<PAGE> 1
CHESTNUT STREET EXCHANGE FUND
(A California Limited Partnership)
ROBERT R. FORTUNE
Chairman and President
February 2, 1995
Fellow Partner:
Enclosed is the Annual Report of Chestnut Street Exchange Fund for the
year ended December 31, 1994.
Our Fund earned $3.07 per share from net investment income for a share
outstanding throughout 1994, compared to $2.62 per share earned in 1993. In
addition, long-term capital gains (federal income tax basis) of $8.77 per
share were realized in 1994 from the sale of our holdings in Paramount
Communications, Inc. and Gerber Products Company.
Total distributions from net investment income, applicable to 1994,
amounted to $3.07 per share, including $1.57 per share distributed in January
1995. In accordance with Fund policy, approximately thirty percent of the
realized capital gains, or $2.63 per share, was also distributed in January
1995.
Securities distributed in redemption of partners' shares since our last
report were 6,290 shares of American Home Products Corporation and 2,408
shares of Barnett Banks Inc.
Data on the performance of our Fund since inception and comparisons to
leading stock market indices are contained in the accompanying Investment
Adviser's Report.
Your questions or comments concerning Chestnut Street Exchange Fund are
welcomed.
Yours sincerely,
/s/ Robert R. Fortune
----------------------
Robert R. Fortune
<PAGE> 2
INVESTMENT ADVISER'S REPORT
After producing double-digit returns in 1993, the financial markets in
early 1994 seemed poised for another record-setting year. The economy was
healthy, inflation seemed to be under control, and interest rates were low.
The first of many blows to the financial markets was felt in early February,
when the Federal Reserve initiated the first of what were to be six increases
in interest rates during the year. Consequently, there were few investments
that managed a 1994 return in excess of the inflation rate.
Large-capitalization equities rose only slightly in 1994; the S&P 500
index total return was only 1.3% for the year. According to Lipper
Analytical, the average U.S. equity mutual fund last year lost 1.7%; and only
21% of funds beat the S&P 500. Your fund returned 5.1%.
COMPARATIVE DATA
<TABLE>
<CAPTION>
CSEF DJIA S&P 500 S&P400
--------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Market Value 12/31/94 $144.43 3,834.44 459.27 547.41
Market Value 12/31/93 $142.79 3,754.09 466.45 540.19
% Increase in 1994 1.1 % 2.1 % -1.5 % 1.3 %
1994 Distributions $ 5.70 $ 102.64 $ 13.01 $ 13.14
Total Return 1994 5.1 % 4.9 % 1.3 % 3.8 %
Market Value 12/29/76 $ 25.00 994.93 106.34 118.27
% Increase 1976-1994 477.7 % 285.4 % 331.9 % 362.8 %
Distributions 1976-1994 $ 38.87 $1,316.86 $157.84 $160.73
Total Return 1976-1994 633.2 % 417.8 % 480.3 % 498.7 %
</TABLE>
Due to the interest rate increases throughout 1994, we expect economic
momentum to subside gradually throughout 1995. The fourth quarter of 1994
exhibited a growth rate of between 4% and 5%. By the end of 1995 economic
growth should be about 1.8%. This slowdown should be enough for the Federal
Reserve to suspend its higher interest rate policy sometime in the second
quarter of 1995. However, we do not expect any declines in short-term
interest rates during the year, mainly due to a rise, albeit a modest one, in
the inflation rate. Long-term interest rates saw their highest levels in this
cycle late in 1994 and could decline modestly in 1995 due to reduced fears of
an overheating economy. We expect the dollar to be flat to slightly weaker
throughout the year.
Although we expect strong earnings growth, comparisons become more
difficult in 1995. And although the new legislative leadership in Washington
has increased the likelihood of a capital gains tax reduction, which give
equities an advantage in 1995, we also expect them to meet serious
competition from both long and short-term interest rates throughout the year.
Your Fund continues to maintain a diversified posture to ensure growth
from both secular and cyclical trends.
PNC INSTITUTIONAL MANAGEMENT CORPORATION
February 2, 1995
2
<PAGE> 3
CHESTNUT STREET EXCHANGE FUND
(A California Limited Partnership)
STATEMENT OF NET ASSETS
December 31, 1994
<TABLE>
<CAPTION>
No. of
Shares Value
- - --------- ---------------------------- -----------
<S> <C> <C>
COMMON STOCKS--96.7%
AUTO & AUTO PARTS--0.8%
41,299 Genuine Parts Company......... $ 1,486,764
-----------
BANKS--7.1%
30,722 Barnett Banks Inc............. 1,178,957
60,000 CoreStates Financial Corp..... 1,560,000
16,993 First Chicago Corp............ 811,416
40,000 Morgan (J.P.) & Co., Inc...... 2,240,000
89,328 NationsBank Corp.............. 4,030,926
157,266 Norwest Corp.................. 3,676,093
-------------
13,497,392
-------------
BUILDING MATERIALS &
FOREST PRODUCTS--1.9%
45,130 Armstrong World Industries,
Inc.......................... 1,737,505
52,117 Weyerhaeuser Company.......... 1,954,388
-------------
3,691,893
-------------
BUSINESS PRODUCTS &
SERVICES--4.2%
50,647 Dun & Bradstreet Corporation. 2,785,585
68,416 Harland (John H.) Co.......... 1,368,320
52,000 Minnesota Mining &
Manufacturing Company ....... 2,775,500
30,000 PHH Corp...................... 1,042,500
-------------
7,971,905
-------------
CHEMICALS--10.4%
96,700 Air Products & Chemicals,
Inc.......................... 4,315,237
53,948 Betz Laboratories, Inc........ 2,387,199
107,844 Cabot Corporation ............ 3,060,073
217,209 Loctite Corp.................. 10,100,218
-------------
19,862,727
-------------
CONSUMER NON-DURABLES &
SERVICES--6.3%
233,052 Coca-Cola (The) Company ...... $12,002,178
-------------
CONTAINERS--1.3%
67,148 *Crown Cork & Seal
Company, Inc................. 2,534,837
-------------
DIVERSIFIED COMPANIES--2.6%
79,069 Alco Standard Corporation..... 4,961,580
-------------
DRUGS & MEDICAL--14.3%
122,442 Abbott Laboratories, Inc...... 3,994,670
39,177 Baxter International, Inc..... 1,106,750
220,198 Johnson & Johnson, Inc........ 12,055,840
211,266 Merck & Company, Inc.......... 8,054,516
62,000 SmithKline Beecham p.l.c.
ADR unit..................... 2,123,500
-------------
27,335,276
-------------
ELECTRICAL EQUIPMENT--5.1%
102,865 Emerson Electric Company...... 6,429,062
64,000 General Electric Company...... 3,264,000
-------------
9,693,062
-------------
ELECTRONICS--16.3%
82,611 AMP, Inc...................... 6,009,950
11,149 Hewlett-Packard Company ...... 1,113,506
188,891 Intel Corp.................... 12,065,413
119,118 Motorola, Incorporated ....... 6,893,954
79,666 Raytheon Company.............. 5,088,666
-------------
31,171,489
-------------
</TABLE>
See Accompanying Notes to Financial Statements.
3
<PAGE> 4
STATEMENT OF NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
No. of
Shares Value
- - --------- ------------------------------- -------------
<S> <C> <C>
ENTERTAINMENT--1.6%
68,000 Walt Disney Company............ $ 3,136,500
------------
FOOD PROCESSING &
DISTRIBUTION--1.6%
170,000 McCormick & Co. Inc............ 3,102,500
------------
INSURANCE & FINANCIAL--2.4%
22,000 Aetna Life & Casualty Co....... 1,036,750
43,930 American Express Company....... 1,295,935
12,028 CIGNA Corp..................... 765,281
19,392 Marsh & McLennan
Companies, Inc................ 1,536,816
-------------
4,634,782
-------------
LODGING & RESTAURANT--1.5%
101,234 McDonald's Corporation ........ 2,961,095
-------------
NATURAL GAS TRANSMISSION--0.5%
24,000 Tenneco, Inc................... 1,020,000
-------------
OFFICE EQUIPMENT--0.4%
10,471 International Business
Machines Corporation ......... 769,619
-------------
PAPER--1.5%
30,000 Consolidated Papers, Inc....... 1,350,000
36,955 Westvaco Corp.................. 1,450,484
-------------
2,800,484
-------------
PETROLEUM--2.8%
13,500 Atlantic Richfield Co.......... 1,373,625
40,000 Exxon Corp..................... 2,430,000
40,360 Louisiana Land & Exploration
Company....................... 1,468,095
-------------
5,271,720
-------------
PETROLEUM EQUIPMENT &
SERVICES--0.8%
30,216 Schlumberger, Ltd.............. 1,522,131
-------------
POLLUTION CONTROL--2.4%
114,556 Browning-Ferris Industries,
Inc........................... $ 3,250,527
51,054 WMX Technologies, Inc.......... 1,340,168
-------------
4,590,695
-------------
RETAIL--GENERAL &
SPECIALTY--4.7%
116,772 Albertson's Inc................ 3,386,388
80,076 K Mart Corp.................... 1,040,988
61,502 Melville Corp.................. 1,898,874
60,000 Penney (J.C.) Company, Inc..... 2,677,500
-------------
9,003,750
-------------
TELEPHONE UTILITIES--4.3%
65,000 AT&T Corp...................... 3,266,250
163,900 GTE Corp....................... 4,978,463
-------------
8,244,713
-------------
TRANSPORTATION--1.9%
39,932 Burlington Northern, Inc....... 1,921,727
40,000 Union Pacific Corp............. 1,825,000
-------------
3,746,727
-------------
Total Common Stocks
(Cost $47,057,389)........... 185,013,819
-------------
PREFERRED STOCKS--0.0%
2,994 *Al Copeland Enterprises, Inc.,
17.50%, Cum.Cvt. (Cost
$25,670)..................... 0
-------------
</TABLE>
See Accompanying Notes to Financial Statements.
4
<PAGE> 5
STATEMENT OF NET ASSETS (Concluded)
<TABLE>
<CAPTION>
Par Value
- - --------- -------------
<S> <C>
SHORT-TERM OBLIGATIONS--5.9%
$5,500,000 General Electric Capital Corp.,
Commercial Paper, 5.00%,
01/06/95...................... 5,500,000
5,800,000 General Electric Capital Corp.,
Commercial Paper, 5.50%,
01/10/95...................... 5,800,000
------------
Total Short-Term Obligations
(Cost $11,300,000)............ 11,300,000
------------
</TABLE>
<TABLE>
<CAPTION>
Value
-------------
<S> <C> <C>
TOTAL INVESTMENTS IN SECURITIES
(Cost--$58,383,059)......... 102.6% $196,313,819
Distributions payable (2.9) (5,576,003)
Other assets in excess of
other liabilities........... 0.3 610,210
---------- ------------
NET ASSETS (Applicable to
1,324,862 partnership
shares outstanding)......... 100.0% $191,348,026
========== ============
Net Asset Value per share.... $ 144.43
============
Net assets applicable to
shares owned by:
Limited partners (1,266,865
shares)..................... $182,971,598
Managing general partners
(13,157 shares)............. $1,900,247
Non-managing general
partner (44,840 shares)..... 6,476,181 8,376,428
---------- ------------
Total net assets(1,324,862
shares) $191,348,026
============
</TABLE>
* Non-Income Producing
See Accompanying Notes to Financial Statements.
5
<PAGE> 6
CHESTNUT STREET EXCHANGE FUND
(A California Limited Partnership)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
Investment Income:
<S> <C> <C>
Dividends ................................. $ 4,774,668
Interest .................................. 382,727
------------
Total income ........................... 5,157,395
------------
Expenses:
Investment advisory fee ................... 878,636
Managing general partners' compensation
and officer's salary ..................... 43,400
Legal ..................................... 32,489
Custodian fees ............................ 25,912
Audit ..................................... 28,860
Transfer agent ............................ 14,386
Insurance ................................. 8,190
Printing .................................. 7,216
Other ..................................... 16,693
------------
Total expenses ......................... 1,055,782
------------
Net investment income ................ 4,101,613
------------
Realized and unrealized gain on
investments:
Realized gain from security
transactions:
Sold or distributed upon redemption of
partnership shares ..................... 17,462,853
Unrealized appreciation of investments:
Beginning of year ........................ $149,781,091
End of year .............................. 137,930,760
------------
(11,850,331)
------------
Net realized and unrealized gain on
investments ......................... 5,612,522
------------
Net increase in net assets resulting
from operations ........................ $ 9,714,135
============
</TABLE>
See Accompanying Notes to Financial Statements.
6
<PAGE> 7
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Increase (Decrease) in net
assets:
Operations:
Net investment income..... $ 4,101,613 $ 3,647,018
Net realized gain from
security transactions
(for federal income
tax purposes net gain
is $11,893,727 and $0).. 11,063,360 0
Excess of market value
over book value of
securities distributed
upon redemption of
partnership shares...... 6,399,493 9,120,893
Increase (decrease) in
unrealized
appreciation of
investments............. (11,850,331) 2,676,840
------------ -----------
Increase in net assets
resulting from
operations.............. 9,714,135 15,444,751
------------ -----------
Distributions to partners
from:
Net investment income..... (4,098,494) (3,652,217)
Net realized gains
(federal income tax
basis).................. (3,484,592) 0
------------ -----------
Total distributions to
partners................ (7,583,086) (3,652,217)
------------ -----------
Capital share
transactions:
Net asset value of 1,853
and 1,928 shares
issued to partners in
lieu of cash
distributions........... 264,120 263,328
Cost of 54,888 and
83,891 shares
repurchased............. (7,795,028) (11,570,519)
------------ ------------
Decrease in net assets
from capital share
transactions............ (7,530,908) (11,307,191)
------------ ------------
Total increase
(decrease) in net
assets.................. (5,399,859) 485,343
Net assets:
Beginning of year......... 196,747,885 196,262,542
------------ ------------
End of year............... $191,348,026 $196,747,885
============ ============
</TABLE>
See Accompanying Notes to Financial Statements.
7
<PAGE> 8
CHESTNUT STREET EXCHANGE FUND
FINANCIAL HIGHLIGHTS
(For a Share of the Fund Outstanding Throughout Each Year)
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------------------------------------
1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year . $ 142.79 $ 134.44 $ 125.46 $ 92.98 $ 95.96
-------- -------- -------- -------- -------
Income From Investment Operations:
Net investment income ........... 3.07 2.62 2.48 2.40 2.26
Net gain (loss) on securities
(both realized and unrealized) 4.27 8.35 8.99 32.47 (2.97)
-------- -------- -------- -------- -------
Total from investment
operations ................. 7.34 10.97 11.47 34.87 (.71)
-------- -------- -------- -------- -------
Less Distributions:
Distributions from net
investment income ............. (3.07) (2.62) (2.49) (2.39) (2.27)
Distributions from realized
gains (federal income tax
basis) ........................ (2.63) .00 .00 .00 .00
-------- -------- -------- -------- -------
Total distributions ......... (5.70) (2.62) (2.49) (2.39) (2.27)
-------- -------- -------- -------- -------
Net Asset Value, End of Year ....... $ 144.43 $ 142.79 $ 134.44 $ 125.46 $ 92.98
======== ======== ======== ======== =======
Total Return ....................... 5.19% 8.19% 9.23% 37.74% (.73%)
Ratios/Supplemental Data:
Net Assets, End of Year (000s) ... $191,348 $196,748 $196,263 $201,101 $152,321
Ratios to average net assets:
Operating expenses .............. .54% .54% .54% .56% .60%
Net investment income ........... 2.11% 1.87% 1.89% 2.18% 2.41%
Portfolio Turnover Rate .......... 3.88% .00% .00% .00% .00%
</TABLE>
See Accompanying Notes to Financial Statements.
8
<PAGE> 9
NOTES TO FINANCIAL STATEMENTS
(A) The Fund is registered under the Investment Company Act of 1940, as
amended, as a diversified open-end management company. Significant
accounting policies are as follows: Investments are stated at value in the
accompanying financial statements. Securities listed on a securities
exchange are valued at the last reported sales price on December 30, 1994
for such 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 trade date. The cost of investments sold or redeemed in
kind is determined by the use of the specific identification method for
both financial reporting and income tax purposes. For securities received
in the Exchange at inception of the Fund in 1976, cost for financial
reporting purposes is the value of the securities as used in the Exchange
and for income tax purposes, the tax basis of the individual investor.
Interest income is recorded on an accrual basis; dividend income is
recorded on the ex-dividend date. No provision is made for federal income
taxes inasmuch as the Fund is a partnership and net income will be taxable
to the individual partners on a pro-rata basis. The Fund intends to
distribute investment income quarterly and approximately 30 percent of its
net realized capital gains (federal income tax basis) annually.
(B) Under agreements among the Fund, PNC Bank, National Association, (PNC Bank)
and PNC Institutional Management Corporation (PIMC), a wholly-owned
subsidiary of PNC Bank, PIMC manages the Fund's portfolio and maintains the
Fund's financial accounts. PFPC, an affiliate of PNC Bank, is the Fund's
transfer agent. PNC Bank is obligated to provide a non-managing general
partner who will own at all times at least 1% of the Fund's outstanding
shares. PNC Bank pays the non-managing general partner a fee, computed
daily and payable monthly, at the annual rate of 1/10 of 1% of the Fund's
average daily net assets as consideration for acting in that capacity. The
Fund pays PIMC a fee, as investment adviser, computed daily and payable
monthly, at an annual rate of 5/10ths of 1% of the first $100,000,000 of
the Fund's average daily net assets plus 4/10ths of 1% of net assets
exceeding $100,000,000. The managing general partners each receive a fixed
fee as compensation for their services.
(C) The aggregate cost of investments for federal income tax purposes at
December 31, 1994 was $44,185,524. The aggregate gross unrealized
appreciation (depreciation) for all securities is as follows: excess of
value over tax cost $152,986,962, excess of tax cost over value ($858,667).
(D) For the year ended December 31, 1994, purchases and sales of investment
securities (excluding short-term obligations) were $7,201,755 and
$11,960,398, respectively.
(E) At December 31, 1994, net assets consisted of:
<TABLE>
<CAPTION>
<S> <C>
Undistributed net investment
income $ 5,142
Unrealized gain on investments 137,930,760
Other capital -- paid-in or
reinvested 53,412,124
-------------
$191,348,026
=============
</TABLE>
9
<PAGE> 10
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Chestnut Street Exchange Fund:
We have audited the accompanying statement of net assets of Chestnut Street
Exchange Fund as of December 31, 1994 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 each
of the five 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.
We conducted our audits in accordance with generally accepted auditing
standards. 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, 1994 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, 1994, the results of its
operations for the year then ended, the changes in 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 generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 15, 1995
10
<PAGE> 11
================================================================================
MANAGING GENERAL PARTNERS
Robert R. Fortune
G. Willing Pepper LOGO
R. Stewart Rauch
David R. Wilmerding, Jr.
INVESTMENT ADVISERS
PNC Bank, National Association
and
PNC Institutional Annual Report
Management Corporation December 31, 1994
400 Bellevue Parkway
Wilmington, Delaware 19809
Chestnut Street Exchange
TRANSFER AGENT Fund
PFPC, Inc. 400 Bellevue Parkway
P.O. Box 8950 Suite 100
Wilmington, Delaware 19899 Wilmington, Delaware 19809
(800) 852-4750 (302) 792-2555
(302) 791-1043 (Delaware) Edward J. Roach, Treasurer
================================================================================
