<PAGE>
Chesapeake Investors, Inc.
ANNUAL REPORT 1996
<PAGE>
Dear Shareholder:
The financial report, contained herein, shows results for the fiscal year ended
September 30, 1996. Net investment income totalled $827,321 or $.22 per share
compared to $977,339 or $.26 per share for the previous year. During the fiscal
year ended September 30, 1996, bonds with a total par value of $3,250,000
matured or were called. Interest rates of these bonds ranged from 6.5% to
10.25%. Replacement of these bonds at currently available interest rates
averaging approximately 5.5% produced a significant decrease in the net
investment income compared with the prior year. Net asset values decreased to
$4.18 per share from $4.19 per share as of September 30, 1995.
It is the Company's intent to provide as high a level of income as possible,
consistent with sound investment policies. The market is constantly monitored to
achieve the objectives of a high level of income and the preservation of net
asset value.
Sincerely,
Albert W. Turner, Warren W. Pearce, Jr.,
Chairman of the Board President
November 20, 1996
- 1 -
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of
Chesapeake Investors, Inc.
We have audited the accompanying statement of assets and liabilities of
Chesapeake Investors, Inc., including the schedule of investments in securities,
as of September 30, 1996, the related statement of operations for the year then
ended, the statements of changes in net assets for each of the two years in the
period then ended, and the selected per share data and ratios for each of the
five years in the period then ended. These financial statements, schedule, and
selected per share data and ratios are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements, schedule, and selected per share data and ratios 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, schedule, and
selected per share data and ratios 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 September 30, 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, schedule, and selected per
share data and ratios referred to above present fairly, in all material
respects, the financial position of Chesapeake Investors, Inc. as of September
30, 1996, the results of its operations for the year then ended, the changes in
its net assets for each of the two years in the period then ended, and the
selected per share data and ratios for each of the five years in the period then
ended, in conformity with generally accepted accounting principles.
STOY, MALONE & COMPANY, P.C.
Bethesda, Maryland
November 20, 1996
- 2 -
<PAGE>
CHESAPEAKE INVESTORS, INC.
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investments in Long-Term Securities, at Value
(Amortized Cost $14,499,161) $15,495,417
Investments in Short-Term Securities
(at cost which approximates market) 810,842
Accrued Interest Receivable 274,127
------------
Total Assets 16,580,386
------------
LIABILITIES:
Accounts Payable and Accrued Expenses:
Investment Securities Purchased 739,767
Other 17,640
------------
Total Liabilities 757,407
------------
NET ASSETS:
Net Assets (Equivalent to $4.18 per share based on
3,783,960 shares of capital stock outstanding) $15,822,979
============
</TABLE>
See Notes to Financial Statements
-3-
<PAGE>
CHESAPEAKE INVESTORS, INC.
SCHEDULE OF INVESTMENTS IN SECURITIES
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Face Amortized
Rating* Amount Cost Value
----------- ---------------- ---------------- -------------------
<S> <C> <C> <C> <C>
Investments in Long-Term
Securities:
Arizona:
Salt River Project,
Arizona - Series C Revenue
5.5%, due 1/1/28 . . . . . . AA $ 700,000 $ 685,620 $ 669,816
Maricopa County
Arizona School District
5.5%, due 7/1/05 . . . . . . AAA 650,000 668,061 672,750
--------- --------- ---------
Total Arizona . . . . . . 1,350,000 1,353,681 1,342,566
--------- --------- ---------
Arkansas:
Jefferson County, Arkansas
Single Family Mortgage
7.25%, due 12/1/10 . . . . . AAA 365,000 324,157 420,604
Little Rock, Arkansas
Single Family Mortgage,
7.3%:
due 9/1/00 . . . . . . . AAA 25,000 24,419 27,469
due 9/1/01 . . . . . . . AAA 25,000 24,300 27,918
due 9/1/02 . . . . . . . AAA 30,000 29,029 33,956
due 9/1/03 . . . . . . . AAA 35,000 33,727 40,053
due 9/1/04 . . . . . . . AAA 35,000 33,597 40,507
due 9/1/05 . . . . . . . AAA 40,000 38,259 46,775
due 9/1/06 . . . . . . . AAA 35,000 33,365 41,295
due 9/1/07 . . . . . . . AAA 45,000 42,764 53,374
due 9/1/08 . . . . . . . AAA 50,000 47,378 59,531
due 9/1/09 . . . . . . . AAA 50,000 47,248 59,633
due 9/1/10 . . . . . . . AAA 30,000 28,276 35,757
--------- --------- ---------
Total Arkansas . . . . . 765,000 706,519 886,872
--------- --------- ---------
</TABLE>
-4-
<PAGE>
CHESAPEAKE INVESTORS, INC.
SCHEDULE OF INVESTMENTS IN SECURITIES (CONTINUED)
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Face Amortized
Rating* Amount Cost Value
----------- ---------------- ---------------- -------------------
<S> <C> <C> <C> <C>
California:
Los Angeles, California
Electric Revenue
5.875%, due 9/1/30 . . . . . AA- 300,000 276,574 300,609
---------------- ---------------- -------------------
Colorado:
Mesa County, Colorado
Sales Tax Revenue Refunding
9.2%, due 12/1/96 . . . . . . AAA 400,000 400,000 402,812
---------------- ---------------- -------------------
District of Columbia:
Georgetown University
Revenue Bond
7.4%, due 4/1/18 . . . . . . A+ 750,000 731,301 792,188
---------------- ---------------- -------------------
Florida:
City of Gainesville, Florida,
Utility System Revenue,
9.125%, due 10/1/05 . . . . AAA 500,000 500,000 642,190
Florida State Board
of Education - Cap Outlay
7.25%, due 6/1/23 . . . . . . AA 200,000 198,791 220,986
---------------- ---------------- -------------------
Total Florida . . . . . . 700,000 698,791 863,176
---------------- ---------------- -------------------
Georgia:
Municipal Electric Authority
6%, due 1/1/05 . . . . . . . AAA 700,000 739,767 739,767
---------------- ---------------- -------------------
</TABLE>
-5-
<PAGE>
CHESAPEAKE INVESTORS, INC.
SCHEDULE OF INVESTMENTS IN SECURITIES (CONTINUED)
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Face Amortized
Rating* Amount Cost Value
----------- ---------------- ---------------- -------------------
<S> <C> <C> <C> <C>
Illinois:
Chicago, Illinois
UTGO Public Library
6.60%, due 1/1/04 . . . . AAA 700,000 719,330 765,737
Chicago, Illinois
School Finance Authority
5%, due 6/1/09 . . . . . AAA 650,000 613,373 623,389
---------------- ---------------- -------------------
Total Illinois . . . . 1,350,000 1,332,703 1,389,126
---------------- ---------------- -------------------
Louisiana:
Shreveport, Louisiana,
Single Family Mortgage,
6.75%, due 9/1/10 . . . . AA 405,000 346,754 448,728
---------------- ---------------- -------------------
Massachusetts:
Massachusetts State Utility
Government Bond,
7.625%, due 6/1/08 . . . . Aaa 500,000 558,179 570,940
---------------- ---------------- -------------------
Minnesota:
Southern Minnesota Municipal
Power Agency, Serial A
5.7%, due 1/1/05 . . . . . A+ 650,000 669,266 679,556
---------------- ---------------- -------------------
New York:
New York State
Local Revenue
5.375%, due 4/1/16 . . . . . A 200,000 186,098 191,938
Triborough Bridge and
Tunnel Authority -
New York Rev Series
7.875%, due 1/1/18 . . . . . A+ 400,000 402,480 424,124
---------------- ---------------- -------------------
Total New York . . . . 600,000 588,578 616,062
---------------- ---------------- -------------------
</TABLE>
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<PAGE>
CHESAPEAKE INVESTORS, INC.
SCHEDULE OF INVESTMENTS IN SECURITIES (CONTINUED)
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Face Amortized
Rating* Amount Cost Value
----------- ---------------- ---------------- -------------------
<S> <C> <C> <C> <C>
North Carolina:
North Carolina Municipal
Power Agency
7.25%, due 1/1/07 . . . . . A 400,000 436,293 452,564
Charlotte, NC Utility
General Obligation
5.5%, due 7/1/07 . . . . . AAA 700,000 729,378 727,237
---------------- ---------------- -------------------
Total North Carolina . . . 1,100,000 1,165,671 1,179,801
---------------- ---------------- -------------------
Oklahoma:
Oklahoma State Turnpike
Authority
Turnpike Revenue
6.125%, due 1/1/20 . . . . A+ 360,000 355,751 370,800
---------------- ---------------- -------------------
Pennsylvania:
Allegheny County, Pennsylvania
Hospital Development Authority
6.0%, due 11/1/23 . . . . . AAA 700,000 670,978 715,204
Commonwealth of Pennsylvania
Utility Government Obligation
6.3%, due 11/1/02 . . . . . AAA 700,000 716,956 760,375
Pennsylvania State Higher
Educational Facility
Authority
7.15%, due 6/15/15 . . . . . AAA 500,000 503,791 544,765
Pennsylvania Intergovernmental
Coop Authority Special
Tax Revenue
7%, due 6/15/04 . . . . . AAA 500,000 520,549 566,015
---------------- ---------------- -------------------
Total Pennsylvania . . . . 2,400,000 2,412,274 2,586,359
---------------- ---------------- -------------------
</TABLE>
-7-
<PAGE>
CHESAPEAKE INVESTORS, INC.
SCHEDULE OF INVESTMENTS IN SECURITIES (CONTINUED)
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Face Amortized
Rating* Amount Cost Value
----------- ---------------- ---------------- -------------------
<S> <C> <C> <C> <C>
Texas:
Cypress-Fairbanks, Texas
Independent School District
5.5%, due 2/15/10 . . . . . AAA 700,000 700,000 702,954
Texas Water Development
Board Revenue
5.5%, due 7/15/10 . . . . . AAA 750,000 752,759 765,818
---------------- ---------------- -------------------
Total Texas . . . . . 1,450,000 1,452,759 1,468,772
---------------- ---------------- -------------------
Utah:
Salt Lake City, Utah
Hospital Revenue
8.125%, due 5/15/15 . . . . . AAA 700,000 710,593 857,283
---------------- ---------------- -------------------
Total Investments in
Long-Term
Securities . . . . $ 14,480,000 $ 14,499,161 $ 15,495,417
================ ================ ===================
* Ratings - Standard & Poor's or Moody's
Unaudited
<CAPTION>
Face
Amount Cost
---------------- -------------------
<S> <C> <C>
Investments in Short-Term Securities:
Seven Seas Series
Tax Free Money Market Fund, 2.6% . . . . . $ 810,842 $ 810,842
---------------- -------------------
Total Investments
in Short-Term Securities . . . . . $ 810,842 $ 810,842
================ ===================
</TABLE>
See Notes to Financial Statements
-8-
<PAGE>
CHESAPEAKE INVESTORS, INC.
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
INVESTMENT INCOME:
<S> <C>
Interest Income $ 942,109
----------------------
EXPENSES:
Investment Advisory Fee 53,155
Custodian Fees 9,930
Transfer Agent and Dividend
Disbursing Agent Fees 10,723
Legal and Auditing Services 14,170
Administrative Services 18,000
Compensation of Directors not
Members of the Investment Adviser's Organization 4,000
Printing Costs 3,185
Miscellaneous 1,625
----------------------
Total Expenses 114,788
----------------------
Net Investment Income 827,321
----------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized Gain From Investment
Transactions (Excluding Short-Term Securities):
Proceeds from Sales 3,315,403
Cost of Investments Sold 3,156,661
----------------------
Net Realized Gain on Investments 158,742
----------------------
Unrealized Loss on Investments:
Unrealized Appreciation of Investments
at Beginning of Year 1,092,374
Unrealized Appreciation of Investments
at End of Year 996,256
----------------------
Net Unrealized Loss on Investments (96,118)
----------------------
Net Realized and Unrealized Gain on
Investments 62,624
----------------------
Net Increase in Net Assets Resulting
from Operations $ 889,945
======================
</TABLE>
See Notes to Financial Statements
-9-
<PAGE>
CHESAPEAKE INVESTORS, INC.
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------------- ----------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net Investment Income $ 827,321 $ 977,339
Net Realized Gain on
Investments 158,742 56,326
Net Unrealized Gain (Loss)
on Investments (96,118) 143,024
------------------- ----------------------
Net Increase in Net Assets
Resulting from Operations 889,945 1,176,689
Dividends to Shareholders from:
Net Investment Income (870,738) (1,045,545)
Net Realized Gain on Investments (56,326) (23,398)
------------------- ----------------------
Total Increase (Decrease)
in Net Assets (37,119) 107,746
NET ASSETS:
Beginning of Year 15,860,098 15,752,352
------------------- ----------------------
End of Year (Including Undistributed
Net Investment Income of $750,011
and $793,428, respectively, and
Undistributed Net Realized Gains
of $158,742 and $56,326, respectively) $ 15,822,979 $ 15,860,098
=================== ======================
</TABLE>
See Notes to Financial Statements
-10-
<PAGE>
CHESAPEAKE INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(1) - SIGNIFICANT ACCOUNTING POLICIES
Chesapeake Investors, Inc. (the "Company") is registered under the
Investment Company Act of 1940, as amended, as a diversified closed-end
management investment company and invests solely in municipal obligations. The
following is a summary of significant accounting policies consistently followed
by the Company in the preparation of its financial statements. The policies are
in conformity with generally accepted accounting principles.
A. Investment Security Valuation - Securities are valued at the mean between the
latest bid and asked prices. Any securities for which market quotations are not
readily available are appraised at fair value as determined in good faith under
methods or procedures authorized by the Board of Directors.
B. Federal Income Taxes - The Company intends to comply with the provisions of
the Internal Revenue Code available to investment companies and to distribute to
shareholders annually all of its net investment income. Accordingly, no
provision for Federal income tax is necessary. The Company, based on provisions
of the Internal Revenue Code, expects to distribute income from capital gains to
its shareholders. Accordingly, such gains will be taxable to the shareholders.
The character of dividends from net investment income or net realized gains on
investments may differ from their ultimate characterization for Federal income
tax purposes due to generally accepted accounting principles and tax differences
in the character of income and expense recognition.
C. Other - Investment security transactions are accounted for on the date the
securities are purchased or sold. Interest income is recorded on the accrual
basis. Bond premiums and discounts are amortized to income ratably over the
total number of months from date of purchase to date of maturity of the bonds.
Certain securities have optional or mandatory tender features which give them a
shorter effective maturity date.
- 11 -
<PAGE>
(2) - CAPITAL STOCK
At September 30, 1996, there were 6,000,000 shares of $.50 par value
capital stock authorized. Shares issued and outstanding at September 30, 1996
totalled 3,783,960.
(3) - PURCHASES AND SALES OF SECURITIES
Sales and maturities of securities during fiscal year 1996, other than
short-term securities, aggregated $3,315,403.
Purchases of long-term securities during fiscal year 1996 aggregated
$4,874,179.
For Federal income tax purposes, the identified cost of investments
owned, excluding short-term securities, at September 30, 1996, was $14,340,748.
Gross unrealized gains totalled $1,171,117 and gross unrealized losses totalled
$16,448 for Federal income tax purposes at September 30, 1996.
(4) - INVESTMENT ADVISORY FEE AND TRANSACTIONS WITH
AFFILIATES
Federated Investment Counseling, Inc. is the investment adviser to the
Company. The advisory contract provides for an annual fee equal to .35 of 1% of
the weighted average managed assets of the Company. The investment advisory
fee for fiscal year 1996 totalled $53,155.
For fiscal year 1996, fees of $18,000 for administrative services were
paid to Carrollton Enterprises Limited Partnership. The Chairman of the Board is
a partner in that firm.
(5) - DIVIDENDS
During fiscal year 1996, the Company distributed dividends of $927,064
to its shareholders. On October 7, 1996, the Company declared a $.08 per share
dividend payable November 4, 1996, to shareholders of record October 21, 1996.
- 12 -
<PAGE>
CHESAPEAKE INVESTORS, INC.
SUPPLEMENTARY INFORMATION
SELECTED PER SHARE DATA AND RATIOS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA:*
Investment Income $ .25 $ .29 $ .32 $ .33 $ .34
Expenses .03 .03 .03 .03 .03
------------- ------------ ------------ ------------- ------------
Net Investment Income .22 .26 .29 .30 .31
Dividends from:
Net Investment Income (.23) (.28) (.27) (.30) (.32)
Net Realized Gain
on Investments (.01) - (.03) - -
Net Realized and Unreal-
ized Gain (Loss) on
Investments .01 .05 (.32) .08 .06
------------- ------------ ------------ ------------- ------------
Net Increase (Decrease)
in Net Asset Value (.01) .03 (.33) .08 .05
Net Asset Value:
Beginning of Year 4.19 4.16 4.49 4.41 4.36
------------- ------------ ------------ ------------- ------------
End of Year $ 4.18 $ 4.19 $ 4.16 $ 4.49 $ 4.41
============= ============ ============ ============= ============
RATIOS:
Ratio of Expenses to
Average Net Assets .72% .74% .74% .70% .73%
Ratio of Net Investment
Income to Average Net
Assets 5.22% 6.18% 6.81% 6.82% 7.14%
</TABLE>
*Selected data for a share of capital stock outstanding throughout the year.
- 13 -
<PAGE>
DIRECTORS INVESTMENT ADVISER
Albert W. Turner Federated Investment
Herndon G. Kilby Counseling, Inc.
Warren W. Pearce, Jr. Pittsburgh, Pennsylvania
John F. Ryon
Wilbert N. Sales
CUSTODIAN
State Street Bank and Trust Company
North Quincy, Massachusetts
TRANSFER AGENT
OFFICERS
Registrar and Transfer Company
Albert W. Turner, Cranford, New Jersey
Chairman of the Board
Warren W. Pearce, Jr., INDEPENDENT AUDITORS
President
Herndon G. Kilby, Stoy, Malone & Company, P.C.
Secretary-Treasurer Bethesda, Maryland
OFFICES
11785 Beltsville Drive
Beltsville, Maryland
- 14 -