<PAGE> 1
CHESTNUT STREET EXCHANGE FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
ROBERT R. FORTUNE
Chairman and President
August 4, 1997
Fellow Partner:
Our Fund earned $1.58 per share of net investment income in the six months
ended June 30, 1997, as compared to $1.63 per share in the same period of 1996.
Capital gains (federal income tax basis) realized in the first six months of
1997 amount to $.51 per share. The reduction in net investment income is
attributable to the increased fee of our investment adviser (an increase of $.10
per share in 1997 as compared to 1996) which is tied to the market value of the
portfolio. In this connection, it should be noted that the value of a share of
the Fund has increased 32 percent since June 1996.
After providing for the $.65 per share distribution to partners of record
on June 30, 1997, the net asset value per partnership share, as shown in the
enclosed report, was $282.25, a new high quarter-end value.
Since our last report the following shares were added as a result of stock
splits:
<TABLE>
<S> <C>
13,500 Atlantic Richfield Co. 10,471 International Business
40,000 Exxon Corp. Machines Corporation
64,000 General Electric Company 19,392 Marsh & McLennan
20,650 Genuine Parts Company Companies, Inc.
116,000 Philip Morris Cos., Inc.
</TABLE>
The holdings in PHH Corp. were exchanged for 49,500 shares of HFS Inc.
(Hospitality Franchise Systems, Inc.) in a merger.
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 a slow start, U.S. equity markets responded to continuing low
inflation and strong economic news with a 17.4% gain in the second quarter.
Large capitalization issues continued to lead the way although small
capitalization issues posted strong returns as well.
The market began the quarter slowly, but surged on reports of low
inflation, steady economic growth and strong first quarter profits. Confirmation
in mid-May of these trends produced another surge through (and beyond) the end
of June. The average money manager has underperformed the market for the year to
date, returning 17% on a total return basis. The Dow Jones continued to
underperform the broader market in the second quarter, rising 16.5%, less than
the broader market's 16.9%. Chestnut Street Exchange Fund returned 14.1% for the
quarter.
COMPARATIVE PERFORMANCE
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
6/30/97 6/30/96
---------- ----------
<S> <C> <C>
Chestnut Street Exchange Fund............................ 16.2% 10.0%
Dow Jones Industrial Average............................. 19.0% 10.5%
Standard & Poor's 500 Index.............................. 19.5% 8.9%
</TABLE>
In the second quarter, large capitalization stocks did better than small
capitalization stocks, with both ends of the size spectrum outperforming the
middle. For the year-to-date, large stocks have significantly outperformed both
smaller and mid sized stocks.
Within the various investing styles, growth stocks outperformed the broader
market in the second quarter. The Russell 1000 Growth returned 18.91% for the
quarter versus the S&P 500's 17.45% while value stocks trailed, with the Russell
1000 Value index returning just 14.74% in the quarter. Year-to-date, the S&P 500
has performed in-line with the large growth index, which also had a 19.5%
return, while showing better performance than the value index, which had a 17.7%
return.
Chestnut Street Exchange Fund's large overweight in healthcare has helped
performance, since healthcare was the best performing sector in the quarter and
the year to date. Also, the Fund's underweights in utilities and energy, two of
the worst performing sectors in the quarter, helped performance. However, the
Fund's performance was hurt by its underweight in financials, one of the
stronger sectors in the quarter and the year to date.
Corporate profits are on track for 9% growth in the second 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 high, suggesting
caution. The Fund's diversification should mitigate some of this risk.
July 22, 1997 PNC INSTITUTIONAL MANAGEMENT CORPORATION
2
<PAGE> 3
CHESTNUT STREET EXCHANGE FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENT OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
NO. OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
COMMON STOCKS--98.5%
AUTO & AUTO PARTS--0.6 %
61,949 Genuine Parts Company..... $ 2,098,505
-------------
BANKS--8.9 %
24,952 Barnett Banks, Inc. ...... 1,309,980
60,000 CoreStates Financial Corp. ... 3,225,000
30,757 First Chicago NBD
Corp. .................. 1,860,798
40,000 Morgan (J.P.) & Co.,
Inc. ................... 4,175,000
178,656 NationsBank Corp. ........ 11,523,312
157,266 Norwest Corp. ............ 8,846,213
-------------
30,940,303
-------------
BUILDING MATERIALS & FOREST
PRODUCTS--1.7 %
45,130 Armstrong World
Industries, Inc. ....... 3,311,414
52,117 Weyerhaeuser Company...... 2,710,084
-------------
6,021,498
-------------
BUSINESS PRODUCTS &
SERVICES--3.9 %
16,882* ACNielsen Corporation..... 331,309
50,647 Cognizant Corporation..... 2,051,203
50,647 Dun & Bradstreet
Corporation............. 1,329,484
68,416 Harland (John H.) Co. .... 1,560,740
52,000 Minnesota Mining &
Manufacturing Company... 5,304,000
49,500 HFS Inc. ................. 2,871,000
-------------
13,447,736
-------------
CAPITAL GOODS--0.0 %
4,800 Newport News Shipbuilding,
Inc..................... 93,300
-------------
CHEMICALS--4.9 %
96,700 Air Products & Chemicals,
Inc. ................... 7,856,875
52,100 BetzDearborn, Inc. ....... 3,438,600
208,000 Cabot Corporation......... 5,902,000
-------------
17,197,475
-------------
CONSUMER NON-DURABLES
& SERVICES--8.0 %
410,660 Coca-Cola (The) Company... 27,719,550
-------------
<CAPTION>
NO. OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
CONTAINERS--1.0%
67,148 Crown Cork & Seal Company,
Inc. ................... $ 3,588,221
-------------
DIVERSIFIED
COMPANIES--1.5 %
157,190 Ikon Office Solutions,
Inc..................... 3,919,926
78,595 Unisource Worldwide,
Inc. ................... 1,257,520
-------------
5,177,446
-------------
DRUGS & MEDICAL--18.3 %
121,964 Abbott Laboratories,
Inc. ................... 8,141,097
7,835 Allegiance Corp........... 213,504
39,177 Baxter International,
Inc. ................... 2,046,998
411,984 Johnson & Johnson,
Inc. ................... 26,521,470
203,995 Merck & Company, Inc. .... 21,113,483
62,000 SmithKline Beecham p.l.c.
ADR..................... 5,680,750
-------------
63,717,302
-------------
ELECTRICAL
EQUIPMENT--5.6 %
203,134 Emerson Electric Company... 11,185,066
128,000 General Electric Company... 8,368,000
-------------
19,553,066
-------------
ELECTRONICS--18.4%
105,538 AMP, Inc. ................ 4,406,211
44,596 Hewlett-Packard Company... 2,497,376
5,200* Imation Corp. ............ 137,150
269,838 Intel Corp. .............. 38,266,401
21,065 Lucent Technologies,
Inc. ................... 1,517,997
119,118 Motorola, Incorporated.... 9,052,968
159,207 Raytheon Company.......... 8,119,557
-------------
63,997,660
-------------
ENTERTAINMENT--1.6%
68,000 Walt Disney Company....... 5,457,000
-------------
FOOD PROCESSING &
DISTRIBUTION--3.8%
97,500 Hershey Foods Corp. ...... 5,392,969
174,000 Philip Morris Cos.,
Inc. ................... 7,721,250
-------------
13,114,219
-------------
</TABLE>
See Accompanying Notes to Financial Statements.
3
<PAGE> 4
STATEMENT OF NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
NO. OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
COMMON STOCKS (CONTINUED)
INSURANCE &
FINANCIAL--4.5%
44,000 Aetna, Inc. .............. $ 4,504,500
43,930 American Express
Company................. 3,272,785
12,028 CIGNA Corp. .............. 2,134,970
70,000 Federal National Mortgage
Association............. 3,053,750
38,784 Marsh & McLennan
Companies, Inc. ........ 2,768,208
-------------
15,734,213
-------------
LODGING &
RESTAURANT--1.4 %
101,234 McDonald's Corporation.... 4,890,868
-------------
NATURAL GAS
TRANSMISSION--0.3%
24,000 Tenneco, Inc. ............ 1,084,500
-------------
OFFICE EQUIPMENT--0.6%
20,942 International Business
Machines Corporation.... 1,888,707
4,062* NCR Corp. ................ 120,845
-------------
2,009,552
-------------
PAPER--1.0%
30,000 Consolidated Papers, Inc. ... 1,620,000
55,432 Westvaco Corp. ........... 1,742,644
-------------
3,362,644
-------------
PETROLEUM--2.9%
27,000 Atlantic Richfield Co. ... 1,903,500
80,000 Exxon Corp. .............. 4,920,000
40,360 Louisiana Land &
Exploration Company..... 2,305,565
33,877 Union Pacific Resources
Group, Inc. ............ 842,690
-------------
9,971,755
-------------
PETROLEUM EQUIPMENT &
SERVICES--1.1%
2,232 El Paso Natural Gas
Co. .................... 122,760
30,216 Schlumberger, Ltd. ....... 3,777,000
-------------
3,899,760
-------------
NO. OF
SHARES VALUE
- ----------- -------------
POLLUTION CONTROL--1.5%
114,556 Browning Ferris
Industries, Inc. ....... $ 3,808,987
48,736 WMX Technologies, Inc. ... 1,565,644
-------------
5,374,631
-------------
RETAIL--GENERAL &
SPECIALTY--3.1%
116,772 Albertson's, Inc. ........ 4,262,178
58,600 CVS Corp. ................ 3,003,250
16,870* Footstar, Inc. ........... 440,729
60,000 Penney (J.C.) Company,
Inc. ................... 3,131,250
-------------
10,837,407
-------------
TELEPHONE UTILITIES--2.1%
163,900 GTE Corp. ................ 7,191,112
-------------
TRANSPORTATION--1.8%
39,932 Burlington Northern,
Inc. ................... 3,588,888
40,000 Union Pacific Corp. ...... 2,820,000
-------------
6,408,888
-------------
Total Common Stocks
(Cost $53,018,263)...... 342,888,611
-------------
</TABLE>
See Accompanying Notes to Financial Statements.
4
<PAGE> 5
STATEMENT OF NET ASSETS (CONCLUDED)
<TABLE>
<CAPTION>
PAR VALUE
- ----------- -------------
<C> <S> <C>
SHORT-TERM
OBLIGATIONS--1.5%
$1,000,000 American General Finance
Corp., Commercial Paper,
5.56%, 07/14/97......... $ 1,000,000
800,000 General Electric Capital
Corp., Commercial Paper,
5.67%, 07/09/97......... 800,000
3,600,000 General Electric Capital
Corp., Commercial Paper,
5.58%, 07/31/97......... 3,600,000
-------------
Total Short-Term
Obligations (Cost
$5,400,000)............. 5,400,000
-------------
TOTAL INVESTMENT IN SECURITIES
(Cost $58,418,263)....... 100.0% 348,288,611
Distributions payable...... (-0.2%) (801,573)
Other assets in excess of
other liabilities........ 0.2% 558,434
----- ------------
NET ASSETS (Applicable to
1,233,094 partnership
shares outstanding)...... 100.0% $348,045,472
===== ============
NET ASSET VALUE PER
SHARE.................... $ 282.25
=============
NET ASSETS APPLICABLE TO
SHARES OWNED BY:
Limited partners
(1,181,669 shares)....... $333,530,728
Managing general partners
(5,292 shares)........... $ 1,493,602
Non-managing general
partner (46,133
shares).................. 13,021,142 14,514,744
----------- ------------
Total net assets
(1,233,094 shares)....... $348,045,472
=============
* Non-Income Producing
</TABLE>
See Accompanying Notes to Financial Statements.
5
<PAGE> 6
CHESTNUT STREET EXCHANGE FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends............................... $ 2,626,847
Interest................................ 118,393
-----------
Total income........................ 2,745,240
-----------
Expenses:
Investment advisory fee................. 698,004
Managing general partners' compensation
and officer's salary.................. 21,673
Legal................................... 16,527
Custodian fees.......................... 12,779
Audit................................... 12,864
Transfer agent.......................... 7,421
Insurance............................... 2,474
Printing................................ 9,076
Miscellaneous........................... 7,504
-----------
Total expenses...................... 788,322
-----------
Net investment income............. 1,956,918
-----------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS:
Realized gain from security
transactions:
sold or distributed upon redemption of
partnership shares.................. 2,726,408
Unrealized appreciation of investments:
Beginning of period..... $244,161,508
End of period........... 289,870,348
------------
45,708,840
-----------
Net realized and unrealized gains
on investments.................. 48,435,248
-----------
Net increase in net assets resulting
from operations..................... $50,392,166
===========
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED FOR THE YEAR
JUNE 30, ENDED
1997 DECEMBER 31,
(UNAUDITED) 1996
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income.. $ 1,956,918 $ 4,224,768
Net realized gain from
security transactions
(for federal income
tax purposes net gain
is $636,248 and
$10,543,851)......... 636,248 9,750,471
Excess of market value
over book value of
securities
distributed upon
redemption of
partnership shares... 2,090,160 9,766,008
Increase in unrealized
appreciation of
investments.......... 45,708,840 45,050,792
------------ ------------
Increase in net assets
resulting from
operations........... 50,392,166 68,792,039
------------ ------------
DISTRIBUTIONS TO PARTNERS
FROM:
Net investment income.. (1,608,857) (4,229,985)
Net realized gains
(federal income tax
basis)............... 0 (3,158,084)
------------ ------------
Total distributions to
partners............. (1,608,857) (7,388,069)
------------ ------------
CAPITAL SHARE
TRANSACTIONS:
Net asset value of
3,041 and 1,596
shares issued to
partners in lieu of
cash distributions... 739,851 326,922
Cost of 18,112 and
50,630 shares
repurchased.......... (4,673,027) (10,530,804)
------------ ------------
Decrease in net assets
from capital share
transactions......... (3,933,176) (10,203,882)
------------ ------------
Total increase in net
assets............... 44,850,133 51,200,088
NET ASSETS:
Beginning of period.... 303,195,339 251,995,251
------------ ------------
End of period.......... $348,045,472 $303,195,339
============= =============
</TABLE>
See Accompanying Notes to Financial Statements.
6
<PAGE> 7
CHESTNUT STREET EXCHANGE FUND
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF THE FUND OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX
MONTHS
ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
1997 --------------------------------------------------------
(UNAUDITED) 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period.......................... $ 242.91 $ 194.26 $ 144.43 $ 142.79 $ 134.44 $ 125.46
-------- -------- -------- -------- -------- --------
Income From Investment Operations:
Net investment income........... 1.58 3.36 3.22 3.07 2.62 2.48
Net gains on securities (both
realized and unrealized)...... 39.06 51.18 49.82 4.27 8.35 8.99
-------- -------- -------- -------- -------- --------
Total from investment
operations............... 40.64 54.54 53.04 7.34 10.97 11.47
-------- -------- -------- -------- -------- --------
Less Distributions:
Distributions from net
investment income............. (1.30) (3.36) (3.21) (3.07) (2.62) (2.49)
Distributions from realized
gains (federal income tax
basis)........................ 0.00 (2.53) 0.00 (2.63) 0.00 0.00
-------- -------- -------- -------- -------- --------
Total distributions........ (1.30) (5.89) (3.21) (5.70) (2.62) (2.49)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period.... $ 282.25 $ 242.91 $ 194.26 $ 144.43 $ 142.79 $ 134.44
======== ======== ======== ======== ======== ========
Total Return...................... 36.70%* 28.09% 36.88% 5.19% 8.19% 9.23%
Ratios/Supplemental Data:
Net Assets, End of Period
(000's)....................... $348,045 $303,195 $251,995 $191,348 $196,748 $196,263
Ratios to average net assets:
Operating expenses............ 0.38%* 0.51% 0.52% 0.54% 0.54% 0.54%
Net investment income......... 1.58%* 1.55% 1.84% 2.11% 1.87% 1.89%
Portfolio Turnover Rate......... 1.31% 3.92% 0.00% 3.88% 0.00% 0.00%
</TABLE>
- ------------------
* Annualized
See Accompanying Notes to Financial Statements.
7
<PAGE> 8
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(A) Chestnut Street Exchange Fund (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 30, 1997 for each 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 the 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.
The preparation of financial statements in conformity with generally
accepted principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of
the financial statement and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these
estimates.
(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 June
30, 1997 was $46,181,243. The aggregate gross unrealized appreciation
(depreciation) for all securities is as follows: excess of value over tax
cost $302,111,812, excess of tax cost over value ($4,444).
(D) For the period ended June 30, 1997 purchases and sales of investment
securities (excluding short-term obligations) were $4,408,661 and
$4,189,569, respectively.
(E) At June 30, 1997, net assets consisted of:
<TABLE>
<S> <C>
Undistributed net investment income.................................... $ 354,729
Unrealized gain on investments......................................... 289,870,348
Other capital--paid-in or reinvested................................... 57,820,395
------------
$ 348,045,472
============
</TABLE>
8
<PAGE> 9
[This Page Intentionally Left Blank.]
<PAGE> 10
===================================================
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
Semiannual Report
June 30, 1997
Chestnut Street Exchange
Fund
400 Bellevue Parkway
Suite 100
Wilmington, Delaware 19809
(302) 792-2555
Edward J. Roach, Treasurer
===================================================
