<PAGE> 1
CHESTNUT STREET EXCHANGE FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
ROBERT R. FORTUNE
Chairman and President
August 1, 1996
Fellow Partner:
Our Fund earned $1.63 per share of net investment income in the six months
ended June 30, 1996, as compared to $1.49 per share in the same period of 1995.
After providing for the $.60 per share distribution to partners of record
on June 28, 1996, the net asset value per partnership share, as shown in the
enclosed report, was $213.60, the highest quarter-end value in the Fund's
history. The value at May 31, 1996, prior to the recent stock market down-turn,
was $216.94 per partnership share.
Since our last report, 226,634 shares of Coca-Cola Company and 205,992
shares of Johnson & Johnson, Inc. were received from stock splits. Additionally,
the preferred shares in the SmithKline Beecham plc investment were redeemed.
Your comments or inquiries concerning Chestnut Street Exchange Fund are
welcomed.
Yours sincerely,
/s/ ROBERT R. FORTUNE
Robert R. Fortune
<PAGE> 2
INVESTMENT ADVISER'S REPORT
The U.S. equity markets have given back some of their year-to-date gains in
the second quarter in response to worries about the sustainability of corporate
earnings. Although the majority of earnings announcements for the second quarter
to date have come in at or ahead of expectations, investors have remained
concerned about the profit outlook for the rest of the year.
There have been no long-lived themes in the quarter and market leadership
has changed frequently. Small capitalization equities significantly outperformed
large capitalization equities during the first two months of the quarter, only
to lose most of their performance edge in June. Industrials as measured by the
Dow Jones Average, which had outperformed the broader market in the first
quarter, rose only 1.2% in the second quarter, significantly less than the
broader market's 3.9%. The Chestnut Street Exchange Fund returned 4.6% for the
quarter.
COMPARATIVE PERFORMANCE
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------
6/30/96 6/30/95
--------- ---------
<S> <C> <C>
Chestnut Street Exchange Fund................................... +10.6% +23.9%
Dow Jones Industrial Average.................................... +10.5% +18.8%
Standard & Poor's 500(R) Composite Stock Price Index............ + 8.9% +18.6%
</TABLE>
We continue to expect the economy to show modest growth through 1996, with
growth slowing in 1997 after the election is behind us. Retail sales of autos
and durable goods are slowing as personal debt continues to increase, although
home sales have held up in the face of modestly increasing mortgage rates. Unit
labor costs and personal income are growing slowly while energy prices are
declining, indicating lesser inflationary pressures. However, business
inventories are falling, some commodity prices are increasing as are some food
and grain prices, causing investors some concern about inflationary pressures.
Despite the conflicting data we expect moderate inflation pressures over the
next six months.
Corporate profits grew 8% in the first quarter and are forecasted to grow
6% in each of the second and third quarters. However, to reach consensus
forecasts for the year, corporate profits will have to grow 16% in the fourth
quarter, an acceleration which seems unlikely in the current economic
environment, especially since the majority of the fourth quarter earnings gain
is expected to come from capital spending-linked industries. Thus, we are
cautious about the market outlook for the rest of the year. The Fund's
diversification should mitigate some of this risk as it did in the second
quarter.
July 29, 1996 PNC INSTITUTIONAL MANAGEMENT CORPORATION
2
<PAGE> 3
CHESTNUT STREET EXCHANGE FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENT OF NET ASSETS
JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
NO. OF
SHARES VALUE
- -------- -------------
<S> <C>
COMMON STOCKS -- 97.1%
AUTO & AUTO
PARTS -- 0.7%
41,299 Genuine Parts Company...... $ 1,889,429
-------------
BANKS -- 7.6%
12,476 Barnett Banks Inc. ........ 761,036
60,000 CoreStates Financial
Corp. ................... 2,310,000
30,757 First Chicago NBD Corp. ... 1,203,368
40,000 Morgan (J.P.) & Co.,
Inc. .................... 3,385,000
89,328 NationsBank Corp. ......... 7,380,726
157,266 Norwest Corp. ............. 5,484,652
-------------
20,524,782
-------------
BUILDING MATERIALS & FOREST
PRODUCTS -- 1.8 %
45,130 Armstrong World Industries,
Inc. .................... 2,600,616
52,117 Weyerhaeuser Company....... 2,214,973
-------------
4,815,589
-------------
BUSINESS PRODUCTS &
SERVICES -- 3.7 %
50,647 Dun & Bradstreet
Corporation.............. 3,165,438
68,416 Harland (John H.) Co. ..... 1,684,744
52,000 Minnesota Mining &
Manufacturing Company.... 3,588,000
30,000 PHH Corp. ................. 1,710,000
-------------
10,148,182
-------------
CHEMICALS -- 7.8%
96,700 Air Products & Chemicals,
Inc. .................... 5,584,425
52,100 Betz Laboratories, Inc. ... 2,285,888
208,000 Cabot Corporation.......... 5,096,000
175,077 Loctite Corp. ............. 8,141,080
-------------
21,107,393
-------------
CONSUMER NON-DURABLES &
SERVICES -- 8.2 %
453,268 Coca-Cola (The) Company.... 22,153,474
-------------
CONTAINERS -- 1.1%
67,148 Crown Cork & Seal Company,
Inc. .................... 3,021,660
-------------
<CAPTION>
NO. OF
SHARES VALUE
- -------- -------------
<C> <S> <C>
DIVERSIFIED
COMPANIES -- 2.6%
157,190 Alco Standard
Corporation.............. $ 7,112,848
-------------
DRUGS &
MEDICAL -- 16.3%
121,964 Abbott Laboratories,
Inc. .................... 5,305,434
39,177 Baxter International,
Inc. .................... 1,851,113
411,984 Johnson & Johnson, Inc. ... 20,393,208
203,995 Merck & Company, Inc. ..... 13,183,177
62,000 SmithKline Beecham plc
ADS...................... 3,371,250
-------------
44,104,182
-------------
ELECTRICAL
EQUIPMENT -- 5.4%
101,567 Emerson Electric Company... 9,179,118
64,000 General Electric Company... 5,536,000
-------------
14,715,118
-------------
ELECTRONICS -- 16.9%
105,538 AMP, Inc. ................. 4,234,712
22,298 Hewlett-Packard Company.... 2,221,438
318,947 Intel Corp. ............... 23,422,670
119,118 Motorola, Incorporated..... 7,489,544
159,207 Raytheon Company........... 8,219,061
-------------
45,587,425
-------------
ENTERTAINMENT -- 1.6%
68,000 Walt Disney Company........ 4,275,500
-------------
FOOD PROCESSING &
DISTRIBUTION -- 1.4%
170,000 McCormick & Co. Inc. ...... 3,761,250
-------------
INSURANCE &
FINANCIAL -- 2.5%
22,000 Aetna Life & Casualty
Co. ..................... 1,573,000
43,930 American Express Company... 1,960,376
12,028 CIGNA Corp. ............... 1,417,801
19,392 Marsh & McLennan Companies,
Inc. .................... 1,871,328
-------------
6,822,505
-------------
LODGING &
RESTAURANT -- 1.8%
101,234 McDonald's Corporation..... 4,732,689
-------------
NATURAL GAS
TRANSMISSION -- 0.5%
24,000 Tenneco, Inc. ............. 1,227,000
-------------
</TABLE>
See Accompanying Notes to Financial Statements.
3
<PAGE> 4
STATEMENT OF NET ASSETS (CONCLUDED)
<TABLE>
<CAPTION>
NO. OF
SHARES VALUE
- -------- -------------
<C> <S> <C>
OFFICE
EQUIPMENT -- 0.4%
10,471 International Business
Machines Corporation..... $ 1,036,629
-------------
PAPER -- 1.2%
30,000 Consolidated Papers,
Inc. .................... 1,560,000
55,432 Westvaco Corp. ............ 1,656,031
-------------
3,216,031
-------------
PETROLEUM -- 2.7 %
13,500 Atlantic Richfield Co. .... 1,599,750
40,000 Exxon Corp. ............... 3,475,000
40,360 Louisiana Land &
Exploration Company...... 2,325,745
-------------
7,400,495
-------------
PETROLEUM EQUIPMENT &
SERVICES -- 0.9 %
30,216 Schlumberger, Ltd. ........ 2,545,698
-------------
POLLUTION CONTROL -- 1.8 %
114,556 Browning-Ferris
Industries, Inc. ........ 3,322,124
48,736 WMX Technologies, Inc. .... 1,596,104
-------------
4,918,228
-------------
RETAIL -- GENERAL &
SPECIALTY -- 3.8%
116,772 Albertson's Inc. .......... 4,831,441
58,600 Melville Corp. ............ 2,373,300
60,000 Penney (J.C.) Company,
Inc. .................... 3,150,000
-------------
10,354,741
-------------
TELEPHONE UTILITIES -- 4.2 %
65,000 AT&T Corp. ................ 4,030,000
163,900 GTE Corp. ................. 7,334,525
-------------
11,364,525
-------------
<CAPTION>
NO. OF
SHARES VALUE
- -------- -------------
<C> <S> <C>
TRANSPORTATION -- 2.2%
39,932 Burlington Northern,
Inc. .................... $ 3,229,500
40,000 Union Pacific Corp. ....... 2,795,000
-------------
6,024,500
-------------
Total Common Stocks
(Cost $45,184,691)..... 262,859,873
-------------
<CAPTION>
PAR
- --------
<S> <C>
SHORT-TERM OBLIGATIONS -- 2.7 %
$7,300,000 General Electric Capital
Corp., Commercial Paper,
5.35%, 07/31/96
(Cost $7,300,000)........ 7,300,000
-------------
TOTAL INVESTMENTS IN SECURITIES
(Cost $52,484,691)......... 99.8% 270,159,873
Distributions payable........ (0.3) (760,606)
Other assets in excess of
other liabilities.......... 0.5 1,356,548
----- -------------
NET ASSETS (Applicable to
1,267,585 partnership
shares outstanding)........ 100.0% $ 270,755,815
===== =============
NET ASSET VALUE PER SHARE.... $ 213.60
=============
NET ASSETS APPLICABLE TO
SHARES OWNED BY:
Limited partners
(1,208,570 shares)........ $ 258,150,227
Managing general partners
(13,358 shares)........... $2,853,265
Non-managing general partner
(45,657 shares)........... 9,752,323 12,605,588
---------- -------------
Total net assets
(1,267,585 shares)........ $ 270,755,815
=============
</TABLE>
See Accompanying Notes to Financial Statements.
4
<PAGE> 5
CHESTNUT STREET EXCHANGE FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends.............................. $ 2,547,420
Interest............................... 195,438
-----------
Total income....................... 2,742,858
-----------
Expenses:
Investment advisory fee................ 574,069
Managing general partners' compensation
and officer's salary................. 21,787
Legal.................................. 15,976
Custodian fees......................... 12,781
Audit.................................. 12,616
Transfer agent......................... 7,459
Insurance.............................. 2,486
Printing............................... 8,968
Other.................................. 7,458
-----------
Total expenses..................... 663,600
-----------
Net investment income............ 2,079,258
-----------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Realized gain from security
transactions:
Sold or distributed upon redemption
of partnership shares.............. 5,697,272
Unrealized appreciation of
investments:
Beginning of period.... $199,110,716
End of period.......... 217,675,182
------------
18,564,466
-----------
Net realized and unrealized gain
on investments................. 24,261,738
-----------
Net increase in net assets resulting
from operations.................... $26,340,996
===========
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, YEAR ENDED
1996 DECEMBER 31,
(UNAUDITED) 1995
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
OPERATIONS:
Net investment
income.............. $ 2,079,258 $ 4,201,731
Net realized gain
(loss) from security
transactions (for
federal income tax
purposes net gain is
$69,781 and
$5,230)............. 69,781 (20,440)
Excess of market value
over book value of
securities
distributed upon
redemption of
partnership
shares.............. 5,627,491 4,500,529
Increase in unrealized
appreciation of
investments......... 18,564,466 61,179,956
------------ ------------
Increase in net assets
resulting from
operations.......... 26,340,996 69,861,776
------------ ------------
DISTRIBUTIONS TO
PARTNERS FROM:
Net investment
income.............. (1,530,474) (4,194,988)
Net realized gains
(federal income
tax basis).......... 0 0
------------ ------------
Total distributions to
partners............ (1,530,474) (4,194,988)
------------ ------------
CAPITAL SHARE
TRANSACTIONS:
Net asset value of
1,035 and 5,545
shares issued to
partners in lieu of
cash
distributions....... 204,102 832,230
Cost of 30,649 and
33,208 shares
repurchased......... (6,254,060) (5,851,793)
------------ ------------
Decrease in net assets
from capital share
transactions........ (6,049,958) (5,019,563)
------------ ------------
Total increase in net
assets.............. 18,760,564 60,647,225
NET ASSETS:
Beginning of period... 251,995,251 191,348,026
------------ ------------
End of period......... $270,755,815 $251,995,251
============ ============
</TABLE>
See Accompanying Notes to Financial Statements.
5
<PAGE> 6
CHESTNUT STREET EXCHANGE FUND
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF THE FUND OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, FOR THE YEAR ENDED DECEMBER 31,
1996 ----------------------------------------------------
(UNAUDITED) 1995 1994 1993 1992 1991
----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period................ $ 194.26 $ 144.43 $ 142.79 $ 134.44 $ 125.46 $ 92.98
---------- -------- -------- -------- -------- --------
Income From Investment
Operations:
Net investment income.... 1.63 3.22 3.07 2.62 2.48 2.40
Net gain on securities
(both realized and
unrealized)........... 18.91 49.82 4.27 8.35 8.99 32.47
---------- -------- -------- -------- -------- --------
Total from
investment
operations....... 20.54 53.04 7.34 10.97 11.47 34.87
---------- -------- -------- -------- -------- --------
Less Distributions:
Distributions from net
investment income..... (1.20) (3.21) (3.07) (2.62) (2.49) (2.39)
Distributions from
realized gains
(federal income
tax basis)............ .00 .00 (2.63) .00 .00 .00
---------- -------- -------- -------- -------- --------
Total
distributions.... (1.20) (3.21) (5.70) (2.62) (2.49) (2.39)
---------- -------- -------- -------- -------- --------
Net Asset Value,
End of Period............ $ 213.60 $ 194.26 $ 144.43 $ 142.79 $ 134.44 $ 125.46
========== ======== ======== ======== ======== ========
Total Return............... 22.40%* 36.88% 5.19% 8.19% 9.23% 37.74%
Ratios/Supplemental Data:
Net Assets, End of
Period (000s)......... $ 270,756 $251,995 $191,348 $196,748 $196,263 $201,101
Ratios to average
net assets:
Operating expenses.... .51%* .52% .54% .54% .54% .56%
Net investment income... 1.59%* 1.84% 2.11% 1.87% 1.89% 2.18%
Portfolio Turnover
Rate.................. .00% .00% 3.88% .00% .00% .00%
</TABLE>
* Annualized
See Accompanying Notes to Financial Statements.
6
<PAGE> 7
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(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 June 28, 1996 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), an indirect
wholly-owned subsidiary of PNC Bank, PIMC manages the Fund's portfolio and
maintains the Fund's financial accounts. PFPC, an indirect wholly-owned
subsidiary 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
1/10th 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 June
30, 1996 was $38,976,802. The gross unrealized appreciation for all
securities (excess of value over tax cost) is $231,183,071.
(D) There were no purchases or sales of securities other than short-term
obligations for the six months ended June 30, 1996.
(E) At June 30, 1996, net assets consisted of:
<TABLE>
<S> <C>
Undistributed net investment income.................................... $ 560,669
Unrealized gain on investments......................................... 217,675,182
Other capital--paid-in or reinvested................................... 52,519,964
-------------
$ 270,755,815
=============
</TABLE>
7
<PAGE> 8
- ---------------------------------------------------
- ---------------------------------------------------
MANAGING GENERAL PARTNERS
Robert R. Fortune
G. Willing Pepper
R. Stewart Rauch
David R. Wilmerding, Jr.
INVESTMENT ADVISERS
PNC Bank, National Association
and
PNC 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 LOGO]
Semiannual Report
June 30, 1996
Chestnut Street Exchange
Fund
400 Bellevue Parkway
Suite 100
Wilmington, Delaware 19809
(302) 792-2555
Edward J. Roach, Treasurer
- ---------------------------------------------------
- ---------------------------------------------------
