<PAGE> 1
CHESTNUT STREET EXCHANGE FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
ROBERT R. FORTUNE
Chairman and President
May 6, 1998
Fellow Partner:
Our Fund earned $0.92 per share of net investment income in the three
months ended March 31, 1998, as compared to $0.80 per share in the same period
of 1997.
After providing for the $0.75 per share distribution to partners of record
on March 31, 1998, the net asset value per partnership share at that date was
$329.37, again a record quarter-end high.
Since our last report, the merger of Barnett Banks, Inc. with NationsBank
Corp. became effective and is reflected in an additional 29,631 shares of
NationsBank Corp.
Due to internal restructuring, the name of the Co-Investment Adviser,
formerly PNC Institutional Management Corporation, is now BlackRock
Institutional Management Corporation.
Your comments or questions about Chestnut Street Exchange Fund are welcome.
Yours sincerely,
/s/ Robert R. Fortune
Robert R. Fortune
<PAGE> 2
INVESTMENT ADVISER'S REPORT
The first quarter was strong across the board with the market benefiting
from a low-inflation, low-interest rate environment. For the quarter the market
advanced 13.96% on a total return basis. The average portfolio manager has
underperformed the market year-to-date, returning 11.9% on a total return basis.
The market gained ground strongly throughout the quarter. Wage inflation
has been largely checked by productivity growth while wholesale inflation has
been consistently negative. Oil prices have dropped to a four-year low, in part
because of lower Asian demand stemming from the financial crises there, although
recent voluntary production cuts suggest a firming of oil prices later this
year. The Dow Jones underperformed the broader market in the first quarter,
rising 11.3% versus the Standard & Poor's 500 Composite Stock Index ("S&P 500")
13.5%. Chestnut Street Exchange Fund returned 12.4% for the quarter.
COMPARATIVE PERFORMANCE
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
03/31/98 03/31/97
------------ ------------
<S> <C> <C>
Chestnut Street Exchange Fund.............................. 12.4% 1.8%
Dow Jones Industrial Average............................... 11.3% 2.1%
S&P 500.................................................... 13.5% 2.2%
</TABLE>
In the first quarter, both small and mid capitalization stocks
underperformed large capitalization stocks, with the smaller stocks performing
the worst.
Within the various investing styles, growth stocks outperformed the broader
market in the first quarter in large, small and mid capitalization stocks, with
the Russell 2000 Growth returning 11.88% and the Russell Midcap Growth returning
11.94% for the quarter versus the 10.06% and 10.81% for their respective overall
indices. Large capitalization growth stocks returned 15.15% for the Russell 1000
Growth versus 13.96% for the S&P 500. Value stocks lagged growth in all three
size groupings.
Chestnut Street Exchange Fund's overweights in consumer cyclicals and
health care helped performance, since those were two of the best performing
sectors in the quarter. Also, the Fund's underweights in utilities and energy
helped performance, as these were the two weakest sectors in the quarter.
However, the Fund's performance was hurt by its overweight in consumer
noncylicals, one of the weaker sectors in the quarter, and by its underweight in
telecom, one of the stronger sectors in the quarter.
Corporate profits are still growing but at a slower pace. Strong inflows
into mutual funds continue to support the market's advance, but the market's
current valuation is considered high, suggesting caution. The Fund's
diversification should mitigate some of this risk.
May 1, 1998 BLACKROCK INSTITUTIONAL MANAGEMENT CORPORATION
2
<PAGE> 3
CHESTNUT STREET EXCHANGE FUND
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENT OF NET ASSETS
MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ------------
<C> <S> <C>
COMMON STOCKS--98.4%
AUTO & AUTO PARTS--0.6 %
61,948 Genuine Parts Company...... $ 2,361,767
------------
BANKS--10.6 %
60,000 CoreStates Financial Corp. ... 5,385,000
30,757 First Chicago NBD Corp. ... 2,710,461
40,000 Morgan (J.P.) & Co., Inc. . 5,372,500
208,287 NationsBank Corp. ......... 15,191,897
314,532 Norwest Corp. ............. 13,072,736
------------
41,732,594
------------
BUILDING MATERIALS & FOREST
PRODUCTS--1.7 %
45,130 Armstrong World Industries,
Inc. .................... 3,906,566
45,830 Weyerhaeuser Company....... 2,589,395
------------
6,495,961
------------
BUSINESS PRODUCTS &
SERVICES--2.7 %
4,355* ACNielsen Corporation...... 115,135
50,647 Cognizant Corporation...... 2,905,872
50,647 Dun & Bradstreet
Corporation.............. 1,731,494
68,416 Harland (John H.) Co. ..... 1,064,724
52,000 Minnesota Mining &
Manufacturing Company.... 4,741,750
------------
10,558,975
------------
CAPITAL GOODS--0.0 %
4,800 Newport News Shipbuilding,
Inc. .................... 128,100
------------
CHEMICALS--4.7 %
96,700 Air Products & Chemicals,
Inc. .................... 8,014,012
52,100 BetzDearborn, Inc ......... 2,940,394
208,000 Cabot Corporation.......... 7,670,000
------------
18,624,406
------------
CONSUMER NON-DURABLES &
SERVICES--6.8 %
118,953* Cendant Corp. ............. 4,713,513
283,411 Coca-Cola (The) Company.... 21,946,639
------------
26,660,152
------------
CONTAINERS--0.9 %
67,148 Crown Cork & Seal Company,
Inc. .................... 3,592,418
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ------------
<C> <S> <C>
DIVERSIFIED
COMPANIES--1.6 %
157,190 Ikon Office
Solutions, Inc. ......... $ 5,432,879
78,595 Unisource Worldwide, Inc. ... 972,613
------------
6,405,492
------------
DRUGS & MEDICAL--19.1 %
121,964 Abbott Laboratories, Inc. . 9,185,414
39,177 Baxter International, Inc. 2,159,632
403,668 Johnson & Johnson, Inc. ... 29,593,910
203,995 Merck & Company, Inc. ..... 26,187,858
124,000 SmithKline Beecham p.1.c.
ADR...................... 7,757,750
------------
74,884,564
------------
ELECTRICAL EQUIPMENT--6.2 %
203,134 Emerson Electric Company... 13,241,798
128,000 General Electric Company... 11,032,000
------------
24,273,798
------------
ELECTRONICS--17.5 %
105,538 AMP, Inc. ................. 4,623,884
44,596 Hewlett-Packard Company.... 2,826,271
539,676 Intel Corp. ............... 42,128,458
21,065 Lucent Technologies, Inc. ... 2,693,687
119,118 Motorola, Incorporated..... 7,221,529
159,207 Raytheon Company........... 9,293,709
------------
68,787,538
------------
ENTERTAINMENT--1.9 %
68,000 Walt Disney Company........ 7,259,000
------------
FOOD PROCESSING &
DISTRIBUTION--3.6 %
97,500 Hershey Foods Corp. ....... 6,983,437
174,000 Philip Morris Cos., Inc. .. 7,253,625
------------
14,237,062
------------
INSURANCE & FINANCIAL--4.6%
44,000 Aetna, Inc. ............... 3,671,250
43,930 American Express Company... 4,033,323
12,028 CIGNA Corp. ............... 2,465,740
70,000 Fannie Mae................. 4,427,500
38,784 Marsh & McLennan Companies,
Inc. .................... 3,386,328
------------
17,984,141
------------
</TABLE>
3
<PAGE> 4
STATEMENT OF NET ASSETS (CONCLUDED)
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
LODGING & RESTAURANT--1.5 %
101,234 McDonald's Corporation..... $ 6,074,040
------------
NATURAL GAS
TRANSMISSION--0.3 %
24,000 Tenneco, Inc. ............. 1,024,500
------------
OFFICE EQUIPMENT--0.6 %
20,942 International Business
Machines Corporation..... 2,175,350
------------
PAPER--0.8 %
24,819 Consolidated Papers, Inc. ... 1,588,416
55,432 Westvaco Corp. ............ 1,704,534
------------
3,292,950
------------
PETROLEUM--2.7 %
27,000 Atlantic Richfield Co. .... 2,122,875
44,004 Burlington Resources, Inc. ... 2,109,442
80,000 Exxon Corp. ............... 5,410,000
33,877 Union Pacific Resources
Group, Inc. ............. 808,813
------------
10,451,130
------------
PETROLEUM EQUIPMENT &
SERVICES--1.2 %
60,432 Schlumberger, Ltd. ........ 4,577,724
------------
POLLUTION CONTROL--1.3 %
114,556 Browning Ferris Industries,
Inc. .................... 3,737,390
48,736 WMX Technologies, Inc...... 1,501,678
------------
5,239,068
------------
RETAIL--GENERAL &
SPECIALTY--4.0 %
116,772 Albertson's, Inc. ......... 6,145,126
58,600 CVS Corp. ................. 4,424,300
16,870* Footstar, Inc. ............ 607,320
60,000 Penney (J.C.) Company,
Inc. .................... 4,541,250
------------
15,717,996
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ------------
<S> <C> <C>
TELEPHONE UTILITIES--1.9 %
124,355 GTE Corp. ................. $ 7,445,756
------------
TRANSPORTATION--1.6 %
39,932 Burlington Northern, Inc. . 4,152,928
40,000 Union Pacific Corp. ....... 2,247,500
------------
6,400,428
------------
Total Common Stocks
(Cost $51,550,076)....... 386,384,910
------------
PAR
- ----------
SHORT-TERM OBLIGATIONS--1.3 %
$4,965,000 Ford Motor Credit Corp.,
Commercial Paper, 5.58%,
04/01/98
(Cost $4,965,000)........ 4,965,000
------------
TOTAL INVESTMENT IN SECURITIES
(Cost $56,515,076)....... 99.7% 391,349,910
Distributions payable...... (0.1%) (466,996)
Other assets in excess of
other liabilities........ 0.4% 1,456,348
----- ------------
NET ASSETS (Applicable to
1,191,188 partnership
shares outstanding)...... 100.0% $392,339,262
===== ============
NET ASSET VALUE PER
SHARE.................... $ 329.37
============
NET ASSETS APPLICABLE TO
SHARES OWNED BY:
Limited partners
(1,185,824 shares)....... $390,572,521
Managing general partners
(5,364 shares)........... 1,766,741
------------
Total net assets
(1,191,188 shares)....... $392,339,262
============
</TABLE>
- ---------------
* Non-Income Producing
Values for securities listed on a securities exchange are based upon the last
reported sale price on March 31, 1998. 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
Richard C. Caldwell
Robert R. Fortune
G. Willing Pepper
Langhorne B. Smith
David R. Wilmerding, Jr.
INVESTMENT ADVISERS
PNC Bank, National Association
and
BlackRock 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
First Quarter Report
March 31, 1998
Chestnut Street Exchange
Fund
400 Bellevue Parkway
Wilmington, Delaware 19809
(302) 792-2555
Edward J. Roach, Treasurer
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