GARDNER LEWIS ASSET MANAGEMENT
April 1, 1996
Dear Shareholder:
The Chesapeake Fund Institutional Class closed the first quarter with a
gain of 5.6%. This gain compares to gains of 5.4% and 6.2% for the S&P 500 and
Nasdaq Industrials, respectively.
Our profits were well balanced among retail, waste management,
telecommunications, healthcare, computer peripheral, transportation, software,
and alternative energy companies. Dampening our results, despite having an
estimated 1996 growth rate in excess of 40% and an average P/E of 9, was a
decline in the semiconductor related portion (currently 13%) of our portfolio.
Wall Street, spooked by short term weakness in specific semi related areas,
chose to treat the majority of this sector's companies as one, forcing most of
these stocks to new lows despite many with proprietary products, excellent
individual prospects and strong forthcoming earnings announcements. The Street's
primary focus remained the stocks of bellwether companies thought to be safe
havens in a volatile market and thought to benefit from both declining interest
rates and substantial mutual fund cash inflows. The stocks of smaller companies
continued to underperform as did technology stocks in general. But, at various
times throughout the quarter and particularly at the end, it seemed that
investors were attempting to return to the company specific focus that they
abandoned late last summer.
The market is currently stratified as evidenced by the relative
outperformance of the Dow Jones Industrials to the Russell 2000 index of smaller
companies, up 37.7% versus 26.8% over the last twelve months and 61.9% versus
31.8% over the last twenty-four. This stratification is even better evidenced by
the disparity in pricing between a stock like Coca-Cola growing at 18% and
selling at 28 times projected 1996 earnings when compared to our portfolio, in
the aggregate growing at 38% and selling at 14 times projected 1996 earnings.
Coca-Cola is not alone, 17 of the Dow 30 currently sell at price-earnings ratios
that exceed both their projected 1996 and their projected 1997 growth rates.
This number increases to 23 when viewed more realistically on projected 1996
earnings alone.
It is our belief that many of the market's current leaders, despite being
excellent companies, are overpriced, and that several types of investors forced
to put money to work because of massive capital inflows have exacerbated this
condition. The first are those who invest in the "market," not individual
companies, under the premise that macroeconomics dictate market direction and
that a declining interest rate environment means higher stock prices because of
the relative attractiveness of stocks to bonds or cash. These investors,
concentrated in the largest of companies, make little effort at "bottom's up"
research, ignore or are unaware of faster growing more dynamic companies, and,
at current valuations, are accepting both lower return and greater risk. They
have no room in their portfolios' pricing for earnings disappointment or a
change in the macroeconomic landscape such as an uptick in interest rates.
<PAGE>
The second type are those investors who base investment decisions on
technical or "momentum" oriented factors rather than fundamental value and
individual company growth prospects. They allow stock price trends to dictate
their purchase and sale decisions rather than the current or future success of
the underlying company. This can result in extreme volatility, causing stocks
like those in the semiconductor field to be dramatically oversold or those
discussed in the following paragraph to be dramatically overbought. We would
liken this risk to that of a midnight drive on a dark country road with
headlights out and sunglasses on. Many of these investors suffered dramatic
declines this quarter due to their investments in Internet related stocks,
stocks we mentioned last quarter that our discipline precluded us from investing
in because of their excessive valuations. UUNET, Netscape, and Spyglass are down
60%, 40% and 62%, respectively, since January 1.
And finally, the third are those concept investors enthralled by a
company's prospects no matter what the company's size or stability, who invest
at excessive multiples in order to participate along with the aforementioned
"momentum" investors, without regard for the significantly higher risk inherent
for having done so. Current examples of their holdings are Cascade, selling at a
P/E ratio of 104 with an estimated growth rate of 45%, Fore Systems selling at a
P/E ratio of 102 with an estimated growth rate of 44%, and Macromedia selling at
a P/E ratio of 65 with an estimated growth rate of 33%.
We would rather miss near term performance opportunity than employ any of
these strategies, not only because we think them unsound, but also because their
success is typically short-lived. So while investors were paying higher and
higher prices for the stocks listed above, or 20 times earnings for Proctor &
Gamble at a 13% growth rate, or 18 times earnings for General Electric at a 12%
growth rate, we were digging for strength not yet well recognized in companies
that met all of the following criteria:
(bullet) a growth rate in excess of 15% - again currently 38%;
(bullet) a valuation at a fraction of that growth rate - again currently 14
times earnings;
(bullet) a proprietary catalyst like a new product, management, distribution
strategy, or manufacturing technology; and
(bullet) a strong balance sheet capable of supporting the company's future
growth.
This digging, aimed at discovering the market's next leaders, has allowed
us to uncover opportunity in a number of areas - particularly retail, medical
products, healthcare, and business services. Because of these opportunities, we
have aggressively culled our portfolio to make room for even better companies.
This has improved our aggregate fundamental strength, and because many of these
investments are in unrelated fields, allowed us to broaden our diversity. Thus,
we go forward with a great sense of optimism knowing that our portfolio has both
excellent potential for future growth because of its strong earnings prospects,
and built-in downside protection because of its low valuation.
This past week's decision by the Federal Reserve to hold rates steady may
be just the catalyst needed to return investors to a company specific focus.
Since then, the performance of many overpriced stocks has suffered and that of
many fundamentally strong and reasonably priced growth companies has improved.
Investors should begin to understand that along with abating mutual fund cash
inflows, their fuel in the form of declining rates may have evaporated. Earnings
and valuation will have to be the drivers; and, therefore, companies like those
in our portfolio with forthcoming strong earnings announcements and low
valuations should fall squarely in investor gun sights. Thus, for several
reasons, we look forward to the coming of Spring.
<PAGE>
In one final note, in an effort to provide more comprehensive shareholder
services, we have made some changes. As part of these, The Cheasapeake Fund
Family has a new toll free number (800) 430- 3863. A fund representative will be
available to answer your questions from 8:30 a.m. to 5:00 p.m. (Eastern).
Effective April 15th, an automated system will be available after hours through
which you may access the following:
(bullet) Current Market Value
(bullet) Daily Net Asset Value
(bullet) Shares Held
(bullet) Transaction History
(bullet) Statement Requests
(bullet) Prospectus and Report Requests
We hope you find these changes helpful.
Sincerely,
/s/ W. WHITFIELD GARDNER /s/ JOHN L. LEWIS
W. Whitfield Gardner John L. Lewis, IV
<PAGE>
THE CHESAPEAKE FUND
PORTFOLIO OF INVESTMENTS
(unaudited)
March 31, 1996
<TABLE>
<CAPTION>
========================================================= ===========================================================
Quantity Security Market Value Quantity Security Market Value
========================================================= ===========================================================
<S> <C> <C> <C> <C> <C>
59,800 3Com Corp. 2,384,525 43,000 Network General Corp. 1,720,000
37,000 ASM Lithography Hldg NV Ord 1,493,875 52,700 Newbridge Networks Corp. 2,964,375
86,700 Adaptec, Inc. 4,183,275 36,000 Nine West Group, Inc. 1,557,000
120,300 Advanced Semiconductor Intl 1,112,775 42,800 Novellus Systems, Inc. 1,904,600
33,000 Altera Corp. 1,843,875 74,100 Olsten Corp. 2,389,725
68,600 Apria Healthcare Group, Inc. 2,178,050 84,100 Ornda Healthcorp 2,417,875
90,800 Atmel Corp. 2,315,400 56,800 Parametric Technology Corp. 2,222,300
52,500 Authentic Fitness Corp. 1,358,437 62,300 Pep Boys 2,087,050
67,900 BMC Software, Inc. 3,717,525 56,800 Petrol Geo Service ADR 1,430,650
91,900 Borders Group, Inc. 2,619,150 41,400 Profitt's Inc. 1,304,100
95,400 California Energy 2,540,025 46,000 Seagate Technology, Inc. 2,518,500
45,100 Carlisle 1,956,212 42,000 Sears 2,047,500
34,632 Columbia/HCA Healthcare Corp. 1,999,998 49,400 Service Corp. 2,414,425
39,100 Computer Associates Internatio 2,800,537 40,700 Sofamor/Danek Group, Inc. 1,378,712
34,700 Consolidated Stores Corp. 1,162,450 49,200 St. Jude Medical, Inc. 1,835,775
57,300 Credence Systems Corp. 959,775 37,300 Sterling Commerce 1,146,975
87,700 E C I Telecom, Ltd. 1,962,287 79,800 Stratus Computer, Inc. 2,214,450
60,800 EMC Corporation 1,322,400 69,400 Sun Microsystems, Inc. 3,036,250
69,000 Federated Department Stores 2,225,250 53,700 Symbol Technologies 1,886,212
81,900 Franklin Quest Co. 2,211,300 182,500 Systems Software Associates, Inc. 4,653,750
42,600 Healthsouth Corp. 1,496,325 86,200 Teradyne, Inc. 1,443,850
40,900 Intel Corp. 2,326,187 90,300 USA Waste Services 2,302,650
56,200 Jones Apparel Group, Inc. 2,725,700 70,700 USS Surgical 2,315,425
85,900 KLA Instruments Corp. 1,943,487 40,300 United Waste, Inc. 2,015,000
99,600 Komag, Inc. 2,415,300 23,300 Universal Health Services, Inc 1,237,812
101,400 Lexmark Holdings, Inc. 1,964,625 56,100 ValuJet Airlines, Inc. 1,402,500
56,300 Lowe's Companies, Inc. 2,012,725 75,450 Vivra, Inc. 2,169,187
65,800 MEMC Electronic Materials, Inc 2,393,475 85,400 Warnaco Group, Inc. 2,060,275
42,600 MediSense, Inc. 1,898,362 61,800 WorldCom, Inc. 2,842,800
58,500 Millipore Corp. 2,237,625 47,900 Zebra Technologies Corp. 1,269,350
31,100 Nellcor Puritan Bennett, Inc. 1,998,175
TOTAL EQUITY 127,948,185
CASH EQUIVALENT 8,269,297
TOTAL ASSETS 136,217,483
</TABLE>
<PAGE>
THE CHESAPEAKE FUND
Institutional Class
Performance Update - $1,000,000 Investment
For the period from April 6, 1994 (commencement of
operations) to February 29, 1996
[graph]
Institutional S&P 500 NASDAQ
Shares Total Return Industries
06-Apr-94 1,000,000 1,000,000 1,000,000
31-May-94 1,013,000 1,023,694 948,107
31-Aug-94 1,058,856 1,073,678 979,987
30-Nov-94 1,082,371 1,031,945 961,219
28-Feb-95 1,129,927 1,116,291 987,229
31-May-95 1,248,466 1,230,355 1,050,266
31-Aug-95 1,536,805 1,303,952 1,220,839
30-Nov-95 1,469,092 1,413,569 1,234,092
29-Feb-96 1,465,036 1,503,648 1,278,564
This graph depicts the performance of The Chesapeake Fund Institutional
Shares versus the NASDAQ Industrials Index and the S&P 500 Total Return Index.
It is important to note that The Chesapeake Fund is a professionally managed
mutual fund while the indexes are not available for investment and are
unmanaged. The comparison is shown for illustrative purposes only.
Annualized Total Return
Commencement
of operations One year ended
through 2/29/96 2/29/96
22.24% 29.66
* The graphs assumes an initial $1,000,000 investment at April 6, 1994.
All dividends and distributions are reinvested.
* At February 29, 1996, the Institutional Shares of the Fund would have
grown to $1,465,036 - total investment return of 46.50% since April 6, 1994.
* At February 29, 1996, a similar investment in the NASDAQ Industrials Index
would have been worth $1,278,564 - total investment return of 27.86%, while a
similar investment in the S&P 500 Total Return Index would have grown to
$1,503,648 - total investment return of 50.36% since April 6, 1994.
* Past performance is not a guarantee of future results. A mutual fund's share
price and investment return will vary with market conditions, and the
principal value of shares, when redeemed, may be worth more or less than the
original cost. Average annual returns are historical in nature and measure net
investment income and capital gain or loss from portfolio investments assuming
reinvestments of dividends.
* For those shareholders initially purchasing shares in the Chesapeake Fund
prior to April 7, 1995, and later converting those shares to one of the four
new classes established on that date, this graph and financial information
reflects approximately the total return since inception for such investment.
<PAGE>
THE CHESAPEAKE FUND
PORTFOLIO OF INVESTMENTS
February 29, 1996
Number of Value
Shares (note 1)
------------ -----------
COMMON STOCKS - 87.83%
CHEMICALS - 0.91%
(a) Cytec Industries, Inc. 15,700 $1,208,900
-----------
COMMERCIAL SERVICES - 3.24%
Service Corporation International 47,200 2,141,700
The Olsten Corporation 47,200 2,159,400
-----------
4,301,100
-----------
COMPUTERS - 18.73%
(a) Adaptec, Inc. 83,000 4,653,187
(a) 3Com Corporation 57,300 2,800,537
(a) Digital Equipment Corporation 29,900 2,152,800
(a) Komag, Inc. 95,400 2,993,175
(a) Lexmark International Group 90,800 2,054,350
(a) Seagate Technology, Inc. 46,000 3,001,500
(a) Stratus Computer, Inc. 77,600 2,250,400
(a) Sun Microsystems, Inc. 66,000 3,465,000
(a) Zebra Technologies Corporation 47,900 1,472,925
-----------
24,843,874
-----------
COMPUTER SOFTWARE & SERVICES - 10.96%
(a) BMC Software, Inc. 67,900 3,785,425
(a) Cisco Systems, Inc. 61,200 2,907,000
Computer Associates International, Inc. 39,100 2,688,125
(a) Network General Corporation 38,000 1,529,500
(a) Symantec Corporation 1,000 12,750
System Software Associates, Inc. 172,500 3,622,500
-----------
14,545,300
-----------
ELECTRONICS - 1.91%
Harman International Industries, Inc. 15,830 561,965
(a) Symbol Technologies, Inc. 51,800 1,968,400
-----------
2,530,365
-----------
ELECTRONICS - SEMICONDUCTOR - 7.29%
(a) Altera Corporation 42,700 2,786,175
(a) Atmel Corporation 86,800 2,321,900
Intel Corporation 40,900 2,405,431
(a) MEMC Electronic Materials 63,300 2,152,200
-----------
9,665,706
-----------
ENVIRONMENTAL CONTROL - 3.47%
(a) USA Waste Services, Inc. 127,700 2,729,588
(a) United Waste Systems, Inc. 40,300 1,873,950
-----------
4,603,538
-----------
<PAGE>
(CONTINUED)
THE CHESAPEAKE FUND
PORTFOLIO OF INVESTMENTS
February 29, 1996
Number of Value
Shares (note 1)
------------ -----------
COMMON STOCKS (Continued)
MACHINE - DIVERSIFIED - 9.08%
(a) Applied Materials, Inc. 48,300 $ 1,726,725
(a) ASM Lithography Holding 37,000 1,794,500
(a) Advanced Semiconductor Materials
International N.V. 40,100 1,483,700
(a) Credence Systems Corporation 57,300 1,088,700
(a) KLA Instruments Corporation 85,900 2,061,600
(a) Novellus Systems, Inc. 40,300 2,110,712
(a) Teradyne, Inc. 86,200 1,777,875
----------
12,043,812
----------
MEDICAL - HOSPITAL MANAGEMENT & SERVICE - 8.31%
(a) Apria Healthcare Group, Inc. 66,500 2,078,125
Columbia/HCA Healthcare Corporation 34,632 1,896,102
(a) Foundation Health Corporation 33,300 1,298,700
(a) Healthsouth Corporation 39,100 1,368,500
(a) OrNda 84,100 2,155,062
(a) Vivra, Inc. 75,450 2,225,775
----------
11,022,264
----------
MEDICAL SUPPLIES - 2.49%
(a) MediSense, Inc. 42,600 1,325,925
(a) Nellcor Puritan Bennet, Inc. 29,600 1,983,200
----------
3,309,125
----------
MISCELLANEOUS - MANUFACTURING - 1.96%
Millipore Corporation 58,500 2,595,938
----------
OIL & GAS - EQUIPMENT & SERVICES - 0.86%
(a) Petroleum Geo-Services A/S 52,600 1,144,050
----------
RETAIL - APPAREL - 4.42%
Authentic Fitness Corporation 52,500 1,463,438
(a) Jones Apparel Group, Inc. 53,700 2,221,838
Warnaco Group, Inc. 83,600 2,173,600
----------
5,858,876
----------
RETAIL - DEPARTMENT STORES - 3.71%
(a) Consolidated Stores Corporation 47,000 1,222,000
(a) Federated Department Stores, Inc. 62,100 1,878,525
Sears, Roebuck and Company 40,100 1,819,538
----------
4,920,063
----------
(CONTINUED)
<PAGE>
THE CHESAPEAKE FUND
PORTFOLIO OF INVESTMENTS
February 29, 1996
NUMBER OF VALUE
SHARES (NOTE 1)
------------ --------------
COMMON STOCKS (Continued)
RETAIL - SPECIALTY LINE - 1.60%
(a) Borders Group, Inc. 91,900 $2,125,187
--------------
SHOES - LEATHER - 1.07%
(a) Nine West Group, Inc. 36,000 1,413,000
--------------
TELECOMMUNICATIONS - 1.63%
ECI Telecommunications Limited 84,800 2,162,400
--------------
TELECOMMUNICATIONS EQUIPMENT - 1.85%
(a) Newbridge Networks Corporation 50,100 2,448,638
--------------
TRANSPORTATION - AIR - 0.98%
(a) ValuJet, Inc. 56,100 1,297,312
--------------
UTILITIES - ELECTRIC - 1.59%
(a) California Energy Company, Inc. 95,400 2,110,725
--------------
UTILITIES - TELECOMMUNICATIONS - 1.77%
(a) WorldCom, Inc. 59,700 2,350,688
--------------
TOTAL COMMON STOCKS (COST $104,051,868) 116,500,861
--------------
Principal
Amount
------------
REPURCHASE AGREEMENT (b) - 13.99%
Wachovia Bank $18,551,995 18,551,995
--------------
.32%, due March 1, 1996
(COST $18,551,995)
TOTAL VALUE OF INVESTMENTS (COST $122,603,863 (c)) 101.82% 135,052,856
Liabilities In Excess of Other Assets (1.82)% (2,414,801)
-------- --------------
NET ASSETS 100.00% $132,638,055
======== ==============
(CONTINUED)
<PAGE>
THE CHESAPEAKE FUND
PORTFOLIO OF INVESTMENTS
February 29, 1996
(a) Non-income producing investment.
(b) Joint repurchase agreement entered into February 29, 1996, with a
maturity value of $68,302,116 collateralized by $71,660,000 U.S.
Treasury Bills, due September 19, 1996. The aggregate market value of
the collateral at February 29, 1996 was $69,697,130. The Fund's pro
rata interest in the market value of the collateral at February 29,
1996 was $18,933,644. The Fund's pro rata interest in the joint
repurchase agreement collateral is taken into possession by the
Fund's custodian upon entering into the repurchase agreement. The
collateral is marked to market daily to ensure its market value is at
least 102 percent of the sales price of the repurchase agreement.
(c) Aggregate cost for federal income tax purposes is $122,611,057.
Unrealized appreciation (depreciation) of investments for federal
income tax purposes is as follows:
Unrealized appreciation $16,647,675
Unrealized depreciation (4,205,876)
------------
NET UNREALIZED APPRECIATION $12,441,799
============
See accompanying notes to financial statements
<PAGE>
THE CHESAPEAKE FUND
STATEMENT OF ASSETS AND LIABILITIES
February 29, 1996
ASSETS
Investments in common stocks at value
(cost $104,051,868) $116,500,861
Repurchase agreement 18,551,995
Cash 746,629
Interest receivable 68,068
Dividends receivable 19,093
Receivable for fund shares sold 331,867
Prepaid expenses 7,912
Deferred organization expenses, net (note 3) 29,759
Other assets 1,733
-------------
Total assets 136,257,917
-------------
LIABILITIES
Accrued expenses 73,585
Payable for investment purchases 3,544,536
Payable to Advisor 1,741
-------------
Total liabilities 3,619,862
-------------
NET ASSETS $132,638,055
=============
NET ASSETS CONSIST OF
Paid-in capital $125,362,317
Accumulated net realized loss on investments (5,173,255)
Net unrealized appreciation on investments 12,448,993
-------------
$132,638,055
=============
INSTITUTIONAL SHARES
Net asset value and offering price per share ($80,252,481/
5,554,687 shares outstanding) $14.45
======
SERIES A INVESTOR SHARES
Net asset value ($32,548,733 / 2,257,961 shares outstanding) $14.42
Maximum offering price per share (100 / 97 of $14.42) $14.87
SERIES C INVESTOR SHARES
Net asset value and offering price per share ($7,907,607/
551,385 shares outstanding) $14.34
======
SERIES D INVESTOR SHARES
Net asset value ($11,929,234 / 828,109 shares outstanding) $14.41
Maximum offering price per share (100 / 98.5 of $14.41) $14.63
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
THE CHESAPEAKE FUND
STATEMENT OF OPERATIONS
Year ended February 29, 1996
INVESTMENT INCOME
INCOME
Interest $299,714
Dividends 102,939
------------
TOTAL INCOME 402,653
------------
EXPENSES
Investment advisory fees (note 2) 643,947
Fund accounting fees (note 2) 78,750
Fund administration fees (note 2) 48,296
Professional fees 37,768
Distribution and service fees - Series A (note 4) 32,342
Distribution and service fees - Series C (note 4) 31,522
Distribution and service fees - Series D (note 4) 40,697
Custody fees 21,257
Registration and filing administration fees (note 2) 17,651
Shareholder recordkeeping fees (note 2) 10,961
Securities pricing fees (note 2) 4,854
Registration and filing expenses 97,001
Printing expenses 17,746
Shareholder servicing expenses 9,362
Amortization of deferred organization expenses (note 3) 9,608
Trustee fees and meeting expenses 5,329
Other operating expenses 5,405
------------
TOTAL EXPENSES 1,112,496
------------
Less:
Investment advisory fees waived (note 2) (98,808)
Distribution and service fees waived (note 4) (20,409)
------------
NET EXPENSES 993,279
------------
NET INVESTMENT LOSS (590,626)
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss from investment transactions (3,843,955)
Increase in unrealized appreciation on investments 11,158,332
------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 7,314,377
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $6,723,751
============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
THE CHESAPEAKE FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the
period from
April 6, 1994
(commencement
Year ended of operations) to
February 29, February 28,
1996 1995
---------------- ---------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net investment loss ($590,626) ($55,378)
Net realized loss from investment transactions (3,843,955) (131,325)
Increase in unrealized appreciation on investments 11,158,332 1,290,661
---------------- ---------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 6,723,751 1,103,958
---------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net realized gain from investment transactions (note 6) (579,228) 0
Tax return of capital (note 6) (391,310) 0
---------------- ---------------
DECREASE IN NET ASSETS RESULTING FROM DISTRIBUTIONS (970,538) 0
---------------- ---------------
CAPITAL SHARE TRANSACTIONS
Increase in net assets resulting from capital share
transactions (a) 111,796,492 13,984,392
---------------- ---------------
TOTAL INCREASE IN NET ASSETS 117,549,705 15,088,350
NET ASSETS
Beginning of period 15,088,350 0
---------------- ---------------
End of period $132,638,055 $15,088,350
================ ===============
</TABLE>
(a) A summary of capital share activity follows:
<TABLE>
<CAPTION>
-------------------------
Institutional Shares
-------------------------
Year ended For the period from April 6, 1994
February 29, 1996 (commencement of operations)
to February 28, 1995
Shares Value Shares Value
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 4,380,621 $64,300,633 1,496,824 $15,716,070
Shares issued for reinvestment
of distributions 32,117 481,428 0 0
---------------- -------------- -------------- ----------------
4,412,738 64,782,061 1,496,824 15,716,070
Shares redeemed (191,923) (2,739,490) (162,952) (1,731,678)
---------------- -------------- -------------- ----------------
Net increase 4,220,815 $62,042,571 1,333,872 $13,984,392
================ ============== ============== ================
</TABLE>
<TABLE>
<CAPTION>
------------------------ ------------------------ ------------------------
Series A Series C Series D
------------------------ ------------------------ ------------------------
For the period from For the period from For the period from
April 7, 1995 April 7, 1995 April 7, 1995
to February 29, 1996 to February 29, 1996 to February 29, 1996
Shares Value Shares Value Shares Value
------------------------ ----------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 2,375,405 $33,628,982 556,093 $7,112,526 990,621 $12,876,680
Shares issued for reinvestment
of distributions 16,639 249,093 3,810 56,850 8,302 124,284
---------- ------------ -------- ----------- --------- ------------
2,392,044 33,878,075 559,903 7,169,376 998,923 13,000,964
Shares redeemed (134,083) (1,836,410) (8,518) (107,907) (170,814) (2,350,177)
---------- ------------ -------- ----------- --------- ------------
Net increase 2,257,961 $32,041,665 551,385 $7,061,469 828,109 $10,650,787
========== ============ ======== =========== ========= ============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
THE CHESAPEAKE FUND
FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
<TABLE>
<CAPTION>
------------------------------------ -------------- ------------ ---------------
Institutional Shares Series A Series C Series D
------------------------------------ -------------- ------------ ---------------
For the
period from For the For the For the
April 6, 1994 period from period from period from
(commencement April 7, 1995 April 7, 1995 April 7, 1995
Year ended of operations) to to to to
February 29, February 28, February 29, February 29, February 29,
1996 1995 1996 1996 1996
--------------- ---------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 11.31 $ 10.00 $ 11.79 $ 11.79 $ 11.79
Income (loss) from investment
operations
Net investment loss (0.05) (0.04) (0.06) (0.12) (0.11)
Net realized and unrealized
gain on investments 3.38 1.35 2.88 2.86 2.92
--------------- ---------------- --------------- ------------- ---------------
Total from investment
operations 3.33 1.31 2.82 2.74 2.81
--------------- ---------------- --------------- ------------- ---------------
Distributions to shareholders from
Net realized gain from
investment transactions (0.11) 0.00 (0.11) (0.11) (0.11)
Tax return of capital (0.08) 0.00 (0.08) (0.08) (0.08)
--------------- ---------------- ------------------------------ ---------------
Total distributions (0.19) 0.00 (0.19) (0.19) (0.19)
--------------- ---------------- --------------- ------------- ---------------
Net asset value, end of period $ 14.45 $ 11.31 $ 14.42 $ 14.34 $ 14.41
=============== ================ =============== ============= ===============
Total return 29.66% 13.12%(a) 23.86%(b) 23.18%(c) 23.77%(d)
=============== ================ =============== ============= ===============
Ratios/supplemental data
Net assets, end of period $80,252,481 $15,088,350 $32,548,733 $7,907,607 $11,929,234
=============== ================ =============== ============= ===============
Ratio of expenses to average
net assets
Before waived fees 1.65% 2.75%(e) 1.88%(e) 2.38%(e) 2.13%(e)
After waived fees 1.49% 1.73%(e) 1.71%(e) 2.18%(e) 1.73%(e)
Ratio of net investment loss
to average net assets
Before waived fees (0.98)% (1.80)%(e) (1.20)%(e) (1.77)%(e) (1.54)%(e)
After waived fees (0.82)% (0.78)%(e) (1.04)%(e) (1.57)%(e) (1.14)%(e)
Portfolio turnover rate 99.33% 64.92% 99.33% 99.33% 99.33%
</TABLE>
(a) Annualized total return for the period is 14.55%.
(b) Total return does not reflect payment of a sales charge. Annualized total
return for the period is 26.89%.
(c) Annualized total return for the period is 26.11%.
(d) Total return does not reflect payment of a sales charge. Annualized total
return for the period is 26.79%.
(e) Annualized.
See accompanying notes to financial statements
<PAGE>
THE CHESAPEAKE FUND
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER INFORMATION
The Chesapeake Fund (the "Fund") is a diversified series of shares of
beneficial interest of the Gardner Lewis Investment Trust (the
"Trust"). The Trust, an open-end investment company, was organized on
August 12, 1992 as a Massachusetts Business Trust and is registered
under the Investment Company Act of 1940. The Fund began operations on
April 6, 1994. Pursuant to a plan approved by the Board of Trustees of
the Trust, the existing single class of shares of the Fund was
redesignated as the Institutional Shares of the Fund on February 3,
1995, and three new classes of shares - Series A, Series C and Series D
Investor Shares (the "Investor Shares") - were authorized. On April 7,
1995, Series A, Series C and Series D Investor Shares became effective.
The Institutional Shares are offered to institutional investors without
a sales charge and bear no distribution and service fees. The Investor
Shares are offered with a sales charge (except for Series C Shares) at
different levels and bear distribution fees at different levels.
Each class of shares has equal rights as to assets of the Fund, and the
classes are identical except for differences in their sales charge
structures and ongoing distribution and service fees. Income, expenses
(other than distribution and service fees, which are attributable to
each class of Investor Shares based upon a set percentage of its net
assets), and realized and unrealized gains or losses on investments are
allocated to each class of shares based upon its relative net assets.
All classes have equal voting privileges since the Trust shareholders
vote in the aggregate, not by fund or class, except where otherwise
required by law or when the Board of Trustees determines that the
matter to be voted on affects only the interests of a particular fund
or class. The following is a summary of significant accounting policies
followed by the Fund.
A. SECURITY VALUATION - The Fund's investments in securities are
carried at value. Securities listed on an exchange or quoted
on a national market system are valued at the last quoted
sales price as of 4:00 p.m. New York time on the day of
valuation. Other securities traded in the over-the-counter
market and listed securities for which no sale was reported on
that date are valued at the most recent bid price. Securities
for which market quotations are not readily available, if any,
are valued by using an independent pricing service or by
following procedures approved by the Board of Trustees.
Short-term investments are valued at cost which approximates
value.
B. FEDERAL INCOME TAXES - No provision has been made for federal
income taxes since it is the policy of the Fund to comply with
the provisions of the Internal Revenue Code applicable to
regulated investment companies and to make sufficient
distributions of taxable income to relieve it from all federal
income taxes.
Net investment income (loss) and net realized gains (losses)
may differ for financial statement and income tax purposes
primarily because of losses incurred subsequent to October 31,
which are deferred for income tax purposes. The character of
distributions made during the year from net investment income
or net realized gains may differ from their ultimate
characterization for federal income tax purposes. Also, due to
the timing of dividend distributions, the fiscal year in which
amounts are distributed may differ from the year that the
income or realized gains were recorded by the Fund.
(CONTINUED)
<PAGE>
THE CHESAPEAKE FUND
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 1996
C. INVESTMENT TRANSACTIONS - Investment transactions are recorded
on the trade date. Realized gains and losses are determined
using the specific identification cost method. Interest
income is recorded daily on the accrual basis. Dividend
income and distributions to shareholders are recorded on the
ex-dividend date.
D. DISTRIBUTIONS TO SHAREHOLDERS - The Fund may declare dividends
quarterly, generally payable in March, June, September and
December, on a date selected by the Trust's Trustees. In
addition, distributions may be made annually in November out
of net realized gains through October 31 of that year. The
Fund may make a supplemental distribution subsequent to the
end of its fiscal year ended February 29, 1996.
E. USE OF ESTIMATES - Management makes a number of estimates in
the preparation of the Fund's financial statements. Actual
results could differ significantly from those estimates.
NOTE 2 - INVESTMENT ADVISORY FEE AND OTHER RELATED PARTY TRANSACTIONS
Pursuant to an investment advisory agreement, Gardner Lewis Asset
Management (the "Advisor") provides the Fund with a continuous program
of supervision of the Fund's assets, including the composition of its
portfolio, and furnishes advice and recommendations with respect to
investments, investment policies, and the purchase and sale of
securities. As compensation for its services, the Advisor receives a
fee at the annual rate of 1.00% of the Fund's average daily net assets.
The Advisor has voluntarily waived a portion of its fees amounting to
$98,808 ($0.02 per share) for the year ended February 29, 1996.
The Fund's administrator, The Nottingham Company (the "Administrator"),
provides administrative services to and is generally responsible for
the overall management and day-to-day operations of the Fund pursuant
to an accounting and administrative agreement with the Trust. As
compensation for its services, the Administrator receives a fee at the
annual rate of 0.075% of the Fund's average daily net assets. The
Administrator also receives a monthly fee of $1,750 for each class of
shares for accounting and recordkeeping services. Additionally, the
Administrator charges the Fund for servicing of shareholder accounts
and registration of the Fund's shares. The contract with the
Administrator provides that the aggregate fees for the aforementioned
administration, accounting and recordkeeping services shall not be less
than $3,000 per month. The Administrator also charges the Fund for
certain expenses involved with the daily valuation of portfolio
securities.
Capital Investment Group, Inc. (the "Distributor") serves as the Fund's
principal underwriter and distributor. The Distributor receives any
sales charges imposed on purchases of shares and re-allocates a portion
of such charges to dealers through whom the sale was made, if any. For
the year ended February 29, 1996, the Distributor retained sales
charges in the amount of $55,149.
Certain Trustees and officers of the Trust are also officers or
directors of the Advisor or the Administrator.
(CONTINUED)
<PAGE>
THE CHESAPEAKE FUND
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 1996
NOTE 3 - DEFERRED ORGANIZATION EXPENSES
All expenses of the Fund incurred in connection with its organization
and the registration of its shares have been assumed by the Fund.
The organization expenses are being amortized over a period of sixty
months. Investors purchasing shares of the Fund bear such expenses only
as they are amortized against the Fund's investment income.
In the event any of the initial shares of the Fund are redeemed during
the amortization period, the redemption proceeds will be reduced by a
pro rata portion of any unamortized organization expenses in the same
proportion as the number of initial shares being redeemed bears to the
number of initial shares of the Fund outstanding at the time of the
redemption.
NOTE 4 - DISTRIBUTION AND SERVICE FEES
The Board of Trustees, including a majority of the Trustees who are not
"interested persons" of the Trust as defined in the Investment Company
Act of 1940 (the "Act"), adopted a distribution plan with respect to
Investor Shares pursuant to Rule 12b-1 of the Act (the "Plan"). Rule
12b-1 regulates the manner in which a regulated investment company may
assume costs of distributing and promoting the sales of its shares and
servicing of its shareholder accounts.
The Plan provides that the Fund may incur certain costs, which may not
exceed 0.25%, 0.75% and 0.50% per annum of the average daily net assets
of Series A, Series C and Series D Investor Shares, respectively, for
each year elapsed subsequent to adoption of the Plan, for payment to
the Distributor and others for items such as advertising expenses,
selling expenses, commissions, travel or other expenses reasonably
intended to result in sales of Investor Shares of the Fund or support
servicing of shareholder accounts. Expenditures paid as service fees to
any person who sells Investor Shares may not exceed 0.25% per annum of
the Investor Shares' average daily net assets. The Fund incurred
$32,342, $31,522 and $40,697 in distribution and service fees under the
Plan with respect to Series A, Series C and Series D Investor Shares,
respectively, for the year ended February 29, 1996. The Distributor has
voluntarily waived a portion of its distribution and service fees
amounting to $20,409 for the year ended February 29, 1996.
NOTE 5 - PURCHASES AND SALES OF INVESTMENTS
Purchases and sales of investments other than short-term investments
aggregated $150,327,542 and $56,130,164, respectively, for the year
ended February 29, 1996.
(CONTINUED)
<PAGE>
THE CHESAPEAKE FUND
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 1996
NOTE 6 - DISTRIBUTIONS TO SHAREHOLDERS
As a result of the Fund's ability to offset a portion of its short-term
capital gains with its operating net investment loss for federal income
tax purposes, a reclassification adjustment of $590,626 has been made
on the statement of assets and liabilities to decrease accumulated net
investment loss, bringing it to zero, and increase accumulated net
realized loss on investments.
Distributions to shareholders from net realized gain from investment
transactions for the year ended February 29, 1996 were as follows:
Institutional Shares $339,834
Series A Investor Shares 129,845
Series C Investor Shares 38,073
Series D Investor Shares 71,476
--------
$579,228
For federal income tax purposes, the Fund must report distributions
from net realized gain from investment transactions that represent
long-term capital gain to its shareholders. Of the total $0.11 per
share of such distributions for the year ended February 29, 1996, $0.07
per share represents long-term capital gain. The remaining short-term
capital gain distribution of $0.04 per share is taxable as ordinary
income to shareholders for federal income tax purposes. Shareholders
should consult a tax advisor on how to report distributions for state
and local income tax purposes.
Distributions to shareholders representing a tax return of capital for
the year ended February 29, 1996 were as follows:
Institutional Shares $229,582
Series A Investor Shares 87,719
Series C Investor Shares 25,721
Series D Investor Shares 48,288
--------
$391,310
The Fund has elected to defer the recognition of $5,154,085 of
post-October capital losses for federal income tax purposes. These
capital losses will be recognized during the year ending February 28,
1997. It is the intention of the Board of Trustees of the Trust not to
distribute any realized gains until these capital losses have been
offset.
<PAGE>
[KPMG PEAT MARWICK Letterhead]
INDEPENDENT AUDITOR'S REPORT
To the Board of Trustees and Shareholders
Gardner Lewis Investment Trust:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of The Chesapeake Fund (the "Fund"), a series of
the Gardner Lewis Investment Trust, as of February 29, 1996, the related
statement of operations for the year then ended, and the statements of changes
in net assets and financial highlights for the year ended February 29, 1996 and
the period from April 6, 1994 (commencement of operations) to February 28, 1995.
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
February 29, 1996 by correspondence with the custodian and brokers. 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 The
Chesapeake Fund as of February 29, 1996, the results of its operations for the
year then ended, and the changes in its net assets and financial highlights for
the year ended February 29, 1996 and the period from April 6, 1994 (commencement
of operations) to February 28, 1995 in conformity with generally accepted
accounting principles.
/s/ KPMG PEAT MARWICK LLP
Richmond, Virginia
April 22, 1996
