<PAGE> 1
===================================================
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
Annual Report
December 31, 1996
Chestnut Street Exchange
Fund
400 Bellevue Parkway
Suite 100
Wilmington, Delaware 19809
(302) 792-2555
Edward J. Roach, Treasurer
===================================================
<PAGE> 2
CHESTNUT STREET EXCHANGE FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
ROBERT R. FORTUNE
Chairman and President
February 7, 1997
Fellow Partner:
Enclosed is the Annual Report of Chestnut Street Exchange Fund for the year
ended December 31, 1996.
Our Fund earned $3.36 per share from net investment income for a share
outstanding throughout 1996, compared to $3.22 per share earned in 1995.
Total distributions from net investment income, applicable to 1996, also
amounted to $3.36 per share, including $1.56 per share distributed in January
1997. Additionally, in accordance with Fund policy, approximately thirty percent
of the 1996 realized capital gains (federal income tax basis), or $2.53 per
share, was distributed in January 1997. After providing for the January 1997
distribution, the net asset value at the end of 1996 was $242.91 per partnership
share, a new year-end high.
Securities purchased since our last report were 22,000 shares of Aetna,
Inc., 58,000 shares of Philip Morris Cos., Inc. and 70,000 shares of Federal
National Mortgage Association. Melville Corp. changed its name to CVS Corp. The
holding in Loctite Corp. was sold in December 1996, resulting in a federal tax
gain of $8.39 per share.
Securities received in corporate spinoffs since our last report and their
source were:
<TABLE>
<S> <C>
ACNielsen Corporation Footstar, Inc.
(Dun & Bradstreet Corporation) (Melville Corp.)
Allegiance Corp. Lucent Technologies, Inc.
(Baxter International, Inc.) (AT&T Corp.)
Cognizant Corporation Newport News Shipbuilding, Inc.
(Dun & Bradstreet Corporation) (Tenneco, Inc.)
El Paso Natural Gas Co. Union Pacific Resources Group, Inc.
(Tenneco, Inc.) (Union Pacific Corp.)
</TABLE>
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.
Accompanying this report is a letter to the partners which provides an
explanation of the different tax treatment of the Fund required as of January 1,
1998. You should discuss this letter with your tax adviser. You may also call
the Fund office if you have questions.
Your questions or comments concerning Chestnut Street Exchange Fund are
welcomed.
Yours sincerely,
/s/ ROBERT R. FORTUNE
Robert R. Fortune
<PAGE> 3
INVESTMENT ADVISER'S REPORT
The stock market turned in another banner investment year. For the second
year, 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 1996; the S&P 500 index total
return was 22.3% for the year. According to Thomson Investment, the average U.
S. equity mutual fund last year returned 22.8%, just ahead of the market.
Chestnut Street Exchange Fund returned 28.1%.
COMPARATIVE DATA
<TABLE>
<CAPTION>
CSEF DJIA S&P 500
-------- --------- -------
<S> <C> <C> <C>
Market Value 12/31/96.............................. $ 242.91 6448.27 740.74
Market Value 12/31/95.............................. $ 194.26 5117.12 615.93
% Increase in 1996................................. 25.0% 26.0% 20.3%
1996 Distributions................................. $ 5.89 $ 131.14 $ 14.90
Total Return 1996.................................. 28.1% 28.6% 22.3%
Market Value 12/29/76.............................. $ 25.00 994.93 106.34
% Increase 1976-1996............................... 871.6% 548.1% 596.6%
Distributions 1976-1996............................ $ 47.97 $1,561.40 $186.53
Total Return 1976-1996............................. 1063.5% 705.0% 772.0%
</TABLE>
We expect the economy to show modest growth through 1997, with growth
slowing over the course of the year. In the fourth quarter of 1996, the economy
grew at 4.7%, higher than expected, leading to 3.4% real GDP growth for the
year. The stage is set for slow but steady economic growth in 1997 with
slowdowns in housing starts and durable goods orders in December 1996 bringing
those indices back to levels more consistent with trendline growth. Retail sales
over the important Christmas shopping season showed modest gains, while
disposable income growth was also modestly positive. We expect export growth to
drive economic growth in the U.S. in 1997 and interest rates to remain largely
flat over the course of the year.
Profit growth began to slow over the course of 1996 and comparisons will
become increasingly difficult as we progress through 1997. In this environment,
stable growth stocks should continue to do well. The Fund's diversification
should enable us to benefit from these trends.
January 31, 1997 PNC INSTITUTIONAL MANAGEMENT CORPORATION
2
<PAGE> 4
CHESTNUT STREET EXCHANGE FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
NO. OF
SHARES VALUE
- ----------- -------------
COMMON STOCKS--98.6%
<C> <S> <C>
AUTO & AUTO PARTS--0.6 %
41,299 Genuine Parts Company..... $ 1,837,806
-------------
BANKS--8.3 %
24,952 Barnett Banks Inc. ....... 1,026,151
60,000 CoreStates Financial Corp. 3,112,500
30,757 First Chicago NBD
Corp. .................. 1,653,189
40,000 Morgan (J.P.) & Co.,
Inc. ................... 3,905,000
89,328 NationsBank Corp. ........ 8,731,812
157,266 Norwest Corp. ............ 6,841,071
-------------
25,269,723
-------------
BUILDING MATERIALS &
FOREST PRODUCTS--1.9 %
45,130 Armstrong World
Industries, Inc. ....... 3,136,535
52,117 Weyerhaeuser Company...... 2,469,043
-------------
5,605,578
-------------
BUSINESS PRODUCTS &
SERVICES--4.1 %
16,882* ACNielsen Corporation..... 255,340
50,647 Cognizant Corporation..... 1,671,351
50,647 Dun & Bradstreet
Corporation............. 1,202,866
68,416 Harland (John H.) Co. .... 2,257,728
52,000 Minnesota Mining &
Manufacturing Company... 4,309,500
60,000 PHH Corp. ................ 2,580,000
-------------
12,276,785
-------------
CHEMICALS--5.0 %
96,700 Air Products & Chemicals,
Inc. ................... 6,684,388
52,100 BetzDearborn Inc. ........ 3,047,850
208,000 Cabot Corporation......... 5,226,000
-------------
14,958,238
-------------
CAPITAL GOODS--0.0 %
4,800* Newport News Shipbuilding,
Inc..................... 72,000
-------------
CONSUMER NON-DURABLES &
SERVICES--7.4 %
425,239 Coca-Cola (The) Company... 22,378,202
-------------
CONTAINERS--1.2%
67,148 Crown Cork & Seal Company,
Inc. ................... 3,651,173
-------------
<CAPTION>
NO. OF
SHARES VALUE
- ----------- -------------
<C> <S> <C>
DIVERSIFIED
COMPANIES--2.7 %
157,190 Alco Standard Corporation... $ 8,114,934
-------------
DRUGS & MEDICAL--16.1 %
121,964 Abbott Laboratories,
Inc. ................... 6,189,673
7,835 Allegiance Corp........... 216,442
39,177 Baxter International,
Inc. ................... 1,606,257
411,984 Johnson & Johnson,
Inc. ................... 20,496,204
203,995 Merck & Company, Inc. .... 16,166,604
62,000 SmithKline Beecham plc
ADS..................... 4,216,000
-------------
48,891,180
-------------
ELECTRICAL
EQUIPMENT--5.3 %
101,567 Emerson Electric Company... 9,826,607
64,000 General Electric Company... 6,328,000
-------------
16,154,607
-------------
ELECTRONICS--19.5%
105,538 AMP, Inc. ................ 4,050,021
44,596 Hewlett-Packard Company... 2,240,949
5,200* Imation Corp. ............ 146,250
280,659 Intel Corp. .............. 36,748,770
21,065 Lucent Technologies,
Inc. ................... 974,256
119,118 Motorola, Incorporated.... 7,310,867
159,207 Raytheon Company.......... 7,661,837
-------------
59,132,950
-------------
ENTERTAINMENT--1.6%
68,000 Walt Disney Company....... 4,734,500
-------------
FOOD PROCESSING &
DISTRIBUTION--3.5%
170,000 McCormick & Co. Inc. ..... 4,005,625
58,000 Philip Morris Cos.,
Inc. ................... 6,532,250
-------------
10,537,875
-------------
INSURANCE &
FINANCIAL--4.0%
44,000 Aetna, Inc. .............. 3,520,000
43,930 American Express
Company................. 2,482,045
12,028 CIGNA Corp. .............. 1,643,326
70,000 Federal National Mortgage
Association............. 2,607,500
19,392 Marsh & McLennan
Companies, Inc. ........ 2,016,768
-------------
12,269,639
-------------
</TABLE>
See Accompanying Notes to Financial Statements.
3
<PAGE> 5
STATEMENT OF NET ASSETS (CONCLUDED)
<TABLE>
<CAPTION>
NO. OF
SHARES VALUE
- ----------- -------------
COMMON STOCKS (CONTINUED)
<C> <S> <C>
LODGING &
RESTAURANT--1.5 %
101,234 McDonald's Corporation.... $ 4,580,838
-------------
NATURAL GAS
TRANSMISSION--0.4%
24,000 Tenneco, Inc. ............ 1,083,000
-------------
OFFICE EQUIPMENT--0.5%
10,471 International Business
Machines Corporation.... 1,581,121
-------------
PAPER--1.0%
30,000 Consolidated Papers, Inc. ... 1,473,750
55,432 Westvaco Corp. ........... 1,593,670
-------------
3,067,420
-------------
PETROLEUM--2.9%
13,500 Atlantic Richfield Co. ... 1,788,750
40,000 Exxon Corp. .............. 3,920,000
40,360 Louisiana Land &
Exploration Company..... 2,164,305
33,877 Union Pacific Resources
Group, Inc. ............ 990,902
-------------
8,863,957
-------------
PETROLEUM EQUIPMENT &
SERVICES--1.0%
2,232 El Paso Natural Gas
Co. .................... 112,716
30,216 Schlumberger, Ltd. ....... 3,017,823
-------------
3,130,539
-------------
POLLUTION CONTROL--1.5%
114,556 Browning-Ferris
Industries, Inc. ....... 3,007,095
48,736 WMX Technologies, Inc. ... 1,590,012
-------------
4,597,107
-------------
RETAIL--GENERAL &
SPECIALTY--3.3%
116,772 Albertson's Inc. ......... 4,160,003
58,600 CVS Corp. ................ 2,424,575
16,870* Footstar, Inc. ........... 419,641
60,000 Penney (J.C.) Company,
Inc. ................... 2,925,000
-------------
9,929,219
-------------
NO. OF
SHARES VALUE
- ----------- -------------
TELEPHONE UTILITIES--3.4%
65,000 AT&T Corp. ............... $ 2,827,500
163,900 GTE Corp. ................ 7,457,450
-------------
10,284,950
-------------
TRANSPORTATION--1.9%
39,932 Burlington Northern,
Inc. ................... 3,449,127
40,000 Union Pacific Corp. ...... 2,405,000
-------------
5,854,127
-------------
TOTAL INVESTMENTS IN SECURITIES
(Cost $54,695,960)....... 98.6% 298,857,468
Distributions payable...... (1.7) (5,105,362)
Other assets in excess of
other liabilities........ 3.1 9,443,233
----- -------------
NET ASSETS (Applicable to
1,248,165 partnership
shares outstanding)...... 100.0% $ 303,195,339
===== =============
NET ASSET VALUE PER
SHARE.................... $ 242.91
=============
NET ASSETS APPLICABLE TO
SHARES OWNED BY:
Limited partners
(1,189,127 shares)....... $ 288,854,249
Managing general partners
(13,381 shares).......... $ 3,250,417
Non-managing general
partner (45,657
shares).................. 11,090,673 14,341,090
----------- -------------
Total net assets
(1,248,165 shares)....... $ 303,195,339
=============
</TABLE>
* Non-Income Producing
See Accompanying Notes to Financial Statements.
4
<PAGE> 6
CHESTNUT STREET EXCHANGE FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends.............................. $ 5,205,309
Interest............................... 413,460
-----------
Total income....................... 5,618,769
-----------
Expenses:
Investment advisory fee................ 1,194,793
Managing general partners' compensation
and officer's salary................. 44,995
Legal.................................. 43,740
Custodian fees......................... 24,820
Audit.................................. 23,765
Transfer agent......................... 15,228
Insurance.............................. 4,362
Printing............................... 26,104
Other.................................. 16,194
-----------
Total expenses..................... 1,394,001
-----------
Net investment income............ 4,224,768
-----------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS:
Realized gain from security
transactions:
Sold or distributed upon redemption
of partnership shares.............. 19,516,479
Unrealized appreciation of investments:
Beginning of year...... $199,110,716
End of year............ 244,161,508
------------
45,050,792
-----------
Net realized and unrealized gain
on investments................. 64,567,271
-----------
Net increase in net assets resulting
from operations.................... $68,792,039
===========
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
OPERATIONS:
Net investment
income.............. $ 4,224,768 $ 4,201,731
Net realized gain
(loss) from security
transactions (for
federal income tax
purposes net gain is
$10,543,851 and
$5,230)............. 9,750,471 (20,440)
Excess of market value
over book value of
securities
distributed upon
redemption of
partnership
shares.............. 9,766,008 4,500,529
Increase in unrealized
appreciation of
investments......... 45,050,792 61,179,956
------------ ------------
Increase in net assets
resulting from
operations.......... 68,792,039 69,861,776
------------ ------------
DISTRIBUTIONS TO
PARTNERS FROM:
Net investment
income.............. (4,229,985) (4,194,988)
Net realized gains
(federal income tax
basis).............. (3,158,084) 0
------------ ------------
Total distributions to
partners............ (7,388,069) (4,194,988)
------------ ------------
CAPITAL SHARE
TRANSACTIONS:
Net asset value of
1,596 and 5,545
shares issued to
partners in lieu of
cash
distributions....... 326,922 832,230
Cost of 50,630 and
33,208 shares
repurchased......... (10,530,804) (5,851,793)
------------ ------------
Decrease in net assets
from capital share
transactions........ (10,203,882) (5,019,563)
------------ ------------
Total increase in net
assets.............. 51,200,088 60,647,225
NET ASSETS:
Beginning of year..... 251,995,251 191,348,026
------------ ------------
End of year........... $303,195,339 $251,995,251
============= =============
</TABLE>
See Accompanying Notes to Financial Statements.
5
<PAGE> 7
CHESTNUT STREET EXCHANGE FUND
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF THE FUND OUTSTANDING THROUGHOUT EACH YEAR)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year...... $ 194.26 $ 144.43 $ 142.79 $ 134.44 $ 125.46
-------- -------- -------- -------- --------
Income From Investment Operations:
Net investment income................. 3.36 3.22 3.07 2.62 2.48
Net gain on securities (both realized
and unrealized).................... 51.18 49.82 4.27 8.35 8.99
-------- -------- -------- -------- --------
Total from investment
operations.................... 54.54 53.04 7.34 10.97 11.47
-------- -------- -------- -------- --------
Less Distributions:
Distributions from net investment
income............................. (3.36) (3.21) (3.07) (2.62) (2.49)
Distributions from realized gains
(federal income tax basis)......... (2.53) .00 (2.63) .00 .00
-------- -------- -------- -------- --------
Total distributions.............. (5.89) (3.21) (5.70) (2.62) (2.49)
-------- -------- -------- -------- --------
Net Asset Value, End of Year............ $ 242.91 $ 194.26 $ 144.43 $ 142.79 $ 134.44
========= ========= ========= ========= =========
Total Return............................ 28.09% 36.88% 5.19% 8.19% 9.23%
Ratios/Supplemental Data:
Net Assets, End of Year (000s)........ $303,195 $251,995 $191,348 $196,748 $196,263
Ratios to average net assets:
Operating expenses................. .51% .52% .54% .54% .54%
Net investment income.............. 1.55% 1.84% 2.11% 1.87% 1.89%
Portfolio Turnover Rate............... 3.92% .00% 3.88% .00% .00%
</TABLE>
See Accompanying Notes to Financial Statements.
6
<PAGE> 8
NOTES TO FINANCIAL STATEMENTS
(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 December 31, 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 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
December 31, 1996 was $41,023,019. The aggregate gross unrealized
appreciation (depreciation) for all securities is as follows: excess of
value over tax cost $258,114,244, excess of tax cost over value ($279,795).
(D) For the year ended December 31, 1996 purchases and sales of investment
securities (excluding short-term obligations) were $10,439,789 and
$10,515,443, respectively.
(E) At December 31, 1996, net assets consisted of:
<TABLE>
<S> <C>
Undistributed net investment income.................................... $ 6,668
Unrealized gain on investments......................................... 244,161,508
Other capital--paid-in or reinvested................................... 59,027,163
------------
$ 303,195,339
============
</TABLE>
7
<PAGE> 9
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 (the "Fund") as of December 31, 1996 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, 1996 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, 1996, 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 7, 1997
8
