<PAGE> 1
CHESTNUT STREET EXCHANGE FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
ROBERT R. FORTUNE
Chairman and President
November 7, 1997
Fellow Partner:
Our Fund earned $2.48 per share of net investment income in the nine months
ended September 30, 1997, as compared to $2.50 per share in the same period of
1996. Long-term capital gains realized in 1997 amount to $.53 per share.
After providing for the $.65 per share distribution to partners of record
on September 30, 1997, the net asset value per partnership share, as shown in
the enclosed report, was $295.71, a new high quarter-end value.
Since our last report, 269,838 shares of Intel Corp., 30,216 shares of
Schlumberger, Ltd. and 62,000 shares of SmithKline Beecham plc were added to our
portfolio as a result of stock splits.
When you receive this report you will have already received the Notice of
Annual Meeting of Partners and the related Proxy Statement. The meeting,
scheduled for December 18, 1997, is being held, in part, to approve changes to
our Partnership Agreement to accommodate the Fund's forthcoming change to
corporate status (for tax purposes only) described in my letter of February 14,
1997. Another copy of that letter is enclosed for your information.
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
The third quarter began strongly, but U.S. equity markets reached their
recent peaks in August with higher trading volatility since then. For the
quarter the market advanced 7.61%. Large capitalization issues were eclipsed by
gains for small and mid cap issues, with growth issues outperforming value
issues for those size categories.
The market began the quarter strongly, but faltered as a succession of high
profile growth companies preannounced earnings disappointments. Weak economic
news in Japan and a currency crisis in Southeast Asia further fueled market
jitters. The average money manager has matched the market for the year-to-date,
returning 29% on a total return basis. The Dow Jones outperformed the broader
market in the third quarter, rising 7.0% versus the S&P 500's 3.6%. Chestnut
Street Exchange Fund returned 4.8% for the quarter.
COMPARATIVE PERFORMANCE
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------
9/30/97 9/30/96
------- -------
<S> <C> <C>
Chestnut Street Exchange Fund.................................... 21.7% 15.5%
Dow Jones Industrial Average..................................... 23.2% 15.0%
Standard & Poor's 500 Index...................................... 27.9% 11.6%
</TABLE>
In the third quarter, both small and mid capitalization stocks outperformed
large capitalization stocks, with the smaller stocks performing the best. For
the year-to-date, large stocks have outperformed both smaller and mid cap
stocks, though the gap has narrowed from the end of the second quarter.
Within the various investing styles, growth stocks outperformed the broader
market in the third quarter in small and mid capitalization stocks, with the
Russell 2000 Growth returning 16.92% and the Russell Midcap Growth returning
13.99% for the quarter versus the 14.88% and 13.28% for their respective overall
indices. Among large capitalization stocks growth stocks lagged, returning 7.52%
for the Russell 1000 Growth versus 7.61% for the S&P 500. Value stocks lagged
growth in the small and mid capitalization stocks, while they provided the best
return among large capitalization stocks.
Chestnut Street Exchange Fund's overweight in technology helped
performance, since technology was the best performing sector in the quarter and
the year-to-date. Also, the Fund's underweights in retail and staples, in the
weak consumer noncyclical sector in the quarter, helped performance. However,
the Fund's performance was hurt by its overweight in healthcare, one of the
weaker sectors in the quarter -- although among the strongest sectors
year-to-date -- and by its underweights in telecom and energy, two of the
stronger sectors in the quarter. For the year to date the Fund's performance has
also been hurt by its overweight in basics, the second worst performing sector
for the year-to-date.
Corporate profits are on track for 10% growth in the third quarter and are
forecast to rise 10% for the entire year. Strong inflows into mutual funds have
supported the market's advance. Nevertheless, the market's current valuation is
high, suggesting caution. The Fund's diversification should mitigate some of
this risk.
PNC INSTITUTIONAL MANAGEMENT CORPORATION
2
<PAGE> 3
CHESTNUT STREET EXCHANGE FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENT OF NET ASSETS
SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
NO. OF
SHARES VALUE
- ----------- -------------
<S> <C>
COMMON STOCKS--98.5%
AUTO & AUTO PARTS--0.5 %
61,948 Genuine Parts Company..... $ 1,908,772
------------
BANKS--9.3 %
24,952 Barnett Banks, Inc. ...... 1,765,354
60,000 CoreStates Financial Corp. 3,971,250
30,757 First Chicago NBD
Corp. .................. 2,314,464
40,000 Morgan (J.P.) & Co.,
Inc. ................... 4,545,000
178,656 NationsBank Corp. ........ 11,054,340
157,266 Norwest Corp. ............ 9,632,543
------------
33,282,951
------------
BUILDING MATERIALS &
FOREST PRODUCTS--1.7 %
45,130 Armstrong World
Industries, Inc. ....... 3,026,531
52,117 Weyerhaeuser Company...... 3,094,447
------------
6,120,978
------------
BUSINESS PRODUCTS &
SERVICES--3.9 %
16,882* ACNielsen Corporation..... 405,168
50,647 Cognizant Corporation..... 2,063,865
50,647 Dun & Bradstreet
Corporation............. 1,437,109
68,416 Harland (John H.) Co. .... 1,577,844
52,000 Minnesota Mining &
Manufacturing Company... 4,810,000
49,500* HFS, Inc. ................ 3,684,656
------------
13,978,642
------------
CAPITAL GOODS--0.0 %
4,800 Newport News Shipbuilding,
Inc. ................... 113,100
------------
CHEMICALS--4.8 %
96,700 Air Products & Chemicals,
Inc. ................... 8,020,056
52,100 BetzDearborn, Inc. ....... 3,562,338
208,000 Cabot Corporation......... 5,603,000
------------
17,185,394
------------
CONSUMER NON-DURABLES &
SERVICES--4.9 %
283,411 Coca-Cola (The) Company... 17,270,358
------------
<CAPTION>
NO. OF
SHARES VALUE
------------
<C> <S> <C>
CONTAINERS--0.9 %
67,148 Crown Cork & Seal Company,
Inc. ................... $ 3,097,202
-------------
DIVERSIFIED
COMPANIES--1.6%
157,190 Ikon Office Solutions,
Inc. ................... 4,018,169
78,595 Unisource Worldwide,
Inc. ................... 1,493,305
------------
5,511,474
------------
DRUGS & MEDICAL--16.8 %
121,964 Abbott Laboratories,
Inc. ................... 7,798,073
7,835 Allegiance Corp. ......... 242,885
39,177 Baxter International,
Inc. ................... 2,046,998
403,668 Johnson & Johnson,
Inc. ................... 23,261,369
203,995 Merck & Company, Inc. .... 20,386,750
124,000 SmithKline Beecham p.l.c.
ADR..................... 6,060,500
------------
59,796,575
------------
ELECTRICAL
EQUIPMENT--5.7 %
203,134 Emerson Electric Company... 11,705,597
128,000 General Electric Company... 8,712,000
------------
20,417,597
------------
ELECTRONICS--22.0 %
105,538 AMP, Inc. ................ 5,652,879
44,596 Hewlett-Packard Company... 3,102,209
5,200* Imation Co. .............. 138,775
539,676 Intel Corp. .............. 49,818,841
21,065 Lucent Technologies,
Inc. ................... 1,714,164
119,118 Motorola, Incorporated.... 8,561,606
159,207 Raytheon Company.......... 9,413,114
------------
78,401,588
------------
ENTERTAINMENT--1.5 %
68,000 Walt Disney Company....... 5,482,500
------------
FOOD PROCESSING &
DISTRIBUTION--3.6 %
97,500 Hershey Foods Corp. ...... 5,508,750
174,000 Philip Morris Cos.,
Inc. ................... 7,231,875
------------
12,740,625
------------
</TABLE>
3
<PAGE> 4
STATEMENT OF NET ASSETS (CONCLUDED)
<TABLE>
<CAPTION>
NO. OF
SHARES VALUE
------------
<S> <C>
COMMON STOCKS (CONTINUED)
INSURANCE &
FINANCIAL--4.4 %
44,000 Aetna, Inc. .............. $ 3,583,250
43,930 American Express
Company................. 3,596,769
12,028 CIGNA Corp. .............. 2,240,215
70,000 Federal National Mortgage
Association............. 3,290,000
38,784 Marsh & McLennan
Companies, Inc. ........ 2,971,824
------------
15,682,058
------------
LODGING &
RESTAURANT--1.4 %
101,234 McDonald's Corporation.... 4,821,269
------------
NATURAL GAS
TRANSMISSION--0.3 %
24,000 Tenneco, Inc. ............ 1,149,000
------------
OFFICE EQUIPMENT--0.7%
20,942 International Business
Machines Corporation.... 2,218,543
4,062* NCR Corp. ................ 141,916
------------
2,360,459
------------
PAPER--1.0 %
24,819 Consolidated Papers, Inc. ... 1,377,454
55,432 Westvaco Corp. ........... 1,999,016
------------
3,376,470
------------
PETROLEUM--3.2 %
27,000 Atlantic Richfield Co. ... 2,306,812
80,000 Exxon Corp. .............. 5,125,000
40,360 Louisiana Land &
Exploration Company..... 3,160,692
33,877 Union Pacific Resources
Group, Inc. ............ 887,154
------------
11,479,658
------------
PETROLEUM
EQUIPMENT &
SERVICES--1.5%
2,232 El Paso Natural Gas
Co. .................... 135,176
60,432 Schlumberger, Ltd. ....... 5,087,619
------------
5,222,795
------------
POLLUTION CONTROL--1.7%
114,556 Browning Ferris
Industries, Inc. ....... 4,360,288
48,736 WMX Technologies, Inc. ... 1,702,714
------------
6,063,002
------------
<CAPTION>
NO. OF
SHARES VALUE
- ----------- -------------
<S> <C> <C>
RETAIL--GENERAL &
SPECIALTY--3.2 %
116,772 Albertson's, Inc. ........ $ 4,072,424
58,600 CVS Corp. ................ 3,332,875
16,870* Footstar, Inc. ........... 454,436
60,000 Penney (J.C.) Company,
Inc. ................... 3,495,000
------------
11,354,735
------------
TELEPHONE UTILITIES--2.1%
162,483 GTE Corp. ................ 7,372,666
------------
TRANSPORTATION--1.8 %
39,932 Burlington Northern,
Inc. ................... 3,858,430
40,000 Union Pacific Corp. ...... 2,505,000
------------
6,363,430
------------
Total Common Stocks
(Cost $52,582,774).. 350,553,298
------------
PAR
- -----------
<S> <C>
SHORT-TERM OBLIGATIONS--1.6%
$5,800,000 Federal Farm Credit Bank
Discount Note,
Commercial Paper,
6.08435%, 10/01/97
(Cost $5,800,000)...... . 5,800,000
------------
TOTAL INVESTMENT IN SECURITIES
(Cost $58,382,774)....... 100.1% 356,353,298
Distributions payable...... (0.2) (782,558)
Other assets in excess of
other liabilities........ 0.1 447,143
----- ------------
NET ASSETS (Applicable to
1,203,936 partnership
shares outstanding)...... 100.0% $356,017,883
===== ============
NET ASSET VALUE PER
SHARE.................... $ 295.71
============
NET ASSETS APPLICABLE TO
SHARES OWNED BY:
Limited partners
(1,152,511 shares)....... $340,811,078
Managing general partners
(5,292 shares)........... $ 1,564,817
Non-managing general
partner (46,133
shares).................. 13,641,988 15,206,805
----------- ------------
Total net assets
(1,203,936 shares)....... $356,017,883
============
</TABLE>
* Non-Income Producing
Values for securities listed on a securities exchange are based upon the last
reported sales price on September 30, 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
Langhorne B. Smith
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, 1997
Chestnut Street Exchange
Fund
400 Bellevue Parkway
Suite 100
Wilmington, Delaware 19809
(302) 792-2555
Edward J. Roach, Treasurer
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