<PAGE> 1
CHESTNUT STREET EXCHANGE FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
ROBERT R. FORTUNE
Chairman and President
February 5, 1996
Fellow Partner:
Enclosed is the Annual Report of Chestnut Street Exchange Fund for the year
ended December 31, 1995.
Our Fund earned $3.22 per share from net investment income for a share
outstanding throughout 1995, compared to $3.07 per share earned in 1994.
Total distributions from net investment income, applicable to 1995,
amounted to $3.21 per share, including $1.41 per share distributed in January
1996. After providing for the January 1996 distribution, the net asset value at
the end of 1995 was $194.26 per partnership share, another new high.
Securities received as a result of stock splits or corporate mergers since
our last report were 78,595 shares of Alco Standard Corporation, 13,764 shares
of First Chicago NBD Corporation, 79,666 shares of Raytheon Company and 18,477
shares of Westvaco Corp. There were 33,208 partnership shares redeemed in 1995
compared to 54,888 shares in 1994.
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 1994's difficult investment year, 1995 turned out to be a banner year
for investors. Inflation was low, interest rates fell, productivity increased,
and profit margins expanded rapidly, combining to produce excellent results for
the year. All market segments did well, with large capitalization stocks
outperforming smaller ones.
Large capitalization equities surged during 1995; the S&P 500 index total
return was 37.6% for the year. According to Lipper Analytical, the average U.S.
equity mutual fund last year returned 31.1%. Because the broad market moved so
strongly it was difficult to beat the indices; only 15% of equity mutual funds
exceeded the S&P 500. Chestnut Street Exchange Fund returned 36.9%.
COMPARATIVE DATA
<TABLE>
<CAPTION>
CSEF DJIA S&P 500 S&P 400
------- --------- ------- -------
<S> <C> <C> <C> <C>
Market Value 12/31/95.................... $194.26 5117.12 615.93 716.76
Market Value 12/31/94.................... $144.43 3834.44 459.27 547.41
% Increase in 1995....................... 34.5% 33.4% 34.1% 30.9%
1995 Distributions....................... $ 3.21 $ 113.40 $ 13.79 $ 13.96
Total Return 1995........................ 36.9% 36.9% 37.6% 35.3%
Market Value 12/29/76.................... $ 25.00 994.93 106.34 118.27
% Increase 1976-1995..................... 677.0% 414.3% 479.2% 506.0%
Distributions 1976-1995.................. $ 42.08 $1,430.26 $171.63 $174.69
Total Return 1976-1995................... 845.3% 558.1% 640.6% 653.7%
</TABLE>
We expect the economy to show modest growth through 1996, with growth
slowing in 1997 after the election is behind us. In the fourth quarter of 1995
the economy grew at a rate between 2 and 3%; we expect economic growth to remain
at that level throughout 1996. Although consumer confidence remains strong,
consumer debt burdens remain high and recent employment gains have been weak; we
saw the results in the very weak holiday shopping season just past.
Consequently, we think the focus of economic activity in 1996 will be on the
business sector, especially in equipment spending. The dollar should continue to
strengthen against the currencies of most of our major trading partners in 1996,
which may slow the export growth we saw in 1995. We expect interest rates to
continue to move down over the course of the year.
Corporate profits' strong 1995 growth has begun to slow. We expect the rate
of change to slow further in 1996 as comparisons become increasingly difficult.
In this environment, stable growth stocks should continue to do well. The Fund's
diversification should enable us to benefit from these trends.
February 2, 1996 PNC INSTITUTIONAL MANAGEMENT CORPORATION
2
<PAGE> 3
CHESTNUT STREET EXCHANGE FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
NO. OF
SHARES VALUE
- ----------- -------------
<S> <C>
COMMON STOCKS--97.2%
AUTO & AUTO PARTS--0.7%
41,299 Genuine Parts Company..... $ 1,693,259
-------------
BANKS--7.5%
12,476 Barnett Banks Inc. ....... 736,084
60,000 CoreStates
Financial Corp. ........ 2,272,500
30,757 First Chicago NBD
Corp. .................. 1,214,902
40,000 Morgan (J.P.) & Co.,
Inc. ................... 3,210,000
89,328 NationsBank Corp. ........ 6,219,462
157,266 Norwest Corp. ............ 5,189,778
-------------
18,842,726
-------------
BUILDING MATERIALS &
FOREST PRODUCTS--2.0%
45,130 Armstrong World
Industries, Inc. ....... 2,798,060
52,117 Weyerhaeuser Company...... 2,254,060
-------------
5,052,120
-------------
BUSINESS PRODUCTS &
SERVICES--3.8%
50,647 Dun & Bradstreet
Corporation............. 3,279,392
68,416 Harland (John H.) Co. .... 1,428,183
52,000 Minnesota Mining &
Manufacturing Company... 3,445,000
30,000 PHH Corp. ................ 1,402,500
-------------
9,555,075
-------------
CHEMICALS--9.1%
96,700 Air Products & Chemicals,
Inc. ................... 5,100,925
52,100 Betz Laboratories,
Inc. ................... 2,136,100
104,214 Cabot Corporation......... 5,614,528
213,832 Loctite Corp. ............ 10,157,020
-------------
23,008,573
-------------
CONSUMER NON-DURABLES &
SERVICES--6.7%
228,062 Coca-Cola (The)
Company................. 16,933,604
-------------
CONTAINERS--1.1%
67,148 *Crown Cork & Seal
Company, Inc. .......... 2,803,429
-------------
<CAPTION>
NO. OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
DIVERSIFIED
COMPANIES--2.8%
157,190 Alco Standard
Corporation............. $ 7,171,794
-------------
DRUGS &
MEDICAL--16.9%
122,442 Abbott Laboratories,
Inc. ................... 5,111,954
39,177 Baxter International,
Inc. ................... 1,640,537
217,204 Johnson & Johnson,
Inc. ................... 18,598,093
211,266 Merck & Company, Inc. .... 13,890,740
62,000 SmithKline Beecham p.l.c.
ADR unit................ 3,441,000
-------------
42,682,324
-------------
ELECTRICAL EQUIPMENT--5.2%
102,865 Emerson Electric
Company................. 8,409,214
64,000 General Electric
Company................. 4,608,000
-------------
13,017,214
-------------
ELECTRONICS--16.2%
163,000 AMP, Inc. ................ 6,255,125
22,298 Hewlett-Packard
Company................. 1,867,458
322,206 Intel Corp. .............. 18,285,191
119,118 Motorola, Incorporated.... 6,789,726
159,332 Raytheon Company.......... 7,528,436
-------------
40,725,936
-------------
ENTERTAINMENT--1.6%
68,000 Walt Disney Company....... 4,012,000
-------------
FOOD PROCESSING &
DISTRIBUTION--1.6%
170,000 McCormick & Co. Inc. ..... 4,101,250
-------------
INSURANCE &
FINANCIAL--2.5%
22,000 Aetna Life & Casualty
Co. .................... 1,523,500
43,930 American Express
Company................. 1,817,604
12,028 CIGNA Corp. .............. 1,241,891
19,392 Marsh & McLennan
Companies, Inc. ........ 1,721,040
-------------
6,304,035
-------------
LODGING & RESTAURANT--1.8%
101,234 McDonald's Corporation.... 4,568,184
-------------
</TABLE>
See Accompanying Notes to Financial Statements.
3
<PAGE> 4
STATEMENT OF NET ASSETS (CONCLUDED)
<TABLE>
<CAPTION>
NO. OF
SHARES VALUE
- ----------- -------------
<S> <C>
COMMON STOCKS (CONTINUED)
NATURAL GAS
TRANSMISSION--0.5%
24,000 Tenneco, Inc. ............ $ 1,191,000
-------------
OFFICE EQUIPMENT--0.4%
10,471 International Business
Machines Corporation.... 960,714
-------------
PAPER--1.3%
30,000 Consolidated
Papers, Inc. ........... 1,683,750
55,432 Westvaco Corp. ........... 1,538,238
-------------
3,221,988
-------------
PETROLEUM--2.6%
13,500 Atlantic Richfield Co. ... 1,495,125
40,000 Exxon Corp. .............. 3,205,000
40,360 Louisiana Land &
Exploration Company..... 1,730,435
-------------
6,430,560
-------------
PETROLEUM EQUIPMENT &
SERVICES--0.8%
30,216 Schlumberger, Ltd. ....... 2,092,458
-------------
POLLUTION CONTROL--1.9%
114,556 Browning-Ferris
Industries, Inc. ....... 3,379,402
48,736 WMX Technologies, Inc. ... 1,455,988
-------------
4,835,390
-------------
RETAIL--GENERAL &
SPECIALTY--3.4%
116,772 Albertson's Inc. ......... 3,838,880
58,600 Melville Corp. ........... 1,801,950
60,000 Penney (J.C.) Company,
Inc. ................... 2,857,500
-------------
8,498,330
-------------
TELEPHONE UTILITIES--4.5%
65,000 AT&T Corp. ............... 4,208,750
163,900 GTE Corp. ................ 7,211,600
-------------
11,420,350
-------------
<CAPTION>
NO. OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
TRANSPORTATION--2.3%
39,932 Burlington Northern,
Inc. ................... $ 3,114,696
40,000 Union Pacific Corp. ...... 2,640,000
-------------
5,754,696
-------------
Total Common Stocks
(Cost
$45,766,293)............ 244,877,009
-------------
<CAPTION>
PAR
- -----------
<S> <C>
SHORT-TERM OBLIGATIONS--3.3%
$8,400,000 General Electric Capital
Corp., Commercial Paper,
5.70%, 01/09/96
(Cost $8,400,000)....... 8,400,000
-------------
TOTAL INVESTMENTS IN SECURITIES
(Cost $54,166,293)........ 100.5% 253,277,009
Distributions payable....... (0.7) (1,829,156)
Other assets in excess of
other liabilities......... 0.2 547,398
----- ------------
NET ASSETS (Applicable to
1,297,199 partnership
shares outstanding)....... 100.0% $251,995,251
===== ============
NET ASSET VALUE PER SHARE... $ 194.26
=============
NET ASSETS APPLICABLE TO
SHARES OWNED BY:
Limited partners
(1,238,227 shares)........ $240,539,289
Managing general partners
(13,315 shares)........... $2,586,586
Non-managing general partner
(45,657 shares)........... 8,869,376 11,455,962
---------- ------------
Total net assets
(1,297,199 shares)........ $251,995,251
=============
</TABLE>
* Non-Income Producing
See Accompanying Notes to Financial Statements.
4
<PAGE> 5
CHESTNUT STREET EXCHANGE FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends.............................. $ 4,960,163
Interest............................... 442,116
-----------
Total income....................... 5,402,279
-----------
Expenses:
Investment advisory fee................ 1,021,188
Managing general partners' compensation
and officer's salary................. 43,347
Legal.................................. 31,316
Custodian fees......................... 26,003
Audit.................................. 26,100
Transfer agent......................... 14,874
Insurance.............................. 4,622
Printing............................... 18,123
Other.................................. 14,975
-----------
Total expenses..................... 1,200,548
-----------
Net investment income............ 4,201,731
-----------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Realized gain from security
transactions:
Sold or distributed upon redemption
of partnership shares.............. 4,480,089
Unrealized appreciation of
investments:
Beginning of year...... $137,930,760
End of year............ 199,110,716
------------
61,179,956
-----------
Net realized and unrealized gain
on investments................. 65,660,045
-----------
Net increase in net assets resulting
from operations.................... $69,861,776
===========
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS:
OPERATIONS:
Net investment
income.............. $ 4,201,731 $ 4,101,613
Net realized gain
(loss) from security
transactions (for
federal income tax
purposes net gain is
$5,230 and
$11,893,727)........ (20,440) 11,063,360
Excess of market value
over book value of
securities
distributed upon
redemption of
partnership
shares.............. 4,500,529 6,399,493
Increase (decrease) in
unrealized
appreciation of
investments......... 61,179,956 (11,850,331)
------------ ------------
Increase in net assets
resulting from
operations.......... 69,861,776 9,714,135
------------ ------------
DISTRIBUTIONS TO
PARTNERS FROM:
Net investment
income.............. (4,194,988) (4,098,494)
Net realized gains
(federal income
tax basis).......... 0 (3,484,592)
------------ ------------
Total distributions to
partners............ (4,194,988) (7,583,086)
------------ ------------
CAPITAL SHARE
TRANSACTIONS:
Net asset value of
5,545 and 1,853
shares issued to
partners in lieu of
cash
distributions....... 832,230 264,120
Cost of 33,208 and
54,888 shares
repurchased......... (5,851,793) (7,795,028)
------------ ------------
Decrease in net assets
from capital share
transactions........ (5,019,563) (7,530,908)
------------ ------------
Total increase
(decrease) in net
assets.............. 60,647,225 (5,399,859)
NET ASSETS:
Beginning of year..... 191,348,026 196,747,885
------------ ------------
End of year........... $251,995,251 $191,348,026
============= =============
</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 YEAR)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year...... $ 144.43 $ 142.79 $ 134.44 $ 125.46 $ 92.98
-------- -------- -------- -------- --------
Income From Investment Operations:
Net investment income................. 3.22 3.07 2.62 2.48 2.40
Net gain on securities
(both realized and unrealized)..... 49.82 4.27 8.35 8.99 32.47
-------- -------- -------- -------- --------
Total from investment
operations.................... 53.04 7.34 10.97 11.47 34.87
-------- -------- -------- -------- --------
Less Distributions:
Distributions from net investment
income............................. (3.21) (3.07) (2.62) (2.49) (2.39)
Distributions from realized gains
(federal income tax basis)......... .00 (2.63) .00 .00 .00
-------- -------- -------- -------- --------
Total distributions.............. (3.21) (5.70) (2.62) (2.49) (2.39)
-------- -------- -------- -------- --------
Net Asset Value, End of Year............ $ 194.26 $ 144.43 $ 142.79 $ 134.44 $ 125.46
========= ========= ========= ========= =========
Total Return............................ 36.88% 5.19% 8.19% 9.23% 37.74%
Ratios/Supplemental Data:
Net Assets, End of Year (000s)........ $251,995 $191,348 $196,748 $196,263 $201,101
Ratios to average net assets:
Operating expenses................. .52% .54% .54% .54% .56%
Net investment income.............. 1.84% 2.11% 1.87% 1.89% 2.18%
Portfolio Turnover Rate............... .00% 3.88% .00% .00% .00%
</TABLE>
See Accompanying Notes to Financial Statements.
6
<PAGE> 7
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 29, 1995 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 1/10th 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
December 31, 1995 was $40,083,535. The aggregate gross unrealized
appreciation (depreciation) for all securities is as follows: excess of
value over tax cost $213,219,136, excess of tax cost over value ($25,662).
(D) For the year ended December 31, 1995 sales of investment securities
(excluding short-term obligations) were $5,239.
(E) At December 31, 1995, net assets consisted of:
<TABLE>
<S> <C>
Undistributed net investment income.................................... $ 11,885
Unrealized gain on investments......................................... 199,110,716
Other capital--paid-in or reinvested................................... 52,872,650
------------
$ 251,995,251
============
</TABLE>
7
<PAGE> 8
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, 1995 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, 1995 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, 1995, 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 9, 1996
8
<PAGE> 9
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<PAGE> 10
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<PAGE> 11
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<PAGE> 12
- ---------------------------------------------------
- ---------------------------------------------------
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 STREET EXCHANGE FUND LOGO]
Annual Report
December 31, 1995
Chestnut Street Exchange
Fund
400 Bellevue Parkway
Suite 100
Wilmington, Delaware 19809
(302) 792-2555
Edward J. Roach, Treasurer
- ---------------------------------------------------
- ---------------------------------------------------
