which $2,276,902 expires December 31,
2011 and $221,201 expires December 31, 2012. Therefore, no provision for
federal income taxes is recorded in the financial statements.
(C) INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Prior to the Meeting of Partners on September 29, 2006, the Investment
Advisers to the Fund were BlackRock Financial Management, Inc. and
BlackRock Institutional Management Corporation ("BIMC") pursuant to an
advisory agreement dated January 1, 1998, ("Prior Advisory Agreement"). At
the September 29, 2006 meeting a new advisory agreement ("Advisory
Agreement") providing for the same advisory, accounting and administrative
services and the same fee as in the prior agreement was entered into with
BlackRock Capital Management, Inc. ("BCM"), a wholly owned subsidiary of
BIMC. All BlackRock entities named are subsidiaries of BlackRock, Inc. in
which PNC Bank now holds a minority interest.
The Advisory Agreement was necessitated by the uncertainty as to whether
BlackRock's agreement with Merrill Lynch & Co. Inc. ("Merrill Lynch") by
which Merrill Lynch contributed its investment management business to form
a new asset management company, would constitute an assignment of the Prior
Advisory Agreement under the Investment Company Act of 1940. If the
transaction were determined to be such an assignment, it would have
resulted in the automatic termination of the Prior Advisory Agreement.
The Advisory Agreement provides for a 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.
PFPC Inc., an affiliate of PNC Bank, serves as the Fund's transfer and
dividend disbursing agent. As compensation for these services, PFPC Inc. is
entitled to a fee equal to $12,500 per year plus related out-of-pocket
expense.
PFPC Trust Company, a subsidiary of PFPC Inc, serves as the Fund's
custodian. As compensation for its services as custodian, PFPC Trust
Company is entitled to a fee computed at an annual rate of 0.0065% of the
Fund's average gross assets plus additional fees based on the number and
type of transactions.
The managing general partners each receive a fixed fee as compensation for
their services. In addition, the President, Treasurer and Chief Compliance
Officer receives additional payments for overseeing the Fund's activities
including compliance with federal securities laws, plus reimbursements of
related expenses. Total payments to or for the managing general partners
amounted to $90,264.
12
Legal fees amounting to $81,643 were paid to Drinker, Biddle & Reath LLP.
Michael P. Malloy, Esq., Secretary of the Fund, is a partner of that firm.
(D) INVESTMENT TRANSACTIONS
Purchases and sales of investment securities (excluding short-term
obligations and redemptions in kind) were $2,756,754 and $2,760,903,
respectively, for the year ended December 31, 2006.
(E) NET ASSETS
At December 31, 2006, net assets consisted of:
<Table>
Undistributed net investment income......................... $ 4,230
Accumulated net realized loss on securities................. (2,498,103)
Net unrealized appreciation of investments (book basis)..... 247,526,760
Other capital -- paid-in or reinvested...................... 45,547,547
------------
$290,580,434
============
</Table>
(F) DISTRIBUTIONS TO SHAREHOLDERS
Net investment income and capital gain distributions are determined in
accordance with federal income tax regulations, which may differ from
accounting principles generally accepted in the United States of America.
The primary difference applicable to the Fund's distributions is the
requirement to pass through 40% of its aggregate expenses to the partners
of the Fund. This is required because the Fund has fewer than 500 partners
and does not continuously offer shares. The partners treat this
pass-through of expenses as a distribution of net investment income and a
corresponding miscellaneous itemized deduction of investment expense.
The tax character of distributions paid during 2006 and 2005 was as
follows:
<Table>
<Caption>
2006 2005
---------- ----------
Ordinary income............................................. $5,859,785 $5,548,000
Investment expense.......................................... (491,616) (478,141)
---------- ----------
$5,368,169 $5,069,859
========== ==========
</Table>
(G) IN-KIND DISTRIBUTION OF SECURITIES
During the year ended December 31, 2006, the Fund distributed portfolio
securities in lieu of cash for most shareholder redemptions. The value of
these redemptions was as follows:
<Table>
<Caption>
NET REALIZED FUND
VALUE OF THE GAIN INCLUDED SHARES
REDEMPTIONS IN REDEMPTIONS REDEEMED
------------ -------------- --------
$13,068,268 $11,490,446 37,201
</Table>
Net realized gains from these transactions are not taxable to the Fund.
Such gains are not distributed to shareholders and will be reclassified to
paid-in capital at the Fund's fiscal year end. These transactions were
completed following guidelines approved by the Managing General Partners.
13
(H) INDEMNIFICATIONS
In the ordinary course of business, the Fund enters into contracts that
contain a variety of indemnifications. The Fund's maximum exposure under
these arrangements is immaterial. The Fund has not had prior claims or
losses pursuant to the contracts and expects the risk of loss to be remote.
(I) TAX MATTERS
At December 31, 2006, the components of distributable earnings on a tax
basis were as follows:
<Table>
Undistributed ordinary income (before tax allocation
described below).......................................... $ 4,230
Capital loss carryover...................................... (2,498,103)
Net unrealized appreciation of investments.................. 251,867,376
------------
$249,373,503
============
</Table>
The cost of investments for federal income tax purposes at December 31, 2006
was $40,312,766. The unrealized appreciation (an excess of value over cost)
was $251,896,950 and the unrealized depreciation was $(29,574). The
difference between book basis and tax basis of investments is attributable
to the use of the individual partners' tax basis for those securities
contributed to the Fund at its inception, as required by law.
On December 31, 2006 undistributed net investment income was decreased by
$1, undistributed net realized gain on securities was decreased by
$11,428,300 and additional paid-in capital was increased by $11,428,301 due
to permanent differing book and tax treatment of realized gains and losses.
Net assets of the Fund were unaffected by this change.
(J) NEW ACCOUNTING PRONOUNCEMENTS
On July 13, 2006 the Financial Accounting Standards Board ("FASB") released
FASB Interpretation No. 48 "Accounting for the Uncertainty of Income Taxes"
("FIN 48"). FIN 48 provides guidance for how uncertain tax positions should
be recognized, measured, presented and disclosed in the financial
statements. FIN 48 requires the evaluation of tax positions taken or
expected to be taken in the course of preparing the Fund's tax returns to
determine whether the tax positions are "more-likely-than-not" of being
sustained by the applicable tax authority. Tax positions not deemed to meet
the more-likely-than-not threshold would be recorded as a tax benefit or
expense in the current year and recognized as: a liability for unrecognized
tax benefits; a reduction of an income tax refund receivable; a reduction
of deferred tax asset; an increase in deferred tax liability; or a
combination thereof. Funds are required to implement FIN 48 no later than
its last NAV calculation in the first required financial statement
reporting period for its fiscal year beginning after December 15, 2006.
In September 2006, the FASB issued Statement on Financial Accounting
Standards No. 157, "Fair Value Measurements" ("SFAS No. 157"). This
standard establishes a single authoritative definition of fair value, sets
out a framework for measuring fair value and requires additional
disclosures about fair value measurements. SFAS No. 157 applies to fair
value measurements already required or permitted by existing standards.
SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal
years. The changes to current accounting principles generally accepted in
the United States of America from the application of this Statement relate
to the definition of fair value, the
14
methods used to measure fair value, and the expanded disclosures about fair
value measurements. As of December 31, 2006, the Fund does not believe the
adoption of SFAS No. 157 will impact the financial statement amounts;
however, additional disclosures may be required about the inputs used to
develop the measurements and the effect of certain of the measurements on
changes in net assets for the period.
15
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners of
Chestnut Street Exchange Fund
Wilmington, Delaware
We have audited the accompanying statement of net assets of Chestnut Street
Exchange Fund (the "FUND"), as of December 31, 2006, 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 the each of the four years in the period then ended. 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. The financial
highlights for the year ended December 31, 2002 were audited by other auditors
whose report dated February 14, 2003 expressed an unqualified opinion on those
financial highlights.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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, 2006 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
Chestnut Street Exchange Fund as of December 31, 2006, 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 four years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America.
Briggs, Bunting & Dougherty, LLP
Philadelphia, Pennsylvania
January 19, 2007
16
ADDITIONAL INFORMATION (UNAUDITED)
MEETING OF PARTNERS
The results of voting at the Meeting of Partners held on September 29, 2006 were
as follows:
1. Proposal to approve a new Investment Advisory Agreement between the
Fund and BlackRock Capital Management Inc.:
<Table>
Shares For.................................................. 320,935.132
Shares Against.............................................. 13,535.605
Shares Abstaining........................................... 112,466
</Table>
2. Election of Managing General Partners:
<Table>
<Caption>
SHARES WITHHOLD
SHARES FOR AGAINST AUTHORITY
----------- ------- ----------
Richard C. Caldwell................................ 393,158.132 0 53,778.605
Gordon L. Keen, Jr. ............................... 433,401.132 0 13,535.605
Edward J. Roach.................................... 393,158.132 0 53,778.605
Langhorne B. Smith................................. 433,401.132 0 13,535.605
David R. Wilmerding, Jr. .......................... 433,401.132 0 13,535.605
</Table>
3. Proposal to ratify selection of Briggs, Bunting & Dougherty, LLP as
independent accountants for the Fund's fiscal year ending December 31,
2006:
<Table>
<Caption>
Shares For.................................................. 433,375.132
Shares Against.............................................. 12,184.605
Shares Abstaining........................................... 1,377.000
</Table>
PROXY VOTING
Policies and procedures that the Fund uses to determine how to vote proxies
relating to portfolio securities as well as information regarding how the Fund
voted proxies relating to portfolio securities for the most recent 12-month
period ended June 30 are available without charge, upon request, by calling
(888) 261-4073 and on the Securities and Exchange Commission's ("SEC") website
at http://www.sec.gov.
QUARTERLY PORTFOLIO SCHEDULE
The Fund files a complete schedule of portfolio holdings with the SEC for the
first and third fiscal quarters of each fiscal year (quarters ended March 31 and
September 30) on Form N-Q. The Fund's Form N-Q is available on the SEC website
at http://www.sec.gov and may be reviewed and copied at the SEC Public Reference
Room in Washington, D.C. Information on the operation of the SEC Public
Reference Room may be obtained by calling 1-800-SEC-0330.
APPROVAL OF INVESTMENT ADVISORY CONTRACT
At a meeting held on July 13, 2006, the Board, including a majority of the
Managing General Partners who are not "interested persons" of the Fund (the
"Independent Managing Partners"), approved the Advisory Agreement with BlackRock
Capital Management, Inc. ("BCM") with respect to the Fund for
17
an initial two-year period. In connection with their approval, the Managing
General Partners considered, with the assistance of independent counsel, their
legal responsibilities and reviewed the nature and quality of services provided
to the Fund and BCM's experience and qualifications.
Representatives of BlackRock, Inc. ("BlackRock") addressed and answered the
Board's questions about the Advisory Agreement. The BlackRock representatives
informed the Board that the combination of BlackRock and Merrill Lynch & Co.,
Inc. ("Merrill Lynch") will have no effect on the Fund, including the Fund's
portfolio management team. The Board reviewed materials relating to the Advisory
Agreement, including descriptions of the prior advisory agreement (see Note (C)
above) and the Advisory Agreement, a comparison of the Fund's advisory fees to
fees paid by similar investment companies, an overview of the investment
advisory and other services provided by BlackRock Institutional Management
Corporation ("BIMC") and BlackRock Financial Management, Inc. ("BFM") under the
prior advisory agreement and by BCM under the Advisory Agreement (including a
description of their equity portfolio capabilities and brokerage policies), a
review of the fees paid by the Fund to affiliates of PNC Bank, N.A. for
custodian services and transfer agency services, performance and expense data of
the Fund and comparable competitors and indices, and information concerning the
personnel rendering services to the Fund. The Board also discussed the
profitability of BIMC, BFM and BCM and reviewed a comparison of management fees
paid by other mutual funds. The Board discussed the various information provided
by BlackRock and reviewed the terms of the Advisory Agreement.
Among other items, the Board reviewed and considered: (1) a report comparing the
advisory fees and total expense ratio of shares of the Fund to those of its peer
group and to the peer group averages; (2) a report on the assets and advisory
fees for the Fund; (3) a report comparing the performance of the Fund to its
benchmarks, its peer group and the performance universe (e.g., all large cap
core equity funds) average; (4) a report on BCM's profitability related to
providing advisory services to the Fund after taking into account (i) advisory
fees and any other benefits realized by BCM or any of its affiliates as a result
of its role as service provider to the Fund, (ii) the direct and indirect
expenses incurred by BCM in providing investment advice to the Fund, and (iii)
other considerations; (5) possible economies of scale; (6) compensation or
possible benefits to BCM arising from its relationship with the Fund; and (7) a
report describing the resources, personnel, capabilities, overall nature and
quality of the services of BCM.
The Board also considered the commitment BCM has made to address new regulatory
compliance requirements applicable to the Fund and the adviser. Included in the
report provided by BCM for the Board's consideration were materials showing the
structure of BlackRock prior to and after the combination with Merrill Lynch.
BCM informed the Board that the services provided to the Fund by BCM under the
Advisory Agreement would be identical to those provided by BIMC and BFM under
the prior advisory agreement. BCM informed the Board that the individuals who
provided investment advisory services under the prior advisory agreement would
continue to provide such services under the Advisory Agreement.
The materials provided to the Board by BCM showed the corporate organization of
BlackRock, and specifically how BCM, BIMC and BFM fit into BlackRock's overall
corporate structure. The Board reviewed lists of portfolio managers for the
various BlackRock portfolio management platforms after the combination of
BlackRock and Merrill Lynch in order to determine that the Fund's portfolio
managers would remain the same after the combination. The Board further reviewed
the investment philosophies of the portfolio managers after the combination to
ensure that there would be no change in advisory services provided to the Fund.
18
The Board considered the various reasons provided by BlackRock for combining
with Merrill Lynch, including (i) achieving economies of scale in their products
and markets; (ii) combining two strong, complementary businesses; (iii) having a
strong presence outside the United States; and (iv) becoming a more diversified
entity.
Representatives of BlackRock informed the Board that BlackRock's rationale
behind changing from BIMC and BFM as the Fund's investment adviser to BCM was to
improve BlackRock's organization after its combination with Merrill Lynch.
BlackRock informed the Board that BCM is a relatively new entity, which is
assigned for equity portfolios managed in its Boston and Philadelphia offices.
BlackRock further explained to the Board that there would be no change in
services provided to the Fund or to any of the individuals or teams responsible
for making investment decisions for the Fund as a result of the change in
investment adviser.
After discussion, the Board concluded that BCM had the capabilities, resources
and personnel necessary to manage the Fund. The Board also concluded that, based
on the services that BCM would provide to the Fund under the Advisory Agreement,
the fee was fair and equitable with respect to the Fund. The Board considered
the fees paid by the Fund in relation to its peer group, as well as the Fund's
performance. After evaluating the amounts paid by the Fund and the Fund's total
operating expenses compared to similar information for the Fund's peer group,
the Board concluded that the advisory fees paid by the Fund were reasonable.
The Board concluded that BCM had allocated sufficient resources and personnel to
the investment management operations of the Fund and was able to provide quality
services to the Fund. Based on the foregoing and upon such other information as
it considered necessary to the exercise of its reasonable business judgment, the
Board concluded unanimously that it was in the best interests of the Fund to
approve the Advisory Agreement with BCM for an initial two-year period.
TAX INFORMATION
As required by the Internal Revenue Code, 100% of ordinary income distributions
paid for the year ended December 31, 2006 have been designated as: 1) qualified
for the reduced tax rate under The Job and Growth Tax Relief Reconciliation Act
of 2003, and 2) eligible for the dividend received deduction for corporate
shareholders.
19
INFORMATION ON THE MANAGING GENERAL
PARTNERS AND OFFICERS OF THE FUND
The list below provides certain information about the identity and business
experience of the Managing General Partners and officers of the Fund. The Fund's
Statement of Additional Information includes additional information about the
Fund's Managing General Partners, which may be obtained from the Fund free of
charge by calling 1-800-852-4750.
TERM OF OFFICE: The Fund's partnership agreement provides that each Managing
General Partner holds officer until the earliest of (a) the election of his
successor; or (b) the date a Managing General Partner dies, resigns, becomes
insane, is adjudicated a bankrupt or is removed by a majority of the partners.
The officers of the Fund are elected by the Managing General Partners and each
officer holds office for one year or until he or she shall resign or be removed
or until his or her successor is elected and qualified.
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION IN FUND OTHER
WITH THE PRINCIPAL COMPLEX(1) DIRECTORSHIP(2)
FUND AND OCCUPATIONS DURING OVERSEEN BY HELD BY
LENGTH OF PAST 5 YEARS AND MANAGING MANAGING
NAME, ADDRESS AND AGE TIME SERVED CURRENT AFFILIATIONS GENERAL PARTNERS GENERAL PARTNER
- --------------------- --------------- --------------------------------- ---------------- ----------------
INTERESTED MANAGING GENERAL
PARTNERS
Richard C. Caldwell* Managing Advisory Director, PNC Florida, 1 None
620 Indian Harbor Road General Partner FSB; Advisory Director in
Vero Beach, FL 32963 since 1997 Philadelphia and Southern New
Age: 62 Jersey region for PNC Bank;
Consultant for PNC Florida;
Chairman, Florida Advisory
Council; formerly, President and
Chief Executive Officer, PNC Bank
FSB from May 1998 until July
1999; Director, JLC, Inc. since
February 1996 (investment holding
company); Director, DR Inc. and
Dingess-Rum Properties Inc. since
April 1994 (investment holding
company).
Edward J. Roach* Managing Certified Public Accountant; Vice 1 None
103 Bellevue Parkway General Partner Chairman of the Board, Fox Chase
Wilmington, DE 19809 since 2000, Cancer Center; Former Director,
Age: 82 Chief Biotrol USA, Inc.; President,
Compliance Vice President and/or Treasurer
Officer since of 1 other investment company
2004, President advised by BIMC; Director, The
since 2002, Bradford Funds, Inc. until 2000.
Treasurer since
1981
</Table>
20
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION IN FUND OTHER
WITH THE PRINCIPAL COMPLEX(1) DIRECTORSHIP(2)
FUND AND OCCUPATIONS DURING OVERSEEN BY HELD BY
LENGTH OF PAST 5 YEARS AND MANAGING MANAGING
NAME, ADDRESS AND AGE TIME SERVED CURRENT AFFILIATIONS GENERAL PARTNERS GENERAL PARTNER
- --------------------- --------------- --------------------------------- ---------------- ----------------
DISINTERESTED MANAGING
GENERAL PARTNERS
Gordon L. Keen, Jr. Managing Former Senior Vice President, Law 1 None
Financial Consultant; General Partner & Corporate Department, Airgas,
1276 Round Hill Road since 2006 Inc. (Radnor, PA-based
Bryn Mawr, PA 19010 distributor of industrial,
Age: 62 medical and specialty gases, and
welding and safety equipment and
supplies) from January 1992 to
January 2006.
Langhorne B. Smith Managing President and Director, The 1 None
7036 Goshen Road General Partner Sandridge Corporation (private
Newtown Square, PA 19073 since 1997 investment company); Director,
Age: 70 Claneil Enterprises, Inc.
(private investment company).
Retired.
David R. Wilmerding, Jr. Managing Chairman, Wilmerding & Associates 52 None
One Tower Bridge General Partner (investment advisers) since
100 Front Street since 1976; February 1989; Director, Beaver
Suite 1430 Chairman of the Management Corporation; Director,
West Conshohocken, PA 19428 Managing Mutual Fire Marine & Inland
Age: 71 General Insurance Co., Inc; Director,
Partners since People First, Inc. (bank holding
2006 company).
OFFICER
Michael P. Malloy Secretary since Secretary of the Chestnut Street N/A N/A
Drinker Biddle & Reath 2001 Exchange Fund; Partner in the law
One Logan Square firm of Drinker Biddle & Reath
18th and Cherry Streets LLP.
Philadelphia, PA 19103
Age: 47
</Table>
* Messrs. Caldwell and Roach are "interested persons" of the Fund as that
term is defined in the Investment Company Act of 1940 ("1940 Act"). Mr.
Caldwell owns stock of an affiliate of the adviser and Mr. Roach is an
employee of the Fund.
(1) A Fund Complex means two or more investment companies that hold themselves
out to investors as related companies for purposes of investment and
investor services, or have a common investment adviser or have an
investment adviser that is an affiliated person of the investment adviser
of any of the other investment companies. David R. Wilmerding, Jr. also
serves as a Trustee to the BlackRock Funds(SM), and Mr. Roach serves as
President and Treasurer of The RBB Fund, Inc.
(2) Directorships of companies required to report to the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended
(i.e., "public companies") or other investment companies registered under
the 1940 Act.
21
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MANAGING GENERAL PARTNERS
Richard C. Caldwell
Gordon L. Keen, Jr.
Edward J. Roach
Langhorne B. Smith
David R. Wilmerding, Jr.
INVESTMENT ADVISERS
BlackRock Capital Management, Inc.
100 Bellevue Parkway
Wilmington, Delaware 19809
TRANSFER AGENT
PFPC Inc.
P.O. Box 8950
Wilmington, Delaware 19899
(800) 852-4750
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(CHESTNUT STREET EXCHANGE FUND LOGO)
ANNUAL REPORT
DECEMBER 31, 2006
CHESTNUT STREET EXCHANGE
FUND
103 Bellevue Parkway
Wilmington, Delaware 19809
(302) 791-1112
Edward J. Roach, President & Treasurer
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ITEM 2. CODE OF ETHICS.
(a) The registrant, as of the end of the period covered by this report, has
adopted a code of ethics that applies to the registrant's principal
executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant
or a third party.
(c) There have been no amendments, during the period covered by this
report, to a provision of the code of ethics that applies to the
registrant's principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing
similar functions, regardless of whether these individuals are employed
by the registrant or a third party, and that relates to any element of
the code of ethics description.
(d) The registrant has not granted any waivers, including an implicit
waiver, from a provision of the code of ethics that applies to the
registrant's principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing
similar functions, regardless of whether these individuals are employed
by the registrant or a third party, that relates to one or more of the
items set forth in paragraph (b) of this item's instructions.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The registrant's board of managing general partners has determined that the
registrant has at least one "audit committee financial expert" (as defined in
Item 3 of Form N-CSR) serving on its audit committee. Langhorne B. Smith is the
"audit committee financial expert" and is "independent" (as each item is defined
in Item 3 of Form N-CSR).
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit Fees
(a) The aggregate fees billed for each of the last two fiscal years for
professional services rendered by the principal accountant for the
audit of the registrant's annual financial statements or services that
are normally provided by the accountant in connection with statutory
and regulatory filings or engagements for those fiscal years are
$22,000 for 2006 and $21,000 for 2005.
Audit-Related Fees
(b) The aggregate fees billed in each of the last two fiscal years for
assurance and related services by the principal accountant that are
reasonably related to the performance of the audit of the
registrant's financial statements and are not reported under paragraph
(a) of this Item are $0 for 2006 and $0 for 2005.
Tax Fees
(c) The aggregate fees billed in each of the last two fiscal years for
professional services rendered by the principal accountant for tax
compliance, tax advice, and tax planning are $0 for 2006 and $0 for
2005.
All Other Fees
(d) The aggregate fees billed in each of the last two fiscal years for
products and services provided by the principal accountant, other than
the services reported in paragraphs (a) through (c) of this Item are $0
for 2006 and $0 for 2005.
(e)(1) Disclose the audit committee's pre-approval policies and procedures
described in paragraph (c)(7) of Rule 2-01 of Regulation S-X.
The Audit Committee does not have pre-approved policies and procedures.
Instead, the Audit Committee approves on a case-by-case basis each
audit or non-audit service before the accountant is engaged by the
Registrant.
(e)(2) The percentage of services described in each of paragraphs (b) through
(d) of this Item that were approved by the audit committee pursuant to
paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X are as follows:
(b) 0%
(c) 0%
(d) 0%
(f) The percentage of hours expended on the principal accountant's
engagement to audit the registrant's financial statements for the most
recent fiscal year that were attributed to work performed by persons
other than the principal accountant's full-time, permanent employees
was 0%.
(g) The aggregate non-audit fees billed by the registrant's accountant for
services rendered to the registrant, and rendered to the registrant's
investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen by
another investment adviser), and any entity controlling, controlled by,
or under common control with the adviser that provides ongoing services
to the registrant for each of the last two fiscal years of the
registrant was $0 for 2006 and $0 for 2005.
(h) Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
Schedule of Investments in securities of unaffiliated issuers as of the close of
the reporting period is included as part of the report to shareholders filed
under Item 1 of this form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which shareholders may
recommend nominees to the registrant's board of managing general partners.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers,
or persons performing similar functions, have concluded that the
registrant's disclosure controls and procedures (as defined in Rule
30a-3(c) under the Investment Company Act of 1940, as amended (the
"1940 Act") (17 CFR 270.30a-3(c))) are effective, as of a date within
90 days of the filing date of the report, based on the evaluation of
these controls and procedures required by Rule 30a-3(b) under the 1940
Act (17 CFR 270.30a-3(b)) and Rule 15d-15(b) under the Securities
Exchange Act of 1934, as amended (17 CFR 240.15d-15(b)).
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17
CFR 270.30a-3(d)) that occurred during the second fiscal quarter of the
period covered by this report that have materially affected, or are
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Code of ethics that is the subject of disclosure required by Item
2 is incorporated by reference to the N-CSR filed on March 9, 2005
(SEC Accession No. 0000893220-05-000491).
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and
Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and
Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) Chestnut Street Exchange Fund
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By (Signature and Title)* /s/ Edward J. Roach
--------------------------------------------
Edward J. Roach, President & Treasurer
(Principal Executive Officer & Principal
Financial Officer)
Date February 22, 2007
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Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ Edward J. Roach
--------------------------------------------
Edward J. Roach, President & Treasurer
(Principal Executive Officer & Principal
Financial Officer)
Date February 22, 2007
-----------------
* Print the name and title of each signing officer under his or her signature.