<PAGE> 1
CHESTNUT STREET EXCHANGE FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
ROBERT R. FORTUNE
Chairman and President
May 5, 1997
Fellow Partner:
Our Fund earned $.80 per share of net investment income in the three months
ended March 31, 1997, as compared to $.82 per share in the same period of 1996.
Capital gains (federal income tax basis) realized from the sale of 170,000
shares of McCormick & Co., Inc. were $.51 per share.
After providing for the $.65 per share distribution to partners of record
on March 31, 1997, the net asset value per partnership share at that date was
$247.35, another record quarter-end high.
Securities purchased since our last report were 97,500 shares of Hershey
Foods Corp. Alco Standard Corporation changed its name to Ikon Office Solutions,
Inc. and distributed 78,595 shares of Unisource Worldwide, Inc. Stock splits of
101,567 shares of Emerson Electric Company and 89,328 shares of NationsBank
Corp. were received. The holdings in NCR Corp. are from a spinoff of AT&T Corp.
Mr. R. Stewart Rauch, a managing general partner for many years, retired in
February 1997. We thank him for his faithful service.
Your comments or questions about 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 were volatile during the first quarter, but ended
the quarter with a 2.22% gain. Large capitalization issues outperformed small
capitalization issues for the year to date and through the second half of 1996
as well.
The market surged during the earlier part of the quarter only to give up
its gains in response to the Federal Reserve's market tightening in March. A
subsequent rally toward the end of the month brought the markets back into
positive territory. The average money manager has underperformed the market for
the year to date, returning -0.2% on a total return basis. The Dow Jones
continued to underperform the broader market in the first quarter, rising 2.1%,
less than the broader market's 2.2%. Chestnut Street Exchange Fund returned 1.8%
for the quarter.
COMPARATIVE PERFORMANCE
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
3/31/97 3/31/96
------------- -------------
<S> <C> <C>
Chestnut Street Exchange Fund................................... 1.8% 5.1%
Dow Jones Industrial Average.................................... 2.1% 9.2%
Standard & Poor's 500 Index..................................... 2.2% 4.8%
</TABLE>
In the first quarter the economy continued to show signs of unexpected
strength with little inflationary pressure evident. Output at factories, mines
and utilities is up while the purchasing managers' index continues to increase.
Capacity utilization is at 84.1%, nearing the 85% level thought to trigger
inflation. However, energy prices have been falling after increasing last year
and wage pressure remains very moderate. Despite the conflicting data we expect
moderate inflation pressures through the end of the year.
Corporate profits grew 9% in the first quarter and are forecast to continue
single digit growth in the remainder of the year. 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.
PNC INSTITUTIONAL MANAGEMENT CORPORATION
May 1, 1997
2
<PAGE> 3
CHESTNUT STREET EXCHANGE FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENT OF NET ASSETS
MARCH 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
NO. OF
SHARES VALUE
- -------- -------------
<C> <S> <C>
COMMON STOCKS -- 98.7%
AUTO & AUTO
PARTS -- 0.6%
41,299 Genuine Parts Company...... $ 1,925,566
-------------
BANKS -- 8.7%
24,952 Barnett Banks, Inc. ....... 1,160,268
60,000 CoreStates Financial 2,850,000
Corp. ...................
30,757 First Chicago NBD Corp. ... 1,664,723
40,000 Morgan (J.P.) & Co., 3,930,000
Inc. ....................
178,656 NationsBank Corp. ......... 9,893,076
157,266 Norwest Corp. ............. 7,273,552
-------------
26,771,619
-------------
BUILDING MATERIALS & FOREST
PRODUCTS -- 1.7%
45,130 Armstrong World Industries, 2,922,167
Inc. ....................
52,117 Weyerhaeuser Company....... 2,325,721
-------------
5,247,888
-------------
BUSINESS PRODUCTS &
SERVICES -- 3.9%
16,882 * ACNielsen Corporation.... 253,230
50,647 Cognizant Corporation...... 1,475,094
50,647 Dun & Bradstreet 1,285,168
Corporation..............
68,416 Harland (John H.) Co. ..... 1,624,880
52,000 Minnesota Mining & 4,394,000
Manufacturing Company....
60,000 PHH Corp. ................. 2,767,500
-------------
11,799,872
-------------
CAPITAL GOODS -- 0.0%
4,800 Newport News Shipbuilding, 69,600
Inc. ....................
-------------
CHEMICALS -- 4.8%
96,700 Air Products & Chemicals, 6,563,512
Inc. ....................
52,100 BetzDearborn, Inc. ........ 3,288,813
208,000 Cabot Corporation.......... 4,992,000
-------------
14,844,325
-------------
CONSUMER NON-DURABLES &
SERVICES --7.6%
414,883 Coca-Cola (The) Company.... 23,181,588
-------------
CONTAINERS -- 1.1%
67,148 Crown Cork & Seal Company, 3,466,515
Inc. ....................
-------------
<CAPTION>
NO. OF
SHARES VALUE
- -------- -------------
<C> <S> <C>
DIVERSIFIED
COMPANIES -- 2.1%
157,190 Ikon Office Solutions. $ 5,265,865
Inc. ....................
78,595 Unisource Worldwide, 1,208,398
Inc. ....................
-------------
6,474,263
-------------
DRUGS &
MEDICAL -- 17.0%
121,964 Abbott Laboratories, 6,845,230
Inc. ....................
7,835 Allegiance Corp. .......... 173,349
39,177 Baxter International, 1,689,508
Inc. ....................
411,984 Johnson & Johnson, Inc. ... 21,783,654
203,995 Merck & Company, Inc. ..... 17,186,579
62,000 SmithKline Beecham p.l.c. 4,340,000
ADR......................
-------------
52,018,320
-------------
ELECTRICAL
EQUIPMENT -- 5.1%
203,134 Emerson Electric Company... 9,141,030
64,000 General Electric Company... 6,352,000
-------------
15,493,030
-------------
ELECTRONICS -- 19.3%
105,538 AMP, Inc. ................. 3,627,869
44,596 Hewlett-Packard Company.... 2,374,737
5,200 * Imation Co. ............. 130,000
269,838 Intel Corp. ............... 37,541,212
21,065 Lucent Technologies, 1,111,179
Inc. ....................
119,118 Motorola, Incorporated..... 7,191,749
159,207 Raytheon Company........... 7,184,216
-------------
59,160,962
-------------
ENTERTAINMENT -- 1.6%
68,000 Walt Disney Company........ 4,964,000
-------------
FOOD PROCESSING &
DISTRIBUTION -- 3.8%
97,500 Hershey Foods Corp. ....... 4,875,000
58,000 Philip Morris Cos., 6,619,250
Inc. ....................
-------------
11,494,250
-------------
INSURANCE &
FINANCIAL -- 4.2%
44,000 Aetna, Inc. ............... 3,778,500
43,930 American Express Company... 2,630,309
12,028 CIGNA Corp. ............... 1,757,591
70,000 Federal National Mortgage 2,528,750
Association..............
19,392 Marsh & McLennan Companies, 2,196,144
Inc. ....................
-------------
12,891,294
-------------
</TABLE>
3
<PAGE> 4
STATEMENT OF NET ASSETS (CONCLUDED)
<TABLE>
<CAPTION>
NO. OF
SHARES VALUE
- -------- -------------
<C> <S> <C>
COMMON STOCKS (CONTINUED)
LODGING & RESTAURANT-- 1.6%
101,234 McDonald's Corporation..... $ 4,783,306
-------------
NATURAL GAS TRANSMISSION --
0.3%
24,000 Tenneco, Inc. ............. 936,000
-------------
OFFICE
EQUIPMENT -- 0.5%
10,471 International Business 1,438,454
Machines Corporation.....
4,062 * NCR Corp. ............... 143,186
-------------
1,581,640
-------------
PAPER -- 1.0%
30,000 Consolidated Papers, 1,563,750
Inc. ....................
55,432 Westvaco Corp. ............ 1,392,729
-------------
2,956,479
-------------
PETROLEUM -- 2.9%
13,500 Atlantic Richfield Co. .... 1,822,500
40,000 Exxon Corp. ............... 4,310,000
40,360 Louisiana Land & 1,912,055
Exploration Company......
33,877 Union Pacific Resources 906,210
Group, Inc. .............
-------------
8,950,765
-------------
PETROLEUM EQUIPMENT &
SERVICES -- 1.1%
2,232 El Paso Natural Gas Co. ... 126,387
30,216 Schlumberger, Ltd. ........ 3,240,666
-------------
3,367,053
-------------
POLLUTION CONTROL -- 1.6%
114,556 Browning-Ferris 3,307,804
Industries, Inc. ........
48,736 WMX Technologies, Inc. .... 1,492,540
-------------
4,800,344
-------------
RETAIL -- GENERAL &
SPECIALTY -- 3.3%
116,772 Albertson's Inc. .......... 3,970,248
58,600 CVS Corp. ................. 2,702,925
16,870 * Footstar, Inc. .......... 499,774
60,000 Penney (J.C.) Company, 2,857,500
Inc. ....................
-------------
10,030,447
-------------
NO. OF
SHARES VALUE
- -------- -------------
TELEPHONE UTILITIES -- 3.2%
61,906 AT&T Corp. ................ $ 2,151,233
163,900 GTE Corp. ................. 7,641,837
-------------
9,793,070
-------------
TRANSPORTATION -- 1.7%
39,932 Burlington Northern, 2,954,968
Inc. ....................
40,000 Union Pacific Corp. ....... 2,270,000
-------------
5,224,968
-------------
302,227,164
Total Common Stocks
(Cost $55,401,603).....
-------------
PAR
- --------
SHORT-TERM OBLIGATIONS -- 1.3%
$4,000,000 General Electric Capital 4,000,000
Corp., Commercial Paper,
5.65%, 06/30/97
(Cost $4,000,000)........
-------------
TOTAL INVESTMENTS IN SECURITIES
(Cost $59,401,603)......... 99.7% 302,227,164
Distributions payable........ (0.3) (807,285)
Other assets in excess of
other liabilities.......... 0.6 1,759,289
----- ------------
NET ASSETS (Applicable to
1,241,888 partnership
shares outstanding)........ 100.0% $307,179,168
===== =============
NET ASSET VALUE PER SHARE.... $ 247.35
=============
NET ASSETS APPLICABLE TO
SHARES OWNED BY:
Limited partners
(1,190,485 shares)....... $294,464,681
Managing general partners
(5,270 shares)........... $ 1,303,145
Non-managing general
partner (46,133
shares).................. 11,411,342 12,714,487
----------- ------------
Total net assets
(1,241,888 shares)....... $307,179,168
=============
</TABLE>
* Non-Income Producing
Values for securities listed on a securities exchange are based upon the last
reported sales price on March 31, 1997. 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
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]
First Quarter Report
March 31, 1997
Chestnut Street Exchange
Fund
400 Bellevue Parkway
Suite 100
Wilmington, Delaware 19809
(302) 792-2555
Edward J. Roach, Treasurer
===================================================
