<PAGE> 1
CHESTNUT STREET EXCHANGE FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
ROBERT R. FORTUNE
Chairman and President
October 29, 1996
Fellow Partner:
Our Fund earned $2.50 per share of net investment income in the nine months
ended September 30, 1996, as compared to $2.39 per share in the same period of
1995. Long-term capital gains realized in 1996 amount to $.05 per share.
After providing for the $.60 per share distribution to partners of record
on September 30, 1996, the net asset value per partnership share, as shown in
the enclosed report, was $224.35, the highest quarter-end value in the Fund's
history.
Since our last report, 12,476 shares of Barnett Banks Inc., 22,298 shares
of Hewlett-Packard Company and 30,000 shares of PHH Corp. were received from
stock splits. Minnesota Mining & Manufacturing Company distributed 5,200 shares
of Imation Corp.
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 fluctuated in the third quarter, but ended the
quarter with a 3.08% gain. Large capitalization issues have outperformed small
capitalization issues for the year to date on the strength of a lesser
correction in July and a better rebound in the third quarter.
The market was apparently nervous about the economy in the third quarter;
its recovery came on the heels of economic news suggesting that reasonable, not
excessive, economic growth is occurring. The Fed's decision not to raise
interest rates at its September FOMC meeting also helped to propel the market's
advance. The average money manager has outperformed the market for the
year-to-date, returning 14.7% on a total return basis. The Dow Jones continued
to underperform the broader market in the third quarter, rising 5.0% in the
third quarter, significantly less than the broader market's 7.3%. Chestnut
Street Exchange Fund returned 5.3% for the quarter.
COMPARATIVE PERFORMANCE
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------
9/30/96 9/30/95
------- -------
<S> <C> <C>
Chestnut Street Exchange Fund................................. +15.5% +30.4%
Dow Jones Industrial Average.................................. +15.0% +24.9%
Standard & Poor's 500(@) Composite Stock Price Index.......... +11.6% +27.2%
</TABLE>
We continue to expect the economy to show modest growth through 1996, with
growth slowing in 1997 after the election is behind us. Housing starts have been
strong although housing permits have been weak; home sales continue to hold up
in the face of modestly increasing mortgage rates. Unit labor costs and personal
income are growing slowly while energy prices have been stable, indicating
modest 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 through the end of the year.
Corporate profits grew 8% in the first and second quarters and are forecast
to grow 9% in each of the third and fourth quarters. This growth in a price
constrained environment reflects continued substitution of capital for labor and
realization of synergies from strategic mergers and acquisitions. Strong inflows
into mutual funds continue to support the market's advance. Nevertheless, the
market's current valuation is toward the high end of its historic range,
suggesting caution. The Fund's diversification should mitigate some of this risk
as it has done during the course of 1996.
PNC INSTITUTIONAL MANAGEMENT CORPORATION
2
<PAGE> 3
CHESTNUT STREET EXCHANGE FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENT OF NET ASSETS
SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
NO. OF
SHARES VALUE
- ----------- -------------
COMMON STOCKS--97.1%
<C> <S> <C>
AUTO & AUTO PARTS--0.7 %
41,299 Genuine Parts Company..... $ 1,806,831
-------------
BANKS--8.0 %
24,952 Barnett Banks Inc. ....... 842,130
60,000 CoreStates Financial Corp.... 2,595,000
30,757 First Chicago NBD
Corp. .................. 1,391,754
40,000 Morgan (J.P.) & Co.,
Inc. ................... 3,555,000
89,328 NationsBank Corp. ........ 7,760,370
157,266 Norwest Corp. ............ 6,428,248
-------------
22,572,502
-------------
BUILDING MATERIALS &
FOREST PRODUCTS--1.9 %
45,130 Armstrong World
Industries, Inc. ....... 2,814,984
52,117 Weyerhaeuser Company...... 2,403,897
-------------
5,218,881
-------------
BUSINESS PRODUCTS &
SERVICES--3.7 %
50,647 Dun & Bradstreet
Corporation............. 3,019,827
68,416 Harland (John H.) Co. .... 2,052,480
52,000 Minnesota Mining &
Manufacturing Company... 3,633,500
60,000 PHH Corp. ................ 1,785,000
-------------
10,490,807
-------------
CHEMICALS--7.9 %
96,700 Air Products & Chemicals,
Inc. ................... 5,632,775
52,100 BetzDearborn Inc. ........ 2,735,250
208,000 Cabot Corporation......... 5,798,000
175,077 Loctite Corp. ............ 7,922,234
-------------
22,088,259
-------------
CONSUMER NON-DURABLES &
SERVICES--8.2 %
451,832 Coca-Cola (The) Company... 22,986,953
-------------
CONTAINERS--1.1%
67,148 Crown Cork & Seal Company,
Inc. ................... 3,097,201
-------------
DIVERSIFIED
COMPANIES--2.8 %
157,190 Alco Standard Corporation... 7,839,851
-------------
<CAPTION>
NO. OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
DRUGS & MEDICAL--16.7 %
121,964 Abbott Laboratories,
Inc. ................... $ 6,006,727
39,177 Baxter International,
Inc. ................... 1,831,525
411,984 Johnson & Johnson,
Inc. ................... 21,114,180
203,995 Merck & Company, Inc. .... 14,356,148
62,000 SmithKline Beecham plc
ADS..................... 3,774,250
-------------
47,082,830
-------------
ELECTRICAL
EQUIPMENT--5.3 %
101,567 Emerson Electric Company... 9,153,726
64,000 General Electric Company... 5,824,000
-------------
14,977,726
-------------
ELECTRONICS--17.1%
105,538 AMP, Inc. ................ 4,089,598
44,596 Hewlett-Packard Company... 2,174,055
5,200* Imation Corp. ............ 127,400
280,659 Intel Corp. .............. 26,785,393
119,118 Motorola, Incorporated.... 6,149,467
159,207 Raytheon Company.......... 8,855,889
-------------
48,181,802
-------------
ENTERTAINMENT--1.5%
68,000 Walt Disney Company....... 4,309,500
-------------
FOOD PROCESSING &
DISTRIBUTION--1.4%
170,000 McCormick & Co. Inc. ..... 3,973,750
-------------
INSURANCE &
FINANCIAL--2.5%
22,000 Aetna, Inc. .............. 1,548,250
43,930 American Express
Company................. 2,031,763
12,028 CIGNA Corp. .............. 1,441,857
19,392 Marsh & McLennan
Companies, Inc. ........ 1,883,448
-------------
6,905,318
-------------
LODGING &
RESTAURANT--1.7 %
101,234 McDonald's Corporation.... 4,795,961
-------------
NATURAL GAS
TRANSMISSION--0.4%
24,000 Tenneco, Inc. ............ 1,203,000
-------------
OFFICE EQUIPMENT--0.5%
10,471 International Business
Machines Corporation.... 1,303,639
-------------
</TABLE>
3
<PAGE> 4
STATEMENT OF NET ASSETS (CONCLUDED)
<TABLE>
<CAPTION>
NO. OF
SHARES VALUE
- ----------- -------------
COMMON STOCKS (CONTINUED)
<C> <S> <C>
PAPER--1.1%
30,000 Consolidated Papers, Inc. ... $ 1,560,000
55,432 Westvaco Corp. ........... 1,642,173
-------------
3,202,173
-------------
PETROLEUM--2.6%
13,500 Atlantic Richfield Co. ... 1,721,250
40,000 Exxon Corp. .............. 3,330,000
40,360 Louisiana Land &
Exploration Company..... 2,123,945
-------------
7,175,195
-------------
PETROLEUM EQUIPMENT &
SERVICES--0.9%
30,216 Schlumberger, Ltd. ....... 2,553,252
-------------
POLLUTION CONTROL--1.6%
114,556 Browning-Ferris
Industries, Inc. ....... 2,863,900
48,736 WMX Technologies, Inc. ... 1,602,196
-------------
4,466,096
-------------
RETAIL--GENERAL &
SPECIALTY--3.8%
116,772 Albertson's Inc. ......... 4,919,021
58,600 Melville Corp. ........... 2,585,725
60,000 Penney (J.C.) Company,
Inc. ................... 3,247,500
-------------
10,752,246
-------------
TELEPHONE UTILITIES--3.5%
65,000 AT&T Corp. ............... 3,396,250
163,900 GTE Corp. ................ 6,310,150
-------------
9,706,400
-------------
<CAPTION>
NO. OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
TRANSPORTATION--2.2%
39,932 Burlington Northern,
Inc. ................... $ 3,369,262
40,000 Union Pacific Corp. ...... 2,930,000
-------------
6,299,262
-------------
Total Common Stocks
(Cost
$45,134,276)............ 272,989,435
-------------
<CAPTION>
PAR
- -----------
<S> <C>
SHORT-TERM OBLIGATIONS--2.7%
$7,600,000 General Electric Capital
Corp., Commercial Paper,
5.29%, 12/31/96
(Cost $7,600,000)....... 7,600,000
------------
TOTAL INVESTMENTS IN SECURITIES
(Cost $52,734,276)....... 99.8% 280,589,435
Distributions payable...... (0.3) (752,233)
Other assets in excess of
other liabilities........ 0.5 1,435,795
----- ------------
NET ASSETS (Applicable to
1,253,721 partnership
shares outstanding)...... 100.0% $281,272,997
===== ============
NET ASSET VALUE PER
SHARE.................... $ 224.35
============
NET ASSETS APPLICABLE TO
SHARES OWNED BY:
Limited partners
(1,194,695 shares)....... $268,030,481
Managing general partners
(13,369 shares).......... $ 2,999,343
Non-managing general
partner (45,657
shares).................. 10,243,173 13,242,516
----------- ------------
Total net assets
(1,253,721 shares)....... $281,272,997
============
</TABLE>
* Non-Income Producing
Values for securities listed on a securities exchange are based upon the last
reported sales price on September 30, 1996. Securities not so listed or not
traded on that date are valued at the latest bid price.
4
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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)
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[CHESTNUT STREET EXCHANGE FUND LOGO]
Third Quarter Report
September 30, 1996
Chestnut Street Exchange
Fund
400 Bellevue Parkway
Suite 100
Wilmington, Delaware 19809
(302) 792-2555
Edward J. Roach, Treasurer
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