As filed with the Securities and Exchange Commission on June 30, 1997
Securities Act File No. 33-53800
Investment Company Act File No. 811-7324
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
Post-Effective Amendment No. 13
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
Amendment No. 14
GARDNER LEWIS INVESTMENT TRUST
105 North Washington Street
Post Office Drawer 69
Rocky Mount, North Carolina 27802-0069
Telephone (919) 972-9922
AGENT FOR SERVICE:
C. Frank Watson III, Secretary
105 North Washington Street
Post Office Drawer 69
Rocky Mount, North Carolina 27802-0069
With copies to:
M. Guy Brooks, III, Esq.
Poyner & Spruill, L.L.P.
3600 Glenwood Avenue
Raleigh, North Carolina 27612
It is proposed that this filing will become effective:
|X| Immediately upon filing pursuant |_| on , 1997 pursuant
to Rule 485(b), or to Rule 485(b), or
|_| 60 days after filing pursuant |_| on , 1997 pursuant
to Rule 485(a)(1), to Rule 485(a)(1), or
|_| 75 days after filing pursuant |_| on , 1997 pursuant
to Rule 485(a)(2) to Rule 485(a)(2), or
The issuer has previously registered an indefinite number of shares of two
series: The Chesapeake Growth Fund and The Chesapeake Fund, under the Securities
Act of 1933, as amended, pursuant to Rule 24f-2 under the Investment Company Act
of 1940, as amended. The Rule 24f-2 Notice for The Chesapeake Growth Fund for
the year ended August 31, 1996 was filed on October 30, 1996. The Rule 24f-2
Notice for The Chesapeake Fund for the year ended February 29, 1997 was filed on
April 29, 1997.
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<PAGE>
This filing includes the Prospectus and Statement of Additional Information of
The Chesapeake Growth Fund, which are incorporated herein by reference to
Post-Effective Amendment No. 12 to the Registrant's Registration Statement on
Form N-1A filed with the Commission on December 11, 1996.
<PAGE>
PART A
PROSPECTUS Cusip Number 36559B401
THE CHESAPEAKE FUND
INSTITUTIONAL SHARES
The investment objective of The Chesapeake Fund (the "Fund") is to seek capital
appreciation through investments in equity securities of medium and large
capitalization companies, consisting primarily of common and preferred stocks
and securities convertible into common stocks. While there is no assurance that
the Fund will achieve its investment objective, it endeavors to do so by
following the investment policies described in this Prospectus. The Fund has a
net asset value that will fluctuate in accordance with the value of its
portfolio securities. An investor may invest, reinvest or redeem shares at any
time.
This Prospectus relates to shares ("Institutional Shares") representing
interests in the Fund. The Institutional Shares are designed to provide
institutional clients with core growth investment management by Gardner Lewis
Asset Management. The Institutional Shares are offered to institutional
investors without any sales or redemption charges or shareholder servicing or
distribution fees. See "Prospectus Summary - Offering Price."
INVESTMENT ADVISOR
Gardner Lewis Asset Management
Chadds Ford, Pennsylvania
The Fund is a diversified series of the Gardner Lewis Investment Trust (the
"Trust"), a registered open-end management investment company. This Prospectus
sets forth concisely the information about the Fund that a prospective investor
should know before investing. Investors should read this Prospectus and retain
it for future reference. Additional information about the Fund has been filed
with the Securities and Exchange Commission (the "SEC") and is available upon
request and without charge. You may request the Statement of Additional
Information, which is incorporated in this Prospectus by reference, by writing
the Fund at Post Office Box 4365, Rocky Mount, North Carolina 27803-0365, or by
calling 1-800-430-3863. The SEC also maintains an Internet Web site
(http://www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference, and other information regarding the Fund.
Investment in the Fund involves risks, including the possible loss of principal.
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by, any financial institution, and such shares are not federally insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other
agency.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus and the Statement of Additional Information is June
30, 1997.
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUMMARY......................................................... 2
FEE TABLE.................................................................. 3
FINANCIAL HIGHLIGHTS....................................................... 4
INVESTMENT OBJECTIVE AND POLICIES.......................................... 5
RISK FACTORS............................................................... 7
INVESTMENT LIMITATIONS..................................................... 8
FEDERAL INCOME TAXES....................................................... 8
DIVIDENDS AND DISTRIBUTIONS................................................ 9
HOW SHARES ARE VALUED...................................................... 9
HOW SHARES MAY BE PURCHASED................................................ 10
HOW SHARES MAY BE REDEEMED................................................. 12
MANAGEMENT OF THE FUND..................................................... 14
OTHER INFORMATION.......................................................... 15
This Prospectus is not an offering of the securities described herein in any
state in which the offering is unauthorized. No sales representative, dealer or
other person is authorized to give any information or make any representations
other than those contained in this Prospectus.
The Fund reserves the right in its sole discretion to withdraw all or any part
of the offering made by this Prospectus or to reject purchase orders. All orders
to purchase shares are subject to acceptance by the Fund and are not binding
until confirmed or accepted in writing.
<PAGE>
PROSPECTUS SUMMARY
The Fund. The Chesapeake Fund (the "Fund") is a diversified series of the
Gardner Lewis Investment Trust (the "Trust"), a registered open-end management
investment company organized as a Massachusetts business trust. This Prospectus
relates to Institutional Shares of the Fund. See "Other Information -
Description of Shares."
Offering Price. The Institutional Shares are offered to institutional investors
at net asset value without a sales charge. The Institutional Shares are not
subject to any 12b-1 distribution or shareholder service fees. The minimum
initial investment is $1,000,000. The minimum subsequent investment is $5,000.
See "How Shares May be Purchased."
Investment Objective and Special Risk Considerations. The investment objective
of the Fund is to seek capital appreciation through investments in equity
securities of medium and large capitalization companies, consisting primarily of
common and preferred stocks and securities convertible into common stocks.
Realization of current income is not a significant investment consideration, and
any income realized will be incidental to the Fund's objective. See "Investment
Objective and Policies." The Fund is not intended to be a complete investment
program, and there can be no assurance that the Fund will achieve its investment
objective. While the Fund will invest primarily in common stocks traded in U.S.
securities markets, some of the Fund's investments may include foreign
securities, illiquid securities, and securities purchased subject to a
repurchase agreement or on a "when-issued" basis, which involve certain risks.
The Fund's portfolio may also contain a significant amount of securities of
medium capitalization companies, which may exhibit more volatility than
securities of large capitalization companies. See "Risk Factors."
Manager. Subject to the general supervision of the Trust's Board of Trustees and
in accordance with the Fund's investment policies, Gardner Lewis Asset
Management of Chadds Ford, Pennsylvania (the "Advisor") manages the Fund's
investments. The Advisor currently manages approximately $3 billion in assets.
For its advisory services, the Advisor receives a monthly fee based on the
Fund's daily net assets at the annual rate of 1.00%. See "Management of the Fund
The Advisor."
Dividends. Income dividends, if any, are paid at least annually; capital gains,
if any, are distributed at least annually or retained for reinvestment by the
Fund. Dividends and capital gains distributions are automatically reinvested in
additional shares of the same Class at net asset value unless the shareholder
elects to receive cash. See "Dividends and Distributions."
Distributor. Capital Investment Group, Inc. (the "Distributor") serves as
distributor of shares of the Fund. See "How Shares May Be Purchased -
Distributor."
Redemption of Shares. There is no charge for redemptions, other than possible
charges associated with wire transfers of redemption proceeds. Shares may be
redeemed at any time at the net asset value next determined after receipt of a
redemption request by the Fund. A shareholder who submits appropriate written
authorization may redeem shares by telephone. See "How Shares May Be Redeemed."
<PAGE>
FEE TABLE
The following table sets forth certain information in connection with the
expenses of the Institutional Shares of the Fund for the current fiscal year.
The information is intended to assist the investor in understanding the various
costs and expenses borne by the Institutional Shares of the Fund, and therefore
indirectly by its investors, the payment of which will reduce an investor's
return on an annual basis.
Shareholder Transaction Expenses for Institutional Shares
Maximum sales load imposed on purchases
(as a percentage of offering price).....................................None
Maximum sales load imposed on
reinvested dividends....................................................None
Maximum deferred sales load................................................None
Redemption fees*...........................................................None
Exchange fee...............................................................None
* The Fund in its discretion may choose to pass through to redeeming
shareholders any charges imposed by the Custodian for wiring redemption
proceeds. The Custodian currently charges the Fund $7.00 per transaction
for wiring redemption proceeds.
Annual Fund Operating Expenses for Institutional Shares
(as a percentage of average net assets)
Investment advisory fees..................................................1.00%
12b-1 fees................................................................None
Other expenses............................................................0.23%
Total operating expenses1...............................................1.23%
EXAMPLE: You would pay the following expenses on a $1,000 investment in
Institutional Shares of the Funds, whether or not you redeem at the end of the
period, assuming a 5% annual return:
1 Year 3 Years 5 Years 10 Years
- ------ ------- ------- --------
$13 $39 $68 $149
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
1 The "Total operating expenses" shown above are based upon actual total
operating expenses incurred by the Institutional Shares of the Fund for the
fiscal year ended February 28, 1997, including amounts of Fund expenses paid
by a broker in connection with a brokerage/service arrangement with the
Fund. After reflecting the Fund expenses paid by the broker in connection
with such brokerage/service arrangement, the actual net operating expenses
incurred by the Institutional Shares of the Fund for the fiscal year ended
February 28, 1997, were 1.22% of average daily net assets of the
Institutional Shares. There can be no assurance that the Fund's
brokerage/service arrangement will continue in the future.
See "Management of the Fund" below for more information about the fees and costs
of operating the Fund. The assumed 5% annual return in the example is required
by the Securities and Exchange Commission. The hypothetical rate of return is
not intended to be representative of past or future performance of the Fund; the
actual rate of return for the Fund may be greater or less than 5%.
FINANCIAL HIGHLIGHTS
The shares of the Fund are divided into multiple Classes representing interests
in the Fund. This Prospectus relates to Institutional Shares. See "Other
Information - Description of Shares." The financial data included in the table
below for the fiscal year ended February 28, 1997, has been audited by Deloitte
& Touche LLP, independent auditors, whose report covering such period is
included in the Statement of Additional Information. The financial data for the
prior fiscal periods was audited by other independent auditors. This information
should be read in conjunction with the Fund's latest audited financial
statements and notes thereto, which are also included in the Statement of
Additional Information, a copy of which may be obtained at no charge by calling
the Fund. Further information about the performance of the Fund is contained in
the Annual Report of the Fund, a copy of which may be obtained at no charge by
calling the Fund.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Institutional Shares
(For a Share Outstanding Throughout the Period)
Year Year Period
Ended Ended Ended
2/28/97 2/29/96 2/28/95(a)
Net Asset Value, Beginning of Period $14.45 $11.31 $10.00
Income (loss) from investment operations
Net investment loss (0.13) (0.05) (0.04)
Net realized and unrealized gain on investments 1.94 3.38 1.35
---- ---- ----
Total from investment operations 1.81 3.33 1.31
---- ---- ----
Distributions to shareholders from
Net realized gain from investment transactions 0.00 (0.11) 0.00
Tax return of capital 0.00 (0.08) 0.00
---- ------ ----
Total distributions 0.00 (0.19) 0.00
---- ------ ----
Net Asset Value, End of Period $16.26 $14.45 $11.31
===== ===== =====
Total return 12.53% 29.66% 13.12%
===== =====
Ratios/supplemental data
Net assets, end of period (000's) $77,858 $80,252 $15,088
======= ====== =======
Ratio of expenses to average net assets
Before expense reimbursements 1.23% 1.65% 2.75%(b)
After expense reimbursements 1.22% 1.49% 1.73%(b)
Ratio of net investment loss to average net assets
Before expense reimbursements (0.85)% (0.98)% (1.80)%(b)
After expense reimbursements (0.84)% (0.82)% (0.78)%(b)
Portfolio turnover rate 126.44% 99.33% 64.92%
Average commission rate paid $0.06
(a) For the period from April 6, 1994 (commencement of operations) to February
28, 1995.
(b) Annualized.
</TABLE>
INVESTMENT OBJECTIVE AND POLICIES
Investment Objective. The investment objective of the Fund is to seek capital
appreciation through investments in equity securities of medium and large
capitalization companies, consisting primarily of common and preferred stocks
and securities convertible into common stocks. Realization of current income
will not be a significant investment consideration, and any such income realized
should be considered incidental to the Fund's objective. The Fund's investment
objective and fundamental investment limitations described herein may not be
altered without the prior approval of a majority of the Fund's shareholders.
Investment Selection. The Fund's portfolio will include equity securities which
the Advisor feels show superior prospects for growth. The Advisor will focus
attention on proven medium and large capitalization companies which, in the view
of the Advisor, exhibit internal changes such as a promising new product, new
distribution strategy, new manufacturing technology, or new management team or
management philosophy. Many of the portfolio companies will be responsible for
technological breakthroughs and/or unique solutions to market needs. Investing
in companies which are undergoing internal change, such as implementing new
strategies or introducing new technologies, may involve greater than average
risk due to their unproven nature. By focusing upon internal rather than
external factors, the Fund will seek to minimize the risk associated with
macro-economic forces such as changes in commodity prices, currency exchange
rates and interest rates.
In selecting portfolio companies, the Advisor uses analysis which includes the
growth rate in earnings, financial performance, management strengths and
weaknesses, and current market valuation in relation to earnings growth as well
as historic and comparable company valuations. The Advisor also analyzes the
level and nature of the company's debt, cash flow, working capital and the
quality of the company's assets. Typically companies included in the Fund's
portfolio will show strong earnings growth versus the previous year's comparable
period. Companies that the Advisor determines have excessive levels of debt are
generally avoided.
By developing and maintaining contacts with management, customers, competitors
and suppliers of current and potential portfolio companies, the Advisor attempts
to invest in those companies undergoing positive changes that have not yet been
recognized by "Wall Street" analysts and the financial press. Lack of
recognition of these changes often causes securities to be less efficiently
priced. The Advisor believes these companies offer unique and potentially
superior investment opportunities. The Advisor favors portfolio companies whose
price when purchased is between 8 and 15 times projected earnings for the coming
year.
While portfolio securities are generally acquired for the long term, they may be
sold under any of the following circumstances:
a) the anticipated price appreciation has been achieved or is no longer
probable;
b) the company's fundamentals appear, in the analysis of the Advisor, to
be deteriorating;
c) general market expectations regarding the company's future performance
exceed those expectations held by the Advisor;
d) alternative investments offer, in the view of the Advisor, superior
potential for appreciation.
The equity securities in which the Fund may invest include common stock,
convertible preferred stock, straight preferred stock, participating and
non-participating preferred stock, and investment grade convertible bonds. All
securities will be traded on domestic and foreign securities exchanges or on the
over-the-counter markets. Up to 10% of the Fund's total assets may consist of
foreign securities and sponsored ADRs.
Under normal conditions, at least 90% of the Fund's total assets will be
invested in equity securities. As a temporary defensive measure, however, when
the Advisor determines that market conditions so warrant, the Fund may invest up
to 100% of the Fund's total assets in investment grade bonds, U.S. Government
Securities, repurchase agreements, or money market instruments. When the Fund
invests its assets in investment grade bonds, U.S. Government Securities or
money market instruments as a temporary defensive measure, it is not pursuing
its stated investment objective. Under normal circumstances, however, the Fund
will also hold money market or repurchase agreement instruments for funds
awaiting investment, to accumulate cash for anticipated purchases of portfolio
securities, to allow for shareholder redemptions, and to provide for Fund
operating expenses.
U.S. Government Securities. The Fund may invest a portion of the portfolio in
U.S. Government Securities, defined to be U.S. Government obligations such as
U.S. Treasury notes, U.S. Treasury bonds, and U.S. Treasury bills, obligations
guaranteed by the U.S. Government such as Government National Mortgage
Association ("GNMA") as well as obligations of U.S. Government authorities,
agencies and instrumentalities such as Federal National Mortgage Association
("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"), Federal Home
Administration ("FHA"), Federal Farm Credit Bank ("FFCB"), Federal Home Loan
Bank ("FHLB"), Student Loan Marketing Association ("SLMA"), and The Tennessee
Valley Authority. U.S. Government Securities may be acquired subject to
repurchase agreements. While obligations of some U.S. Government sponsored
entities are supported by the full faith and credit of the U.S. Government (e.g.
GNMA), several are supported by the right of the issuer to borrow from the U.S.
Government (e.g. FNMA, FHLMC), and still others are supported only by the credit
of the issuer itself (e.g. SLMA, FFCB). No assurances can be given that the U.S.
Government will provide financial support to U.S. Government agencies or
instrumentalities in the future, other than as set forth above, since it is not
obligated to do so by law. The guarantee of the U.S. Government does not extend
to the yield or value of the Fund's shares.
Money Market Instruments. Money market instruments may be purchased for
temporary defensive purposes, to accumulate cash for anticipated purchases of
portfolio securities and to provide for shareholder redemptions and operating
expenses of the Fund. Money market instruments mature in thirteen months or less
from the date of purchase and may include U.S. Government Securities, corporate
debt securities (including those subject to repurchase agreements), bankers
acceptances and certificates of deposit of domestic branches of U.S. banks, and
commercial paper (including variable amount demand master notes) rated in one of
the two highest rating categories by any of the nationally recognized
statistical rating organizations or if not rated, of equivalent quality in the
Advisor's opinion. The Advisor may, when it believes that unusually volatile or
unstable economic and market conditions exist, depart from the Fund's investment
approach and assume temporarily a defensive portfolio posture, increasing the
Fund's percentage investment in money market instruments, even to the extent
that 100% of the Fund's total assets may be so invested.
Repurchase Agreements. The Fund may acquire U.S. Government Securities or
corporate debt securities subject to repurchase agreements. A repurchase
agreement transaction occurs when the Fund acquires a security and
simultaneously resells it to the vendor (normally a member bank of the Federal
Reserve or a registered Government Securities dealer) for delivery on an agreed
upon future date. The repurchase price exceeds the purchase price by an amount
that reflects an agreed upon market interest rate earned by the Fund effective
for the period of time during which the repurchase agreement is in effect.
Delivery pursuant to the resale typically will occur within one to seven days of
the purchase. The Fund will not enter into any repurchase agreement that will
cause more than 10% of its net assets to be invested in repurchase agreements
that extend beyond seven days. In the event of the bankruptcy of the other party
to a repurchase agreement, the Fund could experience delays in recovering its
cash or the securities lent. To the extent that in the interim the value of the
securities purchased may have declined, the Fund could experience a loss. In all
cases, the creditworthiness of the other party to a transaction is reviewed and
found satisfactory by the Advisor. Repurchase agreements are, in effect, loans
of Fund assets. The Fund will not engage in reverse repurchase transactions,
which are considered to be borrowings under the 1940 Act.
Foreign Securities. The Fund may invest up to 10% of its total assets in foreign
securities and sponsored ADRs. The same factors would be considered in selecting
foreign securities as with domestic securities. Foreign securities investment
presents special consideration not typically associated with investment in
domestic securities. Foreign taxes may reduce income. Currency exchange rates
and regulations may cause fluctuations in the value of foreign securities.
Foreign securities are subject to different regulatory environments than in the
United States and, compared to the United States, there may be a lack of uniform
accounting, auditing and financial reporting standards, less volume and
liquidity and more volatility, less public information, and less regulation of
foreign issuers. Countries have been known to expropriate or nationalize assets,
and foreign investments may be subject to political, financial, or social
instability, or adverse diplomatic developments. There may be difficulties in
obtaining service of process on foreign issuers and difficulties in enforcing
judgments with respect to claims under the U.S. securities laws against such
issuers. Favorable or unfavorable differences between U.S. and foreign economies
could affect foreign securities values. The U.S. Government has, in the past,
discouraged certain foreign investments by U.S. investors through taxation or
other restrictions and it is possible that such restrictions could be imposed
again.
Because of the inherent risk of foreign securities over domestic issues, the
Fund will generally limit foreign investments to those traded domestically as
sponsored American Depository Receipts ("ADRs"). ADRs are receipts issued by a
U.S. bank or trust company evidencing ownership of securities of a foreign
issuer. ADRs may be listed on a national securities exchange or may trade in the
over-the-counter market. The prices of ADRs are denominated in U.S. dollars
while the underlying security may be denominated in a foreign currency. To the
extent the Fund invests in other foreign securities, it will generally limit
such investments to foreign securities traded on foreign securities exchanges.
Investment Companies. In order to achieve its investment objective, the Fund may
invest up to 10% of the value of its total assets in securities of other
investment companies whose investment objectives are consistent with the Fund's
investment objective. The Fund will not acquire securities of any one investment
company if, immediately thereafter, the Fund would own more than 3% of such
company's total outstanding voting securities, securities issued by such company
would have an aggregate value in excess of 5% of the Fund's total assets, or
securities issued by such company and securities held by the Fund issued by
other investment companies would have an aggregate value in excess of 10% of the
Fund's total assets. To the extent the Fund invests in other investment
companies, the shareholders of the Fund would indirectly pay a portion of the
operating costs of the underlying investment companies. These costs include
management, brokerage, shareholder servicing and other operational expenses.
Shareholders of the Fund would then indirectly pay higher operational costs than
if they owned shares of the underlying investment companies directly.
Real Estate Securities. The Fund will not invest in real estate or real estate
mortgage loans (including limited partnership interests), but may invest in
readily marketable securities secured by real estate or interests therein or
issued by companies that invest in real estate or interests therein. The Fund
may also invest in readily marketable interests in real estate investment trusts
("REITs"). REITs are generally publicly traded on the national stock exchanges
and in the over-the-counter market and have varying degrees of liquidity.
Although the Fund is not limited in the amount of these types of real estate
securities it may acquire, it is not presently expected that within the next 12
months the Fund will have in excess of 5% of its total assets in real estate
securities.
RISK FACTORS
Investment Policies and Techniques. Reference should be made to "Investment
Objective and Policies" above for a description of special risks presented by
the investment policies of the Fund and the specific securities and investment
techniques that may be employed by the Fund, including the risks associated with
repurchase agreements and foreign securities. A more complete discussion of
certain of these securities and investment techniques and their associated risks
is contained in the Statement of Additional Information.
Fluctuations in Value. To the extent that the major portion of the Fund's
portfolio consists of common stocks, it may be expected that its net asset value
will be subject to greater fluctuation than a portfolio containing mostly fixed
income securities. Given that a significant portion of the Fund's assets may be
invested in equity securities of medium capitalization companies, that portion
of the Fund's portfolio may exhibit more volatility than the portion of the
Fund's portfolio invested in large capitalization companies. Because there is
risk in any investment, there can be no assurance that the Fund will achieve its
investment objective.
Portfolio Turnover. The Fund sells portfolio securities without regard to the
length of time they have been held in order to take advantage of new investment
opportunities. Nevertheless, the Fund's portfolio turnover generally will not
exceed 100% in any one year. Portfolio turnover generally involves some expense
to the Fund, including brokerage commissions or dealer mark-ups and other
transaction costs on the sale of securities and the reinvestment in other
securities. Portfolio turnover may also have capital gains tax consequences. The
Fund's portfolio turnover rate for its fiscal years ended February 28, 1997, and
February 29, 1996, was 126.44% and 99.33%, respectively.
Illiquid Investments. The Fund may invest up to 10% of its net assets in
illiquid securities. Illiquid securities are those that may not be sold or
disposed of in the ordinary course of business within seven days at
approximately the price at which they are valued. Under the supervision of the
Board of Trustees, the Advisor determines the liquidity of the Fund's
investments. The absence of a trading market can make it difficult to ascertain
a market value for illiquid investments. Disposing of illiquid securities before
maturity may be time consuming and expensive, and it may be difficult or
impossible for the Fund to sell illiquid investments promptly at an acceptable
price. The Fund will not invest in restricted securities, which cannot be sold
to the public without registration under the federal securities laws. Unless
registered for sale, restricted securities can only be sold in privately
negotiated transactions or pursuant to an exemption from registration.
Forward Commitments and When-Issued Securities. The Fund may purchase
when-issued securities and commit to purchase securities for a fixed price at a
future date beyond customary settlement time. The Fund is required to hold and
maintain in a segregated account until the settlement date, cash, U.S.
Government Securities or high-grade debt obligations in an amount sufficient to
meet the purchase price. Purchasing securities on a when-issued or forward
commitment basis involves a risk of loss if the value of the security to be
purchased declines prior to the settlement date, which risk is in addition to
the risk of decline in value of the Fund's other assets. In addition, no income
accrues to the purchaser of when-issued securities during the period prior to
issuance. Although the Fund would generally purchase securities on a when-issued
or forward commitment basis with the intention of acquiring securities for its
portfolio, the Fund may dispose of a when-issued security or forward commitment
prior to settlement if the Advisor deems it appropriate to do so. The Fund may
realize short-term gains or losses upon such sales.
INVESTMENT LIMITATIONS
To limit the Fund's exposure to risk, the Fund has adopted certain fundamental
investment limitations. Some of these restrictions are that the Fund will not:
(1) issue senior securities, borrow money or pledge its assets; (2) make loans
of money or securities, except that the Fund may invest in repurchase agreements
(but repurchase agreements having a maturity of longer than seven days, together
with other illiquid securities, are limited to 10% of the Fund's net assets);
(3) invest in securities of issuers which have a record of less than three
years' continuous operation (including predecessors and, in the case of bonds,
guarantors), if more than 5% of its total assets would be invested in such
securities; (4) write, purchase or sell puts, calls, warrants or combinations
thereof, or purchase or sell commodities, commodities contracts, futures
contracts or related options, or invest in oil, gas or mineral leases or
exploration programs, or real estate; (5) invest more than 5% of the value of
its total assets in the securities of any one issuer nor hold more than 10% of
the voting stock of any issuer; (6) invest in restricted securities; (7) invest
more than 10% of the Fund's total assets in foreign securities, including
sponsored ADRs; and (8) invest more than 25% of the Fund's total assets in the
securities of issuers in any one industry. See "Investment Limitations" in the
Fund's Statement of Additional Information for a complete list of investment
limitations.
If the Board of Trustees of the Trust determines that the Fund's investment
objective can best be achieved by a substantive change in a non-fundamental
investment limitation, the Board can make such change without shareholder
approval and will disclose any such material changes in the then current
Prospectus. Any limitation that is not specified in the Fund's Prospectus, or in
the Statement of Additional Information, as being fundamental, is
non-fundamental. If a percentage limitation is satisfied at the time of
investment, a later increase or decrease in such percentage resulting from a
change in the value of the Fund's portfolio securities will not constitute a
violation of such limitation.
FEDERAL INCOME TAXES
Taxation of the Fund. The Internal Revenue Code of 1986, as amended (the
"Code"), treats each series in the Trust, including the Fund, as a separate
regulated investment company. Each series of the Trust, including the Fund,
intends to qualify or remain qualified as a regulated investment company under
the Code by distributing substantially all of its "net investment income" to
shareholders and meeting other requirements of the Code. For the purpose of
calculating dividends, net investment income consists of income accrued on
portfolio assets, less accrued expenses. Upon qualification, the Fund will not
be liable for federal income taxes to the extent earnings are distributed. The
Board of Trustees retains the right for any series of the Trust, including the
Fund, to determine for any particular year if it is advantageous not to qualify
as a regulated investment company. Regulated investment companies, such as each
series of the Trust, including the Fund, are subject to a non-deductible 4%
excise tax to the extent they do not distribute the statutorily required amount
of investment income, determined on a calendar-year basis, and capital gain net
income, using an October 31 year-end measuring period. The Fund intends to
declare or distribute dividends during the calendar year in an amount sufficient
to prevent imposition of the 4% excise tax.
Taxation of Shareholders. For federal income tax purposes, any dividends and
distributions from short-term capital gains that a shareholder receives in cash
from the Fund or which are re-invested in additional shares will be taxable
ordinary income. If a shareholder is not required to pay a tax on income, he
will not be required to pay federal income taxes on the amounts distributed to
him. A dividend declared in October, November or December of a year and paid in
January of the following year will be considered to be paid on December 31 of
the year of declaration.
Distributions paid by the Fund from long-term capital gains, whether received in
cash or reinvested in additional shares, are taxable as long-term capital gains,
regardless of the length of time an investor has owned shares in the Fund.
Capital gain distributions are made when the Fund realizes net capital gains on
sales of portfolio securities during the year. Dividends and capital gain
distributions paid by the Fund shortly after shares have been purchased,
although in effect a return of investment, are subject to federal income
taxation.
The sale of shares of the Fund is a taxable event and may result in a capital
gain or loss. Capital gain or loss may be realized from an ordinary redemption
of shares or an exchange of shares between two mutual funds (or two series of a
mutual fund).
The Trust will inform shareholders of the Fund of the source of their dividends
and capital gains distributions at the time they are paid and, promptly after
the close of each calendar year, will issue an information return to advise
shareholders of the federal tax status of such distributions and dividends.
Dividends and distributions may also be subject to state and local taxes.
Shareholders should consult their tax advisors regarding specific questions as
to federal, state or local taxes.
Federal income tax law requires investors to certify that the social security
number or taxpayer identification number provided to the Fund is correct and
that the investor is not subject to 31% withholding for previous under-reporting
to the Internal Revenue Service (the "IRS"). Investors will be asked to make the
appropriate certification on their application to purchase shares. If a
shareholder of the Fund has not complied with the applicable statutory and IRS
requirements, the Fund is generally required by federal law to withhold and
remit to the IRS 31% of reportable payments (which may include dividends and
redemption amounts).
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute substantially all of its net investment income,
if any, in the form of dividends and distribute capital gains, if any, at least
once each year. The Fund may, however, determine either to distribute or to
retain all or part of any long-term capital gains in any year for reinvestment.
Unless a shareholder elects to receive cash, dividends and capital gains will be
automatically reinvested in additional full and fractional shares of the same
Class of the Fund at the net asset value per share next determined. Reinvested
dividends and capital gains are exempt from any sales load. Shareholders wishing
to receive their dividends or capital gains in cash may make their request in
writing to the Fund at 107 North Washington Street, Post Office Box 4365, Rocky
Mount, North Carolina 27803-0365. That request must be received by the Fund
prior to the record date to be effective as to the next dividend. If cash
payment is requested, checks will be mailed within five business days after the
distribution of the dividends or capital gains, as applicable. Each shareholder
of the Fund will receive a quarterly summary of his or her account, including
information as to reinvested dividends from the Fund. Tax consequences to
shareholders of dividends and distributions are the same if received in cash or
in additional shares of the Fund.
In order to satisfy certain requirements of the Code, the Fund may declare
special year-end dividend and capital gains distributions during December. Such
distributions, if received by shareholders by January 31, are deemed to have
been paid by the Fund and received by shareholders on December 31 of the prior
year.
There is no fixed dividend rate, and there can be no assurance as to the payment
of any dividends or the realization of any gains. The Fund's net investment
income available for distribution to holders of Institutional Shares will be
reduced by the amount of any expenses allocated to the Institutional Shares.
HOW SHARES ARE VALUED
Net asset value for each Class of Shares of the Fund is determined at 4:00 p.m.,
New York time, Monday through Friday, except on business holidays when the New
York Stock Exchange is closed. The net asset value of the shares of the Fund for
purposes of pricing sales and redemptions is equal to the total market value of
its investments and other assets, less all of its liabilities, divided by the
number of its outstanding shares. Net asset value is determined separately for
each Class of Shares of the Fund and reflects any liabilities allocated to a
particular Class as well as the general liabilities of the Fund.
Securities that are listed on a securities exchange are valued at the last
quoted sales price at the time the valuation is made. Price information on
listed securities is taken from the exchange where the security is primarily
traded by the Fund. Securities that are listed on an exchange and which are not
traded on the valuation date are valued at the mean of the bid and asked prices.
Unlisted securities for which market quotations are readily available are valued
at the latest quoted sales price, if available, at the time of valuation,
otherwise, at the latest quoted bid price. Temporary cash investments with
maturities of 60 days or less will be valued at amortized cost, which
approximates market value. Securities for which no current quotations are
readily available are valued at fair value as determined in good faith using
methods approved by the Board of Trustees of the Trust. Securities may be valued
on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities.
HOW SHARES MAY BE PURCHASED
Assistance in opening accounts and a purchase application may be obtained from
the Fund by calling 1-800-430-3863, or by writing to the Fund at the address
shown below for purchases by mail. Assistance is also available through any
broker-dealer authorized to sell shares in the Fund. Payment for shares
purchased may also be made through your account at the broker-dealer processing
your application and order to purchase. Your investment will purchase shares at
the Fund's net asset value next determined after your order is received by the
Fund in proper form as indicated herein.
The minimum initial investment is $1,000,000. The minimum subsequent investment
is $5,000. The Fund may, in the Advisor's sole discretion, accept certain
accounts with less than the stated minimum initial investment. You may invest in
the following ways:
Purchases by Mail. Shares may be purchased initially by completing the
application accompanying this Prospectus and mailing it, together with a check
payable to the Fund, to The Chesapeake Fund, Institutional Shares, 107 North
Washington Street, Post Office Box 4365, Rocky Mount, North Carolina 27803-0365.
Subsequent investments in an existing account in the Fund may be made at any
time by sending a check payable to the Fund, to the address stated above. Please
enclose the stub of your account statement and include the amount of the
investment, the name of the account for which the investment is to be made and
the account number. Please remember to add a reference to "Institutional Shares"
to your check to ensure proper credit to your account.
Purchases by Wire. To purchase shares by wiring federal funds, the Fund must
first be notified by calling 1-800-430-3863 to request an account number and
furnish the Fund with your tax identification number. Following notification to
the Fund, federal funds and registration instructions should be wired through
the Federal Reserve System to:
First Union National Bank of North Carolina
Charlotte, North Carolina
ABA # 053000219
For The Chesapeake Fund
Institutional Shares
Acct #2000000862068
For further credit to (shareholder's name and SS# or EIN#)
It is important that the wire contain all the information and that the Fund
receive prior telephone notification to ensure proper credit. A completed
application with signature(s) of registrant(s) must be mailed to the Fund
immediately after the initial wire as described under "Purchases by Mail" above.
Investors should be aware that some banks may impose a wire service fee.
General. All purchases of shares are subject to acceptance and are not binding
until accepted. The Fund reserves the right to reject any application or
investment. Orders become effective, and shares are purchased at, the next
determined net asset value per share after an investment has been received by
the Fund, which is as of 4:00 p.m., New York time, Monday through Friday,
exclusive of business holidays. Orders received by the Fund and effective prior
to such 4:00 p.m. time will purchase shares at the net asset value determined at
that time. Otherwise, your order will purchase shares as of such 4:00 p.m. time
on the next business day. For orders placed through a qualified broker-dealer,
such firm is responsible for promptly transmitting purchase orders to the Fund.
Investors may be charged a fee if they effect transactions in the Fund shares
through a broker or agent.
If checks are returned unpaid due to nonsufficient funds, stop payment or other
reasons, the Trust will charge $20. To recover any such loss or charge, the
Trust reserves the right, without further notice, to redeem shares of any fund
of the Trust already owned by any purchaser whose order is cancelled, and such a
purchaser may be prohibited from placing further orders unless investments are
accompanied by full payment by wire or cashier's check.
Payment must be made by check or money order drawn on a U.S. bank and payable in
U.S. dollars. Under certain circumstances the Fund, at its sole discretion, may
allow payment in kind for Fund shares purchased by accepting securities in lieu
of cash. Any securities so accepted would be valued on the date received and
included in the calculation of the net asset value of the Fund. See the
Statement of Additional Information for additional information on purchases in
kind.
The Fund is required by federal law to withhold and remit to the IRS 31% of the
dividends, capital gains distributions and, in certain cases, proceeds of
redemptions paid to any shareholder who fails to furnish the Fund with a correct
taxpayer identification number, who under-reports dividend or interest income or
who fails to provide certification of tax identification number. Instructions to
exchange or transfer shares held in established accounts will be refused until
the certification has been provided. In order to avoid this withholding
requirement, you must certify on your application, or on a separate W-9 Form
supplied by the Fund, that your taxpayer identification number is correct and
that you are not currently subject to backup withholding or you are exempt from
backup withholding.
Distributor. Capital Investment Group, Inc., Post Office Box 32249, Raleigh,
North Carolina 27622 (the "Distributor"), is the national distributor for the
Fund under a Distribution Agreement with the Trust. The Distributor may sell
Fund shares to or through qualified securities dealers or others.
The Distributor, at its expense, may provide additional compensation to dealers
in connection with sales of shares of the Fund. Compensation may include
financial assistance to dealers in connection with conferences, sales or
training programs for their employees, seminars for the public, advertising
campaigns regarding the Fund, and/or other dealer-sponsored special events. In
some instances, this compensation may be made available only to certain dealers
whose representatives have sold or are expected to sell a significant amount of
such shares. Compensation may include payment for travel expenses, including
lodging, incurred in connection with trips taken by invited registered
representatives and members of their families to locations within or outside of
the United States for meetings or seminars of a business nature. Dealers may not
use sales of the Fund shares to qualify for this compensation to the extent such
may be prohibited by the laws of any state or any self-regulatory agency, such
as the National Association of Securities Dealers, Inc. None of the
aforementioned compensation is paid for by the Fund or its shareholders.
Exchange Feature. Investors will have the privilege of exchanging shares of the
Fund for shares of any other series of the Trust established by Advisor. An
exchange involves the simultaneous redemption of shares of one series and
purchase of shares of another series at the respective closing net asset value
next determined after a request for redemption has been received plus applicable
sales charge, and is a taxable transaction. Each series of the Trust will have a
different investment objective, which may be of interest to investors in each
series. Shares of the Fund may be exchanged for shares of any other series of
the Trust affiliated with the Advisor at the net asset value plus the percentage
difference between that series' sales charge and any sales charge previously
paid in connection with the shares being exchanged. For example, if a 2% sales
charge was paid on shares that are exchanged into a series with a 3% sales
charge, there would be an additional sales charge of 1% on the exchange.
Exchanges may only be made by investors in states where shares of the other
series are qualified for sale. An investor may direct the Fund to exchange his
shares by writing to the Fund at its principal office. The request must be
signed exactly as the investor's name appears on the account, and it must also
provide the account number, number of shares to be exchanged, the name of the
series to which the exchange will take place and a statement as to whether the
exchange is a full or partial redemption of existing shares. Notwithstanding the
foregoing, exchanges of shares may only be within the same class or type of
class of shares involved. For example, Investor Shares may not be exchanged for
Institutional or Super-Institutional Shares, and Investor Shares may not be
exchanged among the various Classes of Investor Shares (i.e., Series C Shares
may not be exchanged for Series A or Series D Shares and Series D Shares may not
be exchanged for Series A Shares). Notwithstanding the foregoing, unless
otherwise determined by the Fund, an investor may not exchange shares of the
Fund for shares of The Chesapeake Growth Fund, another series of the Trust
affiliated with the Advisor, unless such investor has an existing account with
such Fund.
A pattern of frequent exchange transactions may be deemed by the Advisor to be
an abusive practice that is not in the best interests of the shareholders of the
Fund. Such a pattern may, at the discretion of the Advisor, be limited by the
Fund's refusal to accept further purchase and/or exchange orders from an
investor, after providing the investor with 60 days prior notice. The Advisor
will consider all factors it deems relevant in determining whether a pattern of
frequent purchases, redemptions and/or exchanges by a particular investor is
abusive and not in the best interests of the Fund or its other shareholders.
A shareholder should consider the investment objectives and policies of any
series into which the shareholder will be making an exchange, as described in
the prospectus for that other series. The Board of Trustees of the Trust
reserves the right to suspend or terminate, or amend the terms of, the exchange
privilege upon 60 days written notice to the shareholders.
Automatic Investment Plan. The automatic investment plan enables shareholders to
make regular monthly or quarterly investments in shares through automatic
charges to their checking account. With shareholder authorization and bank
approval, the Fund will automatically charge the checking account for the amount
specified ($100 minimum), which will be automatically invested in shares at the
public offering price on or about the 21st day of the month. The shareholder may
change the amount of the investment or discontinue the plan at any time by
writing to the Fund.
Stock Certificates. Stock certificates will not be issued for your shares.
Evidence of ownership will be given by issuance of periodic account statements
that will show the number of shares owned.
HOW SHARES MAY BE REDEEMED
Shares of the Fund may be redeemed (the Fund will repurchase them from
shareholders) by mail or telephone. Any redemption may be more or less than the
purchase price of your shares depending on the market value of the Fund's
portfolio securities. All redemption orders received in proper form, as
indicated herein, by the Fund, whether by mail or telephone, prior to 4:00 p.m.
New York time, Monday through Friday, except for business holidays, will redeem
shares at the net asset value determined at that time. Otherwise, your order
will redeem shares as of such 4:00 p.m. time on the next business day. There is
no charge for redemptions from the Fund other than possible charges for wiring
redemption proceeds. You may also redeem your shares through a broker-dealer or
other institution, who may charge you a fee for its services.
The Board of Trustees reserves the right to involuntarily redeem any account
having a net asset value of less than $1,000,000 (due to redemptions, exchanges
or transfers, and not due to market action) upon 30 days written notice. If the
shareholder brings his account net asset value up to $1,000,000 or more during
the notice period, the account will not be redeemed. Redemptions from retirement
plans may be subject to tax withholding.
If you are uncertain of the requirements for redemption, please contact the
Fund, at 1-800-430-3863, or write to the address shown below.
Regular Mail Redemptions. Your request should be addressed to The Chesapeake
Fund, Institutional Shares, 107 North Washington Street, Post Office Box 4365,
Rocky Mount, North Carolina 27803-0365. Your request for redemption must
include:
1) Your letter of instruction specifying the account number, and the number of
shares or dollar amount to be redeemed. This request must be signed by all
registered shareholders in the exact names in which they are registered;
2) Any required signature guarantees (see "Signature Guarantees" below); and
3) Other supporting legal documents, if required in the case of estates,
trusts, guardianships, custodianships, corporations, partnerships, pension
or profit sharing plans, and other organizations.
Your redemption proceeds will be sent to you within seven days after receipt of
your redemption request. However, the Fund may delay forwarding a redemption
check for recently purchased shares while it determines whether the purchase
payment will be honored. Such delay (which may take up to 15 days from the date
of purchase) may be reduced or avoided if the purchase is made by certified
check or wire transfer. In all cases the net asset value next determined after
the receipt of the request for redemption will be used in processing the
redemption. The Fund may suspend redemption privileges or postpone the date of
payment (i) during any period that the New York Stock Exchange is closed, or
trading on the New York Stock Exchange is restricted as determined by the
Securities and Exchange Commission (the "Commission"), (ii) during any period
when an emergency exists as defined by the rules of the Commission as a result
of which it is not reasonably practicable for the Fund to dispose of securities
owned by it, or to fairly determine the value of its assets, and (iii) for such
other periods as the Commission may permit.
Telephone and Bank Wire Redemptions. The Fund offers shareholders the option of
redeeming shares by telephone under certain limited conditions. The Fund will
redeem shares when requested by the shareholder if, and only if, the shareholder
confirms redemption instructions in writing.
The Fund may rely upon confirmation of redemption requests transmitted via
facsimile (FAX# 919-972-1908). The confirmation instructions must include:
1) Shareholder name and account number;
2) Number of shares or dollar amount to be redeemed;
3) Instructions for transmittal of redemption funds to the shareholder; and
4) Shareholder signature as it appears on the application then on file with
the Fund.
The net asset value used in processing the redemption will be the net asset
value next determined after the telephone request is received. Redemption
proceeds will not be distributed until written confirmation of the redemption
request is received, per the instructions above. Shareholders can choose to have
redemption proceeds mailed to them at their address of record, their bank, or to
any other authorized person, or they can have the proceeds sent by bank wire to
their bank ($5,000 minimum). Shares of the Fund may not be redeemed by wire on
days on which the bank is not open for business. Shareholders can change
redemption instructions anytime by filing a letter including new redemption
instructions with the Fund. (See "Signature Guarantees" below.) The Fund
reserves the right to restrict or cancel telephone and bank wire redemption
privileges for shareholders, without notice, if the Fund believes it to be in
the best interest of the shareholders to do so. During drastic economic and
market changes, telephone redemption privileges may be difficult to implement.
The Fund in its discretion may choose to pass through to redeeming shareholders
any charges by the Custodian for wire redemptions. The Custodian currently
charges $7.00 per transaction for wiring redemption proceeds. If this cost is
passed through to redeeming shareholders by the Fund, the charge will be
deducted automatically from the shareholder's account by redemption of shares in
the account. The shareholder's bank or brokerage firm may also impose a charge
for processing the wire. If wire transfer of funds is impossible or impractical,
the redemption proceeds will be sent by mail to the designated account.
Shareholders may redeem shares, subject to the procedures outlined above, by
calling the Fund at 1-800-430-3863. Redemption proceeds will only be sent to the
bank account or person named in the Fund Shares Application currently on file
with the Fund. Telephone redemption privileges authorize the Fund to act on
telephone instructions from any person representing himself or herself to be the
investor and reasonably believed by the Fund to be genuine. The Fund will employ
reasonable procedures, such as requiring a form of personal identification, to
confirm that instructions are genuine, and, if it does not follow such
procedures, the Fund will be liable for any losses due to fraudulent or
unauthorized instructions. The Fund will not be liable for following telephone
instructions reasonably believed to be genuine.
Systematic Withdrawal Plan. A shareholder who owns shares of the Fund valued at
$1,000,000 or more at current net asset value may establish a Systematic
Withdrawal Plan to receive a monthly or quarterly check in a stated amount not
less than $1,000. Each month or quarter as specified, the Fund will
automatically redeem sufficient shares from the account to meet the specified
withdrawal amount. Call or write the Fund for an application form. See the
Statement of Additional Information for further details.
Signature Guarantees. To protect an account and the Fund from fraud, signature
guarantees are required to authorize a change in registration, or standing
instructions, for your account. Signature guarantees are required for (1) change
of registration requests, (2) requests to establish or change exchange
privileges or telephone redemption service other than through the initial
account application, and (3) requests for redemptions in excess of $50,000.
Signature guarantees are acceptable from a member bank of the Federal Reserve
System, a savings and loan institution, credit union (if authorized under state
law), registered broker-dealer, securities exchange or association clearing
agency, and must appear on the written request for redemption, establishment or
change in exchange privileges, or change of registration.
MANAGEMENT OF THE FUND
Trustees and Officers. The Fund is a diversified series of the Gardner Lewis
Investment Trust (the "Trust"), a registered open-end management investment
company organized as a Massachusetts business trust. The Board of Trustees of
the Trust is responsible for the management of the business and affairs of the
Trust. The Trustees and executive officers of the Trust and their principal
occupations for the last five years are set forth in the Statement of Additional
Information under "Management of the Fund - Trustees and Officers." The Board of
Trustees of the Trust is primarily responsible for overseeing the conduct of the
Trust's business. The Board of Trustees elects the officers of the Trust who are
responsible for its and the Fund's day-to-day operations.
The Advisor. Subject to the authority of the Board of Trustees, 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, pursuant to an Investment
Advisory Agreement (the "Advisory Agreement") with the Trust.
The Advisor is registered under the Investment Advisors Act of 1940.
Registration of the Advisor does not involve any supervision of management or
investment practices or policies by the Securities and Exchange Commission. The
Advisor, established as a Delaware corporation in 1990 and converted to a
Pennsylvania limited partnership in 1994, is controlled by W. Whitfield Gardner.
The Advisor currently serves as investment advisor to approximately $3 billion
in assets. The Advisor has been rendering investment counsel, utilizing
investment strategies substantially similar to that of the Fund, to individuals,
banks and thrift institutions, pension and profit sharing plans, trusts,
estates, charitable organizations and corporations since its formation. The
Advisor's address is 285 Wilmington-West Chester Pike, Chadds Ford, Pennsylvania
19317.
Under the Advisory Agreement with the Fund, the Advisor receives a monthly
management fee equal to an annual rate of 1.00% of the average daily net asset
value of the Fund. For the fiscal year ended February 28, 1997, the Advisor was
paid investment advisory fees of $1,940,587.
The Advisor supervises and implements the investment activities of the Fund,
including making specific decisions as to the purchase and sale of portfolio
investments. Among the responsibilities of the Advisor under the Advisory
Agreement is the selection of brokers and dealers through whom transactions in
the Fund's portfolio investments will be effected. The Advisor attempts to
obtain the best execution for all such transactions. If it is believed that more
than one broker is able to provide the best execution, the Advisor will consider
the receipt of quotations and other market services and of research, statistical
and other data and the sale of shares of the Fund in selecting a broker. The
Fund may also enter into brokerage/service arrangements pursuant to which
selected brokers executing portfolio transactions for the Fund may pay a portion
of the Fund's operating expenses. See Note 2 to the Fee Table. The Advisor may
also utilize a brokerage firm affiliated with the Trust or the Advisor if it
believes it can obtain the best execution of transactions from such broker.
Research services obtained through Fund brokerage transactions may be used by
the Advisor for its other clients and, conversely, the Fund may benefit from
research services obtained through the brokerage transactions of the Advisor's
other clients. For further information, see "Investment Objective and Policies -
Investment Transactions" in the Statement of Additional Information.
W. Whitfield Gardner and John L. Lewis, IV, principals of the Advisor and
executive officers of the Trust, have been responsible for day-to-day management
of the Fund's portfolio since its inception in 1994. They have been with the
Advisor since its inception. Additional information about these gentlemen is set
forth in the Statement of Additional Information under "Management of the Fund -
Trustees and Officers."
The Administrator. The Trust has entered into an Administration Agreement with
The Nottingham Company (the "Administrator"), 105 North Washington Street, Post
Office Drawer 69, Rocky Mount, North Carolina 27802-0069, pursuant to which the
Administrator receives a fee at the annual rate of 0.075% of the average daily
net assets of the Institutional Shares of the Fund for general administration
services. In addition, the Administrator currently receives a base monthly fee
of $1,750 for the Institutional Shares for accounting and recordkeeping
services. The Administrator also receives a fee at the annual rate of 0.015% of
the average daily net assets of the Institutional Shares of the Fund for
shareholder administration services. The Administrator also charges the Fund for
certain costs involved with the daily valuation of investment securities and is
reimbursed for out-of-pocket expenses.
Subject to the authority of the Board of Trustees, the services the
Administrator provides to the Fund include coordinating and monitoring any third
parties furnishing services to the Fund; providing the necessary office space,
equipment and personnel to perform administrative and clerical functions for the
Fund; and preparing, filing and distributing proxy materials, periodic reports
to shareholders, registration statements and other documents. The Administrator
also performs certain accounting and pricing services for the Fund as pricing
agent, including the daily calculation of the Fund's net asset value.
The Administrator was incorporated as a North Carolina corporation in 1988. With
its predecessors and affiliates, the Administrator has been operating as a
financial services firm since 1985. Frank P. Meadows III is the firm's Managing
Director and controlling shareholder.
The Transfer Agent. North Carolina Shareholder Services, LLC (the "Transfer
Agent") serves as the Fund's transfer, dividend paying, and shareholder
servicing agent. The Transfer Agent, subject to the authority of the Board of
Trustees, provides transfer agency services pursuant to an agreement with the
Administrator, which has been approved by the Trust. The Transfer Agent
maintains the records of each shareholder's account, answers shareholder
inquiries concerning accounts, processes purchases and redemptions of the Fund's
shares, acts as dividend and distribution disbursing agent, and performs other
shareholder servicing functions. The Transfer Agent is compensated for its
services by the Administrator and not directly by the Fund.
The Transfer Agent, whose address is 107 North Washington Street, Post Office
Box 4365, Rocky Mount, North Carolina 27803-0365, was established as a North
Carolina limited liability company in 1997. John D. Marriott, Jr., is the firm's
controlling member.
The Custodian. First Union National Bank of North Carolina (the "Custodian"),
Two First Union Center, Charlotte, North Carolina 28288-1151, serves as
Custodian of the Fund's assets. The Custodian acts as the depository for the
Fund, safekeeps its portfolio securities, collects all income and other payments
with respect to portfolio securities, disburses monies at the Fund's request and
maintains records in connection with its duties.
Other Expenses. The Fund is responsible for the payment of its expenses. These
include, for example, the fees payable to the Advisor, or expenses otherwise
incurred in connection with the management of the investment of the Fund's
assets, the fees and expenses of the Custodian, the fees and expenses of the
Administrator, the fees and expenses of Trustees, outside auditing and legal
expenses, all taxes and corporate fees payable by the Fund, Securities and
Exchange Commission fees, state securities qualification fees, costs of
preparing and printing prospectuses for regulatory purposes and for distribution
to shareholders, costs of shareholder reports and shareholder meetings, and any
extraordinary expenses. The Fund also pays for brokerage commissions and
transfer taxes (if any) in connection with the purchase and sale of portfolio
securities. Expenses attributable to a particular series of the Trust, including
the Fund, will be charged to that series, and expenses not readily identifiable
as belonging to a particular series will be allocated by or under procedures
approved by the Board of Trustees among one or more series in such a manner as
it deems fair and equitable. Any expenses relating only to a particular Class of
Shares of the Fund will be borne solely by such Class.
OTHER INFORMATION
Description of Shares. The Trust was organized as a Massachusetts business trust
on August 12, 1992, under a Declaration of Trust. The Declaration of Trust
permits the Board of Trustees to issue an unlimited number of full and
fractional shares and to create an unlimited number of series of shares. The
Board of Trustees may also classify and reclassify any unissued shares into one
or more classes of shares. The Trust currently has the number of authorized
series of shares, including the Fund, and classes of shares, described in the
Statement of Additional Information under "Description of the Trust." Pursuant
to its authority under the Declaration of Trust, the Board of Trustees has
authorized the issuance of an unlimited number of shares in each of five Classes
("Series A, Series C, and Series D Investor Shares," "Institutional Shares," and
Super-Institutional Shares") representing equal pro rata interests in the Fund,
except that the Classes bear different expenses that reflect the differences in
services provided to them. Investor Shares are sold with a sale charge (except
for Series C Shares) and bear potential distribution expenses and service fees
at different levels. See "How Shares May Be Purchased - Sales Charges" and " -
Distribution Plan." Institutional and Super-Institutional Shares are sold
without a sales charge and bear no shareholder servicing or distribution fees.
The Super-Institutional Shares, however, receive fewer investor services than
the Institutional and Investor Shares due to the size and nature of accounts
holding Super-Institutional Shares. As a result of different charges, fees, and
expenses between the Classes, the total return on the Fund's Investor Shares
will generally be lower than the total return on the Institutional and
Super-Institutional Shares, and the total return on the Institutional Shares
will generally be lower than the total return on the Super-Institutional Shares.
Standardized total return quotations will be computed separately for each Class
of Shares of the Fund.
THIS PROSPECTUS RELATES TO THE FUND'S INSTITUTIONAL SHARES AND DESCRIBES ONLY
THE POLICIES, OPERATIONS, CONTRACTS, AND OTHER MATTERS PERTAINING TO THE
INSTITUTIONAL SHARES. THE FUND ALSO ISSUES A CLASS OF SUPER-INSTITUTIONAL SHARES
AND THREE CLASSES OF INVESTOR SHARES. SUCH OTHER CLASSES MAY HAVE DIFFERENT
SALES CHARGES AND EXPENSES, WHICH MAY AFFECT PERFORMANCE. INVESTORS MAY CALL THE
FUND AT 1-800-430-3863 TO OBTAIN MORE INFORMATION CONCERNING OTHER CLASSES
AVAILABLE TO THEM THROUGH THEIR SALES REPRESENTATIVE. INVESTORS MAY OBTAIN
INFORMATION CONCERNING OTHER CLASSES FROM THEIR SALES REPRESENTATIVE, THE
DISTRIBUTOR, THE FUND, OR ANY OTHER PERSON WHICH IS OFFERING OR MAKING AVAILABLE
TO THEM THE SECURITIES OFFERED IN THIS PROSPECTUS.
When issued, the shares of each series of the Trust, including the Fund, and
each class of shares, will be fully paid, nonassessable and redeemable. The
Trust does not intend to hold annual shareholder meetings; it may, however, hold
special shareholder meetings for purposes such as changing fundamental policies
or electing Trustees. The Board of Trustees shall promptly call a meeting for
the purpose of electing or removing Trustees when requested in writing to do so
by the record holders of a least 10% of the outstanding shares of the Trust. The
term of office of each Trustee is of unlimited duration. The holders of at least
two-thirds of the outstanding shares of the Trust may remove a Trustee from that
position either by declaration in writing filed with the Custodian or by votes
cast in person or by proxy at a meeting called for that purpose.
The Trust's shareholders will vote in the aggregate and not by series (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 the
shareholders of a particular series or class. Matters affecting an individual
series, such as the Fund, include, but are not limited to, the investment
objectives, policies and restrictions of that series. Shares have no
subscription, preemptive or conversion rights. Share certificates will not be
issued. Each share is entitled to one vote (and fractional shares are entitled
to proportionate fractional votes) on all matters submitted for a vote, and
shares have equal voting rights except that only shares of a particular series
or class are entitled to vote on matters affecting only that series or class.
Shares do not have cumulative voting rights. Therefore, the holders of more than
50% of the aggregate number of shares of all series of the Trust may elect all
the Trustees.
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
trust. The Declaration of Trust, therefore, contains provisions which are
intended to mitigate such liability. See "Description of the Trust" in the
Statement of Additional Information for further information about the Trust and
its shares.
Reporting to Shareholders. The Fund will send to its shareholders Annual and
Semi-Annual Reports; the financial statements appearing in Annual Reports for
the Fund will be audited by independent accountants. In addition, the Fund will
send to each shareholder having an account directly with the Fund a quarterly
statement showing transactions in the account, the total number of shares owned
and any dividends or distributions paid. Inquiries regarding the Fund may be
directed in writing to 107 North Washington Street, Post Office Box 4365, Rocky
Mount, North Carolina 27803-0365 or by calling 1-800-430-3863.
Calculation of Performance Data. From time to time the Fund may advertise its
average annual total return for each Class of Shares. The "average annual total
return" refers to the average annual compounded rates of return over 1-, 5-, and
10-year periods that would equate an initial amount invested at the beginning of
a stated period to the ending redeemable value of the investment. The
calculation assumes the reinvestment of all dividends and distributions,
includes all recurring fees that are charged to all shareholder accounts and
deducts all nonrecurring charges at the end of each period. The calculation
further assumes the maximum sales load is deducted from the initial payment. If
the Fund has been operating less than 1, 5 or 10 years, the time period during
which the Fund has been operating is substituted.
In addition, the Fund may advertise other total return performance data other
than average annual total return for each Class of Shares. This data shows as a
percentage rate of return encompassing all elements of return (i.e. income and
capital appreciation or depreciation); it assumes reinvestment of all dividends
and capital gain distributions. Such other total return data may be quoted for
the same or different periods as those for which average annual total return is
quoted. This data may consist of a cumulative percentage rate of return, actual
year-by-year rates or any combination thereof. Cumulative total return
represents the cumulative change in value of an investment in the Fund for
various periods.
The total return of the Fund could be increased to the extent the Advisor may
waive a portion of its fees or may reimburse a portion of the Fund's expenses.
Total return figures are based on the historical performance of the Fund, show
the performance of a hypothetical investment, and are not intended to indicate
future performance. The Fund's quotations may from time to time be used in
advertisements, sales literature, shareholder reports, or other communications.
For further information, see "Additional Information on Performance" in the
Statement of Additional Information.
<PAGE>
- --------------------------------------------------------------------------------
THE CHESAPEAKE FUND
INSTITUTIONAL SHARES
- --------------------------------------------------------------------------------
PROSPECTUS
June 30, 1997
THE CHESAPEAKE FUND
107 North Washington Street
Post Office Box 4365
Rocky Mount, North Carolina 27803-0365
1-800-430-3863
INVESTMENT ADVISOR
Gardner Lewis Asset Management
285 Wilmington-West Chester Pike
Chadds Ford, Pennsylvania 19317
ADMINISTRATOR & FUND ACCOUNTANT
The Nottingham Company
Post Office Drawer 69
Rocky Mount, North Carolina 27802-0069
DIVIDEND DISBURSING & TRANSFER AGENT
North Carolina Shareholder Services
Post Office Box 4365
Rocky Mount, North Carolina 27803-0365
DISTRIBUTOR
Capital Investment Group, Inc.
Post Office Box 32249
Raleigh, North Carolina 27622
CUSTODIAN
First Union National Bank of North Carolina
Two First Union Center
Charlotte, North Carolina 28288-1151
INDEPENDENT AUDITORS
Deloitte & Touche LLP
2500 One PPG Place
Pittsburgh, Pennsylvania 15222-5401
<PAGE>
Investor Class A Cusip Number 36559B203
PROSPECTUS Investor Class C Cusip Number 36559B500
Investor Class D Cusip Number 36559B302
THE CHESAPEAKE FUND
INVESTOR SHARES
The investment objective of The Chesapeake Fund (the "Fund") is to seek capital
appreciation through investments in equity securities of medium and large
capitalization companies, consisting primarily of common and preferred stocks
and securities convertible into common stocks. While there is no assurance that
the Fund will achieve its investment objective, it endeavors to do so by
following the investment policies described in this Prospectus. The Fund has a
net asset value that will fluctuate in accordance with the value of its
portfolio securities. An investor may invest, reinvest or redeem shares at any
time.
This Prospectus relates to three Classes of shares from which investors may
choose representing interests in the Fund: Series A Investor Shares ("Series A
Shares"), Series C Investor Shares ("Series C Shares"), and Series D Investor
Shares ("Series D Shares" and, collectively with Series A Shares and Series C
Shares, "Investor Shares"). Series A and Series D Shares are sold with a sales
charge. Series C Shares are sold without a sales charge. The Investor Shares are
offered to the general public. See "Prospectus Summary - Offering Price."
INVESTMENT ADVISOR
Gardner Lewis Asset Management
Chadds Ford, Pennsylvania
The Fund is a diversified series of the Gardner Lewis Investment Trust (the
"Trust"), a registered open-end management investment company. This Prospectus
sets forth concisely the information about the Fund that a prospective investor
should know before investing. Investors should read this Prospectus and retain
it for future reference. Additional information about the Fund has been filed
with the Securities and Exchange Commission (the "SEC") and is available upon
request and without charge. You may request the Statement of Additional
Information, which is incorporated in this Prospectus by reference, by writing
the Fund at Post Office Box 4365, Rocky Mount, North Carolina 27803-0365, or by
calling 1-800-430-3863. The SEC also maintains an Internet Web site
(http://www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference, and other information regarding the Fund.
Investment in the Fund involves risks, including the possible loss of principal.
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by, any financial institution, and such shares are not federally insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other
agency.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus and the Statement of Additional Information is June
30, 1997.
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUMMARY......................................................... 2
FEE TABLE.................................................................. 3
FINANCIAL HIGHLIGHTS....................................................... 4
INVESTMENT OBJECTIVE AND POLICIES.......................................... 5
RISK FACTORS............................................................... 7
INVESTMENT LIMITATIONS..................................................... 8
FEDERAL INCOME TAXES....................................................... 8
DIVIDENDS AND DISTRIBUTIONS................................................ 9
HOW SHARES ARE VALUED...................................................... 10
HOW SHARES MAY BE PURCHASED................................................ 10
HOW SHARES MAY BE REDEEMED................................................. 16
MANAGEMENT OF THE FUND..................................................... 18
OTHER INFORMATION.......................................................... 19
This Prospectus is not an offering of the securities described herein in any
state in which the offering is unauthorized. No sales representative, dealer or
other person is authorized to give any information or make any representations
other than those contained in this Prospectus.
The Fund reserves the right in its sole discretion to withdraw all or any part
of the offering made by this Prospectus or to reject purchase orders. All orders
to purchase shares are subject to acceptance by the Fund and are not binding
until confirmed or accepted in writing.
<PAGE>
PROSPECTUS SUMMARY
The Fund. The Chesapeake Fund (the "Fund") is a diversified series of the
Gardner Lewis Investment Trust (the "Trust"), a registered open-end management
investment company organized as a Massachusetts business trust. This Prospectus
relates to Investor Shares of the Fund. See "Other Information - Description of
Shares."
Offering Price. The Investor Shares are offered to the general public at net
asset value plus a 3% sales charge for Series A Shares and a 1.5% sales charge
for Series D Shares, which sales charge is reduced on purchases involving larger
amounts. The Series C Shares are offered at net asset value without a sales
charge. The Investor Shares are also subject to potential 12b-1 distribution and
service fees annually of up to 0.25%, 0.75%, and 0.50%, respectively, of the
average net assets of the Series A, Series C, and Series D Shares, respectively.
See "Distributor and Distribution Fee" below. The minimum initial investment is
$25,000. The minimum subsequent investment is $500. See "How Shares May be
Purchased."
Investment Objective and Special Risk Considerations. The investment objective
of the Fund is to seek capital appreciation through investments in equity
securities of medium and large capitalization companies, consisting primarily of
common and preferred stocks and securities convertible into common stocks.
Realization of current income is not a significant investment consideration, and
any income realized will be incidental to the Fund's objective. See "Investment
Objective and Policies." The Fund is not intended to be a complete investment
program, and there can be no assurance that the Fund will achieve its investment
objective. While the Fund will invest primarily in common stocks traded in U.S.
securities markets, some of the Fund's investments may include foreign
securities, illiquid securities, and securities purchased subject to a
repurchase agreement or on a "when-issued" basis, which involve certain risks.
The Fund's portfolio may also contain a significant amount of securities of
medium capitalization companies, which may exhibit more volatility than
securities of large capitalization companies. See "Risk Factors."
Manager. Subject to the general supervision of the Trust's Board of Trustees and
in accordance with the Fund's investment policies, Gardner Lewis Asset
Management of Chadds Ford, Pennsylvania (the "Advisor") manages the Fund's
investments. The Advisor currently manages approximately $3 billion in assets.
For its advisory services, the Advisor receives a monthly fee based on the
Fund's daily net assets at the annual rate of 1.00%. See "Management of the Fund
The Advisor."
Dividends. Income dividends, if any, are paid at least annually; capital gains,
if any, are distributed at least annually or retained for reinvestment by the
Fund. Dividends and capital gains distributions are automatically reinvested in
additional shares of the same Class at net asset value unless the shareholder
elects to receive cash. See "Dividends and Distributions."
Distributor and Distribution Fee. Capital Investment Group, Inc. (the
"Distributor") serves as distributor of shares of the Fund. For its services,
which include payments to qualified securities dealers for sales of Fund shares,
the Distributor receives commissions consisting of the portion of the sales
charge for Series A and Series D Shares remaining after the discounts it allows
to securities dealers. Under the Fund's Distribution Plan with respect to each
class of Investor Shares, expenditures by the Fund for distribution activities
and service fees annually may not exceed 0.25%, 0.75%, and 0.50%, respectively,
of the average net assets of the Series A, Series C, and Series D Shares,
respectively.
See "How Shares May Be Purchased - Sales Charges" and "- Distribution Plan."
Redemption of Shares. There is no charge for redemptions, other than possible
charges associated with wire transfers of redemption proceeds. Shares may be
redeemed at any time at the net asset value next determined after receipt of a
redemption request by the Fund. A shareholder who submits appropriate written
authorization may redeem shares by telephone. See "How Shares May Be Redeemed."
<PAGE>
FEE TABLE
The following table sets forth certain information in connection with the
expenses of the Investor Shares of the Fund for the current fiscal year. The
information is intended to assist the investor in understanding the various
costs and expenses borne by the Investor Shares of the Fund, and therefore
indirectly by its investors, the payment of which will reduce an investor's
return on an annual basis.
Shareholder Transaction Expenses for Investor Shares
- --------------------------------------------------------------------------------
Series A Series C Series D
- --------------------------------------------------------------------------------
Maximum sales load imposed on purchases
(as a percentage of offering price) 3.00% 1 None 1.50%1
Maximum sales load imposed
on reinvested dividends........... None None None
Maximum deferred sales load........ None None None
Redemption fees*................... None None None
Exchange fee....................... None None None
Annual Fund Operating Expenses for Investor Shares
(as a percentage of average net assets)
- --------------------------------------------------------------------------------
Series A Series C Series D
- --------------------------------------------------------------------------------
Investment advisory fees...........1.00% 1.00% 1.00%
12b-1 fees2........................0.25% 0.75% 0.50%
Other expenses.....................0.29% 0.59% 0.52%
----- ----- -----
Total operating expenses3........1.54% 2.34% 2.02%
===== ===== =====
* The Fund in its discretion may choose to pass through to redeeming
shareholders any charges imposed by the Custodian for wiring redemption
proceeds. The Custodian currently charges the Fund $7.00 per transaction for
wiring redemption proceeds.
EXAMPLE: You would pay the following expenses (including the maximum initial
sales charge) on a $1,000 investment in Investor Shares of the Fund, whether or
not you redeem at the end of the period, assuming a 5% annual return:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Series A $45 $77 $111 $208
Series C $24 $73 $125 $268
Series D $35 $77 $122 $246
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
1 Reduced for larger purchases. See "How Shares May Be Purchased - Sales
Charges."
2 The Fund has adopted a Distribution Plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940, as amended (the "1940 Act"), with respect
to each Class of Investor Shares, which provides that the Fund may pay
certain distribution expenses and service fees annually with respect to the
Investor Shares up to 0.25%, 0.75%, and 0.50%, respectively, of the average
net assets of the Series A, Series C, and Series D Shares, respectively.
See "How Shares May Be Purchased - Distribution Plan." Long-term
shareholders may pay more than the economic equivalent of the maximum
front-end sales charge permitted by the National Association of Securities
Dealers.
3 The "Total operating expenses" shown above are based upon actual total
operating expenses incurred by the Investor Shares of the Fund for the
fiscal year ended February 28, 1997, including amounts of Fund expenses
paid by a broker in connection with a brokerage/service arrangement with
the Fund. After reflecting the Fund expenses paid by the broker in
connection with such brokerage/service arrangement, the actual net
operating expenses incurred by the Investor Shares of the Fund for the
fiscal year ended February 28, 1997, were 1.53%, 2.33%, and 2.01% of
average daily net assets of the Series A, Series C, and Series D Investor
Shares, respectively. There can be no assurance that the Fund's
brokerage/service arrangement will continue in the future.
See "How Shares May Be Purchased" and "Management of the Fund" below for more
information about the fees and costs of operating the Fund. The assumed 5%
annual return in the example is required by the Securities and Exchange
Commission. The hypothetical rate of return is not intended to be representative
of past or future performance of the Fund; the actual rate of return for the
Fund may be greater or less than 5%.
<PAGE>
FINANCIAL HIGHLIGHTS
The shares of the Fund are divided into multiple Classes representing interests
in the Fund. This Prospectus relates to Investor Shares. See "Other Information
- - Description of Shares." The financial data included in the table below for the
fiscal year ended February 28, 1997, has been audited by Deloitte & Touche LLP,
independent auditors, whose report covering such period is included in the
Statement of Additional Information. The financial data for the prior fiscal
period was audited by other independent auditors. This information should be
read in conjunction with the Fund's latest audited financial statements and
notes thereto, which are also included in the Statement of Additional
Information, a copy of which may be obtained at no charge by calling the Fund.
Further information about the performance of the Fund is contained in the Annual
Report of the Fund, a copy of which may be obtained at no charge by calling the
Fund.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Investor Shares
(For a Share Outstanding Throughout the Period)
- ---------------------------------------------------------------------------------------------------------------------------
Series A Series C Series D
- ---------------------------------------------------------------------------------------------------------------------------
Year Period Year Period Year Period
Ended ended Ended ended ended ended
2/28/97 2/29/96(a) 2/28/97 2/29/96(a) 2/28/97 2/29/96(a)
- ---------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $14.42 $11.79 $14.34 $11.79 $14.41 $11.79
Income (loss) from investment operations
Net investment loss (0.18) (0.06) (0.29) (0.12) (0.29) (0.11)
Net realized and unrealized gain on investments 1.94 2.88 1.92 2.86 1.97 2.92
------ ------- ------ ------- ------ -------
Total from investment operations 1.76 2.82 1.63 2.74 1.68 2.81
------ ------- ------ ------- ------ -------
Distributions to shareholders from
Net realized gain from investment transactions 0.00 (0.11) 0.00 (0.11) 0.00 (0.11)
Tax return of capital 0.00 (0.08) 0.00 (0.08) 0.00 (0.08)
---- ----- ---- ----- ---- -----
Total distributions 0.00 (0.19) 0.00 (0.19) 0.00 (0.19)
---- ----- ---- ----- ---- -----
Net Asset Value, End of Period $16.18 $14.42 $15.97 $14.34 $16.09 $14.41
===== ====== ===== ====== ===== ======
Total return (b) 12.21% 23.86% 11.30% 23.18% 11.59% 23.77%
===== ===== ===== ===== ===== =====
Ratios/supplemental data
Net assets, end of period (000's) $39,376 $32,549 $9,192 $7,908 $10,774 $11,929
====== ====== ===== ===== ====== ======
Ratio of expenses to average net assets
Before expense reimbursements 1.54% 1.88%(c) 2.34% 2.38%(c) 2.02% 2.13%(c)
After expense reimbursements 1.53% 1.71%(c) 2.33% 2.18%(c) 2.01% 1.73%(c)
Ratio of net investment loss to average net assets
Before expense reimbursements (1.16)% (1.20)%(c) (1.97)% (1.77)%(c) (1.64)% (1.54)%(c)
After expense reimbursements (1.15)% (1.04)%(c) (1.96)% (1.57)%(c) (1.63)% (1.14)%(c)
Portfolio turnover rate 126.44% 99.33% 126.44% 99.33% 126.44% 99.33%
Average commission rate paid $0.06 $0.06 $0.06
(a) For the period from April 7, 1995 (commencement of operations) to February 29, 1996.
(b) Total return does not reflect payment of a sales charge.
(c) Annualized.
</TABLE>
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
Investment Objective. The investment objective of the Fund is to seek capital
appreciation through investments in equity securities of medium and large
capitalization companies, consisting primarily of common and preferred stocks
and securities convertible into common stocks. Realization of current income
will not be a significant investment consideration, and any such income realized
should be considered incidental to the Fund's objective. The Fund's investment
objective and fundamental investment limitations described herein may not be
altered without the prior approval of a majority of the Fund's shareholders.
Investment Selection. The Fund's portfolio will include equity securities which
the Advisor feels show superior prospects for growth. The Advisor will focus
attention on proven medium and large capitalization companies which, in the view
of the Advisor, exhibit internal changes such as a promising new product, new
distribution strategy, new manufacturing technology, or new management team or
management philosophy. Many of the portfolio companies will be responsible for
technological breakthroughs and/or unique solutions to market needs. Investing
in companies which are undergoing internal change, such as implementing new
strategies or introducing new technologies, may involve greater than average
risk due to their unproven nature. By focusing upon internal rather than
external factors, the Fund will seek to minimize the risk associated with
macro-economic forces such as changes in commodity prices, currency exchange
rates and interest rates.
In selecting portfolio companies, the Advisor uses analysis which includes the
growth rate in earnings, financial performance, management strengths and
weaknesses, and current market valuation in relation to earnings growth as well
as historic and comparable company valuations. The Advisor also analyzes the
level and nature of the company's debt, cash flow, working capital and the
quality of the company's assets. Typically companies included in the Fund's
portfolio will show strong earnings growth versus the previous year's comparable
period. Companies that the Advisor determines have excessive levels of debt are
generally avoided.
By developing and maintaining contacts with management, customers, competitors
and suppliers of current and potential portfolio companies, the Advisor attempts
to invest in those companies undergoing positive changes that have not yet been
recognized by "Wall Street" analysts and the financial press. Lack of
recognition of these changes often causes securities to be less efficiently
priced. The Advisor believes these companies offer unique and potentially
superior investment opportunities. The Advisor favors portfolio companies whose
price when purchased is between 8 and 15 times projected earnings for the coming
year.
While portfolio securities are generally acquired for the long term, they may be
sold under any of the following circumstances:
a) the anticipated price appreciation has been achieved or is no longer
probable;
b) the company's fundamentals appear, in the analysis of the Advisor, to
be deteriorating;
c) general market expectations regarding the company's future performance
exceed those expectations held by the Advisor;
d) alternative investments offer, in the view of the Advisor, superior
potential for appreciation.
The equity securities in which the Fund may invest include common stock,
convertible preferred stock, straight preferred stock, participating and
non-participating preferred stock, and investment grade convertible bonds. All
securities will be traded on domestic and foreign securities exchanges or on the
over-the-counter markets. Up to 10% of the Fund's total assets may consist of
foreign securities and sponsored ADRs.
Under normal conditions, at least 90% of the Fund's total assets will be
invested in equity securities. As a temporary defensive measure, however, when
the Advisor determines that market conditions so warrant, the Fund may invest up
to 100% of the Fund's total assets in investment grade bonds, U.S. Government
Securities, repurchase agreements, or money market instruments. When the Fund
invests its assets in investment grade bonds, U.S. Government Securities or
money market instruments as a temporary defensive measure, it is not pursuing
its stated investment objective. Under normal circumstances, however, the Fund
will also hold money market or repurchase agreement instruments for funds
awaiting investment, to accumulate cash for anticipated purchases of portfolio
securities, to allow for shareholder redemptions, and to provide for Fund
operating expenses.
U.S. Government Securities. The Fund may invest a portion of the portfolio in
U.S. Government Securities, defined to be U.S. Government obligations such as
U.S. Treasury notes, U.S. Treasury bonds, and U.S. Treasury bills, obligations
guaranteed by the U.S. Government such as Government National Mortgage
Association ("GNMA") as well as obligations of U.S. Government authorities,
agencies and instrumentalities such as Federal National Mortgage Association
("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"), Federal Home
Administration ("FHA"), Federal Farm Credit Bank ("FFCB"), Federal Home Loan
Bank ("FHLB"), Student Loan Marketing Association ("SLMA"), and The Tennessee
Valley Authority. U.S. Government Securities may be acquired subject to
repurchase agreements. While obligations of some U.S. Government sponsored
entities are supported by the full faith and credit of the U.S. Government (e.g.
GNMA), several are supported by the right of the issuer to borrow from the U.S.
Government (e.g. FNMA, FHLMC), and still others are supported only by the credit
of the issuer itself (e.g. SLMA, FFCB). No assurances can be given that the U.S.
Government will provide financial support to U.S. Government agencies or
instrumentalities in the future, other than as set forth above, since it is not
obligated to do so by law. The guarantee of the U.S. Government does not extend
to the yield or value of the Fund's shares.
Money Market Instruments. Money market instruments may be purchased for
temporary defensive purposes, to accumulate cash for anticipated purchases of
portfolio securities and to provide for shareholder redemptions and operating
expenses of the Fund. Money market instruments mature in thirteen months or less
from the date of purchase and may include U.S. Government Securities, corporate
debt securities (including those subject to repurchase agreements), bankers
acceptances and certificates of deposit of domestic branches of U.S. banks, and
commercial paper (including variable amount demand master notes) rated in one of
the two highest rating categories by any of the nationally recognized
statistical rating organizations or if not rated, of equivalent quality in the
Advisor's opinion. The Advisor may, when it believes that unusually volatile or
unstable economic and market conditions exist, depart from the Fund's investment
approach and assume temporarily a defensive portfolio posture, increasing the
Fund's percentage investment in money market instruments, even to the extent
that 100% of the Fund's total assets may be so invested.
Repurchase Agreements. The Fund may acquire U.S. Government Securities or
corporate debt securities subject to repurchase agreements. A repurchase
agreement transaction occurs when the Fund acquires a security and
simultaneously resells it to the vendor (normally a member bank of the Federal
Reserve or a registered Government Securities dealer) for delivery on an agreed
upon future date. The repurchase price exceeds the purchase price by an amount
that reflects an agreed upon market interest rate earned by the Fund effective
for the period of time during which the repurchase agreement is in effect.
Delivery pursuant to the resale typically will occur within one to seven days of
the purchase. The Fund will not enter into any repurchase agreement that will
cause more than 10% of its net assets to be invested in repurchase agreements
that extend beyond seven days. In the event of the bankruptcy of the other party
to a repurchase agreement, the Fund could experience delays in recovering its
cash or the securities lent. To the extent that in the interim the value of the
securities purchased may have declined, the Fund could experience a loss. In all
cases, the creditworthiness of the other party to a transaction is reviewed and
found satisfactory by the Advisor. Repurchase agreements are, in effect, loans
of Fund assets. The Fund will not engage in reverse repurchase transactions,
which are considered to be borrowings under the 1940 Act.
Foreign Securities. The Fund may invest up to 10% of its total assets in foreign
securities and sponsored ADRs. The same factors would be considered in selecting
foreign securities as with domestic securities. Foreign securities investment
presents special consideration not typically associated with investment in
domestic securities. Foreign taxes may reduce income. Currency exchange rates
and regulations may cause fluctuations in the value of foreign securities.
Foreign securities are subject to different regulatory environments than in the
United States and, compared to the United States, there may be a lack of uniform
accounting, auditing and financial reporting standards, less volume and
liquidity and more volatility, less public information, and less regulation of
foreign issuers. Countries have been known to expropriate or nationalize assets,
and foreign investments may be subject to political, financial, or social
instability, or adverse diplomatic developments. There may be difficulties in
obtaining service of process on foreign issuers and difficulties in enforcing
judgments with respect to claims under the U.S. securities laws against such
issuers. Favorable or unfavorable differences between U.S. and foreign economies
could affect foreign securities values. The U.S. Government has, in the past,
discouraged certain foreign investments by U.S. investors through taxation or
other restrictions and it is possible that such restrictions could be imposed
again.
Because of the inherent risk of foreign securities over domestic issues, the
Fund will generally limit foreign investments to those traded domestically as
sponsored American Depository Receipts ("ADRs"). ADRs are receipts issued by a
U.S. bank or trust company evidencing ownership of securities of a foreign
issuer. ADRs may be listed on a national securities exchange or may trade in the
over-the-counter market. The prices of ADRs are denominated in U.S. dollars
while the underlying security may be denominated in a foreign currency. To the
extent the Fund invests in other foreign securities, it will generally limit
such investments to foreign securities traded on foreign securities exchanges.
Investment Companies. In order to achieve its investment objective, the Fund may
invest up to 10% of the value of its total assets in securities of other
investment companies whose investment objectives are consistent with the Fund's
investment objective. The Fund will not acquire securities of any one investment
company if, immediately thereafter, the Fund would own more than 3% of such
company's total outstanding voting securities, securities issued by such company
would have an aggregate value in excess of 5% of the Fund's total assets, or
securities issued by such company and securities held by the Fund issued by
other investment companies would have an aggregate value in excess of 10% of the
Fund's total assets. To the extent the Fund invests in other investment
companies, the shareholders of the Fund would indirectly pay a portion of the
operating costs of the underlying investment companies. These costs include
management, brokerage, shareholder servicing and other operational expenses.
Shareholders of the Fund would then indirectly pay higher operational costs than
if they owned shares of the underlying investment companies directly.
Real Estate Securities. The Fund will not invest in real estate or real estate
mortgage loans (including limited partnership interests), but may invest in
readily marketable securities secured by real estate or interests therein or
issued by companies that invest in real estate or interests therein. The Fund
may also invest in readily marketable interests in real estate investment trusts
("REITs"). REITs are generally publicly traded on the national stock exchanges
and in the over-the-counter market and have varying degrees of liquidity.
Although the Fund is not limited in the amount of these types of real estate
securities it may acquire, it is not presently expected that within the next 12
months the Fund will have in excess of 5% of its total assets in real estate
securities.
RISK FACTORS
Investment Policies and Techniques. Reference should be made to "Investment
Objective and Policies" above for a description of special risks presented by
the investment policies of the Fund and the specific securities and investment
techniques that may be employed by the Fund, including the risks associated with
repurchase agreements and foreign securities. A more complete discussion of
certain of these securities and investment techniques and their associated risks
is contained in the Statement of Additional Information.
Fluctuations in Value. To the extent that the major portion of the Fund's
portfolio consists of common stocks, it may be expected that its net asset value
will be subject to greater fluctuation than a portfolio containing mostly fixed
income securities. Given that a significant portion of the Fund's assets may be
invested in equity securities of medium capitalization companies, that portion
of the Fund's portfolio may exhibit more volatility than the portion of the
Fund's portfolio invested in large capitalization companies. Because there is
risk in any investment, there can be no assurance that the Fund will achieve its
investment objective.
Portfolio Turnover. The Fund sells portfolio securities without regard to the
length of time they have been held in order to take advantage of new investment
opportunities. Nevertheless, the Fund's portfolio turnover generally will not
exceed 100% in any one year. Portfolio turnover generally involves some expense
to the Fund, including brokerage commissions or dealer mark-ups and other
transaction costs on the sale of securities and the reinvestment in other
securities. Portfolio turnover may also have capital gains tax consequences. The
Fund's portfolio turnover rate for its fiscal years ended February 28, 1997, and
February 29, 1996, was 126.44% and 99.33%, respectively.
Illiquid Investments. The Fund may invest up to 10% of its net assets in
illiquid securities. Illiquid securities are those that may not be sold or
disposed of in the ordinary course of business within seven days at
approximately the price at which they are valued. Under the supervision of the
Board of Trustees, the Advisor determines the liquidity of the Fund's
investments. The absence of a trading market can make it difficult to ascertain
a market value for illiquid investments. Disposing of illiquid securities before
maturity may be time consuming and expensive, and it may be difficult or
impossible for the Fund to sell illiquid investments promptly at an acceptable
price. The Fund will not invest in restricted securities, which cannot be sold
to the public without registration under the federal securities laws. Unless
registered for sale, restricted securities can only be sold in privately
negotiated transactions or pursuant to an exemption from registration.
Forward Commitments and When-Issued Securities. The Fund may purchase
when-issued securities and commit to purchase securities for a fixed price at a
future date beyond customary settlement time. The Fund is required to hold and
maintain in a segregated account until the settlement date, cash, U.S.
Government Securities or high-grade debt obligations in an amount sufficient to
meet the purchase price. Purchasing securities on a when-issued or forward
commitment basis involves a risk of loss if the value of the security to be
purchased declines prior to the settlement date, which risk is in addition to
the risk of decline in value of the Fund's other assets. In addition, no income
accrues to the purchaser of when-issued securities during the period prior to
issuance. Although the Fund would generally purchase securities on a when-issued
or forward commitment basis with the intention of acquiring securities for its
portfolio, the Fund may dispose of a when-issued security or forward commitment
prior to settlement if the Advisor deems it appropriate to do so. The Fund may
realize short-term gains or losses upon such sales.
INVESTMENT LIMITATIONS
To limit the Fund's exposure to risk, the Fund has adopted certain fundamental
investment limitations. Some of these restrictions are that the Fund will not:
(1) issue senior securities, borrow money or pledge its assets; (2) make loans
of money or securities, except that the Fund may invest in repurchase agreements
(but repurchase agreements having a maturity of longer than seven days, together
with other illiquid securities, are limited to 10% of the Fund's net assets);
(3) invest in securities of issuers which have a record of less than three
years' continuous operation (including predecessors and, in the case of bonds,
guarantors), if more than 5% of its total assets would be invested in such
securities; (4) write, purchase or sell puts, calls, warrants or combinations
thereof, or purchase or sell commodities, commodities contracts, futures
contracts or related options, or invest in oil, gas or mineral leases or
exploration programs, or real estate; (5) invest more than 5% of the value of
its total assets in the securities of any one issuer nor hold more than 10% of
the voting stock of any issuer; (6) invest in restricted securities; (7) invest
more than 10% of the Fund's total assets in foreign securities, including
sponsored ADRs; and (8) invest more than 25% of the Fund's total assets in the
securities of issuers in any one industry. See "Investment Limitations" in the
Fund's Statement of Additional Information for a complete list of investment
limitations.
If the Board of Trustees of the Trust determines that the Fund's investment
objective can best be achieved by a substantive change in a non-fundamental
investment limitation, the Board can make such change without shareholder
approval and will disclose any such material changes in the then current
Prospectus. Any limitation that is not specified in the Fund's Prospectus, or in
the Statement of Additional Information, as being fundamental, is
non-fundamental. If a percentage limitation is satisfied at the time of
investment, a later increase or decrease in such percentage resulting from a
change in the value of the Fund's portfolio securities will not constitute a
violation of such limitation.
FEDERAL INCOME TAXES
Taxation of the Fund. The Internal Revenue Code of 1986, as amended (the
"Code"), treats each series in the Trust, including the Fund, as a separate
regulated investment company. Each series of the Trust, including the Fund,
intends to qualify or remain qualified as a regulated investment company under
the Code by distributing substantially all of its "net investment income" to
shareholders and meeting other requirements of the Code. For the purpose of
calculating dividends, net investment income consists of income accrued on
portfolio assets, less accrued expenses. Upon qualification, the Fund will not
be liable for federal income taxes to the extent earnings are distributed. The
Board of Trustees retains the right for any series of the Trust, including the
Fund, to determine for any particular year if it is advantageous not to qualify
as a regulated investment company. Regulated investment companies, such as each
series of the Trust, including the Fund, are subject to a non-deductible 4%
excise tax to the extent they do not distribute the statutorily required amount
of investment income, determined on a calendar-year basis, and capital gain net
income, using an October 31 year-end measuring period. The Fund intends to
declare or distribute dividends during the calendar year in an amount sufficient
to prevent imposition of the 4% excise tax.
Taxation of Shareholders. For federal income tax purposes, any dividends and
distributions from short-term capital gains that a shareholder receives in cash
from the Fund or which are re-invested in additional shares will be taxable
ordinary income. If a shareholder is not required to pay a tax on income, he
will not be required to pay federal income taxes on the amounts distributed to
him. A dividend declared in October, November or December of a year and paid in
January of the following year will be considered to be paid on December 31 of
the year of declaration.
Distributions paid by the Fund from long-term capital gains, whether received in
cash or reinvested in additional shares, are taxable as long-term capital gains,
regardless of the length of time an investor has owned shares in the Fund.
Capital gain distributions are made when the Fund realizes net capital gains on
sales of portfolio securities during the year. Dividends and capital gain
distributions paid by the Fund shortly after shares have been purchased,
although in effect a return of investment, are subject to federal income
taxation.
The sale of shares of the Fund is a taxable event and may result in a capital
gain or loss. Capital gain or loss may be realized from an ordinary redemption
of shares or an exchange of shares between two mutual funds (or two series of a
mutual fund).
The Trust will inform shareholders of the Fund of the source of their dividends
and capital gains distributions at the time they are paid and, promptly after
the close of each calendar year, will issue an information return to advise
shareholders of the federal tax status of such distributions and dividends.
Dividends and distributions may also be subject to state and local taxes.
Shareholders should consult their tax advisors regarding specific questions as
to federal, state or local taxes.
Federal income tax law requires investors to certify that the social security
number or taxpayer identification number provided to the Fund is correct and
that the investor is not subject to 31% withholding for previous under-reporting
to the Internal Revenue Service (the "IRS"). Investors will be asked to make the
appropriate certification on their application to purchase shares. If a
shareholder of the Fund has not complied with the applicable statutory and IRS
requirements, the Fund is generally required by federal law to withhold and
remit to the IRS 31% of reportable payments (which may include dividends and
redemption amounts).
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute substantially all of its net investment income,
if any, in the form of dividends and distribute capital gains, if any, at least
once each year. The Fund may, however, determine either to distribute or to
retain all or part of any long-term capital gains in any year for reinvestment.
Unless a shareholder elects to receive cash, dividends and capital gains will be
automatically reinvested in additional full and fractional shares of the same
Class of the Fund at the net asset value per share next determined. Reinvested
dividends and capital gains are exempt from any sales load. Shareholders wishing
to receive their dividends or capital gains in cash may make their request in
writing to the Fund at 107 North Washington Street, Post Office Box 4365, Rocky
Mount, North Carolina 27803-0365. That request must be received by the Fund
prior to the record date to be effective as to the next dividend. If cash
payment is requested, checks will be mailed within five business days after the
distribution of the dividends or capital gains, as applicable. Each shareholder
of the Fund will receive a quarterly summary of his or her account, including
information as to reinvested dividends from the Fund. Tax consequences to
shareholders of dividends and distributions are the same if received in cash or
in additional shares of the Fund.
In order to satisfy certain requirements of the Code, the Fund may declare
special year-end dividend and capital gains distributions during December. Such
distributions, if received by shareholders by January 31, are deemed to have
been paid by the Fund and received by shareholders on December 31 of the prior
year.
There is no fixed dividend rate, and there can be no assurance as to the payment
of any dividends or the realization of any gains. The Fund's net investment
income available for distribution to holders of Investor Shares will be reduced
by the amount of any expenses allocated to the Investor Shares, and any expenses
allocated among the Classes of the Investor Shares, including the distribution
and service fees under the Fund's Distribution Plan, which vary depending on the
particular Class of the Investor Shares.
HOW SHARES ARE VALUED
Net asset value for each Class of Shares of the Fund is determined at 4:00 p.m.,
New York time, Monday through Friday, except on business holidays when the New
York Stock Exchange is closed. The net asset value of the shares of the Fund for
purposes of pricing sales and redemptions is equal to the total market value of
its investments and other assets, less all of its liabilities, divided by the
number of its outstanding shares. Net asset value is determined separately for
each Class of Shares of the Fund and reflects any liabilities allocated to a
particular Class as well as the general liabilities of the Fund.
Securities that are listed on a securities exchange are valued at the last
quoted sales price at the time the valuation is made. Price information on
listed securities is taken from the exchange where the security is primarily
traded by the Fund. Securities that are listed on an exchange and which are not
traded on the valuation date are valued at the mean of the bid and asked prices.
Unlisted securities for which market quotations are readily available are valued
at the latest quoted sales price, if available, at the time of valuation,
otherwise, at the latest quoted bid price. Temporary cash investments with
maturities of 60 days or less will be valued at amortized cost, which
approximates market value. Securities for which no current quotations are
readily available are valued at fair value as determined in good faith using
methods approved by the Board of Trustees of the Trust. Securities may be valued
on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities.
The net asset value of each Class of Shares will be affected by expenses accrued
and payable by such Class. Because the distribution and service fees
attributable to the Investor Shares vary depending on the particular Class of
the Investor Shares in question, the net income attributable to and the
dividends payable by the Series C Shares will be lower than the net income
attributable to and the dividends payable by the Series A and Series D Shares,
and the net income attributable to and the dividends payable by the Series D
Shares will be lower than the net income attributable to and the dividends
payable by the Series A Shares.
HOW SHARES MAY BE PURCHASED
Assistance in opening accounts and a purchase application may be obtained from
the Fund by calling 1-800-430-3863, or by writing to the Fund at the address
shown below for purchases by mail. Assistance is also available through any
broker-dealer authorized to sell shares in the Fund. Payment for shares
purchased may also be made through your account at the broker-dealer processing
your application and order to purchase. Your investment will purchase shares at
the Fund's public offering price next determined after your order is received by
the Fund in proper form as indicated herein.
The minimum initial investment is $25,000. The minimum subsequent investment is
$500. The Fund may, in the Advisor's sole discretion, accept certain accounts
with less than the stated minimum initial investment. You may invest in the
following ways:
Purchases by Mail. Shares may be purchased initially by completing the
application accompanying this Prospectus and mailing it, together with a check
payable to the Fund, to The Chesapeake Fund, Investor Shares, 107 North
Washington Street, Post Office Box 4365, Rocky Mount, North Carolina 27803-0365.
Subsequent investments in an existing account in the Fund may be made at any
time by sending a check payable to the Fund, to the address stated above. Please
enclose the stub of your account statement and include the amount of the
investment, the name of the account for which the investment is to be made and
the account number. Please remember to add a reference to "Series A," "Series
C," or "Series D" to your check to ensure proper credit to your account.
Purchases by Wire. To purchase shares by wiring federal funds, the Fund must
first be notified by calling 1-800-430-3863 to request an account number and
furnish the Fund with your tax identification number. Following notification to
the Fund, federal funds and registration instructions should be wired through
the Federal Reserve System to:
First Union National Bank of North Carolina
Charlotte, North Carolina
ABA # 053000219 For The Chesapeake Fund
Series A, C, or D Investor Shares Acct
#2000000862068
For further credit to (shareholder's name and SS# or EIN#)
It is important that the wire contain all the information and that the Fund
receive prior telephone notification to ensure proper credit. A completed
application with signature(s) of registrant(s) must be mailed to the Fund
immediately after the initial wire as described under "Purchases by Mail" above.
Investors should be aware that some banks may impose a wire service fee.
General. All purchases of shares are subject to acceptance and are not binding
until accepted. The Fund reserves the right to reject any application or
investment. Orders become effective, and shares are purchased at, the next
determined public offering price per share after an investment has been received
by the Fund, which is as of 4:00 p.m., New York time, Monday through Friday,
exclusive of business holidays. Orders received by the Fund and effective prior
to such 4:00 p.m. time will purchase shares at the public offering price
determined at that time. Otherwise, your order will purchase shares as of such
4:00 p.m. time on the next business day. For orders placed through a qualified
broker-dealer, such firm is responsible for promptly transmitting purchase
orders to the Fund. Investors may be charged a fee if they effect transactions
in the Fund shares through a broker or agent.
If checks are returned unpaid due to nonsufficient funds, stop payment or other
reasons, the Trust will charge $20. To recover any such loss or charge, the
Trust reserves the right, without further notice, to redeem shares of any fund
of the Trust already owned by any purchaser whose order is cancelled, and such a
purchaser may be prohibited from placing further orders unless investments are
accompanied by full payment by wire or cashier's check.
Payment must be made by check or money order drawn on a U.S. bank and payable in
U.S. dollars. Under certain circumstances the Fund, at its sole discretion, may
allow payment in kind for Fund shares purchased by accepting securities in lieu
of cash. Any securities so accepted would be valued on the date received and
included in the calculation of the net asset value of the Fund. See the
Statement of Additional Information for additional information on purchases in
kind.
The Fund is required by federal law to withhold and remit to the IRS 31% of the
dividends, capital gains distributions and, in certain cases, proceeds of
redemptions paid to any shareholder who fails to furnish the Fund with a correct
taxpayer identification number, who under-reports dividend or interest income or
who fails to provide certification of tax identification number. Instructions to
exchange or transfer shares held in established accounts will be refused until
the certification has been provided. In order to avoid this withholding
requirement, you must certify on your application, or on a separate W-9 Form
supplied by the Fund, that your taxpayer identification number is correct and
that you are not currently subject to backup withholding or you are exempt from
backup withholding. For individuals, your taxpayer identification number is your
social security number.
Sales Charges. The public offering price of Investor Shares of the Fund equals
net asset value plus a sales charge for Series A and Series D Shares. Series C
Shares are sold without a sales charge. Capital Investment Group, Inc. (the
"Distributor") receives this sales charge as Distributor and may reallow it in
the form of dealer discounts and brokerage commissions as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
Sales Sales
Charge As Charge As Dealers Discounts
% of Net % of Public and Brokerage
Amount of Transaction Amount Offering Commissions as % of
At Public Offering Price Invested Price Public Offering Price
- -------------------------------------------------------------------------------------------------------------------
Series A Shares
Less than $250,000........................... 3.09% 3.00% 2.80%
$250,000 but less than $500,000.............. 2.04% 2.00% 1.80%
$500,000 or more............................. 1.01% 1.00% 0.90%
Series D Shares
Less than $250,000........................... 1.52% 1.50% 1.35%
$250,000 but less than $500,000.............. 1.01% 1.00% 0.90%
$500,000 or more............................. 0.50% 0.50% 0.45%
</TABLE>
At times the Distributor may reallow the entire sales charge to selected
dealers. From time to time dealers who receive dealer discounts and brokerage
commissions from the Distributor may reallow all or a portion of such dealer
discounts and brokerage commissions to other dealers or brokers. Pursuant to the
terms of the Distribution Agreement, the sales charge payable to the Distributor
and the dealer discounts may be suspended, terminated or amended. Dealers who
receive 90% or more of the sales charge may be deemed to be "underwriters" under
the federal securities laws.
The dealer discounts and brokerage commissions schedule above applies to all
dealers who have agreements with the Distributor. The Distributor, at its
expense, may also provide additional compensation to dealers in connection with
sales of shares of the Fund. Compensation may include financial assistance to
dealers in connection with conferences, sales or training programs for their
employees, seminars for the public, advertising campaigns regarding the Fund,
and/or other dealer-sponsored special events. In some instances, this
compensation may be made available only to certain dealers whose representatives
have sold or are expected to sell a significant amount of such shares.
Compensation may include payment for travel expenses, including lodging,
incurred in connection with trips taken by invited registered representatives
and members of their families to locations within or outside of the United
States for meetings or seminars of a business nature. Dealers may not use sales
of the Fund shares to qualify for this compensation to the extent such may be
prohibited by the laws of any state or any self-regulatory agency, such as the
National Association of Securities Dealers, Inc. None of the aforementioned
compensation is paid for by the Fund or its shareholders.
Reduced Sales Charges
Concurrent Purchases. For purposes of qualifying for a lower sales charge
for Series A or Series D Shares, investors have the privilege of combining
concurrent purchases of the Fund and any other series of the Trust affiliated
with the Advisor and sold with a sales charge. For example, if a shareholder
concurrently purchases shares in another series of the Trust affiliated with the
Advisor and sold with a sales charge at the total public offering price of
$250,000, and Series A Shares in the Fund at the total public offering price of
$250,000, the sales charge would be that applicable to a $500,000 purchase as
shown in the appropriate table above. This privilege may be modified or
eliminated at any time or from time to time by the Trust without notice thereof.
Rights of Accumulation. Pursuant to the right of accumulation, investors
are permitted to purchase shares at the public offering price applicable to the
total of (a) the total public offering price of the Series A or Series D Shares
of the Fund then being purchased plus (b) an amount equal to the then current
net asset value of the purchaser's combined holdings of the shares of all of the
series of the Trust affiliated with the Advisor of the same Class and sold with
a sales charge. To receive the applicable public offering price pursuant to the
right of accumulation, investors must, at the time of purchase, provide
sufficient information to permit confirmation of qualification, and confirmation
of the purchase is subject to such verification. This right of accumulation may
be modified or eliminated at any time or from time to time by the Trust without
notice.
Letters of Intent. Investors may qualify for a lower sales charge for
Series A or Series D Shares by executing a letter of intent. A letter of intent
allows an investor to purchase Series A or Series D Shares of the Fund (as
applicable) over a 13-month period at reduced sales charges based on the total
amount intended to be purchased of the applicable Class plus an amount equal to
the then current net asset value of the purchaser's combined holdings of the
shares of all of the series of the Trust affiliated with the Advisor of the same
Class and sold with a sales charge. Thus, a letter of intent permits an investor
to establish a total investment goal to be achieved by any number of purchases
over a 13-month period. Each investment made during the period receives the
reduced sales charge applicable to the total amount of the intended investment.
The letter of intent does not obligate the investor to purchase, or the Fund to
sell, the indicated amount. If such amount is not invested within the period,
the investor must pay the difference between the sales charge applicable to the
purchases made and the charges previously paid. If such difference is not paid
by the investor, the Distributor is authorized by the investor to liquidate a
sufficient number of shares held by the investor to pay the amount due. On the
initial purchase of shares, if required (or subsequent purchases, if necessary)
shares equal to at least five percent of the amount indicated in the letter of
intent will be held in escrow during the 13-month period (while remaining
registered in the name of the investor) for this purpose. The value of any
shares redeemed or otherwise disposed of by the investor prior to termination or
completion of the letter of intent will be deducted from the total purchases
made under such letter of intent.
A 90-day back-dating period can be used to include earlier purchases of the
applicable Class at the investor's cost (without a retroactive downward
adjustment of the sales charge); the 13-month period would then begin on the
date of the first purchase during the 90-day period. No retroactive adjustment
will be made if purchases exceed the amount indicated in the letter of intent.
Investors must notify the Fund or the Distributor whenever a purchase is being
made pursuant to a letter of intent.
Investors electing to purchase shares pursuant to a letter of intent should
carefully read the letter of intent, which is included in the Fund Shares
Application accompanying this Prospectus or is otherwise available from the Fund
or the Distributor. This letter of intent option may be modified or eliminated
at any time or from time to time by the Trust without notice.
Reinvestments. Investors may reinvest, without a sales charge, proceeds
from a redemption of Series A or Series D Shares of the Fund in either Series A
or Series D Shares of the Fund (as applicable) or in shares of another series of
the Trust affiliated with the Advisor of the same Class and sold with a sales
charge, within 90 days after the redemption. If the other class charges a sales
charge higher than the sales charge the investor paid in connection with the
shares redeemed, the investor must pay the difference. In addition, the shares
of the class to be acquired must be registered for sale in the investor's state
of residence. The amount that may be so reinvested may not exceed the amount of
the redemption proceeds, and a written order for the purchase of such shares
must be received by the Fund or the Distributor within 90 days after the
effective date of the redemption.
If an investor realizes a gain on the redemption, the reinvestment will not
affect the amount of any federal capital gains tax payable on the gain. If an
investor realizes a loss on the redemption, the reinvestment may cause some or
all of the loss to be disallowed as a tax deduction, depending on the number of
shares purchased by reinvestment and the period of time that has elapsed after
the redemption, although for tax purposes, the amount disallowed is added to the
cost of the shares acquired upon the reinvestment.
Purchases by Related Parties and Groups. Reductions in sales charges apply
to purchases by a single "person," including an individual, members of a family
unit, consisting of a husband, wife and children under the age of 21 purchasing
securities for their own account, or a trustee or other fiduciary purchasing for
a single fiduciary account or single trust estate.
Reductions in sales charges also apply to purchases by individual members of a
"qualified group." The reductions are based on the aggregate dollar value of
shares purchased by all members of the qualified group and still owned by the
group plus the shares currently being purchased. For purposes of this paragraph,
a qualified group consists of a "company," as defined in the 1940 Act, which has
been in existence for more than six months and which has a primary purpose other
than acquiring shares of the Fund at a reduced sales charge, and the "related
parties" of such company. For purposes of this paragraph, a "related party" of a
company is: (i) any individual or other company who directly or indirectly owns,
controls, or has the power to vote five percent or more of the outstanding
voting securities of such company; (ii) any other company of which such company
directly or indirectly owns, controls, or has the power to vote five percent of
more of its outstanding voting securities; (iii) any other company under common
control with such company; (iv) any executive officer, director or partner of
such company or of a related party; and (v) any partnership of which such
company is a partner.
Sales at Net Asset Value. The Fund may sell shares at a purchase price
equal to the net asset value of such shares, without a sales charge, to
Trustees, officers, and employees of the Trust, the Fund, and the Advisor, and
to employees and principals of related organizations and their families and
certain parties related thereto, including clients and related accounts of the
Advisor. In addition, the Fund may sell shares at a purchase price equal to the
net asset value of such shares, without a sales charge, to investment advisors,
financial planners and their clients who are charged a management, consulting or
other fee for their services; and clients of such investment advisors or
financial planners who place trades for their own accounts if the accounts are
linked to the master account of such investment advisor or financial planner on
the books and records of the broker or agent. The public offering price of
shares of the Fund may also be reduced to net asset value per share in
connection with the acquisition of the assets of or merger or consolidation with
a personal holding company or a public or private investment company.
Distribution Plan. Capital Investment Group, Inc., Post Office Box 32249,
Raleigh, North Carolina 27622 (the "Distributor"), is the national distributor
for the Fund under a Distribution Agreement with the Trust. The Distributor may
sell Fund shares to or through qualified securities dealers or others.
The Trust has adopted a Distribution Plan (the "Plan") for each Class of the
Investor Shares of the Fund pursuant to Rule 12b-1 under the 1940 Act. Under the
Plan the Fund may reimburse any expenditures to finance any activity primarily
intended to result in sale of the Investor Shares of the Fund or the servicing
of shareholder accounts, including, but not limited to, the following: (i)
payments to the Distributor, securities dealers, and others for the sale of
Investor Shares of the Fund; (ii) payment of compensation to and expenses of
personnel who engage in or support distribution of Investor Shares of the Fund
or who render shareholder support services not otherwise provided by the
Administrator or Custodian; and (iii) formulation and implementation of
marketing and promotional activities. The categories of expenses for which
reimbursement is made are approved by the Board of Trustees of the Trust.
Expenditures by the Fund pursuant to the Plan are accrued based on the Investor
Shares' average daily net assets (of the particular Class in question) and may
not exceed 0.25%, 0.75%, 0.50%, respectively, of the average net assets of the
Series A, Series C, and Series D Shares, respectively, for each year elapsed
subsequent to adoption of the Plan. Such expenditures paid as service fees to
any person who sells Fund shares may not exceed 0.25% of the Investor Shares'
average annual net asset value of such shares of the particular Class in
question.
The Plan may not be amended to increase materially the amount to be spent under
the Plan without shareholder approval. The continuation of the Plan must be
approved by the Board of Trustees annually. At least quarterly the Board of
Trustees must review a written report of amounts expended pursuant to the Plan
and the purposes for which such expenditures were made.
The Fund incurred $96,096, $64,129, and $58,554 in distribution and service fees
under the Plan with respect to Series A, Series C, and Series D Investor Shares,
respectively, for the fiscal period ended February 28, 1997.
Choosing Among Investor Shares
Investors who purchase Investor Shares must specify at the time of purchase
whether they are purchasing Series A, Series C, or Series D Shares Investor
Shares. Investors should understand the differences between each such Class of
Investor Shares before purchasing Investor Shares.
As described under "How Shares May Be Purchased - Sales Charges," the Series A
Shares are sold subject to a maximum sales charge of 3%, as compared to a
maximum sales charge of 1.5% for sales of Series D Shares and no sales charge
for Series C Shares. The sales charge is reduced or may be waived in some cases.
Series A Shares, however, bear potential distribution and service fees under the
Distribution Plan of up to 0.25% of the Series A Shares' average net assets
annually, as compared to potential distribution and service fees under the
Distribution Plan for the other Classes of Investor Shares of up to 0.50% and
0.75%, respectively, of the Series D and Series C Shares' average net assets
annually, respectively. See "How Shares May Be Purchased - Distribution Plan."
Before deciding among the three Classes of Investor Shares of the Fund, an
investor should carefully consider the amount and intended length of his or her
investment in Investor Shares. Specifically, an investor should consider whether
the accumulated distribution and servicing fees applicable to Series C or Series
D Shares (and the lower sales charge for Series D Shares) would be less than the
sales charge and accumulated distribution and servicing fees applicable to
Series A Shares purchased at the same time and held for the same period, and the
extent to which the differences between those amounts would be offset by the
higher returns associated with Series A Shares. A similar analysis should be
made between Series C Shares and Series D Shares. Because the operating expenses
of Series C and Series D Shares will be greater than those of Series A Shares,
and the operating expenses of Series C Shares will be greater than those of
Series D Shares, the dividends on Series A Shares will be higher than the
dividends on Series C and Series D Shares, and the dividends on Series D Shares
will be higher than the dividends on Series C Shares. However, since the sales
charge is deducted at the time of purchase of Series A or Series D Shares, not
all of the purchase amount will purchase Series A or Series D Shares.
Consequently, the same initial investment will purchase more Series C or Series
D Shares than Series A Shares, and more Series C Shares than Series D Shares.
Because of reductions in the sales charge for purchases of Series A or Series D
Shares aggregating $250,000 or more, it may be advantageous for investors
purchasing large quantities of Investor Shares to purchase Series A or Series D
Shares. Investors who may qualify for any exemption from the sales charge
ordinarily payable with respect to purchases of Investor Shares should purchase
Series A Shares. In addition, because the accumulated higher operating expenses
of Series C and Series D Shares may exceed the amount of the sales charge and
distribution and servicing fees associated with Series A Shares, investors who
intend to hold their Investor Shares for an extended period of time should
consider purchasing Series A Shares.
Investors who would not qualify for a reduction in the sales charge for
purchases of Series A or Series D Shares may decide that it is more advantageous
to have the entire purchase amount invested immediately in Series C Shares
notwithstanding the higher operating expenses associated with Series C Shares.
These higher operating expenses may be offset by any return an investor receives
from the additional Series C Shares received as a result of not having to pay a
sales charge. However, an investor should understand that the Fund's future
return cannot be predicted, and that there is no assurance that such return, if
any, would compensate for the higher operating expenses associated with Series C
Shares.
Exchange Feature. Investors will have the privilege of exchanging shares of the
Fund for shares of any other series of the Trust established by Advisor. An
exchange involves the simultaneous redemption of shares of one series and
purchase of shares of another series at the respective closing net asset value
next determined after a request for redemption has been received plus applicable
sales charge, and is a taxable transaction. Each series of the Trust will have a
different investment objective, which may be of interest to investors in each
series. Shares of the Fund may be exchanged for shares of any other series of
the Trust affiliated with the Advisor at the net asset value plus the percentage
difference between that series' sales charge and any sales charge previously
paid in connection with the shares being exchanged. For example, if a 2% sales
charge was paid on shares that are exchanged into a series with a 3% sales
charge, there would be an additional sales charge of 1% on the exchange.
Exchanges may only be made by investors in states where shares of the other
series are qualified for sale. An investor may direct the Fund to exchange his
shares by writing to the Fund at its principal office. The request must be
signed exactly as the investor's name appears on the account, and it must also
provide the account number, number of shares to be exchanged, the name of the
series to which the exchange will take place and a statement as to whether the
exchange is a full or partial redemption of existing shares. Notwithstanding the
foregoing, exchanges of shares may only be within the same class or type of
class of shares involved. For example, Investor Shares may not be exchanged for
Institutional or Super-Institutional Shares, and Investor Shares may not be
exchanged among the various Classes of Investor Shares (i.e., Series C Shares
may not be exchanged for Series A or Series D Shares and Series D Shares may not
be exchanged for Series A Shares). Notwithstanding the foregoing, unless
otherwise determined by the Fund, an investor may not exchange shares of the
Fund for shares of The Chesapeake Growth Fund, another series of the Trust
affiliated with the Advisor, unless such investor has an existing account with
such Fund.
A pattern of frequent exchange transactions may be deemed by the Advisor to be
an abusive practice that is not in the best interests of the shareholders of the
Fund. Such a pattern may, at the discretion of the Advisor, be limited by the
Fund's refusal to accept further purchase and/or exchange orders from an
investor, after providing the investor with 60 days prior notice. The Advisor
will consider all factors it deems relevant in determining whether a pattern of
frequent purchases, redemptions and/or exchanges by a particular investor is
abusive and not in the best interests of the Fund or its other shareholders.
A shareholder should consider the investment objectives and policies of any
series into which the shareholder will be making an exchange, as described in
the prospectus for that other series. The Board of Trustees of the Trust
reserves the right to suspend or terminate, or amend the terms of, the exchange
privilege upon 60 days written notice to the shareholders.
Automatic Investment Plan. The automatic investment plan enables shareholders to
make regular monthly or quarterly investments in shares through automatic
charges to their checking account. With shareholder authorization and bank
approval, the Fund will automatically charge the checking account for the amount
specified ($100 minimum), which will be automatically invested in shares at the
public offering price on or about the 21st day of the month. The shareholder may
change the amount of the investment or discontinue the plan at any time by
writing to the Fund.
Stock Certificates. Stock certificates will not be issued for your shares.
Evidence of ownership will be given by issuance of periodic account statements
that will show the number of shares owned.
HOW SHARES MAY BE REDEEMED
Shares of the Fund may be redeemed (the Fund will repurchase them from
shareholders) by mail or telephone. Any redemption may be more or less than the
purchase price of your shares depending on the market value of the Fund's
portfolio securities. All redemption orders received in proper form, as
indicated herein, by the Fund, whether by mail or telephone, prior to 4:00 p.m.
New York time, Monday through Friday, except for business holidays, will redeem
shares at the net asset value determined at that time. Otherwise, your order
will redeem shares as of such 4:00 p.m. time on the next business day. There is
no charge for redemptions from the Fund other than possible charges for wiring
redemption proceeds. You may also redeem your shares through a broker-dealer or
other institution, who may charge you a fee for its services.
The Board of Trustees reserves the right to involuntarily redeem any account
having a net asset value of less than $25,000 (due to redemptions, exchanges or
transfers, and not due to market action) upon 30 days written notice. If the
shareholder brings his account net asset value up to $25,000 or more during the
notice period, the account will not be redeemed. Redemptions from retirement
plans may be subject to tax withholding.
If you are uncertain of the requirements for redemption, please contact the
Fund, at 1-800-430-3863, or write to the address shown below.
Regular Mail Redemptions. Your request should be addressed to The Chesapeake
Fund, Investor Shares, 107 North Washington Street, Post Office Box 4365, Rocky
Mount, North Carolina 27803-0365. Your request for redemption must include:
1) Your letter of instruction specifying the account number, and the number of
shares or dollar amount to be redeemed. This request must be signed by all
registered shareholders in the exact names in which they are registered;
2) Any required signature guarantees (see "Signature Guarantees" below); and
3) Other supporting legal documents, if required in the case of estates,
trusts, guardianships, custodianships, corporations, partnerships, pension
or profit sharing plans, and other organizations.
Your redemption proceeds will be sent to you within seven days after receipt of
your redemption request. However, the Fund may delay forwarding a redemption
check for recently purchased shares while it determines whether the purchase
payment will be honored. Such delay (which may take up to 15 days from the date
of purchase) may be reduced or avoided if the purchase is made by certified
check or wire transfer. In all cases the net asset value next determined after
the receipt of the request for redemption will be used in processing the
redemption. The Fund may suspend redemption privileges or postpone the date of
payment (i) during any period that the New York Stock Exchange is closed, or
trading on the New York Stock Exchange is restricted as determined by the
Securities and Exchange Commission (the "Commission"), (ii) during any period
when an emergency exists as defined by the rules of the Commission as a result
of which it is not reasonably practicable for the Fund to dispose of securities
owned by it, or to fairly determine the value of its assets, and (iii) for such
other periods as the Commission may permit.
Telephone and Bank Wire Redemptions. The Fund offers shareholders the option of
redeeming shares by telephone under certain limited conditions. The Fund will
redeem shares when requested by the shareholder if, and only if, the shareholder
confirms redemption instructions in writing.
The Fund may rely upon confirmation of redemption requests transmitted via
facsimile (FAX# 919-972-1908). The confirmation instructions must include:
1) Shareholder name and account number;
2) Number of shares or dollar amount to be redeemed;
3) Instructions for transmittal of redemption funds to the shareholder; and
4) Shareholder signature as it appears on the application then on file with
the Fund.
The net asset value used in processing the redemption will be the net asset
value next determined after the telephone request is received. Redemption
proceeds will not be distributed until written confirmation of the redemption
request is received, per the instructions above. Shareholders can choose to have
redemption proceeds mailed to them at their address of record, their bank, or to
any other authorized person, or they can have the proceeds sent by bank wire to
their bank ($5,000 minimum). Shares of the Fund may not be redeemed by wire on
days on which the bank is not open for business. Shareholders can change
redemption instructions anytime by filing a letter including new redemption
instructions with the Fund. (See "Signature Guarantees" below.) The Fund
reserves the right to restrict or cancel telephone and bank wire redemption
privileges for shareholders, without notice, if the Fund believes it to be in
the best interest of the shareholders to do so. During drastic economic and
market changes, telephone redemption privileges may be difficult to implement.
The Fund in its discretion may choose to pass through to redeeming shareholders
any charges by the Custodian for wire redemptions. The Custodian currently
charges $7.00 per transaction for wiring redemption proceeds. If this cost is
passed through to redeeming shareholders by the Fund, the charge will be
deducted automatically from the shareholder's account by redemption of shares in
the account. The shareholder's bank or brokerage firm may also impose a charge
for processing the wire. If wire transfer of funds is impossible or impractical,
the redemption proceeds will be sent by mail to the designated account.
Shareholders may redeem shares, subject to the procedures outlined above, by
calling the Fund at 1-800-430-3863. Redemption proceeds will only be sent to the
bank account or person named in the Fund Shares Application currently on file
with the Fund. Telephone redemption privileges authorize the Fund to act on
telephone instructions from any person representing himself or herself to be the
investor and reasonably believed by the Fund to be genuine. The Fund will employ
reasonable procedures, such as requiring a form of personal identification, to
confirm that instructions are genuine, and, if it does not follow such
procedures, the Fund will be liable for any losses due to fraudulent or
unauthorized instructions. The Fund will not be liable for following telephone
instructions reasonably believed to be genuine.
Systematic Withdrawal Plan. A shareholder who owns shares of the Fund valued at
$10,000 or more at current net asset value may establish a Systematic Withdrawal
Plan to receive a monthly or quarterly check in a stated amount not less than
$100. Each month or quarter as specified, the Fund will automatically redeem
sufficient shares from the account to meet the specified withdrawal amount. Call
or write the Fund for an application form. See the Statement of Additional
Information for further details.
Signature Guarantees. To protect an account and the Fund from fraud, signature
guarantees are required to authorize a change in registration, or standing
instructions, for your account. Signature guarantees are required for (1) change
of registration requests, (2) requests to establish or change exchange
privileges or telephone redemption service other than through the initial
account application, and (3) requests for redemptions in excess of $50,000.
Signature guarantees are acceptable from a member bank of the Federal Reserve
System, a savings and loan institution, credit union (if authorized under state
law), registered broker-dealer, securities exchange or association clearing
agency, and must appear on the written request for redemption, establishment or
change in exchange privileges, or change of registration.
MANAGEMENT OF THE FUND
Trustees and Officers. The Fund is a diversified series of the Gardner Lewis
Investment Trust (the "Trust"), a registered open-end management investment
company organized as a Massachusetts business trust. The Board of Trustees of
the Trust is responsible for the management of the business and affairs of the
Trust. The Trustees and executive officers of the Trust and their principal
occupations for the last five years are set forth in the Statement of Additional
Information under "Management of the Fund - Trustees and Officers." The Board of
Trustees of the Trust is primarily responsible for overseeing the conduct of the
Trust's business. The Board of Trustees elects the officers of the Trust who are
responsible for its and the Fund's day-to-day operations.
The Advisor. Subject to the authority of the Board of Trustees, 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, pursuant to an Investment
Advisory Agreement (the "Advisory Agreement") with the Trust.
The Advisor is registered under the Investment Advisors Act of 1940.
Registration of the Advisor does not involve any supervision of management or
investment practices or policies by the Securities and Exchange Commission. The
Advisor, established as a Delaware corporation in 1990 and converted to a
Pennsylvania limited partnership in 1994, is controlled by W. Whitfield Gardner.
The Advisor currently serves as investment advisor to approximately $3 billion
in assets. The Advisor has been rendering investment counsel, utilizing
investment strategies substantially similar to that of the Fund, to individuals,
banks and thrift institutions, pension and profit sharing plans, trusts,
estates, charitable organizations and corporations since its formation. The
Advisor's address is 285 Wilmington-West Chester Pike, Chadds Ford, Pennsylvania
19317.
Under the Advisory Agreement with the Fund, the Advisor receives a monthly
management fee equal to an annual rate of 1.00% of the average daily net asset
value of the Fund. For the fiscal year ended February 28, 1997, the Advisor was
paid investment advisory fees of $1,940,587.
The Advisor supervises and implements the investment activities of the Fund,
including making specific decisions as to the purchase and sale of portfolio
investments. Among the responsibilities of the Advisor under the Advisory
Agreement is the selection of brokers and dealers through whom transactions in
the Fund's portfolio investments will be effected. The Advisor attempts to
obtain the best execution for all such transactions. If it is believed that more
than one broker is able to provide the best execution, the Advisor will consider
the receipt of quotations and other market services and of research, statistical
and other data and the sale of shares of the Fund in selecting a broker. The
Fund may also enter into brokerage/service arrangements pursuant to which
selected brokers executing portfolio transactions for the Fund may pay a portion
of the Fund's operating expenses. See Note 2 to the Fee Table. The Advisor may
also utilize a brokerage firm affiliated with the Trust or the Advisor if it
believes it can obtain the best execution of transactions from such broker.
Research services obtained through Fund brokerage transactions may be used by
the Advisor for its other clients and, conversely, the Fund may benefit from
research services obtained through the brokerage transactions of the Advisor's
other clients. For further information, see "Investment Objective and Policies -
Investment Transactions" in the Statement of Additional Information.
W. Whitfield Gardner and John L. Lewis, IV, principals of the Advisor and
executive officers of the Trust, have been responsible for day-to-day management
of the Fund's portfolio since its inception in 1994. They have been with the
Advisor since its inception. Additional information about these gentlemen is set
forth in the Statement of Additional Information under "Management of the Fund -
Trustees and Officers."
The Administrator. The Trust has entered into an Administration Agreement with
The Nottingham Company (the "Administrator"), 105 North Washington Street, Post
Office Drawer 69, Rocky Mount, North Carolina 27802-0069, pursuant to which the
Administrator receives a fee at the annual rate of 0.075% of the average daily
net assets of the Investor Shares of the Fund for general administration
services. In addition, the Administrator currently receives a base monthly fee
of $1,750 for each Class of Investor Shares for accounting and recordkeeping
services. The Administrator also receives a fee at the annual rate of 0.015% of
the average daily net assets of the Investor Shares of the Fund for shareholder
administration services. The Administrator also charges the Fund for certain
costs involved with the daily valuation of investment securities and is
reimbursed for out-of-pocket expenses.
Subject to the authority of the Board of Trustees, the services the
Administrator provides to the Fund include coordinating and monitoring any third
parties furnishing services to the Fund; providing the necessary office space,
equipment and personnel to perform administrative and clerical functions for the
Fund; and preparing, filing and distributing proxy materials, periodic reports
to shareholders, registration statements and other documents. The Administrator
also performs certain accounting and pricing services for the Fund as pricing
agent, including the daily calculation of the Fund's net asset value.
The Administrator was incorporated as a North Carolina corporation in 1988. With
its predecessors and affiliates, the Administrator has been operating as a
financial services firm since 1985. Frank P. Meadows III is the firm's Managing
Director and controlling shareholder.
The Transfer Agent. North Carolina Shareholder Services, LLC (the "Transfer
Agent") serves as the Fund's transfer, dividend paying, and shareholder
servicing agent. The Transfer Agent, subject to the authority of the Board of
Trustees, provides transfer agency services pursuant to an agreement with the
Administrator, which has been approved by the Trust. The Transfer Agent
maintains the records of each shareholder's account, answers shareholder
inquiries concerning accounts, processes purchases and redemptions of the Fund's
shares, acts as dividend and distribution disbursing agent, and performs other
shareholder servicing functions. The Transfer Agent is compensated for its
services by the Administrator and not directly by the Fund.
The Transfer Agent, whose address is 107 North Washington Street, Post Office
Box 4365, Rocky Mount, North Carolina 27803-0365, was established as a North
Carolina limited liability company in 1997. John D. Marriott, Jr., is the firm's
controlling member.
The Custodian. First Union National Bank of North Carolina (the "Custodian"),
Two First Union Center, Charlotte, North Carolina 28288-1151, serves as
Custodian of the Fund's assets. The Custodian acts as the depository for the
Fund, safekeeps its portfolio securities, collects all income and other payments
with respect to portfolio securities, disburses monies at the Fund's request and
maintains records in connection with its duties.
Other Expenses. The Fund is responsible for the payment of its expenses. These
include, for example, the fees payable to the Advisor, or expenses otherwise
incurred in connection with the management of the investment of the Fund's
assets, the fees and expenses of the Custodian, the fees and expenses of the
Administrator, the fees and expenses of Trustees, outside auditing and legal
expenses, all taxes and corporate fees payable by the Fund, Securities and
Exchange Commission fees, state securities qualification fees, costs of
preparing and printing prospectuses for regulatory purposes and for distribution
to shareholders, costs of shareholder reports and shareholder meetings, and any
extraordinary expenses. The Fund also pays for brokerage commissions and
transfer taxes (if any) in connection with the purchase and sale of portfolio
securities. Expenses attributable to a particular series of the Trust, including
the Fund, will be charged to that series, and expenses not readily identifiable
as belonging to a particular series will be allocated by or under procedures
approved by the Board of Trustees among one or more series in such a manner as
it deems fair and equitable. Any expenses relating only to a particular Class of
Shares of the Fund will be borne solely by such Class.
OTHER INFORMATION
Description of Shares. The Trust was organized as a Massachusetts business trust
on August 12, 1992, under a Declaration of Trust. The Declaration of Trust
permits the Board of Trustees to issue an unlimited number of full and
fractional shares and to create an unlimited number of series of shares. The
Board of Trustees may also classify and reclassify any unissued shares into one
or more classes of shares. The Trust currently has the number of authorized
series of shares, including the Fund, and classes of shares, described in the
Statement of Additional Information under "Description of the Trust." Pursuant
to its authority under the Declaration of Trust, the Board of Trustees has
authorized the issuance of an unlimited number of shares in each of five Classes
("Series A, Series C, and Series D Investor Shares," "Institutional Shares," and
Super-Institutional Shares") representing equal pro rata interests in the Fund,
except that the Classes bear different expenses that reflect the differences in
services provided to them. Investor Shares are sold with a sale charge (except
for Series C Shares) and bear potential distribution expenses and service fees
at different levels. See "How Shares May Be Purchased - Sales Charges" and " -
Distribution Plan." Institutional and Super-Institutional Shares are sold
without a sales charge and bear no shareholder servicing or distribution fees.
The Super-Institutional Shares, however, receive fewer investor services than
the Institutional and Investor Shares due to the size and nature of accounts
holding Super-Institutional Shares. As a result of different charges, fees, and
expenses between the Classes, the total return on the Fund's Investor Shares
will generally be lower than the total return on the Institutional and
Super-Institutional Shares, the total return on the Fund's Series C Shares will
generally be lower than the total return on the Series A and Series D Shares,
and the total return on the Series D Shares will generally be lower than the
total return on the Series A Shares. Standardized total return quotations will
be computed separately for each Class of Shares of the Fund.
THIS PROSPECTUS RELATES TO THE FUND'S INVESTOR SHARES (INCLUDING THE THREE
CLASSES OF INVESTOR SHARES) AND DESCRIBES ONLY THE POLICIES, OPERATIONS,
CONTRACTS, AND OTHER MATTERS PERTAINING TO THE INVESTOR SHARES. THE FUND ALSO
ISSUES A CLASS OF INSTITUTIONAL SHARES AND A CLASS OF SUPER-INSTITUTIONAL
SHARES. SUCH OTHER CLASSES MAY HAVE DIFFERENT SALES CHARGES AND EXPENSES, WHICH
MAY AFFECT PERFORMANCE. INVESTORS MAY CALL THE FUND AT 1-800-430-3863 TO OBTAIN
MORE INFORMATION CONCERNING OTHER CLASSES AVAILABLE TO THEM THROUGH THEIR SALES
REPRESENTATIVE. INVESTORS MAY OBTAIN INFORMATION CONCERNING OTHER CLASSES FROM
THEIR SALES REPRESENTATIVE, THE DISTRIBUTOR, THE FUND, OR ANY OTHER PERSON WHICH
IS OFFERING OR MAKING AVAILABLE TO THEM THE SECURITIES OFFERED IN THIS
PROSPECTUS.
When issued, the shares of each series of the Trust, including the Fund, and
each class of shares, will be fully paid, nonassessable and redeemable. The
Trust does not intend to hold annual shareholder meetings; it may, however, hold
special shareholder meetings for purposes such as changing fundamental policies
or electing Trustees. The Board of Trustees shall promptly call a meeting for
the purpose of electing or removing Trustees when requested in writing to do so
by the record holders of a least 10% of the outstanding shares of the Trust. The
term of office of each Trustee is of unlimited duration. The holders of at least
two-thirds of the outstanding shares of the Trust may remove a Trustee from that
position either by declaration in writing filed with the Custodian or by votes
cast in person or by proxy at a meeting called for that purpose.
The Trust's shareholders will vote in the aggregate and not by series (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 the
shareholders of a particular series or class. Matters affecting an individual
series, such as the Fund, include, but are not limited to, the investment
objectives, policies and restrictions of that series. Shares have no
subscription, preemptive or conversion rights. Share certificates will not be
issued. Each share is entitled to one vote (and fractional shares are entitled
to proportionate fractional votes) on all matters submitted for a vote, and
shares have equal voting rights except that only shares of a particular series
or class are entitled to vote on matters affecting only that series or class.
Shares do not have cumulative voting rights. Therefore, the holders of more than
50% of the aggregate number of shares of all series of the Trust may elect all
the Trustees.
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
trust. The Declaration of Trust, therefore, contains provisions which are
intended to mitigate such liability. See "Description of the Trust" in the
Statement of Additional Information for further information about the Trust and
its shares.
Reporting to Shareholders. The Fund will send to its shareholders Annual and
Semi-Annual Reports; the financial statements appearing in Annual Reports for
the Fund will be audited by independent accountants. In addition, the Fund will
send to each shareholder having an account directly with the Fund a quarterly
statement showing transactions in the account, the total number of shares owned
and any dividends or distributions paid. Inquiries regarding the Fund may be
directed in writing to 107 North Washington Street, Post Office Box 4365, Rocky
Mount, North Carolina 27803-0365 or by calling 1-800-430-3863.
Calculation of Performance Data. From time to time the Fund may advertise its
average annual total return for each Class of Shares. The "average annual total
return" refers to the average annual compounded rates of return over 1-, 5-, and
10-year periods that would equate an initial amount invested at the beginning of
a stated period to the ending redeemable value of the investment. The
calculation assumes the reinvestment of all dividends and distributions,
includes all recurring fees that are charged to all shareholder accounts and
deducts all nonrecurring charges at the end of each period. The calculation
further assumes the maximum sales load is deducted from the initial payment. If
the Fund has been operating less than 1, 5 or 10 years, the time period during
which the Fund has been operating is substituted.
In addition, the Fund may advertise other total return performance data other
than average annual total return for each Class of Shares. This data shows as a
percentage rate of return encompassing all elements of return (i.e. income and
capital appreciation or depreciation); it assumes reinvestment of all dividends
and capital gain distributions. Such other total return data may be quoted for
the same or different periods as those for which average annual total return is
quoted. This data may consist of a cumulative percentage rate of return, actual
year-by-year rates or any combination thereof. Cumulative total return
represents the cumulative change in value of an investment in the Fund for
various periods.
The total return of the Fund could be increased to the extent the Advisor may
waive a portion of its fees or may reimburse a portion of the Fund's expenses.
Total return figures are based on the historical performance of the Fund, show
the performance of a hypothetical investment, and are not intended to indicate
future performance. The Fund's quotations may from time to time be used in
advertisements, sales literature, shareholder reports, or other communications.
For further information, see "Additional Information on Performance" in the
Statement of Additional Information.
<PAGE>
- --------------------------------------------------------------------------------
THE CHESAPEAKE FUND
INVESTOR SHARES
- --------------------------------------------------------------------------------
PROSPECTUS
June 30, 1997
THE CHESAPEAKE FUND
107 North Washington Street
Post Office Box 4365
Rocky Mount, North Carolina 27803-0365
1-800-430-3863
INVESTMENT ADVISOR
Gardner Lewis Asset Management
285 Wilmington-West Chester Pike
Chadds Ford, Pennsylvania 19317
ADMINISTRATOR & FUND ACCOUNTANT
The Nottingham Company
Post Office Drawer 69
Rocky Mount, North Carolina 27802-0069
DIVIDEND DISBURSING & TRANSFER AGENT
North Carolina Shareholder Services
Post Office Box 4365
Rocky Mount, North Carolina 27803-0365
DISTRIBUTOR
Capital Investment Group, Inc.
Post Office Box 32249
Raleigh, North Carolina 27622
CUSTODIAN
First Union National Bank of North Carolina
Two First Union Center
Charlotte, North Carolina 28288-1151
INDEPENDENT AUDITORS
Deloitte & Touche LLP
2500 One PPG Place
Pittsburgh, Pennsylvania 15222-5401
<PAGE>
PROSPECTUS Cusip Number 36559B609
THE CHESAPEAKE FUND
SUPER-INSTITUTIONAL SHARES
The investment objective of The Chesapeake Fund (the "Fund") is to seek capital
appreciation through investments in equity securities of medium and large
capitalization companies, consisting primarily of common and preferred stocks
and securities convertible into common stocks. While there is no assurance that
the Fund will achieve its investment objective, it endeavors to do so by
following the investment policies described in this Prospectus. The Fund has a
net asset value that will fluctuate in accordance with the value of its
portfolio securities. An investor may invest, reinvest or redeem shares at any
time.
This Prospectus relates to shares ("Super-Institutional Shares") representing
interests in the Fund. The Super-Institutional Shares are designed to provide
institutional clients purchasing substantial amounts of shares in the Fund with
core growth investment management by Gardner Lewis Asset Management. The
Super-Institutional Shares are offered to institutional investors described
herein without any sales or redemption charges or shareholder servicing or
distribution fees. See "Prospectus Summary - Offering Price."
INVESTMENT ADVISOR
Gardner Lewis Asset Management
Chadds Ford, Pennsylvania
The Fund is a diversified series of the Gardner Lewis Investment Trust (the
"Trust"), a registered open-end management investment company. This Prospectus
sets forth concisely the information about the Fund that a prospective investor
should know before investing. Investors should read this Prospectus and retain
it for future reference. Additional information about the Fund has been filed
with the Securities and Exchange Commission (the "SEC") and is available upon
request and without charge. You may request the Statement of Additional
Information, which is incorporated in this Prospectus by reference, by writing
the Fund at Post Office Box 4365, Rocky Mount, North Carolina 27803-0365, or by
calling 1-800-430-3863. The SEC also maintains an Internet Web site
(http://www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference, and other information regarding the Fund.
Investment in the Fund involves risks, including the possible loss of principal.
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by, any financial institution, and such shares are not federally insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other
agency.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus and the Statement of Additional Information is June
30, 1997.
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUMMARY...................................................... 2
FEE TABLE............................................................... 3
FINANCIAL HIGHLIGHTS.................................................... 4
INVESTMENT OBJECTIVE AND POLICIES....................................... 5
RISK FACTORS............................................................ 7
INVESTMENT LIMITATIONS.................................................. 8
FEDERAL INCOME TAXES.................................................... 8
DIVIDENDS AND DISTRIBUTIONS............................................. 9
HOW SHARES ARE VALUED................................................... 9
HOW SHARES MAY BE PURCHASED............................................. 10
HOW SHARES MAY BE REDEEMED.............................................. 11
MANAGEMENT OF THE FUND.................................................. 13
OTHER INFORMATION....................................................... 15
This Prospectus is not an offering of the securities described herein in any
state in which the offering is unauthorized. No sales representative, dealer or
other person is authorized to give any information or make any representations
other than those contained in this Prospectus.
The Fund reserves the right in its sole discretion to withdraw all or any part
of the offering made by this Prospectus or to reject purchase orders. All orders
to purchase shares are subject to acceptance by the Fund and are not binding
until confirmed or accepted in writing.
<PAGE>
PROSPECTUS SUMMARY
The Fund. The Chesapeake Fund (the "Fund") is a diversified series of the
Gardner Lewis Investment Trust (the "Trust"), a registered open-end management
investment company organized as a Massachusetts business trust. This Prospectus
relates to Super-Institutional Shares of the Fund. See "Other Information -
Description of Shares."
Offering Price. The Super-Institutional Shares are offered to institutional
investors at net asset value without a sales charge. The Super-Institutional
Shares are not subject to any 12b-1 distribution or shareholder service fees.
The minimum initial investment is $50,000,000. The minimum subsequent investment
is $100,000. See "How Shares May be Purchased."
Investment Objective and Special Risk Considerations. The investment objective
of the Fund is to seek capital appreciation through investments in equity
securities of medium and large capitalization companies, consisting primarily of
common and preferred stocks and securities convertible into common stocks.
Realization of current income is not a significant investment consideration, and
any income realized will be incidental to the Fund's objective. See "Investment
Objective and Policies." The Fund is not intended to be a complete investment
program, and there can be no assurance that the Fund will achieve its investment
objective. While the Fund will invest primarily in common stocks traded in U.S.
securities markets, some of the Fund's investments may include foreign
securities, illiquid securities, and securities purchased subject to a
repurchase agreement or on a "when-issued" basis, which involve certain risks.
The Fund's portfolio may also contain a significant amount of securities of
medium capitalization companies, which may exhibit more volatility than
securities of large capitalization companies. See "Risk Factors."
Manager. Subject to the general supervision of the Trust's Board of Trustees and
in accordance with the Fund's investment policies, Gardner Lewis Asset
Management of Chadds Ford, Pennsylvania (the "Advisor") manages the Fund's
investments. The Advisor currently manages approximately $3 billion in assets.
For its advisory services, the Advisor receives a monthly fee based on the
Fund's daily net assets at the annual rate of 1.00%. See "Management of the Fund
The Advisor."
Dividends. Income dividends, if any, are paid at least annually; capital gains,
if any, are distributed at least annually or retained for reinvestment by the
Fund. Dividends and capital gains distributions are automatically reinvested in
additional shares of the same Class at net asset value unless the shareholder
elects to receive cash. See "Dividends and Distributions."
Distributor. Capital Investment Group, Inc. (the "Distributor") serves as
distributor of shares of the Fund. See "How Shares May Be Purchased -
Distributor."
Redemption of Shares. There is no charge for redemptions, other than possible
charges associated with wire transfers of redemption proceeds. Shares may be
redeemed at any time at the net asset value next determined after receipt of a
redemption request by the Fund. A shareholder who submits appropriate written
authorization may redeem shares by telephone. See "How Shares May Be Redeemed."
<PAGE>
FEE TABLE
The following table sets forth certain information in connection with the
expenses of the Super-Institutional Shares of the Fund for the current fiscal
year. The information is intended to assist the investor in understanding the
various costs and expenses borne by the Super-Institutional Shares of the Fund,
and therefore indirectly by its investors, the payment of which will reduce an
investor's return on an annual basis.
Shareholder Transaction Expenses for Super-Institutional Shares
Maximum sales load imposed on purchases
(as a percentage of offering price).....................................None
Maximum sales load imposed on
reinvested dividends....................................................None
Maximum deferred sales load................................................None
Redemption fees*...........................................................None
Exchange fee...............................................................None
* The Fund in its discretion may choose to pass through to redeeming
shareholders any charges imposed by the Custodian for wiring redemption
proceeds. The Custodian currently charges the Fund $7.00 per transaction
for wiring redemption proceeds.
Annual Fund Operating Expenses for Super-Institutional Shares
(as a percentage of average net assets)
Investment advisory fees.................................................1.00%
12b-1 fees...............................................................None
Other expenses...........................................................0.08%
Total operating expenses1..............................................1.08%
EXAMPLE: You would pay the following expenses on a $1,000 investment in
Super-Institutional Shares of the Funds, whether or not you redeem at the end of
the period, assuming a 5% annual return:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$11 $34 $60 $132
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
1 The "Total operating expenses" shown above are based upon actual total
operating expenses incurred by the Super-Institutional Shares of the Fund on
an annualized basis for the fiscal period from June 12, 1996 (commencement
of operations for the Super-Institutional Shares) to February 28, 1997,
including amounts of Fund expenses paid by a broker in connection with a
brokerage/service arrangement with the Fund. After reflecting the Fund
expenses paid by the broker in connection with such brokerage/service
arrangement, the actual net operating expenses incurred by the
Super-Institutional Shares of the Fund on an annualized basis for the fiscal
period from June 12, 1996 (commencement of operations for the
Super-Institutional Shares) to February 28, 1997, were 1.04% of average
daily net assets of the Super-Institutional Shares. There can be no
assurance that the Fund's brokerage/service arrangement will continue in the
future.
See "Management of the Fund" below for more information about the fees and costs
of operating the Fund. The assumed 5% annual return in the example is required
by the Securities and Exchange Commission. The hypothetical rate of return is
not intended to be representative of past or future performance of the Fund; the
actual rate of return for the Fund may be greater or less than 5%.
FINANCIAL HIGHLIGHTS
The shares of the Fund are divided into multiple Classes representing interests
in the Fund. This Prospectus relates to Super-Institutional Shares. See "Other
Information - Description of Shares." The financial data included in the table
below for the fiscal period ended February 28, 1997, has been audited by
Deloitte & Touche LLP, independent auditors, whose report covering such period
is included in the Statement of Additional Information. This information should
be read in conjunction with the Fund's latest audited financial statements and
notes thereto, which are also included in the Statement of Additional
Information, a copy of which may be obtained at no charge by calling the Fund.
Further information about the performance of the Fund is contained in the Annual
Report of the Fund, a copy of which may be obtained at no charge by calling the
Fund.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Super-Institutional Shares
(For a Share Outstanding Throughout the Period)
- -----------------------------------------------------------------------------------------
Period
Ended
2/28/97(a)
- -----------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $15.53
Income (loss) from investment operations
Net investment loss (0.07)
Net realized and unrealized gain on investments 0.83
Total from investment operations 0.76
Distributions to shareholders from
Net realized gain from investment transactions 0.00
Tax return of capital 0.00
Total distributions 0.00
----
Net Asset Value, End of Period $16.29
=====
Total return 4.89%
=====
Ratios/supplemental data
Net assets, end of period (000's) $94,340
Ratio of expenses to average net assets ========
Before expense reimbursements 1.08%(b)
After expense reimbursements 1.04%(b)
Ratio of net investment loss to average net assets
Before expense reimbursements (0.75)%(b)
After expense reimbursements (0.72)%(b)
Portfolio turnover rate 126.44%
Average commission rate paid $0.06 (a) For the period from June 12, 1996
(commencement of operations) to February 28, 1997.
(b) Annualized.
</TABLE>
INVESTMENT OBJECTIVE AND POLICIES
Investment Objective. The investment objective of the Fund is to seek capital
appreciation through investments in equity securities of medium and large
capitalization companies, consisting primarily of common and preferred stocks
and securities convertible into common stocks. Realization of current income
will not be a significant investment consideration, and any such income realized
should be considered incidental to the Fund's objective. The Fund's investment
objective and fundamental investment limitations described herein may not be
altered without the prior approval of a majority of the Fund's shareholders.
Investment Selection. The Fund's portfolio will include equity securities which
the Advisor feels show superior prospects for growth. The Advisor will focus
attention on proven medium and large capitalization companies which, in the view
of the Advisor, exhibit internal changes such as a promising new product, new
distribution strategy, new manufacturing technology, or new management team or
management philosophy. Many of the portfolio companies will be responsible for
technological breakthroughs and/or unique solutions to market needs. Investing
in companies which are undergoing internal change, such as implementing new
strategies or introducing new technologies, may involve greater than average
risk due to their unproven nature. By focusing upon internal rather than
external factors, the Fund will seek to minimize the risk associated with
macro-economic forces such as changes in commodity prices, currency exchange
rates and interest rates.
In selecting portfolio companies, the Advisor uses analysis which includes the
growth rate in earnings, financial performance, management strengths and
weaknesses, and current market valuation in relation to earnings growth as well
as historic and comparable company valuations. The Advisor also analyzes the
level and nature of the company's debt, cash flow, working capital and the
quality of the company's assets. Typically companies included in the Fund's
portfolio will show strong earnings growth versus the previous year's comparable
period. Companies that the Advisor determines have excessive levels of debt are
generally avoided.
By developing and maintaining contacts with management, customers, competitors
and suppliers of current and potential portfolio companies, the Advisor attempts
to invest in those companies undergoing positive changes that have not yet been
recognized by "Wall Street" analysts and the financial press. Lack of
recognition of these changes often causes securities to be less efficiently
priced. The Advisor believes these companies offer unique and potentially
superior investment opportunities. The Advisor favors portfolio companies whose
price when purchased is between 8 and 15 times projected earnings for the coming
year.
While portfolio securities are generally acquired for the long term, they may be
sold under any of the following circumstances:
a) the anticipated price appreciation has been achieved or is no longer
probable;
b) the company's fundamentals appear, in the analysis of the Advisor, to
be deteriorating;
c) general market expectations regarding the company's future performance
exceed those expectations held by the Advisor;
d) alternative investments offer, in the view of the Advisor, superior
potential for appreciation.
The equity securities in which the Fund may invest include common stock,
convertible preferred stock, straight preferred stock, participating and
non-participating preferred stock, and investment grade convertible bonds. All
securities will be traded on domestic and foreign securities exchanges or on the
over-the-counter markets. Up to 10% of the Fund's total assets may consist of
foreign securities and sponsored ADRs.
Under normal conditions, at least 90% of the Fund's total assets will be
invested in equity securities. As a temporary defensive measure, however, when
the Advisor determines that market conditions so warrant, the Fund may invest up
to 100% of the Fund's total assets in investment grade bonds, U.S. Government
Securities, repurchase agreements, or money market instruments. When the Fund
invests its assets in investment grade bonds, U.S. Government Securities or
money market instruments as a temporary defensive measure, it is not pursuing
its stated investment objective. Under normal circumstances, however, the Fund
will also hold money market or repurchase agreement instruments for funds
awaiting investment, to accumulate cash for anticipated purchases of portfolio
securities, to allow for shareholder redemptions, and to provide for Fund
operating expenses.
U.S. Government Securities. The Fund may invest a portion of the portfolio in
U.S. Government Securities, defined to be U.S. Government obligations such as
U.S. Treasury notes, U.S. Treasury bonds, and U.S. Treasury bills, obligations
guaranteed by the U.S. Government such as Government National Mortgage
Association ("GNMA") as well as obligations of U.S. Government authorities,
agencies and instrumentalities such as Federal National Mortgage Association
("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"), Federal Home
Administration ("FHA"), Federal Farm Credit Bank ("FFCB"), Federal Home Loan
Bank ("FHLB"), Student Loan Marketing Association ("SLMA"), and The Tennessee
Valley Authority. U.S. Government Securities may be acquired subject to
repurchase agreements. While obligations of some U.S. Government sponsored
entities are supported by the full faith and credit of the U.S. Government (e.g.
GNMA), several are supported by the right of the issuer to borrow from the U.S.
Government (e.g. FNMA, FHLMC), and still others are supported only by the credit
of the issuer itself (e.g. SLMA, FFCB). No assurances can be given that the U.S.
Government will provide financial support to U.S. Government agencies or
instrumentalities in the future, other than as set forth above, since it is not
obligated to do so by law. The guarantee of the U.S. Government does not extend
to the yield or value of the Fund's shares.
Money Market Instruments. Money market instruments may be purchased for
temporary defensive purposes, to accumulate cash for anticipated purchases of
portfolio securities and to provide for shareholder redemptions and operating
expenses of the Fund. Money market instruments mature in thirteen months or less
from the date of purchase and may include U.S. Government Securities, corporate
debt securities (including those subject to repurchase agreements), bankers
acceptances and certificates of deposit of domestic branches of U.S. banks, and
commercial paper (including variable amount demand master notes) rated in one of
the two highest rating categories by any of the nationally recognized
statistical rating organizations or if not rated, of equivalent quality in the
Advisor's opinion. The Advisor may, when it believes that unusually volatile or
unstable economic and market conditions exist, depart from the Fund's investment
approach and assume temporarily a defensive portfolio posture, increasing the
Fund's percentage investment in money market instruments, even to the extent
that 100% of the Fund's total assets may be so invested.
Repurchase Agreements. The Fund may acquire U.S. Government Securities or
corporate debt securities subject to repurchase agreements. A repurchase
agreement transaction occurs when the Fund acquires a security and
simultaneously resells it to the vendor (normally a member bank of the Federal
Reserve or a registered Government Securities dealer) for delivery on an agreed
upon future date. The repurchase price exceeds the purchase price by an amount
that reflects an agreed upon market interest rate earned by the Fund effective
for the period of time during which the repurchase agreement is in effect.
Delivery pursuant to the resale typically will occur within one to seven days of
the purchase. The Fund will not enter into any repurchase agreement that will
cause more than 10% of its net assets to be invested in repurchase agreements
that extend beyond seven days. In the event of the bankruptcy of the other party
to a repurchase agreement, the Fund could experience delays in recovering its
cash or the securities lent. To the extent that in the interim the value of the
securities purchased may have declined, the Fund could experience a loss. In all
cases, the creditworthiness of the other party to a transaction is reviewed and
found satisfactory by the Advisor. Repurchase agreements are, in effect, loans
of Fund assets. The Fund will not engage in reverse repurchase transactions,
which are considered to be borrowings under the 1940 Act.
Foreign Securities. The Fund may invest up to 10% of its total assets in foreign
securities and sponsored ADRs. The same factors would be considered in selecting
foreign securities as with domestic securities. Foreign securities investment
presents special consideration not typically associated with investment in
domestic securities. Foreign taxes may reduce income. Currency exchange rates
and regulations may cause fluctuations in the value of foreign securities.
Foreign securities are subject to different regulatory environments than in the
United States and, compared to the United States, there may be a lack of uniform
accounting, auditing and financial reporting standards, less volume and
liquidity and more volatility, less public information, and less regulation of
foreign issuers. Countries have been known to expropriate or nationalize assets,
and foreign investments may be subject to political, financial, or social
instability, or adverse diplomatic developments. There may be difficulties in
obtaining service of process on foreign issuers and difficulties in enforcing
judgments with respect to claims under the U.S. securities laws against such
issuers. Favorable or unfavorable differences between U.S. and foreign economies
could affect foreign securities values. The U.S. Government has, in the past,
discouraged certain foreign investments by U.S. investors through taxation or
other restrictions and it is possible that such restrictions could be imposed
again.
Because of the inherent risk of foreign securities over domestic issues, the
Fund will generally limit foreign investments to those traded domestically as
sponsored American Depository Receipts ("ADRs"). ADRs are receipts issued by a
U.S. bank or trust company evidencing ownership of securities of a foreign
issuer. ADRs may be listed on a national securities exchange or may trade in the
over-the-counter market. The prices of ADRs are denominated in U.S. dollars
while the underlying security may be denominated in a foreign currency. To the
extent the Fund invests in other foreign securities, it will generally limit
such investments to foreign securities traded on foreign securities exchanges.
Investment Companies. In order to achieve its investment objective, the Fund may
invest up to 10% of the value of its total assets in securities of other
investment companies whose investment objectives are consistent with the Fund's
investment objective. The Fund will not acquire securities of any one investment
company if, immediately thereafter, the Fund would own more than 3% of such
company's total outstanding voting securities, securities issued by such company
would have an aggregate value in excess of 5% of the Fund's total assets, or
securities issued by such company and securities held by the Fund issued by
other investment companies would have an aggregate value in excess of 10% of the
Fund's total assets. To the extent the Fund invests in other investment
companies, the shareholders of the Fund would indirectly pay a portion of the
operating costs of the underlying investment companies. These costs include
management, brokerage, shareholder servicing and other operational expenses.
Shareholders of the Fund would then indirectly pay higher operational costs than
if they owned shares of the underlying investment companies directly.
Real Estate Securities. The Fund will not invest in real estate or real estate
mortgage loans (including limited partnership interests), but may invest in
readily marketable securities secured by real estate or interests therein or
issued by companies that invest in real estate or interests therein. The Fund
may also invest in readily marketable interests in real estate investment trusts
("REITs"). REITs are generally publicly traded on the national stock exchanges
and in the over-the-counter market and have varying degrees of liquidity.
Although the Fund is not limited in the amount of these types of real estate
securities it may acquire, it is not presently expected that within the next 12
months the Fund will have in excess of 5% of its total assets in real estate
securities.
RISK FACTORS
Investment Policies and Techniques. Reference should be made to "Investment
Objective and Policies" above for a description of special risks presented by
the investment policies of the Fund and the specific securities and investment
techniques that may be employed by the Fund, including the risks associated with
repurchase agreements and foreign securities. A more complete discussion of
certain of these securities and investment techniques and their associated risks
is contained in the Statement of Additional Information.
Fluctuations in Value. To the extent that the major portion of the Fund's
portfolio consists of common stocks, it may be expected that its net asset value
will be subject to greater fluctuation than a portfolio containing mostly fixed
income securities. Given that a significant portion of the Fund's assets may be
invested in equity securities of medium capitalization companies, that portion
of the Fund's portfolio may exhibit more volatility than the portion of the
Fund's portfolio invested in large capitalization companies. Because there is
risk in any investment, there can be no assurance that the Fund will achieve its
investment objective.
Portfolio Turnover. The Fund sells portfolio securities without regard to the
length of time they have been held in order to take advantage of new investment
opportunities. Nevertheless, the Fund's portfolio turnover generally will not
exceed 100% in any one year. Portfolio turnover generally involves some expense
to the Fund, including brokerage commissions or dealer mark-ups and other
transaction costs on the sale of securities and the reinvestment in other
securities. Portfolio turnover may also have capital gains tax consequences. The
Fund's portfolio turnover rate for its fiscal years ended February 28, 1997, and
February 29, 1996, was 126.44% and 99.33%, respectively.
Illiquid Investments. The Fund may invest up to 10% of its net assets in
illiquid securities. Illiquid securities are those that may not be sold or
disposed of in the ordinary course of business within seven days at
approximately the price at which they are valued. Under the supervision of the
Board of Trustees, the Advisor determines the liquidity of the Fund's
investments. The absence of a trading market can make it difficult to ascertain
a market value for illiquid investments. Disposing of illiquid securities before
maturity may be time consuming and expensive, and it may be difficult or
impossible for the Fund to sell illiquid investments promptly at an acceptable
price. The Fund will not invest in restricted securities, which cannot be sold
to the public without registration under the federal securities laws. Unless
registered for sale, restricted securities can only be sold in privately
negotiated transactions or pursuant to an exemption from registration.
Forward Commitments and When-Issued Securities. The Fund may purchase
when-issued securities and commit to purchase securities for a fixed price at a
future date beyond customary settlement time. The Fund is required to hold and
maintain in a segregated account until the settlement date, cash, U.S.
Government Securities or high-grade debt obligations in an amount sufficient to
meet the purchase price. Purchasing securities on a when-issued or forward
commitment basis involves a risk of loss if the value of the security to be
purchased declines prior to the settlement date, which risk is in addition to
the risk of decline in value of the Fund's other assets. In addition, no income
accrues to the purchaser of when-issued securities during the period prior to
issuance. Although the Fund would generally purchase securities on a when-issued
or forward commitment basis with the intention of acquiring securities for its
portfolio, the Fund may dispose of a when-issued security or forward commitment
prior to settlement if the Advisor deems it appropriate to do so. The Fund may
realize short-term gains or losses upon such sales.
INVESTMENT LIMITATIONS
To limit the Fund's exposure to risk, the Fund has adopted certain fundamental
investment limitations. Some of these restrictions are that the Fund will not:
(1) issue senior securities, borrow money or pledge its assets; (2) make loans
of money or securities, except that the Fund may invest in repurchase agreements
(but repurchase agreements having a maturity of longer than seven days, together
with other illiquid securities, are limited to 10% of the Fund's net assets);
(3) invest in securities of issuers which have a record of less than three
years' continuous operation (including predecessors and, in the case of bonds,
guarantors), if more than 5% of its total assets would be invested in such
securities; (4) write, purchase or sell puts, calls, warrants or combinations
thereof, or purchase or sell commodities, commodities contracts, futures
contracts or related options, or invest in oil, gas or mineral leases or
exploration programs, or real estate; (5) invest more than 5% of the value of
its total assets in the securities of any one issuer nor hold more than 10% of
the voting stock of any issuer; (6) invest in restricted securities; (7) invest
more than 10% of the Fund's total assets in foreign securities, including
sponsored ADRs; and (8) invest more than 25% of the Fund's total assets in the
securities of issuers in any one industry. See "Investment Limitations" in the
Fund's Statement of Additional Information for a complete list of investment
limitations.
If the Board of Trustees of the Trust determines that the Fund's investment
objective can best be achieved by a substantive change in a non-fundamental
investment limitation, the Board can make such change without shareholder
approval and will disclose any such material changes in the then current
Prospectus. Any limitation that is not specified in the Fund's Prospectus, or in
the Statement of Additional Information, as being fundamental, is
non-fundamental. If a percentage limitation is satisfied at the time of
investment, a later increase or decrease in such percentage resulting from a
change in the value of the Fund's portfolio securities will not constitute a
violation of such limitation.
FEDERAL INCOME TAXES
Taxation of the Fund. The Internal Revenue Code of 1986, as amended (the
"Code"), treats each series in the Trust, including the Fund, as a separate
regulated investment company. Each series of the Trust, including the Fund,
intends to qualify or remain qualified as a regulated investment company under
the Code by distributing substantially all of its "net investment income" to
shareholders and meeting other requirements of the Code. For the purpose of
calculating dividends, net investment income consists of income accrued on
portfolio assets, less accrued expenses. Upon qualification, the Fund will not
be liable for federal income taxes to the extent earnings are distributed. The
Board of Trustees retains the right for any series of the Trust, including the
Fund, to determine for any particular year if it is advantageous not to qualify
as a regulated investment company. Regulated investment companies, such as each
series of the Trust, including the Fund, are subject to a non-deductible 4%
excise tax to the extent they do not distribute the statutorily required amount
of investment income, determined on a calendar-year basis, and capital gain net
income, using an October 31 year-end measuring period. The Fund intends to
declare or distribute dividends during the calendar year in an amount sufficient
to prevent imposition of the 4% excise tax.
Taxation of Shareholders. For federal income tax purposes, any dividends and
distributions from short-term capital gains that a shareholder receives in cash
from the Fund or which are re-invested in additional shares will be taxable
ordinary income. If a shareholder is not required to pay a tax on income, he
will not be required to pay federal income taxes on the amounts distributed to
him. A dividend declared in October, November or December of a year and paid in
January of the following year will be considered to be paid on December 31 of
the year of declaration.
Distributions paid by the Fund from long-term capital gains, whether received in
cash or reinvested in additional shares, are taxable as long-term capital gains,
regardless of the length of time an investor has owned shares in the Fund.
Capital gain distributions are made when the Fund realizes net capital gains on
sales of portfolio securities during the year. Dividends and capital gain
distributions paid by the Fund shortly after shares have been purchased,
although in effect a return of investment, are subject to federal income
taxation.
The sale of shares of the Fund is a taxable event and may result in a capital
gain or loss. Capital gain or loss may be realized from an ordinary redemption
of shares or an exchange of shares between two mutual funds (or two series of a
mutual fund).
The Trust will inform shareholders of the Fund of the source of their dividends
and capital gains distributions at the time they are paid and, promptly after
the close of each calendar year, will issue an information return to advise
shareholders of the federal tax status of such distributions and dividends.
Dividends and distributions may also be subject to state and local taxes.
Shareholders should consult their tax advisors regarding specific questions as
to federal, state or local taxes.
Federal income tax law requires investors to certify that the social security
number or taxpayer identification number provided to the Fund is correct and
that the investor is not subject to 31% withholding for previous under-reporting
to the Internal Revenue Service (the "IRS"). Investors will be asked to make the
appropriate certification on their application to purchase shares. If a
shareholder of the Fund has not complied with the applicable statutory and IRS
requirements, the Fund is generally required by federal law to withhold and
remit to the IRS 31% of reportable payments (which may include dividends and
redemption amounts).
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute substantially all of its net investment income,
if any, in the form of dividends and distribute capital gains, if any, at least
once each year. The Fund may, however, determine either to distribute or to
retain all or part of any long-term capital gains in any year for reinvestment.
Unless a shareholder elects to receive cash, dividends and capital gains will be
automatically reinvested in additional full and fractional shares of the same
Class of the Fund at the net asset value per share next determined. Reinvested
dividends and capital gains are exempt from any sales load. Shareholders wishing
to receive their dividends or capital gains in cash may make their request in
writing to the Fund at 107 North Washington Street, Post Office Box 4365, Rocky
Mount, North Carolina 27803-0365. That request must be received by the Fund
prior to the record date to be effective as to the next dividend. If cash
payment is requested, checks will be mailed within five business days after the
distribution of the dividends or capital gains, as applicable. Each shareholder
of the Fund will receive a quarterly summary of his or her account, including
information as to reinvested dividends from the Fund. Tax consequences to
shareholders of dividends and distributions are the same if received in cash or
in additional shares of the Fund.
In order to satisfy certain requirements of the Code, the Fund may declare
special year-end dividend and capital gains distributions during December. Such
distributions, if received by shareholders by January 31, are deemed to have
been paid by the Fund and received by shareholders on December 31 of the prior
year.
There is no fixed dividend rate, and there can be no assurance as to the payment
of any dividends or the realization of any gains. The Fund's net investment
income available for distribution to holders of Super-Institutional Shares will
be reduced by the amount of any expenses allocated to the Super-Institutional
Shares.
HOW SHARES ARE VALUED
Net asset value for each Class of Shares of the Fund is determined at 4:00 p.m.,
New York time, Monday through Friday, except on business holidays when the New
York Stock Exchange is closed. The net asset value of the shares of the Fund for
purposes of pricing sales and redemptions is equal to the total market value of
its investments and other assets, less all of its liabilities, divided by the
number of its outstanding shares. Net asset value is determined separately for
each Class of Shares of the Fund and reflects any liabilities allocated to a
particular Class as well as the general liabilities of the Fund.
Securities that are listed on a securities exchange are valued at the last
quoted sales price at the time the valuation is made. Price information on
listed securities is taken from the exchange where the security is primarily
traded by the Fund. Securities that are listed on an exchange and which are not
traded on the valuation date are valued at the mean of the bid and asked prices.
Unlisted securities for which market quotations are readily available are valued
at the latest quoted sales price, if available, at the time of valuation,
otherwise, at the latest quoted bid price. Temporary cash investments with
maturities of 60 days or less will be valued at amortized cost, which
approximates market value. Securities for which no current quotations are
readily available are valued at fair value as determined in good faith using
methods approved by the Board of Trustees of the Trust. Securities may be valued
on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities.
HOW SHARES MAY BE PURCHASED
Assistance in opening accounts and a purchase application may be obtained from
the Fund by calling 1-800-430-3863, or by writing to the Fund at the address
shown below for purchases by mail. Assistance is also available through any
broker-dealer authorized to sell shares in the Fund. Payment for shares
purchased may also be made through your account at the broker-dealer processing
your application and order to purchase. Your investment will purchase shares at
the Fund's net asset value next determined after your order is received by the
Fund in proper form as indicated herein.
The minimum initial investment is $50,000,000. The minimum subsequent investment
is $100,000. The Fund may, in the Advisor's sole discretion, accept certain
accounts with less than the stated minimum initial investment. You may invest in
the following ways:
Purchases by Mail. Shares may be purchased initially by completing the
application accompanying this Prospectus and mailing it, together with a check
payable to the Fund, to The Chesapeake Fund, Super-Institutional Shares, 107
North Washington Street, Post Office Box 4365, Rocky Mount, North Carolina
27803-0365. Subsequent investments in an existing account in the Fund may be
made at any time by sending a check payable to the Fund, to the address stated
above. Please enclose the stub of your account statement and include the amount
of the investment, the name of the account for which the investment is to be
made and the account number. Please remember to add a reference to
"Super-Institutional Shares" to your check to ensure proper credit to your
account.
Purchases by Wire. To purchase shares by wiring federal funds, the Fund must
first be notified by calling 1-800-430-3863 to request an account number and
furnish the Fund with your tax identification number. Following notification to
the Fund, federal funds and registration instructions should be wired through
the Federal Reserve System to:
First Union National Bank of North Carolina
Charlotte, North Carolina
ABA # 053000219
For The Chesapeake Fund
Super-Institutional Shares
Acct #2000000862068
For further credit to (shareholder's name and SS# or EIN#)
It is important that the wire contain all the information and that the Fund
receive prior telephone notification to ensure proper credit. A completed
application with signature(s) of registrant(s) must be mailed to the Fund
immediately after the initial wire as described under "Purchases by Mail" above.
Investors should be aware that some banks may impose a wire service fee.
General. All purchases of shares are subject to acceptance and are not binding
until accepted. The Fund reserves the right to reject any application or
investment. Orders become effective, and shares are purchased at, the next
determined net asset value per share after an investment has been received by
the Fund, which is as of 4:00 p.m., New York time, Monday through Friday,
exclusive of business holidays. Orders received by the Fund and effective prior
to such 4:00 p.m. time will purchase shares at the net asset value determined at
that time. Otherwise, your order will purchase shares as of such 4:00 p.m. time
on the next business day. For orders placed through a qualified broker-dealer,
such firm is responsible for promptly transmitting purchase orders to the Fund.
Investors may be charged a fee if they effect transactions in the Fund shares
through a broker or agent.
If checks are returned unpaid due to nonsufficient funds, stop payment or other
reasons, the Trust will charge $20. To recover any such loss or charge, the
Trust reserves the right, without further notice, to redeem shares of any fund
of the Trust already owned by any purchaser whose order is cancelled, and such a
purchaser may be prohibited from placing further orders unless investments are
accompanied by full payment by wire or cashier's check.
Payment must be made by check or money order drawn on a U.S. bank and payable in
U.S. dollars. Under certain circumstances the Fund, at its sole discretion, may
allow payment in kind for Fund shares purchased by accepting securities in lieu
of cash. Any securities so accepted would be valued on the date received and
included in the calculation of the net asset value of the Fund. See the
Statement of Additional Information for additional information on purchases in
kind.
The Fund is required by federal law to withhold and remit to the IRS 31% of the
dividends, capital gains distributions and, in certain cases, proceeds of
redemptions paid to any shareholder who fails to furnish the Fund with a correct
taxpayer identification number, who under-reports dividend or interest income or
who fails to provide certification of tax identification number. Instructions to
exchange or transfer shares held in established accounts will be refused until
the certification has been provided. In order to avoid this withholding
requirement, you must certify on your application, or on a separate W-9 Form
supplied by the Fund, that your taxpayer identification number is correct and
that you are not currently subject to backup withholding or you are exempt from
backup withholding.
Distributor. Capital Investment Group, Inc., Post Office Box 32249, Raleigh,
North Carolina 27622 (the "Distributor"), is the national distributor for the
Fund under a Distribution Agreement with the Trust. The Distributor may sell
Fund shares to or through qualified securities dealers or others.
The Distributor, at its expense, may provide additional compensation to dealers
in connection with sales of shares of the Fund. Compensation may include
financial assistance to dealers in connection with conferences, sales or
training programs for their employees, seminars for the public, advertising
campaigns regarding the Fund, and/or other dealer-sponsored special events. In
some instances, this compensation may be made available only to certain dealers
whose representatives have sold or are expected to sell a significant amount of
such shares. Compensation may include payment for travel expenses, including
lodging, incurred in connection with trips taken by invited registered
representatives and members of their families to locations within or outside of
the United States for meetings or seminars of a business nature. Dealers may not
use sales of the Fund shares to qualify for this compensation to the extent such
may be prohibited by the laws of any state or any self-regulatory agency, such
as the National Association of Securities Dealers, Inc. None of the
aforementioned compensation is paid for by the Fund or its shareholders.
Stock Certificates. Stock certificates will not be issued for your shares.
Evidence of ownership will be given by issuance of periodic account statements
that will show the number of shares owned.
HOW SHARES MAY BE REDEEMED
Shares of the Fund may be redeemed (the Fund will repurchase them from
shareholders) by mail or telephone. Any redemption may be more or less than the
purchase price of your shares depending on the market value of the Fund's
portfolio securities. All redemption orders received in proper form, as
indicated herein, by the Fund, whether by mail or telephone, prior to 4:00 p.m.
New York time, Monday through Friday, except for business holidays, will redeem
shares at the net asset value determined at that time. Otherwise, your order
will redeem shares as of such 4:00 p.m. time on the next business day. There is
no charge for redemptions from the Fund other than possible charges for wiring
redemption proceeds. You may also redeem your shares through a broker-dealer or
other institution, who may charge you a fee for its services.
The Board of Trustees reserves the right to involuntarily redeem any account
having a net asset value of less than $10,000,000 (due to redemptions, exchanges
or transfers, and not due to market action) upon 30 days written notice. If the
shareholder brings his account net asset value up to $10,000,000 or more during
the notice period, the account will not be redeemed. Redemptions from retirement
plans may be subject to tax withholding.
If you are uncertain of the requirements for redemption, please contact the
Fund, at 1-800-430-3863, or write to the address shown below.
Regular Mail Redemptions. Your request should be addressed to The Chesapeake
Fund, Super-Institutional Shares, 107 North Washington Street, Post Office Box
4365, Rocky Mount, North Carolina 27803-0365. Your request for redemption must
include:
1) Your letter of instruction specifying the account number, and the number of
shares or dollar amount to be redeemed. This request must be signed by all
registered shareholders in the exact names in which they are registered;
2) Any required signature guarantees (see "Signature Guarantees" below); and
3) Other supporting legal documents, if required in the case of estates,
trusts, guardianships, custodianships, corporations, partnerships, pension
or profit sharing plans, and other organizations.
Your redemption proceeds will be sent to you within seven days after receipt of
your redemption request. However, the Fund may delay forwarding a redemption
check for recently purchased shares while it determines whether the purchase
payment will be honored. Such delay (which may take up to 15 days from the date
of purchase) may be reduced or avoided if the purchase is made by certified
check or wire transfer. In all cases the net asset value next determined after
the receipt of the request for redemption will be used in processing the
redemption. The Fund may suspend redemption privileges or postpone the date of
payment (i) during any period that the New York Stock Exchange is closed, or
trading on the New York Stock Exchange is restricted as determined by the
Securities and Exchange Commission (the "Commission"), (ii) during any period
when an emergency exists as defined by the rules of the Commission as a result
of which it is not reasonably practicable for the Fund to dispose of securities
owned by it, or to fairly determine the value of its assets, and (iii) for such
other periods as the Commission may permit.
Telephone and Bank Wire Redemptions. The Fund offers shareholders the option of
redeeming shares by telephone under certain limited conditions. The Fund will
redeem shares when requested by the shareholder if, and only if, the shareholder
confirms redemption instructions in writing.
The Fund may rely upon confirmation of redemption requests transmitted via
facsimile (FAX# 919-972-1908). The confirmation instructions must include:
1) Shareholder name and account number;
2) Number of shares or dollar amount to be redeemed;
3) Instructions for transmittal of redemption funds to the shareholder; and
4) Shareholder signature as it appears on the application then on file with
the Fund.
The net asset value used in processing the redemption will be the net asset
value next determined after the telephone request is received. Redemption
proceeds will not be distributed until written confirmation of the redemption
request is received, per the instructions above. Shareholders can choose to have
redemption proceeds mailed to them at their address of record, their bank, or to
any other authorized person, or they can have the proceeds sent by bank wire to
their bank ($5,000 minimum). Shares of the Fund may not be redeemed by wire on
days on which the bank is not open for business. Shareholders can change
redemption instructions anytime by filing a letter including new redemption
instructions with the Fund. (See "Signature Guarantees" below.) The Fund
reserves the right to restrict or cancel telephone and bank wire redemption
privileges for shareholders, without notice, if the Fund believes it to be in
the best interest of the shareholders to do so. During drastic economic and
market changes, telephone redemption privileges may be difficult to implement.
The Fund in its discretion may choose to pass through to redeeming shareholders
any charges by the Custodian for wire redemptions. The Custodian currently
charges $7.00 per transaction for wiring redemption proceeds. If this cost is
passed through to redeeming shareholders by the Fund, the charge will be
deducted automatically from the shareholder's account by redemption of shares in
the account. The shareholder's bank or brokerage firm may also impose a charge
for processing the wire. If wire transfer of funds is impossible or impractical,
the redemption proceeds will be sent by mail to the designated account.
Shareholders may redeem shares, subject to the procedures outlined above, by
calling the Fund at 1-800-430-3863. Redemption proceeds will only be sent to the
bank account or person named in the Fund Shares Application currently on file
with the Fund. Telephone redemption privileges authorize the Fund to act on
telephone instructions from any person representing himself or herself to be the
investor and reasonably believed by the Fund to be genuine. The Fund will employ
reasonable procedures, such as requiring a form of personal identification, to
confirm that instructions are genuine, and, if it does not follow such
procedures, the Fund will be liable for any losses due to fraudulent or
unauthorized instructions. The Fund will not be liable for following telephone
instructions reasonably believed to be genuine.
Signature Guarantees. To protect an account and the Fund from fraud, signature
guarantees are required to authorize a change in registration, or standing
instructions, for your account. Signature guarantees are required for (1) change
of registration requests, (2) requests to establish or change exchange
privileges or telephone redemption service other than through the initial
account application, and (3) requests for redemptions in excess of $50,000.
Signature guarantees are acceptable from a member bank of the Federal Reserve
System, a savings and loan institution, credit union (if authorized under state
law), registered broker-dealer, securities exchange or association clearing
agency, and must appear on the written request for redemption, establishment or
change in exchange privileges, or change of registration.
MANAGEMENT OF THE FUND
Trustees and Officers. The Fund is a diversified series of the Gardner Lewis
Investment Trust (the "Trust"), a registered open-end management investment
company organized as a Massachusetts business trust. The Board of Trustees of
the Trust is responsible for the management of the business and affairs of the
Trust. The Trustees and executive officers of the Trust and their principal
occupations for the last five years are set forth in the Statement of Additional
Information under "Management of the Fund - Trustees and Officers." The Board of
Trustees of the Trust is primarily responsible for overseeing the conduct of the
Trust's business. The Board of Trustees elects the officers of the Trust who are
responsible for its and the Fund's day-to-day operations.
The Advisor. Subject to the authority of the Board of Trustees, 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, pursuant to an Investment
Advisory Agreement (the "Advisory Agreement") with the Trust.
The Advisor is registered under the Investment Advisors Act of 1940.
Registration of the Advisor does not involve any supervision of management or
investment practices or policies by the Securities and Exchange Commission. The
Advisor, established as a Delaware corporation in 1990 and converted to a
Pennsylvania limited partnership in 1994, is controlled by W. Whitfield Gardner.
The Advisor currently serves as investment advisor to approximately $3 billion
in assets. The Advisor has been rendering investment counsel, utilizing
investment strategies substantially similar to that of the Fund, to individuals,
banks and thrift institutions, pension and profit sharing plans, trusts,
estates, charitable organizations and corporations since its formation. The
Advisor's address is 285 Wilmington-West Chester Pike, Chadds Ford, Pennsylvania
19317.
Under the Advisory Agreement with the Fund, the Advisor receives a monthly
management fee equal to an annual rate of 1.00% of the average daily net asset
value of the Fund. For the fiscal year ended February 28, 1997, the Advisor was
paid investment advisory fees of $1,940,587.
The Advisor supervises and implements the investment activities of the Fund,
including making specific decisions as to the purchase and sale of portfolio
investments. Among the responsibilities of the Advisor under the Advisory
Agreement is the selection of brokers and dealers through whom transactions in
the Fund's portfolio investments will be effected. The Advisor attempts to
obtain the best execution for all such transactions. If it is believed that more
than one broker is able to provide the best execution, the Advisor will consider
the receipt of quotations and other market services and of research, statistical
and other data and the sale of shares of the Fund in selecting a broker. The
Fund may also enter into brokerage/service arrangements pursuant to which
selected brokers executing portfolio transactions for the Fund may pay a portion
of the Fund's operating expenses. See Note 2 to the Fee Table. The Advisor may
also utilize a brokerage firm affiliated with the Trust or the Advisor if it
believes it can obtain the best execution of transactions from such broker.
Research services obtained through Fund brokerage transactions may be used by
the Advisor for its other clients and, conversely, the Fund may benefit from
research services obtained through the brokerage transactions of the Advisor's
other clients. For further information, see "Investment Objective and Policies -
Investment Transactions" in the Statement of Additional Information.
W. Whitfield Gardner and John L. Lewis, IV, principals of the Advisor and
executive officers of the Trust, have been responsible for day-to-day management
of the Fund's portfolio since its inception in 1994. They have been with the
Advisor since its inception. Additional information about these gentlemen is set
forth in the Statement of Additional Information under "Management of the Fund -
Trustees and Officers."
The Administrator. The Trust has entered into an Administration Agreement with
The Nottingham Company (the "Administrator"), 105 North Washington Street, Post
Office Drawer 69, Rocky Mount, North Carolina 27802-0069, pursuant to which the
Administrator receives a fee at the annual rate of 0.015% of the average daily
net assets of the Super-Institutional Shares of the Fund for administration
services. The Administrator also charges the Fund for certain costs involved
with the daily valuation of investment securities and is reimbursed for
out-of-pocket expenses.
Subject to the authority of the Board of Trustees, the services the
Administrator provides to the Fund include coordinating and monitoring any third
parties furnishing services to the Fund; providing the necessary office space,
equipment and personnel to perform administrative and clerical functions for the
Fund; and preparing, filing and distributing proxy materials, periodic reports
to shareholders, registration statements and other documents. The Administrator
also performs certain accounting and pricing services for the Fund as pricing
agent, including the daily calculation of the Fund's net asset value.
The Administrator was incorporated as a North Carolina corporation in 1988. With
its predecessors and affiliates, the Administrator has been operating as a
financial services firm since 1985. Frank P. Meadows III is the firm's Managing
Director and controlling shareholder.
The Transfer Agent. North Carolina Shareholder Services, LLC (the "Transfer
Agent") serves as the Fund's transfer, dividend paying, and shareholder
servicing agent. The Transfer Agent, subject to the authority of the Board of
Trustees, provides transfer agency services pursuant to an agreement with the
Administrator, which has been approved by the Trust. The Transfer Agent
maintains the records of each shareholder's account, answers shareholder
inquiries concerning accounts, processes purchases and redemptions of the Fund's
shares, acts as dividend and distribution disbursing agent, and performs other
shareholder servicing functions. The Transfer Agent is compensated for its
services by the Administrator and not directly by the Fund.
The Transfer Agent, whose address is 107 North Washington Street, Post Office
Box 4365, Rocky Mount, North Carolina 27803-0365, was established as a North
Carolina limited liability company in 1997. John D. Marriott, Jr., is the firm's
controlling member.
The Custodian. First Union National Bank of North Carolina (the "Custodian"),
Two First Union Center, Charlotte, North Carolina 28288-1151, serves as
Custodian of the Fund's assets. The Custodian acts as the depository for the
Fund, safekeeps its portfolio securities, collects all income and other payments
with respect to portfolio securities, disburses monies at the Fund's request and
maintains records in connection with its duties.
Other Expenses. The Fund is responsible for the payment of its expenses. These
include, for example, the fees payable to the Advisor, or expenses otherwise
incurred in connection with the management of the investment of the Fund's
assets, the fees and expenses of the Custodian, the fees and expenses of the
Administrator, the fees and expenses of Trustees, outside auditing and legal
expenses, all taxes and corporate fees payable by the Fund, Securities and
Exchange Commission fees, state securities qualification fees, costs of
preparing and printing prospectuses for regulatory purposes and for distribution
to shareholders, costs of shareholder reports and shareholder meetings, and any
extraordinary expenses. The Fund also pays for brokerage commissions and
transfer taxes (if any) in connection with the purchase and sale of portfolio
securities. Expenses attributable to a particular series of the Trust, including
the Fund, will be charged to that series, and expenses not readily identifiable
as belonging to a particular series will be allocated by or under procedures
approved by the Board of Trustees among one or more series in such a manner as
it deems fair and equitable. Any expenses relating only to a particular Class of
Shares of the Fund will be borne solely by such Class.
OTHER INFORMATION
Description of Shares. The Trust was organized as a Massachusetts business trust
on August 12, 1992, under a Declaration of Trust. The Declaration of Trust
permits the Board of Trustees to issue an unlimited number of full and
fractional shares and to create an unlimited number of series of shares. The
Board of Trustees may also classify and reclassify any unissued shares into one
or more classes of shares. The Trust currently has the number of authorized
series of shares, including the Fund, and classes of shares, described in the
Statement of Additional Information under "Description of the Trust." Pursuant
to its authority under the Declaration of Trust, the Board of Trustees has
authorized the issuance of an unlimited number of shares in each of five Classes
("Series A, Series C, and Series D Investor Shares," "Institutional Shares," and
Super-Institutional Shares") representing equal pro rata interests in the Fund,
except that the Classes bear different expenses that reflect the differences in
services provided to them. Investor Shares are sold with a sale charge (except
for Series C Shares) and bear potential distribution expenses and service fees
at different levels. See "How Shares May Be Purchased - Sales Charges" and " -
Distribution Plan." Institutional and Super-Institutional Shares are sold
without a sales charge and bear no shareholder servicing or distribution fees.
The Super-Institutional Shares, however, receive fewer investor services than
the Institutional and Investor Shares due to the size and nature of accounts
holding Super-Institutional Shares. As a result of different charges, fees, and
expenses between the Classes, the total return on the Fund's Investor Shares
will generally be lower than the total return on the Institutional and
Super-Institutional Shares, and the total return on the Institutional Shares
will generally be lower than the total return on the Super-Institutional Shares.
Standardized total return quotations will be computed separately for each Class
of Shares of the Fund.
THIS PROSPECTUS RELATES TO THE FUND'S SUPER-INSTITUTIONAL SHARES AND DESCRIBES
ONLY THE POLICIES, OPERATIONS, CONTRACTS, AND OTHER MATTERS PERTAINING TO THE
SUPER-INSTITUTIONAL SHARES. THE FUND ALSO ISSUES A CLASS OF INSTITUTIONAL SHARES
AND THREE CLASSES OF INVESTOR SHARES. SUCH OTHER CLASSES MAY HAVE DIFFERENT
SALES CHARGES AND EXPENSES, WHICH MAY AFFECT PERFORMANCE. INVESTORS MAY CALL THE
FUND AT 1-800-430-3863 TO OBTAIN MORE INFORMATION CONCERNING OTHER CLASSES
AVAILABLE TO THEM THROUGH THEIR SALES REPRESENTATIVE. INVESTORS MAY OBTAIN
INFORMATION CONCERNING OTHER CLASSES FROM THEIR SALES REPRESENTATIVE, THE
DISTRIBUTOR, THE FUND, OR ANY OTHER PERSON WHICH IS OFFERING OR MAKING AVAILABLE
TO THEM THE SECURITIES OFFERED IN THIS PROSPECTUS.
When issued, the shares of each series of the Trust, including the Fund, and
each class of shares, will be fully paid, nonassessable and redeemable. The
Trust does not intend to hold annual shareholder meetings; it may, however, hold
special shareholder meetings for purposes such as changing fundamental policies
or electing Trustees. The Board of Trustees shall promptly call a meeting for
the purpose of electing or removing Trustees when requested in writing to do so
by the record holders of a least 10% of the outstanding shares of the Trust. The
term of office of each Trustee is of unlimited duration. The holders of at least
two-thirds of the outstanding shares of the Trust may remove a Trustee from that
position either by declaration in writing filed with the Custodian or by votes
cast in person or by proxy at a meeting called for that purpose.
The Trust's shareholders will vote in the aggregate and not by series (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 the
shareholders of a particular series or class. Matters affecting an individual
series, such as the Fund, include, but are not limited to, the investment
objectives, policies and restrictions of that series. Shares have no
subscription, preemptive or conversion rights. Share certificates will not be
issued. Each share is entitled to one vote (and fractional shares are entitled
to proportionate fractional votes) on all matters submitted for a vote, and
shares have equal voting rights except that only shares of a particular series
or class are entitled to vote on matters affecting only that series or class.
Shares do not have cumulative voting rights. Therefore, the holders of more than
50% of the aggregate number of shares of all series of the Trust may elect all
the Trustees.
As of May 1, 1997, the following person owned of record or beneficially more
than 25% of the Super-Institutional Shares of the Fund: Ohio School Employee
Retirement System, 45 North 4th Street, Columbus, Ohio 43214-3634, record owner
with respect to 100% of the Super-Institutional Shares. Accordingly, this entity
may be deemed to be a "controlling person" of the Super-Institutional Shares of
the Fund within the meaning of the 1940 Act.
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
trust. The Declaration of Trust, therefore, contains provisions which are
intended to mitigate such liability. See "Description of the Trust" in the
Statement of Additional Information for further information about the Trust and
its shares.
Reporting to Shareholders. The Fund will send to its shareholders Annual and
Semi-Annual Reports; the financial statements appearing in Annual Reports for
the Fund will be audited by independent accountants. In addition, the Fund will
send to each shareholder having an account directly with the Fund a quarterly
statement showing transactions in the account, the total number of shares owned
and any dividends or distributions paid. Inquiries regarding the Fund may be
directed in writing to 107 North Washington Street, Post Office Box 4365, Rocky
Mount, North Carolina 27803-0365 or by calling 1-800-430-3863.
Calculation of Performance Data. From time to time the Fund may advertise its
average annual total return for each Class of Shares. The "average annual total
return" refers to the average annual compounded rates of return over 1-, 5-, and
10-year periods that would equate an initial amount invested at the beginning of
a stated period to the ending redeemable value of the investment. The
calculation assumes the reinvestment of all dividends and distributions,
includes all recurring fees that are charged to all shareholder accounts and
deducts all nonrecurring charges at the end of each period. The calculation
further assumes the maximum sales load is deducted from the initial payment. If
the Fund has been operating less than 1, 5 or 10 years, the time period during
which the Fund has been operating is substituted.
In addition, the Fund may advertise other total return performance data other
than average annual total return for each Class of Shares. This data shows as a
percentage rate of return encompassing all elements of return (i.e. income and
capital appreciation or depreciation); it assumes reinvestment of all dividends
and capital gain distributions. Such other total return data may be quoted for
the same or different periods as those for which average annual total return is
quoted. This data may consist of a cumulative percentage rate of return, actual
year-by-year rates or any combination thereof. Cumulative total return
represents the cumulative change in value of an investment in the Fund for
various periods.
The total return of the Fund could be increased to the extent the Advisor may
waive a portion of its fees or may reimburse a portion of the Fund's expenses.
Total return figures are based on the historical performance of the Fund, show
the performance of a hypothetical investment, and are not intended to indicate
future performance. The Fund's quotations may from time to time be used in
advertisements, sales literature, shareholder reports, or other communications.
For further information, see "Additional Information on Performance" in the
Statement of Additional Information.
<PAGE>
- --------------------------------------------------------------------------------
THE CHESAPEAKE FUND
SUPER-INSTITUTIONAL SHARES
- --------------------------------------------------------------------------------
PROSPECTUS
June 30, 1997
THE CHESAPEAKE FUND
107 North Washington Street
Post Office Box 4365
Rocky Mount, North Carolina 27803-0365
1-800-430-3863
INVESTMENT ADVISOR
Gardner Lewis Asset Management
285 Wilmington-West Chester Pike
Chadds Ford, Pennsylvania 19317
ADMINISTRATOR & FUND ACCOUNTANT
The Nottingham Company
Post Office Drawer 69
Rocky Mount, North Carolina 27802-0069
DIVIDEND DISBURSING & TRANSFER AGENT
North Carolina Shareholder Services
Post Office Box 4365
Rocky Mount, North Carolina 27803-0365
DISTRIBUTOR
Capital Investment Group, Inc.
Post Office Box 32249
Raleigh, North Carolina 27622
CUSTODIAN
First Union National Bank of North Carolina
Two First Union Center
Charlotte, North Carolina 28288-1151
INDEPENDENT AUDITORS
Deloitte & Touche LLP
2500 One PPG Place
Pittsburgh, Pennsylvania 15222-5401
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
THE CHESAPEAKE FUND
June 30, 1997
A Series of
GARDNER LEWIS INVESTMENT TRUST
107 North Washington Street, Post Office
Box 4365
Rocky Mount, North Carolina 27803-0365
Telephone 1-800-430-3863
Table of Contents
INVESTMENT OBJECTIVE AND POLICIES............................................ 2
INVESTMENT LIMITATIONS....................................................... 4
NET ASSET VALUE.............................................................. 5
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION............................... 6
DESCRIPTION OF THE TRUST..................................................... 7
ADDITIONAL INFORMATION CONCERNING TAXES...................................... 8
MANAGEMENT OF THE FUND........................................................ 9
SPECIAL SHAREHOLDER SERVICES................................................. 14
ADDITIONAL INFORMATION ON PERFORMANCE........................................ 15
APPENDIX A - DESCRIPTION OF RATINGS.......................................... 18
ANNUAL REPORT FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1997...............ATTACHED
This Statement of Additional Information (the "Additional Statement") is meant
to be read in conjunction with the Prospectus for the Institutional,
Super-Institutional, and Investor Shares of The Chesapeake Fund (the "Fund"),
each dated the same date as this Additional Statement, and is incorporated by
reference in its entirety into each Prospectus. Because this Additional
Statement is not itself a prospectus, no investment in shares of the Fund should
be made solely upon the information contained herein. Copies of the Fund's
Prospectuses may be obtained at no charge by writing or calling the Fund at the
address and phone number shown above. This Additional Statement is not a
prospectus but is incorporated by reference in each Prospectus in its entirety.
Capitalized terms used but not defined herein have the same meanings as in each
Prospectus.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The following policies supplement the Fund's investment objective and policies
as set forth in the Prospectuses for each Class of Shares of the Fund. The Fund,
organized in 1994, has no prior operating history.
Additional Information on Fund Instruments. Attached to this Additional
Statement is Appendix A, which contains descriptions of the rating symbols used
by Rating Agencies for securities in which the Fund may invest.
Investment Transactions. Subject to the general supervision of the Trust's Board
of Trustees, the Advisor is responsible for, makes decisions with respect to,
and places orders for all purchases and sales of portfolio securities for the
Fund.
The annualized portfolio turnover rate for the Fund is calculated by dividing
the lesser of purchases or sales of portfolio securities for the reporting
period by the monthly average value of the portfolio securities owned during the
reporting period. The calculation excludes all securities whose maturities or
expiration dates at the time of acquisition are one year or less. Portfolio
turnover of the Fund may vary greatly from year to year as well as within a
particular year, and may be affected by cash requirements for redemption of
shares and by requirements that enable the Fund to receive favorable tax
treatment. Portfolio turnover will not be a limiting factor in making Fund
decisions, and the Fund may engage in short-term trading to achieve its
investment objectives.
Purchases of money market instruments by the Fund are made from dealers,
underwriters and issuers. The Fund currently does not expect to incur any
brokerage commission expense on such transactions because money market
instruments are generally traded on a "net" basis by a dealer acting as
principal for its own account without a stated commission. The price of the
security, however, usually includes a profit to the dealer. Securities purchased
in underwritten offerings include a fixed amount of compensation to the
underwriter, generally referred to as the underwriter's concession or discount.
When securities are purchased directly from or sold directly to an issuer, no
commissions or discounts are paid.
Transactions on U.S. stock exchanges involve the payment of negotiated brokerage
commissions. On exchanges on which commissions are negotiated, the cost of
transactions may vary among different brokers. Transactions in the
over-the-counter market are generally on a net basis (i.e., without commission)
through dealers, or otherwise involve transactions directly with the issuer of
an instrument. The Fund's fixed income portfolio transactions will normally be
principal transactions executed in over-the-counter markets and will be executed
on a "net" basis, which may include a dealer markup. With respect to securities
traded only in the over-the-counter market, orders will be executed on a
principal basis with primary market makers in such securities except where
better prices or executions may be obtained on an agency basis or by dealing
with other than a primary market maker.
The Fund may participate, if and when practicable, in bidding for the purchase
of Fund securities directly from an issuer in order to take advantage of the
lower purchase price available to members of a bidding group. The Fund will
engage in this practice, however, only when the Advisor, in its sole discretion,
believes such practice to be otherwise in the Fund's interest.
In executing Fund transactions and selecting brokers or dealers, the Advisor
will seek to obtain the best overall terms available for the Fund. In assessing
the best overall terms available for any transaction, the Advisor shall consider
factors it deems relevant, including the breadth of the market in the security,
the price of the security, the financial condition and execution capability of
the broker or dealer, and the reasonableness of the commission, if any, both for
the specific transaction and on a continuing basis. The sale of Fund shares may
be considered when determining the firms that are to execute brokerage
transactions for the Fund. In addition, the Advisor is authorized to cause the
Fund to pay a broker-dealer which furnishes brokerage and research services a
higher commission than that which might be charged by another broker-dealer for
effecting the same transaction, provided that the Advisor determines in good
faith that such commission is reasonable in relation to the value of the
brokerage and research services provided by such broker-dealer, viewed in terms
of either the particular transaction or the overall responsibilities of the
Advisor to the Fund. Such brokerage and research services might consist of
reports and statistics relating to specific companies or industries, general
summaries of groups of stocks or bonds and their comparative earnings and
yields, or broad overviews of the stock, bond and government securities markets
and the economy.
Supplementary research information so received is in addition to, and not in
lieu of, services required to be performed by the Advisor and does not reduce
the advisory fees payable by the Fund. The Trustees will periodically review any
commissions paid by the Fund to consider whether the commissions paid over
representative periods of time appear to be reasonable in relation to the
benefits inuring to the Fund. It is possible that certain of the supplementary
research or other services received will primarily benefit one or more other
investment companies or other accounts for which investment discretion is
exercised by the Advisor. Conversely, the Fund may be the primary beneficiary of
the research or services received as a result of securities transactions
effected for such other account or investment company.
The Fund may also enter into brokerage/service arrangements pursuant to which
selected brokers executing portfolio transactions for the Fund may pay a portion
of the Fund's operating expenses. For the fiscal year ended February 28, 1997,
the Fund entered into such a brokerage/service arrangement with Ernst and
Company, of New York, New York. During such year such firm received $74,802 in
brokerage commissions from the Fund and paid $21,927 of the Fund's operating
expenses. There can be no assurance that such arrangement will continue in the
future.
The Advisor may also utilize a brokerage firm affiliated with the Trust or the
Advisor if it believes it can obtain the best execution of transactions from
such broker. The Fund will not execute portfolio transactions through, acquire
securities issued by, make savings deposits in or enter into repurchase
agreements with the Advisor or an affiliated person of the Advisor (as such term
is defined in the 1940 Act) acting as principal, except to the extent permitted
by the Securities and Exchange Commission ("SEC"). In addition, the Fund will
not purchase securities during the existence of any underwriting or selling
group relating thereto of which the Advisor, or an affiliated person of the
Advisor, is a member, except to the extent permitted by the SEC. Under certain
circumstances, the Fund may be at a disadvantage because of these limitations in
comparison with other investment companies that have similar investment
objectives but are not subject to such limitations.
Investment decisions for the Fund will be made independently from those for any
other series of the Trust, if any, and for any other investment companies and
accounts advised or managed by the Advisor. Such other investment companies and
accounts may also invest in the same securities as the Fund. To the extent
permitted by law, the Advisor may aggregate the securities to be sold or
purchased for the Fund with those to be sold or purchased for other investment
companies or accounts in executing transactions. When a purchase or sale of the
same security is made at substantially the same time on behalf of the Fund and
another investment company or account, the transaction will be averaged as to
price and available investments allocated as to amount, in a manner which the
Advisor believes to be equitable to the Fund and such other investment company
or account. In some instances, this investment procedure may adversely affect
the price paid or received by the Fund or the size of the position obtained or
sold by the Fund.
For the fiscal year ended February 28, 1997, the fiscal year ended February 29,
1996, and the fiscal period ended February 28, 1995, the Fund paid brokerage
commissions of $686,397, $226,947, and $29,966, respectively.
Repurchase Agreements. The Fund may acquire U.S. Government Securities or
corporate debt securities subject to repurchase agreements. A repurchase
transaction occurs when, at the time the Fund purchases a security (normally a
U.S. Treasury obligation), it also resells it to the vendor (normally a member
bank of the Federal Reserve or a registered Government Securities dealer) and
must deliver the security (and/or securities substituted for them under the
repurchase agreement) to the vendor on an agreed upon date in the future. The
repurchase price exceeds the purchase price by an amount which reflects an
agreed upon market interest rate effective for the period of time during which
the repurchase agreement is in effect. Delivery pursuant to the resale will
occur within one to five days of the purchase.
Repurchase agreements are considered "loans" under the Investment Company Act of
1940, as amended (the "1940 Act"), collateralized by the underlying security.
The Trust will implement procedures to monitor on a continuous basis the value
of the collateral serving as security for repurchase obligations. Additionally,
the Advisor to the Fund will consider the creditworthiness of the vendor. If the
vendor fails to pay the agreed upon resale price on the delivery date, the Fund
will retain or attempt to dispose of the collateral. The Fund's risk is that
such default may include any decline in value of the collateral to an amount
which is less than 100% of the repurchase price, any costs of disposing of such
collateral, and any loss resulting from any delay in foreclosing on the
collateral. The Fund will not enter into any repurchase agreement which will
cause more than 10% of its net assets to be invested in repurchase agreements
which extend beyond seven days and other illiquid securities.
Description of Money Market Instruments. Money market instruments may include
U.S. Government Securities or corporate debt securities (including those subject
to repurchase agreements), provided that they mature in thirteen months or less
from the date of acquisition and are otherwise eligible for purchase by the
Fund. Money market instruments also may include Banker's Acceptances and
Certificates of Deposit of domestic branches of U.S. banks, Commercial Paper and
Variable Amount Demand Master Notes ("Master Notes"). Banker's Acceptances are
time drafts drawn on and "accepted" by a bank. When a bank "accepts" such a time
draft, it assumes liability for its payment. When the Fund acquires a Banker's
Acceptance the bank which "accepted" the time draft is liable for payment of
interest and principal when due. The Banker's Acceptance carries the full faith
and credit of such bank. A Certificate of Deposit ("CD") is an unsecured
interest-bearing debt obligation of a bank. Commercial Paper is an unsecured,
short term debt obligation of a bank, corporation or other borrower. Commercial
Paper maturity generally ranges from two to 270 days and is usually sold on a
discounted basis rather than as an interest-bearing instrument. The Fund will
invest in Commercial Paper only if it is rated one of the top two rating
categories by Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's
Ratings Group ("S&P"), Fitch Investors Service, Inc. ("Fitch") or Duff & Phelps
("D&P") or, if not rated, of equivalent quality in the Advisor's opinion.
Commercial Paper may include Master Notes of the same quality. Master Notes are
unsecured obligations which are redeemable upon demand of the holder and which
permit the investment of fluctuating amounts at varying rates of interest.
Master Notes are acquired by the Fund only through the Master Note program of
the Fund's custodian bank, acting as administrator thereof. The Advisor will
monitor, on a continuous basis, the earnings power, cash flow and other
liquidity ratios of the issuer of a Master Note held by the Fund.
Illiquid Investments. The Fund may invest up to 10% of its net assets in
illiquid securities, which are investments that cannot be sold or disposed of in
the ordinary course of business within seven days at approximately the prices at
which they are valued. Under the supervision of the Board of Trustees, the
Advisor determines the liquidity of the Fund's investments and, through reports
from the Advisor, the Board monitors investments in illiquid instruments. In
determining the liquidity of the Fund's investments, the Advisor may consider
various factors including (1) the frequency of trades and quotations, (2) the
number of dealers and prospective purchasers in the marketplace, (3) dealer
undertakings to make a market, (4) the nature of the security (including any
demand or tender features) and (5) the nature of the marketplace for trades
(including the ability to assign or offset the Fund's rights and obligations
relating to the investment). Investments currently considered by the Fund to be
illiquid include repurchase agreements not entitling the holder to payment of
principal and interest within seven days. If through a change in values, net
assets or other circumstances, the Fund were in a position where more than 10%
of its net assets were invested in illiquid securities, it would seek to take
appropriate steps to protect liquidity.
INVESTMENT LIMITATIONS
The Fund has adopted the following fundamental investment limitations, which
cannot be changed without approval by holders of a majority of the outstanding
voting shares of the Fund. A "majority" for this purpose, means the lesser of
(i) 67% of the Fund's outstanding shares represented in person or by proxy at a
meeting at which more than 50% of its outstanding shares are represented, or
(ii) more than 50% of its outstanding shares. Unless otherwise indicated,
percentage limitations apply at the time of purchase.
As a matter of fundamental policy, the Fund may not:
(1) Invest more than 5% of the value of its total assets in the securities of
any one issuer or purchase more than 10% of the outstanding voting
securities or of any class of securities of any one issuer (except that
securities of the U.S. Government, its agencies and instrumentalities are
not subject to these limitations);
(2) Invest 25% or more of the value of its total assets in any one industry or
group of industries (except that securities of the U.S. Government, its
agencies and instrumentalities are not subject to these limitations);
(3) Invest more than 10% of the value of its total assets in foreign securities
or sponsored American Depository Receipts ("ADRs");
(4) Invest in the securities of any issuer if any of the officers or Trustees
of the Trust or its Investment Advisor who own beneficially more than 1/2
of 1% of the outstanding securities of such issuer together own more than
5% of the outstanding securities of such issuer;
(5) Invest for the purpose of exercising control or management of another
issuer;
(6) Invest in interests in real estate, real estate mortgage loans, real estate
limited partnerships, oil, gas or other mineral exploration leases or
development programs, except that the Fund may invest in the securities of
companies (other than those which are not readily marketable) which own or
deal in such things;
(7) Underwrite securities issued by others except to the extent the Fund may be
deemed to be an underwriter under the federal securities laws, in
connection with the disposition of portfolio securities;
(8) Purchase securities on margin (but the Fund may obtain such short-term
credits as may be necessary for the clearance of transactions);
(9) Make short sales of securities or maintain a short position, except short
sales "against the box"; (A short sale is made by selling a security the
Fund does not own. A short sale is "against the box" to the extent that the
Fund contemporaneously owns or has the right to obtain at no additional
cost securities identical to those sold short.);
(10) Participate on a joint or joint and several basis in any trading account in
securities;
(11) Make loans of money or securities, except that the Fund may invest in
repurchase agreements (but repurchase agreements having a maturity of
longer than seven days, together with other illiquid securities, are
limited to 10% of the Fund's net assets);
(12) Invest in securities of issuers which have a record of less than three
years' continuous operation (including predecessors and, in the case of
bonds, guarantors), if more than 5% of its total assets will be invested in
such securities;
(13) Issue senior securities, borrow money or pledge its assets;
(14) Write, purchase, or sell puts, calls, warrants, or combinations thereof, or
purchase or sell commodities, commodities contracts, futures contracts, or
related options; or
(15) Invest in restricted securities.
Percentage restrictions stated as an investment policy or investment limitation
apply at the time of investment; if a later increase or decrease in percentage
beyond the specified limits results from a change in securities values or total
assets, it will not be considered a violation.
While the Fund has reserved the right to make short sales "against the box"
(limitation number 9, above), the Advisor has no present intention of engaging
in such transactions at this time or during the coming year.
NET ASSET VALUE
The net asset value per share of each Class of the Fund is calculated separately
by adding the value of the Fund's securities and other assets belonging to the
Fund and attributable to that Class, subtracting the liabilities charged to the
Fund and to that Class, and dividing the result by the number of outstanding
shares of such Class. "Assets belonging to" the Fund consist of the
consideration received upon the issuance of shares of the Fund together with all
net investment income, realized gains/losses and proceeds derived from the
investment thereof, including any proceeds from the sale of such investments,
any funds or payments derived from any reinvestment of such proceeds, and a
portion of any general assets of the Trust not belonging to a particular
investment Fund. Income, realized and unrealized capital gains and losses, and
any expenses of the Fund not allocated to a particular Class of the Fund will be
allocated to each Class of the Fund on the basis of the net asset value of that
Class in relation to the net asset value of the Fund. Assets belonging to the
Fund are charged with the direct liabilities of the Fund and with a share of the
general liabilities of the Trust, which are normally allocated in proportion to
the number of or the relative net asset values of all of the Trust's series at
the time of allocation or in accordance with other allocation methods approved
by the Board of Trustees. Certain expenses attributable to a particular Class of
shares (such as the distribution and service fees attributable to Investor
Shares) will be charged against that Class of shares. Certain other expenses
attributable to a particular Class of shares (such as registration fees,
professional fees, and certain printing and postage expenses) may be charged
against that Class of shares if such expenses are actually incurred in a
different amount by that Class or if the Class receives services of a different
kind or to a different degree than other Classes, and the Board of Trustees
approves such allocation. Subject to the provisions of the Declaration of Trust,
determinations by the Board of Trustees as to the direct and allocable
liabilities, and the allocable portion of any general assets, with respect to
the Fund and the Classes of the Fund are conclusive.
The net asset value per share of each Class of the Fund is determined at 4:00
p.m., New York time, Monday through Friday, except on business holidays when the
New York Stock Exchange is closed. The New York Stock Exchange generally
recognizes the following holidays: New Year's Day, President's Day, Good Friday,
Memorial Day, Fourth of July, Labor Day, Thanksgiving Day, and Christmas Day.
Any other holiday recognized by the New York Stock Exchange will be considered a
business holiday on which the Fund's net asset value will not be determined.
For the fiscal year ended February 28, 1997, the total expenses of the Fund
(after expense reductions of $21,927 paid by a broker pursuant to a
brokerage/services arrangement with the Fund) were $2,561,976 (1.04%, 1.22%,
1.53%, 2.33%, and 2.01% of the average daily net assets of the Fund's
Super-Institutional, Institutional, Series A Shares, Series C Shares, and Series
D Shares, respectively). For the fiscal year ended February 29, 1996, the total
expenses of the Fund after fee waivers were $993,279 (1.49%, 1.71%, 2.18%, and
1.73% of the average daily net assets of the Fund's Institutional Shares, Series
A Shares, Series C Shares, and Series D Shares, respectively). For the fiscal
period ended February 28, 1995, the total expenses of the Fund, after fee
waivers and expense reimbursements were $122,384 (1.73% of the average daily net
assets of the Institutional Shares). Investor Shares of the Fund were not
authorized for issuance during the fiscal period ended February 28, 1995.
Super-Institutional Shares of the Fund were not authorized for issuance during
the fiscal year ended February 29, 1996, and the fiscal period ended February
28, 1995.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Purchases. Shares of the Fund are offered and sold on a continuous basis and may
be purchased through authorized investment dealers or directly by contacting the
Distributor or the Fund. Selling dealers have the responsibility of transmitting
orders promptly to the Fund. The public offering price of shares of the Fund
equals net asset value, plus a sales charge generally for the Investor Shares.
Capital Investment Group, Inc. (the "Distributor") receives this sales charge as
Distributor and may reallow it in the form of dealer discounts and brokerage
commissions. The current schedule of sales charges and related dealer discounts
and brokerage commissions is set forth in the Prospectus for the Investor
Shares, along with the information on current purchases, rights of accumulation,
and letters of intent. See "How Shares May Be Purchased" in the Prospectus.
Plan Under Rule 12b-1. The Trust has adopted a Plan of Distribution (the "Plan")
for each Series of the Investor Shares of the Fund pursuant to Rule 12b-1 under
the 1940 Act (see "How Shares May Be Purchased - Distribution Plan" in the
Prospectus). Under the Plan the Fund may expend a percentage of the Investor
Shares' average net assets annually to finance any activity which is primarily
intended to result in the sale of shares of the Investor Shares of the Fund and
the servicing of shareholder accounts, provided the Trust's Board of Trustees
has approved the category of expenses for which payment is being made. This
percentage is up to 0.25%, 0.50%, and 0.75% of the average net assets of the
Series A, Series D, and Series C Investor Shares, respectively. Such
expenditures paid as service fees to any person who sells shares of the Fund may
not exceed 0.25% of the average annual net asset value of such shares. Potential
benefits of the Plan to the Fund include improved shareholder servicing, savings
to the Fund in transfer agency costs, benefits to the investment process from
growth and stability of assets and maintenance of a financially healthy
management organization.
All of the distribution expenses incurred by the Distributor and others, such as
broker-dealers, in excess of the amount paid by the Fund will be borne by such
persons without any reimbursement from the Fund. Subject to seeking best
execution, the Fund may, from time to time, buy or sell portfolio securities
from or to firms which receive payments under the Plan.
From time to time the Distributor may pay additional amounts from its own
resources to dealers for aid in distribution or for aid in providing
administrative services to shareholders.
The Plan and the Distribution Agreement with the Distributor have been approved
by the Board of Trustees of the Trust, including a majority of the Trustees who
are not "interested persons" (as defined in the 1940 Act) of the Trust and who
have no direct or indirect financial interest in the Plan or any related
agreements, by vote cast in person or at a meeting duly called for the purpose
of voting on the Plan and such Agreement. Continuation of the Plan and the
Distribution Agreement must be approved annually by the Board of Trustees in the
same manner as specified above.
Each year the Trustees must determine whether continuation of the Plan is in the
best interest of shareholders of the Fund and that there is a reasonable
likelihood of its providing a benefit to the Fund, and the Board of Trustees has
made such a determination for the current year of operations under the Plan. The
Plan, the Distribution Agreement and the Dealer Agreement with any
broker/dealers may be terminated at any time without penalty by a majority of
those trustees who are not "interested persons" or, with respect to a particular
Series of the Investor Shares, by a majority vote of the Investor Shares'
outstanding voting stock relating to that particular Series. Any amendment
materially increasing the maximum percentage payable under the Plan, with
respect to a particular Series of the Investor Shares, must likewise be approved
by a majority vote of the Investor Shares' outstanding voting stock relating to
that particular Series, as well as by a majority vote of those trustees who are
not "interested persons." Also, any other material amendment to the Plan must be
approved by a majority vote of the trustees including a majority of the
noninterested Trustees of the Trust having no interest in the Plan. In addition,
in order for the Plan to remain effective, the selection and nomination of
Trustees who are not "interested persons" of the Trust must be effected by the
Trustees who themselves are not "interested persons" and who have no direct or
indirect financial interest in the Plan. Persons authorized to make payments
under the Plan must provide written reports at least quarterly to the Board of
Trustees for their review.
For the fiscal year ended February 28, 1997, the Fund incurred $96,096, $64,129,
and $58,554 for costs in connection with the Plan under Rule 12b-1, with respect
to the Series A, Series C, and Series D Investor Shares, respectively. Such
costs were spent primarily on compensation to sales personnel for sale of
Investor Shares and servicing of shareholder accounts for Investor Shares, with
a small portion spent on miscellaneous costs incurred in connection with
distribution of the Fund.
Redemptions. Under the 1940 Act, the Fund may suspend the right of redemption or
postpone the date of payment for shares during any period when (a) trading on
the New York Stock Exchange is restricted by applicable rules and regulations of
the SEC; (b) the Exchange is closed for other than customary weekend and holiday
closings; (c) the SEC has by order permitted such suspension; or (d) an
emergency exists as determined by the SEC. The Fund may also suspend or postpone
the recordation of the transfer of shares upon the occurrence of any of the
foregoing conditions.
In addition to the situations described in the Prospectus under "How Shares may
be Redeemed," the Fund may redeem shares involuntarily to reimburse the Fund for
any loss sustained by reason of the failure of a shareholder to make full
payment for shares purchased by the shareholder or to collect any charge
relating to a transaction effected for the benefit of a shareholder which is
applicable to Fund shares as provided in the Prospectus from time to time.
DESCRIPTION OF THE TRUST
The Trust is an unincorporated business trust organized under Massachusetts law
on August 12, 1992. The Trust's Declaration of Trust authorizes the Board of
Trustees to divide shares into series, each series relating to a separate
portfolio of investments, and to classify and reclassify any unissued shares
into one or more classes of shares of each such series. The Declaration of Trust
currently provides for the shares of two series, as follows: the Fund and The
Chesapeake Growth Fund, both managed by the Advisor. The shares of The
Chesapeake Growth Fund are all of one class; the shares of the Fund are divided
into five classes (Institutional Shares, Super-Institutional Shares, and Series
A, Series C, and Series D Investor Shares). The number of shares of each series
shall be unlimited. The Trust does not intend to issue share certificates.
In the event of a liquidation or dissolution of the Trust or an individual
series, such as the Fund, shareholders of a particular series would be entitled
to receive the assets available for distribution belonging to such series.
Shareholders of a series are entitled to participate equally in the net
distributable assets of the particular series involved on liquidation, based on
the number of shares of the series that are held by each shareholder. If there
are any assets, income, earnings, proceeds, funds or payments, that are not
readily identifiable as belonging to any particular series, the Trustees shall
allocate them among any one or more of the series as they, in their sole
discretion, deem fair and equitable.
Shareholders of all of the series of the Trust, including the Fund, will vote
together and not separately on a series-by-series or class-by-class basis,
except as otherwise required by law or when the Board of Trustees determines
that the matter to be voted upon affects only the interests of the shareholders
of a particular series or class. Rule 18f-2 under the 1940 Act provides that any
matter required to be submitted to the holders of the outstanding voting
securities of an investment company such as the Trust shall not be deemed to
have been effectively acted upon unless approved by the holders of a majority of
the outstanding shares of each series or class affected by the matter. A series
or class is affected by a matter unless it is clear that the interests of each
series or class in the matter are substantially identical or that the matter
does not affect any interest of the series or class. Under Rule 18f-2, the
approval of an investment advisory agreement or any change in a fundamental
investment policy would be effectively acted upon with respect to a series only
if approved by a majority of the outstanding shares of such series. However, the
Rule also provides that the ratification of the appointment of independent
accountants, the approval of principal underwriting contracts and the election
of Trustees may be effectively acted upon by shareholders of the Trust voting
together, without regard to a particular series or class.
When used in the Prospectus or this Additional Statement, a "majority" of
shareholders means the vote of the lesser of (1) 67% of the shares of the Trust
or the applicable series or class present at a meeting if the holders of more
than 50% of the outstanding shares are present in person or by proxy, or (2)
more than 50% of the outstanding shares of the Trust or the applicable series or
class.
When issued for payment as described in the Prospectus and this Additional
Statement, shares of the Fund will be fully paid and non-assessable.
The Declaration of Trust provides that the Trustees of the Trust will not be
liable in any event in connection with the affairs of the Trust, except as such
liability may arise from his or her own bad faith, willful misfeasance, gross
negligence, or reckless disregard of duties. It also provides that all third
parties shall look solely to the Trust property for satisfaction of claims
arising in connection with the affairs of the Trust. With the exceptions stated,
the Declaration of Trust provides that a Trustee or officer is entitled to be
indemnified against all liability in connection with the affairs of the Trust.
ADDITIONAL INFORMATION CONCERNING TAXES
The following summarizes certain additional tax considerations generally
affecting the Fund and its shareholders that are not described in the
Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Fund or its shareholders, and the discussion here and in the
Prospectus is not intended as a substitute for careful tax planning and is based
on tax laws and regulations that are in effect on the date hereof; such laws and
regulations may be changed by legislative, judicial, or administrative action.
Investors are advised to consult their tax advisors with specific reference to
their own tax situations.
Each series of the Trust, including the Fund, will be treated as a separate
corporate entity under the Code and intends to qualify or remain qualified as a
regulated investment company. In order to so qualify, each series must elect to
be a regulated investment company or have made such an election for a previous
year and must satisfy, in addition to the distribution requirement described in
the Prospectus, certain requirements with respect to the source of its income
for a taxable year. At least 90% of the gross income of each series must be
derived from dividends, interest, payments with respect to securities loans,
gains from the sale or other disposition of stocks, securities or foreign
currencies, and other income derived with respect to the series' business of
investing in such stock, securities or currencies. Any income derived by a
series from a partnership or trust is treated as derived with respect to the
series' business of investing in stock, securities or currencies only to the
extent that such income is attributable to items of income that would have been
qualifying income if realized by the series in the same manner as by the
partnership or trust.
Another requirement for qualification as a regulated investment company under
the Code is that less than 30% of a series' gross income for a taxable year must
be derived from gains realized on the sale or other disposition of the following
investments held for less than three months: (l) stock and securities (as
defined in Section 2(a) (36) of the 1940 Act); (2) options, futures and forward
contracts other than those on foreign currencies; or (3) foreign currencies (or
options, futures or forward contracts on foreign currencies) that are not
directly related to a series' principal business of investing in stocks or
securities (or options and futures with respect to stocks or securities).
Interest (including original issue discount and, with respect to certain debt
securities, accrued market discount) received by a series upon maturity or
disposition of a security held for less than three months will not be treated as
gross income derived from the sale or other disposition of such security within
the meaning of this requirement. However, any other income which is attributable
to realized market appreciation will be treated as gross income from the sale or
other disposition of securities for this purpose.
An investment company may not qualify as a regulated investment company for any
taxable year unless it satisfies certain requirements with respect to the
diversification of its investments at the close of each quarter of the taxable
year. In general, at least 50% of the value of its total assets must be
represented by cash, cash items, government securities, securities of other
regulated investment companies and other securities which, with respect to any
one issuer, do not represent more than 5% of the total assets of the investment
company nor more than 10% of the outstanding voting securities of such issuer.
In addition, not more than 25% of the value of the investment company's total
assets may be invested in the securities (other than government securities or
the securities of other regulated investment companies) of any one issuer. The
Fund intends to satisfy all requirements on an ongoing basis for continued
qualification as a regulated investment company.
Each series of the Trust, including the Fund, will designate any distribution of
long term capital gains as a capital gain dividend in a written notice mailed to
shareholders within 60 days after the close of the series' taxable year.
Shareholders should note that, upon the sale or exchange of series shares, if
the shareholder has not held such shares for at least six months, any loss on
the sale or exchange of those shares will be treated as long term capital loss
to the extent of the capital gain dividends received with respect to the shares.
A 4% nondeductible excise tax is imposed on regulated investment companies that
fail to currently distribute an amount equal to specified percentages of their
ordinary taxable income and capital gain net income (excess of capital gains
over capital losses). Each series of the Trust, including the Fund, intends to
make sufficient distributions or deemed distributions of its ordinary taxable
income and any capital gain net income prior to the end of each calendar year to
avoid liability for this excise tax.
If for any taxable year a series does not qualify for the special federal income
tax treatment afforded regulated investment companies, all of its taxable income
will be subject to federal income tax at regular corporate rates (without any
deduction for distributions to its shareholders). In such event, dividend
distributions (whether or not derived from interest on tax-exempt securities)
would be taxable as ordinary income to shareholders to the extent of the series'
current and accumulated earnings and profits, and would be eligible for the
dividends received deduction for corporations.
Each series of the Trust, including the Fund, will be required in certain cases
to withhold and remit to the U.S. Treasury 31% of taxable dividends or 31% of
gross proceeds realized upon sale paid to shareholders who have failed to
provide a correct tax identification number in the manner required, or who are
subject to withholding by the Internal Revenue Service for failure to properly
include on their return payments of taxable interest or dividends, or who have
failed to certify to the Fund that they are not subject to backup withholding
when required to do so or that they are "exempt recipients."
Depending upon the extent of the Fund's activities in states and localities in
which its offices are maintained, in which its agents or independent contractors
are located or in which it is otherwise deemed to be conducting business, the
Fund may be subject to the tax laws of such states or localities. In addition,
in those states and localities that have income tax laws, the treatment of the
Fund and its shareholders under such laws may differ from their treatment under
federal income tax laws.
MANAGEMENT OF THE FUND
Trustees and Officers. The Trustees and executive officers of the Trust, their
addresses and ages, and their principal occupations for the last five years are
as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
Name, Age*, Position(s) Principal Occupation(s)
and Address During Past 5 Years
- ----------------------------------------------------------------------------------------------------------------------------
Jack E. Brinson, 64 President, Brinson Investment Co. (personal investments)
Trustee President, Brinson Chevrolet, Inc. (auto dealership)
1105 Panola Street Tarboro, North Carolina
Tarboro, North Carolina 27886
W. Whitfield Gardner, 34 Chairman and Executive Officer
Trustee** Gardner Lewis Asset Management (Advisor to the Chesapeake Funds)
Chief Executive Officer Chadds Ford, Pennsylvania
The Chesapeake Funds
285 Wilmington - West Chester Pike
Chadds Ford, Pennsylvania 19317
Stephen J. Kneeley, 34 Chief Operating Officer
Trustee Turner Investment Partners (investment manager)
1235 Westlakes Drive Berwyn, Pennsylvania
Suite 350
Berwyn, Pennsylvania 19312
John L. Lewis, IV, 33 President
President Gardner Lewis Asset Management (Advisor to the Chesapeake Funds)
The Chesapeake Funds Chadds Ford, Pennsylvania
285 Wilmington - West Chester Pike
Chadds Ford, Pennsylvania 19317
J. Hope Reese, 36 Comptroller
Treasurer and Assistant The Nottingham Company
Secretary Rocky Mount, North Carolina
105 North Washington Street (Administrator to the Chesapeake Funds), since 1995;
Rocky Mount, North Carolina 27802 previously, Cash Manager, Law Companies Group, Atlanta, Georgia,
since 1993; previously, Financial Manager, MGR Food Services,
Atlanta, Georgia
C. Frank Watson III, 26 Vice President
Secretary and Assistant Treasurer The Nottingham Company
105 North Washington Street Rocky Mount, North Carolina (Administrator to the Chesapeake
Rocky Mount, North Carolina 27802 Funds)
William D. Zantzinger, 35 Director of Trading
Vice President Gardner Lewis Asset Management (Advisor to the Chesapeake Funds)
The Chesapeake Funds Chadds Ford, Pennsylvania
285 Wilmington - West Chester Pike
Chadds Ford, Pennsylvania 19317
- -------------------------------
* As of June 27, 1997
** Indicates that Trustee is an "interested person" of the Trust for purposes of
the 1940 Act because of his position with the Advisor or Administrator to the
Trust.
</TABLE>
Compensation. The officers of the Trust will not receive compensation from the
Trust for performing the duties of their offices. Each Trustee who is not an
"interested person" of the Trust receives a fee of $7,500 each year plus $400
per series of the Trust per meeting attended in person and $150 per series of
the Trust per meeting attended by telephone. All Trustees are reimbursed for any
out-of-pocket expenses incurred in connection with attendance at meetings.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Compensation Table
- ---------------------------------------------------------------------------------------------------------------
Pension Total
Retirement Compensation
Aggregate Benefits Estimated from the
Compensation Accrued As Annual Trust
Name of Person, from the Part of Fund Benefits Upon Paid to
Position Trust Expenses Retirement Trustees
- ---------------------------------------------------------------------------------------------------------------
Jack E. Brinson $10,200 None None $10,200
Trustee
W. Whitfield Gardner None None None None
Trustee
Stephen J. Kneeley $4,550 None None $4,550
Trustee
- ---------------------------------------------------------------------------------------------------------------
Figures are for the calendar year ended December 31, 1996.
</TABLE>
Principal Holders of Voting Securities. As of June 24, 1997, the Trustees and
Officers of the Trust as a group owned beneficially (i.e., had voting and/or
investment power) less than 1% of the then outstanding shares of each Class of
the Fund. On the same date the following shareholders owned of record more than
5% of the outstanding shares of beneficial interest of a Class of the Fund.
Except as provided below, no person is known by the Trust to be the beneficial
owner of more than 5% of the outstanding shares of a Class of the Fund as of
June 24, 1997.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
Name and Address of Amount and Nature of Percent
Beneficial Owner Beneficial Ownership* of Class
- -----------------------------------------------------------------------------------------------------------
INSTITUTIONAL SHARES
Crestar Bank Custodian FBO 623,184.687 Shares 13.289%
Carpenter Co. Profit Sharing Plan
P.O. Box 26665
Richmond, Virginia 23267
Norwest Bank Colorado Custodian 408,736.444 Shares 8.716%
FBO COBANK
1740 Broadway
Denver, CO 80274
Jonah Nominees Limited 404,585.300 Shares 8.627%
12 Gough Square
London, England EC4A 3DE
Caribou Nominees Limited 337,154.417 Shares 7.189%
12 Gough Square
London, England EC4A 3DE
SERIES A INVESTOR SHARES
Charles Schwab & Company, Inc. 224,286.329 Shares 9.822%
Custody Account FBO Customers
101 Montgomery Street
San Francisco, CA 94104
SERIES C INVESTOR SHARES
Interstate/Johnson Lane 63,165.180 Shares 23.273%
William W. Jones, Trustee
Interstate Tower
P.O. Box 1220
Charlotte, NC 28201-1220
Strafe & Co. 49,769.853 Shares 18.337%
FAO Southwest Bone & Joint
P.O. Box 160
Westerville, OH 43086
Dorothy Matthews Marital 24,703.362 Shares 9.102%
Deduction Trust #2
Salvadore E. Rodriguez, Trustee
1000 Louisiana, Suite 2000
Houston, Texas 77002
SUPER-INSTITUTIONAL SHARES
Ohio School 5,792,345.667 Shares 100.00%**
Employee Retirement System
45 North 4th Street
Columbus, OH 43214-3634
* The shares indicated are believed by the Fund to be owned both of record
and beneficially, except as indicated above.
** Pursuant to applicable SEC regulations, this shareholder is deemed to
control the indicated Class of Shares of the Fund.
</TABLE>
Investment Advisor. Information about Gardner Lewis Asset Management, Chadds
Ford, Pennsylvania (the "Advisor") and its duties and compensation as Advisor is
contained in the Prospectus.
The Advisor will receive a monthly management fee equal to an annual rate of
1.00% of the average daily net asset value of the Fund. For the fiscal year
ended February 28, 1997, the Advisor received its fee in the amount of
$1,940,587. The Advisor voluntarily waived a portion of its fee for the fiscal
year ended February 29, 1996. The total fees waived amounted to $98,808 (the
Advisor received $545,139 of its fee). The Advisor voluntarily waived its fee
and reimbursed a portion of the Fund's operating expenses for the fiscal period
ended February 28, 1995. The total fees waived amounted to $70,747 and expenses
reimbursed amounted to $1,080.
Under the Advisory Agreement, the Advisor is not liable for any error of
judgment or mistake of law or for any loss suffered by the Fund in connection
with the performance of such Agreement, except a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services or a
loss resulting from willful misfeasance, bad faith or gross negligence on the
part of the Advisor in the performance of its duties or from its reckless
disregard of its duties and obligations under the Agreement.
Administrator and Transfer Agent. The Trust has entered into a Fund Accounting,
Dividend Disbursing & Transfer Agent and Administration Agreement with The
Nottingham Company (the "Administrator"), 105 North Washington Street, Post
Office Drawer 69, Rocky Mount, North Carolina 27802-0069, pursuant to which the
Administrator receives a fee at the annual rate of 0.075% of the average daily
net assets of each Class of Investor and Institutional Shares of the Fund for
general administration services. In addition, the Administrator currently
receives a base monthly fee of $1,750 for each Class of Investor and
Institutional Shares for accounting and recordkeeping services for such Classes
of Shares of the Fund. The Administrator also receives a fee at the annual rate
of 0.015% of the average daily net assets of each Class of Shares of the Fund
for shareholder administration services. The Administrator also charges the Fund
for certain costs involved with the daily valuation of investment securities and
is reimbursed for out-of-pocket expenses. The Administrator charges a minimum
fee of $3,000 per month for all of its fees for the Fund taken in the aggregate,
analyzed monthly. For services to the Fund for the fiscal year ended February
28, 1997, the fiscal year ended February 29, 1996, and the fiscal period ended
February 28, 1995, the Administrator received aggregate administration fees of
$146,824, $65,947, and $12,844, respectively. For such fiscal years and period,
the Administrator received $84,000, $78,750, and $19,250, respectively, for
accounting and recordkeeping services.
The Administrator will perform the following services for the Fund: (1)
coordinate with the Custodian and monitor the services it provides to the Fund;
(2) coordinate with and monitor any other third parties furnishing services to
the Fund; (3) provide the Fund with necessary office space, telephones and other
communications facilities and personnel competent to perform administrative and
clerical functions for the Fund; (4) supervise the maintenance by third parties
of such books and records of the Fund as may be required by applicable federal
or state law; (5) prepare or supervise the preparation by third parties of all
federal, state and local tax returns and reports of the Fund required by
applicable law; (6) prepare and, after approval by the Trust, file and arrange
for the distribution of proxy materials and periodic reports to shareholders of
the Fund as required by applicable law; (7) prepare and, after approval by the
Trust, arrange for the filing of such registration statements and other
documents with the Securities and Exchange Commission and other federal and
state regulatory authorities as may be required by applicable law; (8) review
and submit to the officers of the Trust for their approval invoices or other
requests for payment of Fund expenses and instruct the Custodian to issue checks
in payment thereof; and (9) take such other action with respect to the Fund as
may be necessary in the opinion of the Administrator to perform its duties under
the agreement. The Administrator will also provide certain accounting and
pricing services for the Fund.
With the approval of the Trust, the Administrator has contracted with North
Carolina Shareholder Services, LLC (the "Transfer Agent"), a North Carolina
limited liability company, to serve as transfer, dividend paying, and
shareholder servicing agent for the Fund. The Transfer Agent is compensated for
its services by the Administrator and not directly by the Fund. The address of
the Transfer Agent is 107 North Washington Street, Post Office Box 4365, Rocky
Mount, North Carolina 27803-0365.
Distributor. Capital Investment Group, Inc. (the "Distributor"), Post Office Box
32249, Raleigh, North Carolina 27622, acts as an underwriter and distributor of
the Fund's shares for the purpose of facilitating the registration of shares of
the Fund under state securities laws and to assist in sales of Fund shares
pursuant to a Distribution Agreement (the "Distribution Agreement") approved by
the Board of Trustees of the Trust.
In this regard, the Distributor has agreed at its own expense to qualify as a
broker-dealer under all applicable federal or state laws in those states which
the Fund shall from time to time identify to the Distributor as states in which
it wishes to offer its shares for sale, in order that state registrations may be
maintained for the Fund.
The Distributor is a broker-dealer registered with the Securities and Exchange
Commission and a member in good standing of the National Association of
Securities Dealers, Inc.
The Distribution Agreement may be terminated by either party upon 60 days prior
written notice to the other party.
For the fiscal year ended February 28, 1997, the aggregate dollar amount of
sales charges paid on the sale of Fund shares was $110,001, from which the
Distributor retained sales charges of $8,836. For the fiscal year ended February
29, 1996, the aggregate dollar amount of sales charges paid on the sale of Fund
shares was $709,015, from which the Distributor retained sales charges of
$55,149. For the fiscal period ended February 28, 1995, the aggregate dollar
amount of sales charges paid on the sale of Fund shares was $114,948, from which
the Distributor retained sales charges of $9,495.
Custodian. First Union National Bank of North Carolina (the "Custodian"), Two
First Union Center, Charlotte, North Carolina 28288-1151, serves as custodian
for the Fund's assets. The Custodian acts as the depository for the Fund,
safekeeps its portfolio securities, collects all income and other payments with
respect to portfolio securities, disburses monies at the Fund's request and
maintains records in connection with its duties as Custodian. For its services
as Custodian, the Custodian is entitled to receive from the Fund an annual fee
based on the average net assets of the Fund held by the Custodian.
Independent Auditors. The firm of Deloitte & Touche LLP, 2500 One PPG Place,
Pittsburgh, Pennsylvania 15222-5401, serves as independent auditors for the
Fund, and will audit the annual financial statements of the Fund, prepare the
Fund's federal and state tax returns, and consult with the Fund on matters of
accounting and federal and state income taxation. A copy of the most recent
annual report of the Fund will accompany this Additional Statement whenever it
is requested by a shareholder or prospective investor.
SPECIAL SHAREHOLDER SERVICES
The Fund offers the following shareholder services:
Regular Account. The regular account allows for voluntary investments to be made
at any time. Available to individuals, custodians, corporations, trusts,
estates, corporate retirement plans and others, investors are free to make
additions and withdrawals to or from their account as often as they wish. When
an investor makes an initial investment in the Fund, a shareholder account is
opened in accordance with the investor's registration instructions. Each time
there is a transaction in a shareholder account, such as an additional
investment or the reinvestment of a dividend or distribution, the shareholder
will receive a confirmation statement showing the current transaction and all
prior transactions in the shareholder account during the calendar year to date,
along with a summary of the status of the account as of the transaction date. As
stated in the Prospectus, share certificates are not issued.
Automatic Investment Plan (Investor and Institutional Shares Only). The
automatic investment plan enables shareholders to make regular monthly or
quarterly investment in shares through automatic charges to their checking
account. With shareholder authorization and bank approval, the Fund will
automatically charge the checking account for the amount specified ($100
minimum) which will be automatically invested in shares at the public offering
price on or about the 21st day of the month. The shareholder may change the
amount of the investment or discontinue the plan at any time by writing to the
Fund.
Systematic Withdrawal Plan (Investor and Institutional Shares Only).
Shareholders owning shares with a value of $10,000 or more ($1,000,000 or more
for holders of Institutional Shares) may establish a Systematic Withdrawal Plan.
A shareholder may receive monthly or quarterly payments, in amounts of not less
than $100 per payment, by authorizing the Fund to redeem the necessary number of
shares periodically (each month, or quarterly in the months of March, June,
September and December) in order to make the payments requested. The Fund has
the capacity of electronically depositing the proceeds of the systematic
withdrawal directly to the shareholder's personal bank account ($5,000 minimum
per bank wire). Instructions for establishing this service are included in the
Fund Shares Application, enclosed in the Prospectus, or available by calling the
Fund. If the shareholder prefers to receive his systematic withdrawal proceeds
in cash, or if such proceeds are less than the $5,000 minimum for a bank wire,
checks will be made payable to the designated recipient and mailed within 7 days
of the valuation date. If the designated recipient is other than the registered
shareholder, the signature of each shareholder must be guaranteed on the
application (see "Signature Guarantees" in the Prospectus). A corporation (or
partnership) must also submit a "Corporate Resolution" (or "Certification of
Partnership") indicating the names, titles and required number of signatures
authorized to act on its behalf. The application must be signed by a duly
authorized officer(s) and the corporate seal affixed. No redemption fees are
charged to shareholders under this plan. Costs in conjunction with the
administration of the plan are borne by the Fund. Shareholders should be aware
that such systematic withdrawals may deplete or use up entirely their initial
investment and may result in realized long-term or short-term capital gains or
losses. The Systematic Withdrawal Plan may be terminated at any time by the Fund
upon sixty days written notice or by a shareholder upon written notice to the
Fund. Applications and further details may be obtained by calling the Fund at
1-800-430-3863, or by writing to:
The Chesapeake Fund
[Investor Shares] or [Institutional Shares]
107 North Washington Street
Post Office Box 4365
Rocky Mount, North Carolina 27803-0365
Purchases in Kind. The Fund may accept securities in lieu of cash in payment for
the purchase of shares in the Fund. The acceptance of such securities is at the
sole discretion of the Advisor based upon the suitability of the securities
accepted for inclusion as a long term investment of the Fund, the marketability
of such securities, and other factors which the Advisor may deem appropriate. If
accepted, the securities will be valued using the same criteria and methods as
described in "How Shares are Valued" in the Prospectus.
Redemptions in Kind. The Fund does not intend, under normal circumstances, to
redeem its securities by payment in kind. It is possible, however, that
conditions may arise in the future which would, in the opinion of the Trustees,
make it undesirable for the Fund to pay for all redemptions in cash. In such
case, the Board of Trustees may authorize payment to be made in readily
marketable portfolio securities of the Fund. Securities delivered in payment of
redemptions would be valued at the same value assigned to them in computing the
net asset value per share. Shareholders receiving them would incur brokerage
costs when these securities are sold. An irrevocable election has been filed
under Rule 18f-1 of the 1940 Act, wherein the Fund committed itself to pay
redemptions in cash, rather than in kind, to any shareholder of record of the
Fund who redeems during any ninety-day period, the lesser of (a) $250,000 or (b)
one percent (1%) of the Fund's net asset value at the beginning of such period.
Transfer of Registration. To transfer shares to another owner, send a written
request to the Fund at the address shown herein. Your request should include the
following: (1) the Fund name and existing account registration; (2) signature(s)
of the registered owner(s) exactly as the signature(s) appear(s) on the account
registration; (3) the new account registration, address, social security or
taxpayer identification number and how dividends and capital gains are to be
distributed; (4) signature guarantees (See the Prospectus under the heading
"Signature Guarantees"); and (5) any additional documents which are required for
transfer by corporations, administrators, executors, trustees, guardians, etc.
If you have any questions about transferring shares, call or write the Fund.
ADDITIONAL INFORMATION ON PERFORMANCE
From time to time, the total return of each Class of the Fund may be quoted in
advertisements, sales literature, shareholder reports or other communications to
shareholders. The Fund computes the "average annual total return" of each Class
of the Fund by determining the average annual compounded rates of return during
specified periods that equate the initial amount invested to the ending
redeemable value of such investment. This is done by determining the ending
redeemable value of a hypothetical $1,000 initial payment. This calculation is
as follows:
P(1+T)n = ERV
Where: T = average annual total return.
ERV = ending redeemable value at the end of the period
covered by the computation of a hypothetical $1,000
payment made at the beginning of the period.
P = hypothetical initial payment of $1,000 from which the
maximum sales load is deducted.
n = period covered by the computation, expressed in terms
of years.
The Fund may also compute the aggregate total return of each Class of the Fund,
which is calculated in a similar manner, except that the results are not
annualized.
The calculation of average annual total return and aggregate total return assume
that the maximum sales load is deducted from the initial $1,000 investment at
the time it is made and that there is a reinvestment of all dividends and
capital gain distributions on the reinvestment dates during the period. The
ending redeemable value is determined by assuming complete redemption of the
hypothetical investment and the deduction of all nonrecurring charges at the end
of the period covered by the computations. The Fund may also quote other total
return information that does not reflect the effects of the sales load.
The average annual total return for the Institutional Shares of the Fund for the
year ended February 28, 1997, and since inception (April 6, 1994 to February 28,
1997) was 12.53% and 18.75%, respectively. The cumulative total return for the
Institutional Shares of the Fund since inception through February 28, 1997, was
64.66%.
The average annual total return for the Series A, Series C, and Series D
Investor Shares of the Fund for the year ended February 28, 1997, was 8.84%,
11.30%, and 9.92%, respectively. The average annual total return for the Series
A, Series C, and Series D Investor Shares of the Fund since inception (April 7,
1995 to February 28, 1997) was 17.04%, 18.08%, and 17.60%, respectively. Without
reflecting the effects of the maximum sales load, the average annual total
return for the Series A and Series D Investor Shares of the Fund for the year
ended February 28, 1997, was 12.21% and 11.59%, respectively. Without reflecting
the effects of the maximum sales load, the average annual total return for the
Series A and Series D Investor Shares of the Fund since inception (April 7, 1995
to February 28, 1997) was 18.93% and 18.54%, respectively. The cumulative total
return for the Series A, Series C, and Series D Investor Shares of the Fund
since inception through February 28, 1997, was 34.81%, 37.09%, and 36.05%,
respectively. Without reflecting the effects of the maximum sales load, the
cumulative total return for the Series A and Series D Investor Shares of the
Fund since inception through February 28, 1997, was 38.98% and 38.12%,
respectively.
The Fund may also quote the performance of the Series A Investor Shares of the
Fund from the original inception of the Fund on April 6, 1994, as opposed to the
inception of the class of Series A Investor Shares on April 7, 1995. Under such
circumstances, historical performance of the Series A Shares will be calculated
by using the performance of the original class of the Fund (now called the
Institutional Shares) from inception on April 6, 1994, until the date of
issuance of the class of Series A Shares on April 7, 1995, and combining such
performance with the performance of the Series A Shares since April 7, 1995.
Calculated in this manner, the average annual return of the Series A Shares of
the Fund since inception through February 28, 1997, with and without reflecting
the effects of the maximum sales load, was 17.20% and 18.50%, respectively, and
the cumulative total return of the Series A Shares of the Fund since inception
through February 28, 1997, with and without reflecting the effects of the
maximum sales load, was 58.95% and 63.97%, respectively.
The aggregate total return for the Super-Institutional Shares of the Fund since
inception (June 12, 1996 to February 28, 1997) was 4.89%.
These performance quotations should not be considered representative of the
Fund's performance for any specified period in the future. Aggregate total
return is calculated in a similar manner to annual total return, except that the
return is aggregated, rather than annualized.
The Fund's performance may be compared in advertisements, sales literature,
shareholder reports, and other communications to the performance of other mutual
funds having similar objectives or to standardized indices or other measures of
investment performance. In particular, the Fund may compare its performance to
the S&P 500 Total Return Index and the NASDAQ Industrials Index, which are
generally considered to be representative of the performance of unmanaged common
stocks that are publicly traded in the United States securities markets.
Comparative performance may also be expressed by reference to a ranking prepared
by a mutual fund monitoring service or by one or more newspapers, newsletters or
financial periodicals. The Fund may also occasionally cite statistics to reflect
its volatility and risk. The Fund may also compare its performance to other
published reports of the performance of unmanaged portfolios of companies. The
performance of such unmanaged portfolios generally does not reflect the effects
of dividends or dividend reinvestment. Of course, there can be no assurance that
the Fund will experience the same results. Performance comparisons may be useful
to investors who wish to compare the Fund's past performance to that of other
mutual funds and investment products. Of course, past performance is not a
guarantee of future results.
The Fund's performance fluctuates on a daily basis largely because net earnings
and net asset value per share fluctuate daily. Both net earnings and net asset
value per share are factors in the computation of total return as described
above.
As indicated, from time to time, the Fund may advertise its performance compared
to similar funds or portfolios using certain indices, reporting services, and
financial publications. These may include the following:
o Lipper Analytical Services, Inc. ranks funds in various fund categories
by making comparative calculations using total return. Total return
assumes the reinvestment of all capital gains distributions and income
dividends and takes into account any change in net asset value over a
specific period of time.
o Morningstar, Inc., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for
two weeks.
Investors may use such indices in addition to the Fund's Prospectus to obtain a
more complete view of the Fund's performance before investing. Of course, when
comparing the Fund's performance to any index, factors such as composition of
the index and prevailing market conditions should be considered in assessing the
significance of such comparisons. When comparing funds using reporting services,
or total return, investors should take into consideration any relevant
differences in funds such as permitted portfolio compositions and methods used
to value portfolio securities and compute offering price. Advertisements and
other sales literature for the Fund may quote total returns that are calculated
on non-standardized base periods. The total returns represent the historic
change in the value of an investment in the Fund based on monthly reinvestment
of dividends over a specified period of time.
From time to time the Fund may include in advertisements and other
communications information, charts, and illustrations relating to inflation and
the effects of inflation on the dollar, including the purchasing power of the
dollar at various rates of inflation. The Fund may also disclose from time to
time information about its portfolio allocation and holdings at a particular
date (including ratings of securities assigned by independent rating services
such as S&P and Moody's). The Fund may also depict the historical performance of
the securities in which the Fund may invest over periods reflecting a variety of
market or economic conditions either alone or in comparison with alternative
investments, performance indices of those investments, or economic indicators.
The Fund may also include in advertisements and in materials furnished to
present and prospective shareholders statements or illustrations relating to the
appropriateness of types of securities and/or mutual funds that may be employed
to meet specific financial goals, such as saving for retirement, children's
education, or other future needs.
<PAGE>
APPENDIX A
DESCRIPTION OF RATINGS
The Fund will normally be at least 90% invested in equities. As a temporary
defensive position, however, the Fund may invest up to 100% of its assets in
investment grade bonds, U.S. Government Securities, repurchase agreements, or
money market instruments ("Investment-Grade Debt Securities"). When the Fund
invests in Investment Grade-Debt Securities as a temporary defensive measure, it
is not pursuing its investment objective. Under normal circumstances, however,
the fund may invest in money market or repurchase agreement instruments as
described in the Prospectus. The various ratings used by the nationally
recognized securities rating services are described below.
A rating by a rating service represents the service's opinion as to the credit
quality of the security being rated. However, the ratings are general and are
not absolute standards of quality or guarantees as to the creditworthiness of an
issuer. Consequently, the Advisor believes that the quality of fixed income
securities in which the Fund may invest should be continuously reviewed and that
individual analysts give different weightings to the various factors involved in
credit analysis. A rating is not a recommendation to purchase, sell or hold a
security, because it does not take into account market value or suitability for
a particular investor. When a security has received a rating from more than one
service, each rating is evaluated independently. Ratings are based on current
information furnished by the issuer or obtained by the rating services from
other sources that they consider reliable. Ratings may be changed, suspended or
withdrawn as a result of changes in or unavailability of such information, or
for other reasons.
Standard & Poor's Ratings Group. The following summarizes the highest four
ratings used by Standard & Poor's Ratings Group ("S&P") for bonds which are
deemed to be "Investment-Grade Debt Securities" by the Advisor:
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay interest and repay
principal.
AA - Debt rated AA is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in a small
degree.
A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher
rated categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category than for debt in
higher rated categories.
To provide more detailed indications of credit quality, the AA, A and BBB
ratings may be modified by the addition of a plus or minus sign to show relative
standing within these major rating categories.
Bonds rated BB, B, CCC, CC and C are not considered by the Advisor to be
"Investment-Grade Debt Securities" and are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
bonds may have some quality and protective characteristics, these are outweighed
by large uncertainties or major risk exposures to adverse conditions.
Commercial paper rated A-1 by S&P indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted A-1+. Capacity for timely payment on
commercial paper rated A-2 is satisfactory, but the relative degree of safety is
not as high as for issues designated A-1.
The rating SP-1 is the highest rating assigned by S&P to municipal notes and
indicates a very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics are given a
plus (+) designation.
Moody's Investors Service, Inc. The following summarizes the highest four
ratings used by Moody's Investors Service, Inc. ("Moody's") for bonds which are
deemed to be "Investment-Grade Debt Securities" by the Advisor:
Aaa - Bonds that are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa - Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A - Debt which is rated A possesses many favorable investment attributes
and is to be considered as an upper medium grade obligation. Factors
giving security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa - Debt which is rated Baa is considered as a medium grade obligation,
i.e., it is neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such debt lacks outstanding
investment characteristics and in fact has speculative characteristics as
well.
Moody's applies numerical modifiers (l, 2 and 3) with respect to bonds rated Aa,
A and Baa. The modifier 1 indicates that the bond being rated ranks in the
higher end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the bond ranks in the lower end of
its generic rating category.
Bonds which are rated Ba, B, Caa, Ca or C by Moody's are not considered
"Investment-Grade Debt Securities" by the Advisor. Bonds rated Ba are judged to
have speculative elements because their future cannot be considered as well
assured. Uncertainty of position characterizes bonds in this class, because the
protection of interest and principal payments often may be very moderate and not
well safeguarded.
Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the security over any long period for time may be small. Bonds
which are rated Caa are of poor standing. Such securities may be in default or
there may be present elements of danger with respect to principal or interest.
Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
Bonds which are rated C are the lowest rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
The rating Prime-1 is the highest commercial paper rating assigned by Moody's.
Issuers rated Prime-1 (or related supporting institutions) are considered to
have a superior capacity for repayment of short-term promissory obligations.
Issuers rated Prime-2 (or related supporting institutions) are considered to
have a strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics of issuers rated
Prime-1 but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics, while
still appropriated may be more affected by external conditions. Ample alternate
liquidity is maintained.
The following summarizes the highest rating used by Moody's for short-term notes
and variable rate demand obligations:
MIG-l; VMIG-l - Obligations bearing these designations are of the best
quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
Duff & Phelps Credit Rating Co. The following summarizes the highest four
ratings used by Duff & Phelps Credit Rating Co. ("D&P") for bonds which are
deemed to be "Investment-Grade Debt Securities" by the Advisor:
AAA - Bonds that are rated AAA are of the highest credit quality. The
risk factors are considered to be negligible, being only slightly more
than for risk-free U.S. Treasury debt.
AA - Bonds that are rated AA are of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to
time because of economic conditions.
A - Bonds rated A have average but adequate protection factors. The risk
factors are more variable and greater in periods of economic stress.
BBB - Bonds rated BBB have below average protection factors but are still
considered sufficient for prudent investment. There is considerable
variability in risk during economic cycles.
Bonds rated BB, B and CCC by D&P are not considered "Investment-Grade Debt
Securities" and are regarded, on balance, as predominantly speculative with
respect to the issuer's ability to pay interest and make principal payments in
accordance with the terms of the obligations. BB indicates the lowest degree of
speculation and CCC the highest degree of speculation.
The rating Duff l is the highest rating assigned by D&P for short-term debt,
including commercial paper. D&P employs three designations, Duff l+, Duff 1 and
Duff 1- within the highest rating category. Duff l+ indicates highest certainty
of timely payment. Short-term liquidity, including internal operating factors
and/or access to alternative sources of funds, is judged to be "outstanding, and
safety is just below risk-free U.S. Treasury short-term obligations." Duff 1
indicates very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are
considered to be minor. Duff 1- indicates high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
Fitch Investors Service, Inc. The following summarizes the highest four ratings
used by Fitch Investors Service, Inc. ("Fitch") for bonds which are deemed to be
"Investment-Grade Debt Securities" by the Advisor:
AAA - Bonds are considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA - Bonds are considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated AAA. Because
bonds rated in the AAA and AA categories are not significantly vulnerable
to foreseeable future developments, short-term debt of these issuers is
generally rated F-1+.
A - Bonds that are rated A are considered to be investment grade and of
high credit quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more vulnerable to
adverse changes in economic conditions and circumstances than bonds with
higher ratings.
BBB - Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and
repay principal is considered to be adequate. Adverse changes in economic
conditions and circumstances, however, are more likely to have adverse
impact on these bonds, and therefore impair timely payment. The
likelihood that the ratings of these bonds will fall below investment
grade is higher than for bonds with higher ratings.
To provide more detailed indications of credit quality, the AA, A and BBB
ratings may be modified by the addition of a plus or minus sign to show relative
standing within a rating category.
Bonds rated BB, B and CCC by Fitch are not considered "Investment-Grade Debt
Securities" and are regarded, on balance, as predominantly speculative with
respect to the issuer's ability to pay interest and make principal payments in
accordance with the terms of the obligations. BB indicates the lowest degree of
speculation and CCC the highest degree of speculation.
The following summarizes the three highest ratings used by Fitch for short-term
notes, municipal notes, variable rate demand instruments and commercial paper:
F-1+ - Instruments assigned this rating are regarded as having the
strongest degree of assurance for timely payment.
F-1 - Instruments assigned this rating reflect an assurance of timely
payment only slightly less in degree than issues rated F-1+
F-2 - Instruments assigned this rating have satisfactory degree of
assurance for timely payment, but the margin of safety is not as great as
for issues assigned F-1+ and F-1 ratings.
<PAGE>
April 1, 1997
Dear Shareholder:
The Chesapeake Fund Institutional Class closed the March quarter with a
loss of 2.1% which compares to losses of 8.3% and 5.2% for the Nasdaq
Industrials and Russell 2000, and a gain of 2.7% for the S&P 500. Perhaps the
most noticeable trend so far this year has been the continued revaluation of
smaller to medium sized stocks. With the Russell 2000 growth index down 10.5%
since the beginning of this year, and even more since June of last, it is clear
that a significant correction in this market segment has already occurred while
the S&P has only recently begun to falter. We have written many times in the
past about the need for adherence to stringent valuation criteria and have
discussed our reluctance to invest in stocks whose prices cannot be rationalized
by their earnings. This quarter, as evidenced by a March 28th article in the
Wall Street Journal, adherence to our discipline saved us from the dramatic
declines experienced by many of the managers with whom we compete. In fact, when
looking at a group of five of the most well known, we find that the average
decline year-to-date is 15%, and the average decline since June is 18%. Even the
Investor's Business Daily Mutual Fund Index which includes a broad variety of
management styles is down 8% since the end of June. Conversely, we made 8% over
this time frame because our valuations were low relative to our growth rate.
Thus, we experienced less price-earnings ratio compression; and, because our
earnings were stronger than this compression we were able to profit. The market
always has a tendency to overreact and we do not believe the case today to be
any different. In fact, we felt there to be an abundance of opportunity prior to
this sell-off and think it even greater now given the revaluation of so many
stocks.
We believe that larger company dominance is ending. The S&P 500 has now
outperformed the Russell 2000 by 40% in the last three years, but since the
Federal Reserve met on March 25th of this year, it has given back 2% to the
Russell. This is a very short period of time, particularly when considering that
the Russell did outperform the S&P in 3 of the 12 quarters during the three year
period, but there are now fundamental drivers in place to cause a more lasting
reversal.
The first is the Fed's decision to raise short term rate, the second is
the slowing of earnings growth in the S&P 500, and the third is the generally
high P/E of the S&P relative to its growth rate. A portion of the S&P's progress
over the past two years has been due to investor willingness to pay what we
believe to be an excessive premium for the predictability inherent in some of
its companies. But, more recently, many fundamentalists have been unwilling to
step up and pay these prices. As a result, the S&P's performance has been
increasingly dependent on a massive resurgence in indexation. This too will
change. For, the overall results of the S&P have become more and more reliant
upon a handful of its most heavily weighted companies which are the largest and
often the most economically sensitive. Thus a waning in the growth of a
relatively small number of these companies could bring index returns down
causing renewed focus on stock picking, a practice which has allowed independent
growth management firms, as opposed to large mutual fund houses, to outperform
indexation 70% of the time in the last 10 year (according to a recent study
conducted by a consultant at Dean Witter). We think that as the market digests
both the repercussions of higher interest rates and its recent trend toward
pooled purchases of stock rather than singular investment in companies the
current trend will change. This change will be the result of asset rebalancing
which will increase weightings in smaller to mid-sized companies and, in
particular, those companies whose valuations support investment in them.
Our companies have very little indebtedness and therefore are
internally less susceptible to interest rate movement. They have very high
growth rates driven primarily by the proprietary nature of their businesses and
therefore are an excellent hedge against inflationary pressure; and, they have
low valuations relative to their growth rates which should insulate them from
the pressure rising interest rates can have on higher price to growth rate
stocks. In fact, our companies may be the kind investors seek when the macro
environment becomes clouded. Their strongest performance was during the
inflationary period from the middle 1970's to the early 1980's. This is not to
suggest that we are now anticipating significant inflationary pressure, just
that when the driver for large stocks in the form of Fed loosening reversed
itself in late March, investors had a clear signal that large stocks could no
longer rely upon an accommodating Fed policy and a benign inflationary
environment for continued appreciation. This suggests to us that many smaller to
mid-sized growth companies are not only attractive because of their current
fundamentals but also because of what we believe will be an increase in desire
on the part of investors to own them.
It appears to us that two themes are converging to fuel our stocks. The
first is the recognition that valuation matters and the second is the
recognition that bigger is not always better; in fact, statistically it usually
is not. Lower valuations began to aid our stock prices as early as last year's
mid-summer sell-off but are yet to cause the significant appreciation we expect
because of the general deflection of interest from our portfolio created by the
voracious appetite for much larger companies. Thus, the benefit associated with
a waning in this larger company appetite should only be furthered by the
attractive valuations of our stocks.
The areas that currently excite us seem endless. They range from broad
themes like the movement of both service and manufacturing companies to focus on
their core competencies by outsourcing tasks from product design to customer
service, to more specific themes like the personal communications systems
infrastructure build (PCS) which will ultimately allow anyone to be reached
anywhere via one telephone number. Everything in between is also of interest
like the infinite opportunities to create more efficient business operations
through better management and storage of data, and the revolutionary ways to
promote better health through preventative care, rehabilitation therapy, and
both in-home and inpatient assisted living, as well as the seemingly mundane
blocking and tackling of a retailer who, as a result, can offer a better product
at a better price to its customer base. We continue to have more investment
opportunities that we have cash to invest causing us to constantly cull the
portfolio to make room for new names. This has allowed us to maintain a high 35%
growth rate and a low P/E of 15, the formula we think always needed, and perhaps
even more so today, to promote strong portfolio appreciation.
In one final note, we would like to welcome Brad Hoopman to our
research staff. Have a pleasant spring.
Sincerely,
/s/ Whitfield Gardner /s/ John Lewis
W. Whitfield Gardner John L. Lewis, IV
<PAGE>
April 1, 1997
Dear Shareholder:
The Chesapeake Fund Series A closed the March quarter with a loss of
2.2% which compares to losses of 8.3% and 5.2% for the Nasdaq Industrials and
Russell 2000, and a gain of 2.7% for the S&P 500. Perhaps the most noticeable
trend so far this year has been the continued revaluation of smaller to medium
sized stocks. With the Russell 2000 growth index down 10.5% since the beginning
of this year, and even more since June of last, it is clear that a significant
correction in this market segment has already occurred while the S&P has only
recently begun to falter. We have written many times in the past about the need
for adherence to stringent valuation criteria and have discussed our reluctance
to invest in stocks whose prices cannot be rationalized by their earnings. This
quarter, as evidenced by a March 28th article in the Wall Street Journal,
adherence to our discipline saved us from the dramatic declines experienced by
many of the managers with whom we compete. In fact, when looking at a group of
five of the most well known, we find that the average decline year-to-date is
15%, and the average decline since June is 18%. Even the Investor's Business
Daily Mutual Fund Index which includes a broad variety of management styles is
down 8% since the end of June. Conversely, we made 8% over this time frame
because our valuations were low relative to our growth rate. Thus, we
experienced less price-earnings ratio compression; and, because our earnings
were stronger than this compression we were able to profit. The market always
has a tendency to overreact and we do not believe the case today to be any
different. In fact, we felt there to be an abundance of opportunity prior to
this sell-off and think it even greater now given the revaluation of so many
stocks.
We believe that larger company dominance is ending. The S&P 500 has now
outperformed the Russell 2000 by 40% in the last three years, but since the
Federal Reserve met on March 25th of this year, it has given back 2% to the
Russell. This is a very short period of time, particularly when considering that
the Russell did outperform the S&P in 3 of the 12 quarters during the three year
period, but there are now fundamental drivers in place to cause a more lasting
reversal.
The first is the Fed's decision to raise short term rate, the second is
the slowing of earnings growth in the S&P 500, and the third is the generally
high P/E of the S&P relative to its growth rate. A portion of the S&P's progress
over the past two years has been due to investor willingness to pay what we
believe to be an excessive premium for the predictability inherent in some of
its companies. But, more recently, many fundamentalists have been unwilling to
step up and pay these prices. As a result, the S&P's performance has been
increasingly dependent on a massive resurgence in indexation. This too will
change. For, the overall results of the S&P have become more and more reliant
upon a handful of its most heavily weighted companies which are the largest and
often the most economically sensitive. Thus a waning in the growth of a
relatively small number of these companies could bring index returns down
causing renewed focus on stock picking, a practice which has allowed independent
growth management firms, as opposed to large mutual fund houses, to outperform
indexation 70% of the time in the last 10 year (according to a recent study
conducted by a consultant at Dean Witter). We think that as the market digests
both the repercussions of higher interest rates and its recent trend toward
pooled purchases of stock rather than singular investment in companies the
current trend will change. This change will be the result of asset rebalancing
which will increase weightings in smaller to mid-sized companies and, in
particular, those companies whose valuations support investment in them.
Our companies have very little indebtedness and therefore are
internally less susceptible to interest rate movement. They have very high
growth rates driven primarily by the proprietary nature of their businesses and
therefore are an excellent hedge against inflationary pressure; and, they have
low valuations relative to their growth rates which should insulate them from
the pressure rising interest rates can have on higher price to growth rate
stocks. In fact, our companies may be the kind investors seek when the macro
environment becomes clouded. Their strongest performance was during the
inflationary period from the middle 1970's to the early 1980's. This is not to
suggest that we are now anticipating significant inflationary pressure, just
that when the driver for large stocks in the form of Fed loosening reversed
itself in late March, investors had a clear signal that large stocks could no
longer rely upon an accommodating Fed policy and a benign inflationary
environment for continued appreciation. This suggests to us that many smaller to
mid-sized growth companies are not only attractive because of their current
fundamentals but also because of what we believe will be an increase in desire
on the part of investors to own them.
It appears to us that two themes are converging to fuel our stocks. The
first is the recognition that valuation matters and the second is the
recognition that bigger is not always better; in fact, statistically it usually
is not. Lower valuations began to aid our stock prices as early as last year's
mid-summer sell-off but are yet to cause the significant appreciation we expect
because of the general deflection of interest from our portfolio created by the
voracious appetite for much larger companies. Thus, the benefit associated with
a waning in this larger company appetite should only be furthered by the
attractive valuations of our stocks.
The areas that currently excite us seem endless. They range from broad
themes like the movement of both service and manufacturing companies to focus on
their core competencies by outsourcing tasks from product design to customer
service, to more specific themes like the personal communications systems
infrastructure build (PCS) which will ultimately allow anyone to be reached
anywhere via one telephone number. Everything in between is also of interest
like the infinite opportunities to create more efficient business operations
through better management and storage of data, and the revolutionary ways to
promote better health through preventative care, rehabilitation therapy, and
both in-home and inpatient assisted living, as well as the seemingly mundane
blocking and tackling of a retailer who, as a result, can offer a better product
at a better price to its customer base. We continue to have more investment
opportunities that we have cash to invest causing us to constantly cull the
portfolio to make room for new names. This has allowed us to maintain a high 35%
growth rate and a low P/E of 15, the formula we think always needed, and perhaps
even more so today, to promote strong portfolio appreciation.
In one final note, we would like to welcome Brad Hoopman to our
research staff. Have a pleasant spring.
Sincerely,
/s/ Whitfield Gardner /s/ John Lewis
W. Whitfield Gardner John L. Lewis, IV
<PAGE>
April 1, 1997
Dear Shareholder:
The Chesapeake Fund Series C closed the March quarter with a loss of
2.5% which compares to losses of 8.3% and 5.2% for the Nasdaq Industrials and
Russell 2000, and a gain of 2.7% for the S&P 500. Perhaps the most noticeable
trend so far this year has been the continued revaluation of smaller to medium
sized stocks. With the Russell 2000 growth index down 10.5% since the beginning
of this year, and even more since June of last, it is clear that a significant
correction in this market segment has already occurred while the S&P has only
recently begun to falter. We have written many times in the past about the need
for adherence to stringent valuation criteria and have discussed our reluctance
to invest in stocks whose prices cannot be rationalized by their earnings. This
quarter, as evidenced by a March 28th article in the Wall Street Journal,
adherence to our discipline saved us from the dramatic declines experienced by
many of the managers with whom we compete. In fact, when looking at a group of
five of the most well known, we find that the average decline year-to-date is
15%, and the average decline since June is 18%. Even the Investor's Business
Daily Mutual Fund Index which includes a broad variety of management styles is
down 8% since the end of June. Conversely, we made 8% over this time frame
because our valuations were low relative to our growth rate. Thus, we
experienced less price-earnings ratio compression; and, because our earnings
were stronger than this compression we were able to profit. The market always
has a tendency to overreact and we do not believe the case today to be any
different. In fact, we felt there to be an abundance of opportunity prior to
this sell-off and think it even greater now given the revaluation of so many
stocks.
We believe that larger company dominance is ending. The S&P 500 has now
outperformed the Russell 2000 by 40% in the last three years, but since the
Federal Reserve met on March 25th of this year, it has given back 2% to the
Russell. This is a very short period of time, particularly when considering that
the Russell did outperform the S&P in 3 of the 12 quarters during the three year
period, but there are now fundamental drivers in place to cause a more lasting
reversal.
The first is the Fed's decision to raise short term rate, the second is
the slowing of earnings growth in the S&P 500, and the third is the generally
high P/E of the S&P relative to its growth rate. A portion of the S&P's progress
over the past two years has been due to investor willingness to pay what we
believe to be an excessive premium for the predictability inherent in some of
its companies. But, more recently, many fundamentalists have been unwilling to
step up and pay these prices. As a result, the S&P's performance has been
increasingly dependent on a massive resurgence in indexation. This too will
change. For, the overall results of the S&P have become more and more reliant
upon a handful of its most heavily weighted companies which are the largest and
often the most economically sensitive. Thus a waning in the growth of a
relatively small number of these companies could bring index returns down
causing renewed focus on stock picking, a practice which has allowed independent
growth management firms, as opposed to large mutual fund houses, to outperform
indexation 70% of the time in the last 10 year (according to a recent study
conducted by a consultant at Dean Witter). We think that as the market digests
both the repercussions of higher interest rates and its recent trend toward
pooled purchases of stock rather than singular investment in companies the
current trend will change. This change will be the result of asset rebalancing
which will increase weightings in smaller to mid-sized companies and, in
particular, those companies whose valuations support investment in them.
Our companies have very little indebtedness and therefore are
internally less susceptible to interest rate movement. They have very high
growth rates driven primarily by the proprietary nature of their businesses and
therefore are an excellent hedge against inflationary pressure; and, they have
low valuations relative to their growth rates which should insulate them from
the pressure rising interest rates can have on higher price to growth rate
stocks. In fact, our companies may be the kind investors seek when the macro
environment becomes clouded. Their strongest performance was during the
inflationary period from the middle 1970's to the early 1980's. This is not to
suggest that we are now anticipating significant inflationary pressure, just
that when the driver for large stocks in the form of Fed loosening reversed
itself in late March, investors had a clear signal that large stocks could no
longer rely upon an accommodating Fed policy and a benign inflationary
environment for continued appreciation. This suggests to us that many smaller to
mid-sized growth companies are not only attractive because of their current
fundamentals but also because of what we believe will be an increase in desire
on the part of investors to own them.
It appears to us that two themes are converging to fuel our stocks. The
first is the recognition that valuation matters and the second is the
recognition that bigger is not always better; in fact, statistically it usually
is not. Lower valuations began to aid our stock prices as early as last year's
mid-summer sell-off but are yet to cause the significant appreciation we expect
because of the general deflection of interest from our portfolio created by the
voracious appetite for much larger companies. Thus, the benefit associated with
a waning in this larger company appetite should only be furthered by the
attractive valuations of our stocks.
The areas that currently excite us seem endless. They range from broad
themes like the movement of both service and manufacturing companies to focus on
their core competencies by outsourcing tasks from product design to customer
service, to more specific themes like the personal communications systems
infrastructure build (PCS) which will ultimately allow anyone to be reached
anywhere via one telephone number. Everything in between is also of interest
like the infinite opportunities to create more efficient business operations
through better management and storage of data, and the revolutionary ways to
promote better health through preventative care, rehabilitation therapy, and
both in-home and inpatient assisted living, as well as the seemingly mundane
blocking and tackling of a retailer who, as a result, can offer a better product
at a better price to its customer base. We continue to have more investment
opportunities that we have cash to invest causing us to constantly cull the
portfolio to make room for new names. This has allowed us to maintain a high 35%
growth rate and a low P/E of 15, the formula we think always needed, and perhaps
even more so today, to promote strong portfolio appreciation.
In one final note, we would like to welcome Brad Hoopman to our
research staff. Have a pleasant spring.
Sincerely,
/s/ Whitfield Gardner /s/ John Lewis
W. Whitfield Gardner John L. Lewis, IV
<PAGE>
April 1, 1997
Dear Shareholder:
The Chesapeake Fund Series D closed the March quarter with a loss of
2.4% which compares to losses of 8.3% and 5.2% for the Nasdaq Industrials and
Russell 2000, and a gain of 2.7% for the S&P 500. Perhaps the most noticeable
trend so far this year has been the continued revaluation of smaller to medium
sized stocks. With the Russell 2000 growth index down 10.5% since the beginning
of this year, and even more since June of last, it is clear that a significant
correction in this market segment has already occurred while the S&P has only
recently begun to falter. We have written many times in the past about the need
for adherence to stringent valuation criteria and have discussed our reluctance
to invest in stocks whose prices cannot be rationalized by their earnings. This
quarter, as evidenced by a March 28th article in the Wall Street Journal,
adherence to our discipline saved us from the dramatic declines experienced by
many of the managers with whom we compete. In fact, when looking at a group of
five of the most well known, we find that the average decline year-to-date is
15%, and the average decline since June is 18%. Even the Investor's Business
Daily Mutual Fund Index which includes a broad variety of management styles is
down 8% since the end of June. Conversely, we made 8% over this time frame
because our valuations were low relative to our growth rate. Thus, we
experienced less price-earnings ratio compression; and, because our earnings
were stronger than this compression we were able to profit. The market always
has a tendency to overreact and we do not believe the case today to be any
different. In fact, we felt there to be an abundance of opportunity prior to
this sell-off and think it even greater now given the revaluation of so many
stocks.
We believe that larger company dominance is ending. The S&P 500 has now
outperformed the Russell 2000 by 40% in the last three years, but since the
Federal Reserve met on March 25th of this year, it has given back 2% to the
Russell. This is a very short period of time, particularly when considering that
the Russell did outperform the S&P in 3 of the 12 quarters during the three year
period, but there are now fundamental drivers in place to cause a more lasting
reversal.
The first is the Fed's decision to raise short term rate, the second is
the slowing of earnings growth in the S&P 500, and the third is the generally
high P/E of the S&P relative to its growth rate. A portion of the S&P's progress
over the past two years has been due to investor willingness to pay what we
believe to be an excessive premium for the predictability inherent in some of
its companies. But, more recently, many fundamentalists have been unwilling to
step up and pay these prices. As a result, the S&P's performance has been
increasingly dependent on a massive resurgence in indexation. This too will
change. For, the overall results of the S&P have become more and more reliant
upon a handful of its most heavily weighted companies which are the largest and
often the most economically sensitive. Thus a waning in the growth of a
relatively small number of these companies could bring index returns down
causing renewed focus on stock picking, a practice which has allowed independent
growth management firms, as opposed to large mutual fund houses, to outperform
indexation 70% of the time in the last 10 year (according to a recent study
conducted by a consultant at Dean Witter). We think that as the market digests
both the repercussions of higher interest rates and its recent trend toward
pooled purchases of stock rather than singular investment in companies the
current trend will change. This change will be the result of asset rebalancing
which will increase weightings in smaller to mid-sized companies and, in
particular, those companies whose valuations support investment in them.
Our companies have very little indebtedness and therefore are
internally less susceptible to interest rate movement. They have very high
growth rates driven primarily by the proprietary nature of their businesses and
therefore are an excellent hedge against inflationary pressure; and, they have
low valuations relative to their growth rates which should insulate them from
the pressure rising interest rates can have on higher price to growth rate
stocks. In fact, our companies may be the kind investors seek when the macro
environment becomes clouded. Their strongest performance was during the
inflationary period from the middle 1970's to the early 1980's. This is not to
suggest that we are now anticipating significant inflationary pressure, just
that when the driver for large stocks in the form of Fed loosening reversed
itself in late March, investors had a clear signal that large stocks could no
longer rely upon an accommodating Fed policy and a benign inflationary
environment for continued appreciation. This suggests to us that many smaller to
mid-sized growth companies are not only attractive because of their current
fundamentals but also because of what we believe will be an increase in desire
on the part of investors to own them.
It appears to us that two themes are converging to fuel our stocks. The
first is the recognition that valuation matters and the second is the
recognition that bigger is not always better; in fact, statistically it usually
is not. Lower valuations began to aid our stock prices as early as last year's
mid-summer sell-off but are yet to cause the significant appreciation we expect
because of the general deflection of interest from our portfolio created by the
voracious appetite for much larger companies. Thus, the benefit associated with
a waning in this larger company appetite should only be furthered by the
attractive valuations of our stocks.
The areas that currently excite us seem endless. They range from broad
themes like the movement of both service and manufacturing companies to focus on
their core competencies by outsourcing tasks from product design to customer
service, to more specific themes like the personal communications systems
infrastructure build (PCS) which will ultimately allow anyone to be reached
anywhere via one telephone number. Everything in between is also of interest
like the infinite opportunities to create more efficient business operations
through better management and storage of data, and the revolutionary ways to
promote better health through preventative care, rehabilitation therapy, and
both in-home and inpatient assisted living, as well as the seemingly mundane
blocking and tackling of a retailer who, as a result, can offer a better product
at a better price to its customer base. We continue to have more investment
opportunities that we have cash to invest causing us to constantly cull the
portfolio to make room for new names. This has allowed us to maintain a high 35%
growth rate and a low P/E of 15, the formula we think always needed, and perhaps
even more so today, to promote strong portfolio appreciation.
In one final note, we would like to welcome Brad Hoopman to our
research staff. Have a pleasant spring.
Sincerely,
/s/ Whitfield Gardner /s/ John Lewis
W. Whitfield Gardner John L. Lewis, IV
<PAGE>
THE CHESAPEAKE FUND
Super Institutional Shares
Performance Update - $50,000,000 Investment
For the period from June 12, 1996 (commencement of operations)
to February 28, 1997
Super Ins S&P 500 NASDAQ
Date Shares Total Return Industrial
06/12/96 50000000 50000000 50000000
06/30/96 46361880 50145489 47710503
07/31/96 42144237 47929797 42422054
08/31/96 44816484 48940746 45188818
09/30/96 48744366 51695941 47647561
10/31/96 48776561 53121406 46327320
11/30/96 51513200 56981759 48033613
12/31/96 51191243 56004738 47786797
01/31/97 53509337 59503381 49921942
02/28/97 52446877 59969752 47256720
This graph depicts the performance of The Chesapeake Fund Super Institutional
Shares versus the NASDAQ Industrials Index and the S&P 500 Total Return Index.
It is important to note 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.
Total Return
- ------------------------------
Commencement of operations
through 2/28/97
- ------------------------------
4.89%
- ------------------------------
The graph assumes an initial $50,000,000 investment at June 12, 1996. All
dividends and distributions are reinvested.
At February 28, 1997, the Super Institutional Shares of the Fund would have
grown to $52,446,877 - total investment return of 4.89% since June 12, 1996.
At February 28, 1997, a similar investment in the NASDAQ Industrials Index would
have been worth $47,256,720 - total investment return of -5.49%; while a similar
investment in the S&P 500 Total Return Index would have grown to $59,969,752.04
- - total investment return of 19.94% since June 12, 1996.
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.
<PAGE>
THE CHESAPEAKE FUND
Institutional Shares
Performance Update - $1,000,000 Investment
For the period from April 6,1994 (commencement of operations)
to February 28, 1997
Institutional S&P 500 NASDAQ
Date Shares Total Return Industrial
04/06/94 1000000 1000000 1000000
05/31/94 1013000 1023703 947950
08/31/94 1058200 1073692 979838
11/30/94 1081100 1031962 961061
02/28/95 1128600 1116296 988000
05/31/95 1247000 1230372 1053310
08/31/95 1535000 1303973 1226306
11/30/95 1467366 1431491 1240874
02/29/96 1463316 1522715 1287605
05/31/96 1571672 1600271 1516725
08/31/96 1408631 1567793 1347959
11/30/96 1618255 1825383 1432818
02/28/97 1646610 1921102 1409644
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 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
- ------------------------------------
Since Inception One Year
- ------------------------------------
18.75% 12.53%
- ------------------------------------
The graph assumes an initial $1,000,000 investment at April 6, 1994. All
dividends and distributions are reinvested.
At February 28, 1997, the Institutional Shares of the Fund would have grown to
$1,646,610 - total investment return of 64.66% since April 6, 1994.
At February 28, 1997, a similar investment in the NASDAQ Industrials Index would
have grown to $,1409,644 - total investment return of 40.96%; while a similar
investment in the S&P 500 Total Return Index would have grown to $1,921,102 -
total investment return of 92.11% 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.
<PAGE>
THE CHESAPEAKE FUND
Series A Investor Shares
Performance Update - $25,000 Investment
For the period from April 7,1995 (commencement of operations)
to February 28, 1997
Series A NASDAQ S&P 500 Total
Shares Industrials Return
04/07/95 24250 25000 25000
05/31/95 25628 25834 26443
08/31/95 31572 30077 28025
11/30/95 30140 30434 32020
02/29/96 30036 31580 33109
05/31/96 32244 37200 33963
08/31/96 28890 33061 33274
11/30/96 33139 35142 38741
02/28/97 33702 34574 40772
This graph depicts the performance of The Chesapeake Fund Series A Investor
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.
- ------------------------------------------------------------------
Since Inception One Year
- ------------------------------------------------------------------
No Sales Load 18.93% 12.21%
With 3% Sales Load 17.04% 8.84%
- -----------------------------------------------------------------
The graph assumes an initial $25,000 investment at April 7, 1995 ($24,250 after
maximum sales load of 3%). All dividends and distributions are reinvested.
At February 28, 1997, the Series A Investor Shares of the Fund would have grown
to $33,702 - total investment return of 34.81% since April 7, 1995. Without the
deduction of the 3% maximum sales load, the Series A Investor Shares of the Fund
would have grown to $34,744 - total investment return of 38.98% since April 7,
1995. The sales load may be reduced or eliminated for larger purchases.
At February 28, 1997, a similar investment in the NASDAQ Industrials Index would
have grown to $34,574 - total investment return of 38.29%; while a similar
investment in the S&P 500 Total Return Index would have grown to $40,772 - total
investment return of 63.09% since April 7, 1995.
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.
<PAGE>
THE CHESAPEAKE FUND
Series C Investor Shares
Performance Update - $25,000 Investment
For the period from April 7,1995 (commencement of operations)
to February 28, 1997
Series C NASDAQ S&P 500
Date Shares Industrial Total Return
04/07/95 25000 25000 25000
05/31/95 26421 25834 26443
08/31/95 32528 30077 28025
11/30/95 30966 30434 32020
02/29/96 30794 31580 33109
05/31/96 33028 37200 33963
08/31/96 29506 33061 33274
11/30/96 33779 35142 38741
02/28/97 34273 34574 40772
This graph depicts the performance of The Chesapeake Fund Series C Investor
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.
- ---------------------------------------------
Since Inception One Year
- ---------------------------------------------
18.08% 11.30%
- ---------------------------------------------
The graph assumes an initial $25,000 investment at April 7, 1995. All dividends
and distributions are reinvested.
At February 28, 1997, the Series C Investor Shares of the Fund would have grown
to $34,273 - total investment return of 37.09% since April 7, 1995.
At February 28, 1997, a similar investment in the NASDAQ Industrials Index would
have grown to $34,574 - total investment return of 38.29%; while a similar
investment in the S&P 500 Total Return Index would have grown to $40,772 - total
investment return of 63.09% since April 7, 1995.
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.
<PAGE>
THE CHESAPEAKE FUND
Series D Investor Shares
Performance Update - $25,000 Investment
For the period from April 7,1995 (commencement of operations)
to February 28, 1997
Series D NASDAQ S&P 500
Date Shares Industrial Total Return
04/07/95 24625 25000 25000
05/31/95 26045 25834 26443
08/31/95 32040 30077 28025
11/30/95 30606 30434 32020
02/29/96 30479 31580 33109
05/31/96 32700 37200 33963
08/31/96 29231 33061 33274
11/30/96 33504 35142 38741
This graph depicts the performance of The Chesapeake Fund Series D Investor
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.
- ----------------------------------------------------------------
Since Inception One Year
- ----------------------------------------------------------------
No Sales Load 18.54% 11.59%
With 1.5% Sales Load 17.60% 9.92%
- ----------------------------------------------------------------
The graph assumes an initial $25,000 investment at April 7, 1995 ($24,625 after
maximum sales load of 1.5%). All dividends and distributions are reinvested.
At February 28, 1997, the Series D Investor Shares of the Fund would have grown
to $34,012 - total investment return of 36.05% since April 7, 1995. Without the
deduction of the 1.5% maximum sales load, the Series D Investor Shares of the
Fund would have grown to $34,529 - total investment return of 38.12% since April
7, 1995. The sales load may be reduced or eliminated for larger purchases.
At February 28, 1997, a similar investment in the NASDAQ Industrials Index would
have grown to $34,574 - total investment return of 38.29%; while a similar
investment in the S&P 500 Total Return Index would have grown to $40,772 - total
investment return of 63.09% since April 7, 1995.
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.
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
THE CHESAPEAKE FUND
PORTFOLIO OF INVESTMENTS
February 28, 1997
- -------------------------------------------------------------------------------------------
Value
Shares (note 1)
- -------------------------------------------------------------------------------------------
COMMON STOCKS - 97.90%
Apparel - Textiles - 7.59%
(a)Jones Apparel Group, Inc. 168,600 $6,259,275
Liz Claiborne, Inc. 86,300 3,495,150
Warnaco Group, Inc. 128,000 4,080,000
(a)WestPoint Stevens, Inc. 108,100 3,729,450
------- ---------
17,563,875
----------
Building Materials - 1.44%
(a)Dal-Tile International Inc. 187,400 3,326,350
------- ---------
Commercial Services - 0.57%
(a)AccuStaff, Inc. 63,600 1,319,700
------ ---------
Computers - 14.87%
(a)3Com Corporation 42,800 1,417,082
(a)Compaq Computer Corporation 42,100 3,336,425
(a)Dell Computer Corporation 52,200 3,712,725
(a)EMC Corporation 161,600 5,817,600
(a)Komag, Inc. 32,200 966,000
(a)Lexmark International Group, Inc. 150,400 4,192,400
(a)Quantum Corporation 84,500 3,358,875
(a)Read-Rite Corporation 74,700 2,292,356
(a)Seagate Technology, Inc. 73,600 3,477,600
(a)Sun Microsystems, Inc. 108,200 3,340,675
(a)U.S. Robotics Corporation 45,700 2,550,631
------ ---------
34,462,369
----------
Computer Software & Services - 6.02%
(a)BMC Software, Inc. 75,800 3,245,187
(a)Cadence Design Systems, Inc. 62,100 2,289,937
(a)Network General Corporation 84,500 1,869,563
(a)Structural Dynamics Research Corporation 116,800 2,321,400
(a)System Software Associates, Inc. 297,900 3,090,713
(a)Vanstar Corporation 82,200 1,130,250
------ ---------
13,947,050
----------
Electrical Equipment - 0.79%
(a)Cable Design Technologies 69,000 1,828,500
------ ---------
Electronics - Semiconductor - 9.37%
(a)Adaptec, Inc. 225,400 8,579,287
(a)Advanced Micro Devices, Inc. 73,400 2,633,225
(a)ESS Technology, Inc. 20,000 526,250
Intel Corporation 29,000 4,114,375
(a)Lattice Semiconductor Corporation 46,800 2,234,700
(a)MEMC Electronic Materials, Inc. 46,100 1,129,450
(a)S3, Inc. 143,700 2,487,806
------- ---------
21,705,093
----------
(Continued)
<PAGE>
THE CHESAPEAKE FUND
PORTFOLIO OF INVESTMENTS
February 28, 1997
- -------------------------------------------------------------------------------------------
Value
Shares (note 1)
- -------------------------------------------------------------------------------------------
COMMON STOCKS - (Continued)
Emerging Technology - 1.01%
Cognizant Corporation 67,000 $2,336,625
------ ----------
Environmental Control - 2.23%
(a)USA Waste Services, Inc. 143,600 5,169,600
------- ---------
Financial - Banks, Money Center - 0.92%
The Money Store, Inc. 82,300 2,129,512
------ ---------
Foreign Securities - 4.91%
(a)ASM Lithography Holding 24,100 1,602,650
ECI Telecommunications Limited 168,300 3,997,125
(a)Petroleum Geo-Services ASA - ADR 45,600 1,915,200
Teva Pharmaceutical Industries Ltd. - ADR 62,500 3,863,281
------ ---------
11,378,256
----------
Imaging - 1.57%
Polaroid Corporation 86,400 3,650,400
------ ---------
Lodging - 0.97%
(a)Prime Hospitality Corp. 136,400 2,250,600
------- ---------
Machine - Diversified - 1.05%
AGCO Corporation 85,300 2,420,387
------ ---------
Medical - Hospital Management & Service - 6.09%
(a)Genesis Health Ventures, Inc. 117,800 4,078,825
(a)HEALTHSOUTH Corporation 92,900 3,739,225
(a)Lincare Holdings, Inc. 82,200 3,544,875
(a)MedPartners, Inc. 124,500 2,739,000
------- ---------
14,101,925
----------
Medical Supplies - 0.99%
(a)Sofamor Danek Group, Inc. 57,700 2,286,363
------ ---------
Miscellaneous - Manufacturing - 3.88%
Apogee Enterprises, Inc. 127,600 2,536,050
(a)Coltec Industries, Inc. 178,200 3,252,150
(a)Samsonite Corporation 67,300 3,196,750
------ ---------
8,984,950
---------
Office & Business Equipment - 1.55%
(a)U.S. Office Products Company 111,900 3,580,800
------- ---------
Oil & Gas - Equipment & Services - 1.86%
(a)Reading & Bates Corporation 94,200 2,284,350
(a)Rowan Companies, Inc. 102,100 2,029,238
------- ---------
4,313,588
---------
(Continued)
<PAGE>
THE CHESAPEAKE FUND
PORTFOLIO OF INVESTMENTS
February 28, 1997
- -------------------------------------------------------------------------------------------
Value
Shares (note 1)
- -------------------------------------------------------------------------------------------
COMMON STOCKS - (Continued)
Oil & Gas - Exploration - 1.37%
(a)J. Ray McDermott, S.A. 137,500 $3,162,500
------- ----------
Pharmaceuticals - 0.94%
Watson Pharmaceuticals, Inc. 49,700 2,168,163
------ ---------
Restaurants & Food Service - 1.22%
(a)Boston Chicken, Inc. 62,500 2,046,875
CKE Restaurants, Inc. 39,800 771,125
------ -------
2,818,000
---------
Retail - Apparel - 2.34%
(a)Footstar, Inc. 93,700 2,365,925
Ross Stores, Inc. 12,900 619,200
TJX Companies, Inc. 58,300 2,434,025
------ ---------
5,419,150
---------
Retail - Department Stores - 3.81%
(a)Consolidated Stores Corporation 66,125 2,322,641
(a)Proffitt's, Inc. 95,400 3,088,575
Sears, Roebuck and Co. 62,700 3,401,475
------ ---------
8,812,691
---------
Retail - Specialty Line - 7.93%
(a)Borders Group, Inc. 100,400 4,229,350
Costco Companies, Inc. 139,900 3,584,938
(a)General Nutrition Companies, Inc. 120,900 2,176,200
(a)Hollywood Entertainment Corporation 61,500 1,476,000
Lowe's Companies, Inc. 110,800 4,044,200
(a)Staples, Inc. 73,000 1,578,625
(a)Toys "R" Us, Inc. 48,500 1,261,000
------ ---------
18,350,313
----------
Shoes - Leather - 2.65%
(a)Nine West Group, Inc. 63,400 2,979,800
Wolverine World Wide, Inc. 88,900 3,155,950
------ ---------
6,135,750
---------
Telecommunications - 1.32%
Tel-Save Holdings, Inc. 170,600 3,049,475
------- ---------
Telecommunications Equipment - 2.23%
(a)Newbridge Networks Corporation 71,000 2,263,125
(a)QUALCOMM, Inc. 52,000 2,895,750
------ ---------
5,158,875
---------
Transportation - 0.82%
(a)Gulfstream Aerospace Corporation 87,000 1,892,250
------ ---------
Utilities - Electric - 3.48%
Calenergy Co., Inc. 241,200 8,050,050
------- ---------
(Continued)
<PAGE>
THE CHESAPEAKE FUND
PORTFOLIO OF INVESTMENTS
February 28, 1997
- --------------------------------------------------------------------------------------------
Value
Shares (note 1)
- --------------------------------------------------------------------------------------------
COMMON STOCKS - (Continued)
Utilities - Telecommunications - 2.11%
(a)WorldCom, Inc. 183,700 $4,891,013
------- ----------
Total Common Stocks (Cost $197,137,549) 226,664,173
-----------
Principal
Amount
REPURCHASE AGREEMENT (b) - 0.38%
Wachovia Bank $891,108 891,108
5.38%, dated February 28, 1997, due March 3, 1997 -------
(Cost $891,108)
Total Value of Investments (Cost $198,028,657 (c)) 98.28% 227,555,281
Other Assets Less Liabilities 1.72% 3,985,650
---- ---------
Net Assets 100.00% $231,540,931
====== ============
</TABLE>
(a) Non-income producing investment.
(b) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio. The
investment in the repurchase agreement is through participation in a joint
account with other funds administered by The Nottingham Company.
(c) Aggregate cost for federal income tax purposes is $198,187,488. Unrealized
appreciation (depreciation) of investments for federal income tax purposes
is as follows:
Unrealized appreciation $37,648,881
Unrealized depreciation (8,281,088)
-----------
Net unrealized appreciation $29,367,793
===========
See accompanying notes to financial statements
<PAGE>
THE CHESAPEAKE FUND
STATEMENT OF ASSETS AND LIABILITIES
February 28, 1997
ASSETS
Investments, at value (cost $198,028,657) $227,555,281
Income receivable 66,200
Receivable for investments sold 5,711,210
Receivable for fund shares sold 25,776
Prepaid expenses 13,093
Deferred organization expenses, net (note 3) 21,817
Due from administrator (note 2) 13,657
Other asset 1,725
------------
Total assets 233,408,759
------------
LIABILITIES
Accrued expenses 69,371
Payable for investment purchases 1,643,745
Due to investment advisor (note 2) 1,741
Disbursements in excess of cash on demand deposit 152,971
------------
Total liabilities 1,867,828
------------
NET ASSETS $231,540,931
============
NET ASSETS CONSIST OF
Paid-in capital $202,300,431
Accumulated net realized loss on investments (286,124)
Net unrealized appreciation on investments 29,526,624
------------
$231,540,931
============
INSTITUTIONAL SHARES
Net asset value, redemption and offering price per share $16.26
($77,858,406 / 4,787,965 shares outstanding) ============
SERIES A INVESTOR SHARES
Net asset value, redemption and offering price per share $16.18
($39,376,442 / 2,433,384 shares outstanding) ============
Maximum offering price per share (100 / 97 of $16.18) $16.68
============
SERIES C INVESTOR SHARES
Net asset value, redemption and offering price per share $15.97
($9,191,946 / 575,663 shares outstanding) ============
SERIES D INVESTOR SHARES
Net asset value, redemption and offering price per share $16.09
($10,774,384 / 669,574 shares outstanding) ============
Maximum offering price per share (100 / 98.5 of $16.09) $16.34
============
SUPER INSTITUTIONAL SHARES
Net asset value, redemption and offering price per share $16.29
($94,339,753 / 5,792,346 shares outstanding) ============
See accompanying notes to financial statements
<PAGE>
THE CHESAPEAKE FUND
STATEMENT OF OPERATIONS
Year ended February 28, 1997
INVESTMENT INCOME
Income
Interest $394,366
Dividends 300,920
------------
Total income 695,286
------------
Expenses
Investment advisory fees (note 2) 1,940,587
Fund administration fees (note 2) 101,473
Distribution and service fees - Class A (note 4) 96,096
Distribution and service fees - Class C (note 4) 64,129
Distribution and service fees - Class D (note 4) 58,554
Custody fees 16,627
Registration and filing administration fees (note 2) 21,107
Fund accounting fees (note 2) 84,000
Audit fees 15,265
Legal fees 22,699
Securities pricing fees 7,162
Shareholder administration fees 24,244
Shareholder recordkeeping fees 9,950
Shareholder servicing expenses 23,288
Registration and filing expenses 77,082
Printing expenses 9,770
Amortization of deferred organization expenses (note 3) 7,942
Trustee fees and meeting expenses 8,508
Other operating expenses 9,077
------------
Total expenses 2,597,560
------------
Less:
Expense reimbursements-Super-Institutional Class (note 2) (13,657)
Expense reductions (note 6) (21,927)
------------
Net expenses 2,561,976
------------
Net investment loss (1,866,690)
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain from investment transactions 4,887,131
Increase in unrealized appreciation on investments 17,077,631
------------
Net realized and unrealized gain on investments 21,964,762
------------
Net increase in net assets resulting from operations $20,098,072
============
See accompanying notes to financial statements
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
THE CHESAPEAKE FUND
STATEMENTS OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------------------------------------------
Year ended Year ended
February 28, February 29,
1997 1996
- ------------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS
Operations
Net investment loss $(1,866,690) $(590,626)
Net realized gain (loss) from investment transactions 4,887,131 (3,843,955)
Increase in unrealized appreciation on investments 17,077,631 11,158,332
---------- ----------
Net increase in net assets resulting from operations 20,098,072 6,723,751
---------- ---------
Distributions to shareholders from
Net realized gain from investment transactions 0 (579,228)
Tax return of capital 0 (391,310)
---------- ---------
Decrease in net assets resulting from distributions 0 (970,538)
Capital share transactions ---------- ---------
Increase in net assets resulting from capital share transactions (a) 78,804,804 111,796,492
---------- -----------
Total increase in net assets 98,902,876 117,549,705
NET ASSETS
Beginning of year 132,638,055 15,088,350
----------- ----------
End of year (including accumulated net investment loss $231,540,931 $132,638,055
of $0 in 1997 and $0 in 1996) ============ ============
(a) A summary of capital share activity follows:
Year ended Year ended
February 28, 1997 February 29, 1996
--------------------------- ---------------------------
Shares Value Shares Value
Institutional Shares --------------------------- ---------------------------
Shares sold 1,194,039 $17,551,689 4,380,621 $64,300,633
Shares issued for reinvestment of distributiions 0 0 32,117 481,428
Shares redeemed (1,960,761) (29,179,867) (191,923) (2,739,490)
---------- ----------- -------- ----------
Net increase (decrease) (766,722) $(11,628,178) 4,220,815 $62,042,571
======== ============ ========= ===========
Year ended For the period from April 7, 1995
February 28, 1997 to February 29, 1996
------------------------- ---------------------------------
Shares Value Shares Value
------------------------- ---------------------------------
Series A Shares
Shares sold 886,587 $13,180,184 2,375,405 $33,628,982
Shares issued for reinvestment of distributions 0 0 16,639 249,093
Shares redeemed (711,164) (10,814,500) (134,083) (1,836,410)
-------- ----------- -------- ----------
Net increase 175,423 $2,365,684 2,257,961 $32,041,665
======= ========== ========= ===========
Series C Shares
Shares sold 51,704 $764,137 556,093 $7,112,526
Shares issued for reinvestment of distributions 0 0 3,810 56,850
Shares redeemed (27,426) (414,118) (8,518) (107,907)
------- -------- ------ --------
Net increase 24,278 $350,019 551,385 $7,061,469
====== ======== ======= ==========
Series D Shares
Shares sold 80,650 $1,210,179 990,621 $12,876,680
Shares issued for reinvestment of distributions 0 0 8,302 124,284
Shares redeemed (239,185) (3,492,900) (170,814) (2,350,177)
-------- ---------- -------- ----------
Net increase (decrease) (158,535) $(2,282,721) 828,109 $10,650,787
======== =========== ======= ===========
For the period from June 12, 1996
to February 28, 1997
---------------------------------
Shares Value
Super Institutional Shares ---------------------------------
Shares sold 5,792,346 $90,000,000
Shares redeemed 0 0
--------- -----------
Net increase 5,792,346 $90,000,000
========= ===========
Year ended Year ended
February 28, 1997 February 29, 1996
--------------------------- ---------------------------
Shares Value Shares Value
Fund Summary --------------------------- ---------------------------
Shares sold 8,005,326 $122,706,189 8,302,740 $117,918,821
Shares issued for reinvestment of distributions 0 0 60,868 911,655
Shares redeemed (2,938,536) (43,901,385) (505,338) (7,033,984)
---------- ----------- -------- ----------
Net increase 5,066,790 $78,804,804 7,858,270 $111,796,492
========= =========== ========= ============
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
THE CHESAPEAKE FUND
FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
---------------------------------------------
Institutional
---------------------------------------------
For the
period from
April 6, 1994
(commencement of
Year ended Year ended operations) to
February 28, February 29, February 28,
1997 1996 1995
Net asset value, beginning of period $14.45 $11.31 $10.00
Income from investment operations
Net investment loss (0.13) (0.05) (0.04)
Net realized and unrealized gain (loss) on investments 1.94 3.38 1.35
Total from investment operations 1.81 3.33 1.31
Distributions to shareholders from
Net realized gain from investment transactions 0.00 (0.11) 0.00
Tax return of capital 0.00 (0.08) 0.00
Total distributions 0.00 (0.19) 0.00
Net asset value, end of period $16.26 $14.45 $11.31
Total return 12.53 % 29.66 % 13.12 %
Ratios/supplemental data
Net assets, end of period (000's) $77,858 $80,252 $15,088
Ratio of expenses to average net assets
Before expense reimbursements and waivers 1.23 % 1.65 % 2.75 %(b)
After expense reimbursements and waivers 1.22 % 1.49 % 1.73 %(b)
Ratio of net investment loss to average net assets
Before expense reimbursements and waivers (0.85)% (0.98)% (1.80)%(b)
After expense reimbursements and waivers (0.84)% (0.82)% (0.78)%(b)
Portfolio turnover rate 126.44 % 99.33 % 64.92 %(b)
Average broker commission per share $0.06
(a) Total return does not reflect payment of a sales charge.
(b) Annualized.
--------------------------- ----------------------------
Series A Series C
--------------------------- ----------------------------
For the For the
period from period from
April 7, 1995 April 7, 1995
(commencement of (commencement of
Year ended operations) to Year ended operations) to
February 28, February 29, February 28, February 29,
1997 1996 1997 1996
Net asset value, beginning of period $14.42 $11.79 $14.34 $11.79
Income from investment operations
Net investment loss (0.18) (0.06) (0.29) (0.12)
Net realized and unrealized gain (loss) on investments 1.94 2.88 1.92 2.86
Total from investment operations 1.76 2.82 1.63 2.74
Distributions to shareholders from
Net realized gain from investment transactions 0.00 (0.11) 0.00 (0.11)
Tax return of capital 0.00 (0.08) 0.00 (0.08)
Total distributions 0.00 (0.19) 0.00 (0.19)
Net asset value, end of period $16.18 $14.42 $15.97 $14.34
Total return 12.21%(a) 23.86%(a) 11.30% 23.18%
Ratios/supplemental data
Net assets, end of period (000's) $39,376 $32,549 $9,192 $7,908
Ratio of expenses to average net assets
Before expense reimbursements and waivers 1.54% 1.88%(b) 2.34% 2.38%(b)
After expense reimbursements and waivers 1.53% 1.71%(b) 2.33% 2.18%(b)
Ratio of net investment loss to average net assets
Before expense reimbursements and waivers (1.16)% (1.20)%(b) (1.97)% (1.77)%(b)
After expense reimbursements and waivers (1.15)% (1.04)%(b) (1.96)% (1.57)%(b)
Portfolio turnover rate 126.44 % 99.33 % 126.44 % 99.33 %
Average broker commission per share $0.06 $0.06
(a) Total return does not reflect payment of a sales charge.
(b) Annualized.
------------------------------ --------------
Super
Series D Institutional
------------------------------ --------------
For the For the
period from period from
April 7, 1995 June 12, 1996
commencement of (commencement of
Year ended operations) to operations) to
February 28, February 29, February 28,
1997 1996 1997
Net asset value, beginning of period $14.41 $11.79 $15.53
Income from investment operations
Net investment loss (0.29) (0.11) (0.07)
Net realized and unrealized gain (loss) on investment 1.97 2.92 0.83
Total from investment operations 1.68 2.81 0.76
Distributions to shareholders from
Net realized gain from investment transactions 0.00 (0.11) 0.00
Tax return of capital 0.00 (0.08) 0.00
Total distributions 0.00 (0.19) 0.00
Net asset value, end of period $16.09 $14.41 $16.29
Total return 11.59%(a) 23.77%(a) 4.89%
Ratios/supplemental data
Net assets, end of period (000's) $10,774 $11,929 $94,340
Ratio of expenses to average net assets
Before expense reimbursements and waivers 2.02 % 2.13 %(b) 1.08 %(b)
After expense reimbursements and waivers 2.01 % 1.73 %(b) 1.04 %(b)
Ratio of net investment loss to average net assets
Before expense reimbursements and waivers (1.64)% (1.54)%(b) (0.75)%(b)
After expense reimbursements and waivers (1.63)% (1.14)%(b) (0.72)%(b)
Portfolio turnover rate 126.44 % 99.33 % 126.44 %
Average broker commission per share $0.06 $0.06
(a) Total return does not reflect payment of a sales charge.
(b) Annualized.
See accompanying notes to financial statements
</TABLE>
<PAGE>
THE CHESAPEAKE FUND
NOTES TO FINANCIAL STATEMENTS
February 28, 1997
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, as
amended. The Fund began operations on April 6, 1994. The investment objective of
the Fund is to seek capital appreciation through investments in equity
securities of medium and large capitalization companies, consisting primarily of
common and preferred stocks and securities convertible into common stocks.
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 Board of Trustees of the Trust approved on May 2, 1996 a plan to
authorize a new class of shares designated as the Super Institutional Shares. On
June 12, 1996, the Super Institutional Shares became effective. The
Institutional Shares and Super 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, ongoing
distribution and service fees, and various expenses that can be attributed to
specific class activity. 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 other expenses which can be traced to specific
class activity), 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 28, 1997
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 an 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.
The Fund has capital loss carryforwards for federal income tax purposes of
$127,293 which expire in the year 2005. It is the intention of the Board of
Trustees of the Trust not to distribute any realized gains until the
carryforwards have been offset or expire.
E. Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts of assets, liabilities,
expenses and revenues reported in the financial statements. Actual results
could differ from those estimated.
F. Repurchase Agreements - The Fund may acquire U. S. Government Securities or
corporate debt securities subject to repurchase agreements. A repurchase
agreement transaction occurs when the Fund acquires a security and
simultaneously resells it to the vendor (normally a member bank of the
Federal Reserve or a registered Government Securities dealer) for delivery
on an agreed upon future date. The repurchase price exceeds the purchase
price by an amount which reflects an agreed upon market interest rate
earned by the Fund effective for the period of time during which the
repurchase agreement is in effect. Delivery pursuant to the resale
typically will occur within one to five days of the purchase. The Fund will
not enter into a repurchase agreement which will cause more than 10% of its
net assets to be invested in repurchase agreements which extend beyond
seven days. In the event of the bankruptcy of the other party to a
repurchase agreement, the Fund could experience delays in recovering its
cash or the securities lent. To the extent that in the interim the value of
the securities purchased may have declined, the Fund could experience a
loss. In all cases, the creditworthiness of the other party to a
transaction is reviewed and found satisfactory by the Advisor. Repurchase
agreements are, in effect, loans of Fund assets. The Fund will not engage
in reverse repurchase transactions, which are considered to be borrowings
under the Investment Company Act of 1940, as amended.
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.
(Continued)
<PAGE>
THE CHESAPEAKE FUND
NOTES TO FINANCIAL STATEMENTS
February 28, 1997
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 average daily
net assets for the Institutional Shares and for Series A, Series C, and Series D
Investor Shares. The Administrator also receives a monthly fee of $1,750 for the
Institutional Shares and for Series A, Series C, and Series D Investor 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 receives a
fee at the annual rate of 0.015% of average daily net assets for shareholder
administration costs. The Administrator also charges the Fund for certain
expenses involved with the daily valuation of portfolio securities. The
Administrator currently intends to reimburse expenses of the Super-Institutional
Class to limit total Super- Institutional Class operating expenses to 1.04% of
the average daily net assets of that class. There can be no assurance that the
foregoing voluntary expense reimbursements will continue. A receivable from the
Administrator in the amount of $13,657 has been recorded to reflect the
reimbursement for the year ended February 28, 1997.
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 fiscal year
ended February 28, 1997, the Distributor retained sales charges in the amount of
$8,836.
Certain Trustees and officers of the Trust are also officers or directors of the
Advisor or the Administrator.
NOTE 3 - DEFERRED ORGANIZATION EXPENSES
Expenses totalling $66,799 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.
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.
(Continued)
<PAGE>
THE CHESAPEAKE FUND
NOTES TO FINANCIAL STATEMENTS
February 28, 1997
The Fund incurred $96,096, $64,129 and $58,554 in distribution and service fees
under the Plan with respect to Series A, Series C and Series D Investor Shares,
respectively, for the fiscal year ended February 28, 1997.
NOTE 5 - PURCHASES AND SALES OF INVESTMENTS
Purchases and sales of investments other than short-term investments aggregated
$321,103,038 and $232,904,488, respectively, for the fiscal year ended February
28, 1997.
NOTE 6 - EXPENSE REDUCTIONS
The Advisor has transacted certain portfolio trades with brokers who paid a
portion of the fund's expenses. For the fiscal year ended February 28, 1997, the
Fund's expenses were reduced by $21,927 under this arrangement.
<PAGE>
[Deloitte & Touche letterhead]
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees of Gardner Lewis Investment Trust and Shareholders of
The Chesapeake Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of The Chesapeake Fund as of February 28, 1997,
and the related statements of operations and changes in net assets, and
financial highlights for the year 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 audit. The statement of changes in net assets
for the year ended February 29, 1996 and the financial highlights for the two
years in the period ended February 29, 1996 were audited by other auditors,
whose reports thereon dated April 22, 1996, expressed an unqualified opinion.
We conducted our audit 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 the securities owned as of February 28, 1997
by correspondence with the custodian and brokers; where replies were not
received from brokers, we performed other auditing procedures. 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 audit provides a reasonable basis for our
opinion.
In our opinion, the 1997 financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of The
Chesapeake Fund as of February 28, 1997, the results of its operations, the
changes in its net assets and its financial highlights for the year then ended
in conformity with generally accepted accounting principles.
Deloitte & Touche
Pittsburgh, Pennsylvania
March 26, 1997
<PAGE>
PART C
GARDNER LEWIS INVESTMENT TRUST
FORM N1-A
OTHER INFORMATION
ITEM 24. Financial Statements and Exhibits
a) Financial Statements: Financial Highlights included in Part A for
each series of the Registrant for the latest fiscal year.
b) Exhibits: Annual Report included in part B for each series of the
Registrant for the latest fiscal year.
(1) Amended and Restated Declaration of Trust - Incorporated by reference;
filed 2/3/95
(2) Amended and Restated By-Laws - Incorporated by reference; filed 2/3/95
(3) Not applicable
(4) Not applicable - the series of the Registrant do not issue certificates
(see Exhibit 1 and 2 for the relevant portions of the Declaration of Trust
and By-Laws)
(5) (a) Investment Advisory Agreement for The Chesapeake Growth Fund -
Incorporated by reference; filed 10/27/92 (b) Investment Advisory Agreement
for The Chesapeake Fund - Incorporated by reference; filed 1/27/94
(6) (a) Distribution Agreement for The Chesapeake Growth Fund - Incorporated by
reference; filed 11/16/94
(b) Distribution Agreement for The Chesapeake Fund - Incorporated by
reference; filed 1/27/94
(7) Not applicable
(8) Custodian Agreement - Enclosed Exhibit 8
(9) (a) Fund Accounting, Dividend Disbursing and Transfer Agent and
Administration Agreement - Incorporated by reference; filed 12/21/93
(b) Amendment to the Fund Accounting, Dividend Disbursing and Transfer
Agent and Administration Agreement - Incorporated by reference; filed
10/26/95
(c) Amendment to the Fund Accounting, Dividend Disbursing and Transfer
Agent and Administration Agreement - Incorporated by reference; filed
7/08/1996
(10) Opinion of Counsel - Incorporated by reference; filed 10/30/96 and 4/29/97
with 24f-2 notices
(11) Consent of Auditors - Enclosed Exhibit 11
(12) Not Applicable
(13) Not Applicable
(14) Not applicable
(15) (a) Distribution Plan for The Chesapeake Fund Series A Investor Shares -
Incorporated by reference; filed 2/7/95
(b) Distribution Plan for The Chesapeake Fund Series C Investor Shares -
Incorporated by reference; filed 2/7/95
(c) Distribution Plan for The Chesapeake Fund Series D Investor Shares -
Incorporated by reference; filed 2/7/95
(16) Computation of Performance - Enclosed Exhibit 16
(17) Copies of Powers of Attorney - Incorporated by reference; filed 12/11/96
(18) Copies of Amended and Restated Rule 18f-3 Multi-Class Plan - Incorporated
by reference; filed 12/11/96
ITEM 25. Persons Controlled by or Under Common Control with Registrant
No person is controlled by or under common control with the Registrant.
<PAGE>
ITEM 26. Number of Holders of Securities
As of June 24, 1997, the number of record holders of each class of securities of
Registrant was as follows:
Number of
Title of Class Record Holders
- ------------------------------------------------------------------------
The Chesapeake Growth Fund..........................................2386
The Chesapeake Fund - Institutional Shares...........................222
The Chesapeake Fund - Series A Investor Shares.......................978
The Chesapeake Fund - Series C Investor Shares........................71
The Chesapeake Fund - Series D Investor Shares.......................315
The Chesapeake Fund - Super-Institutional Shares.......................1
ITEM 27. Indemnification
The Declaration of Trust and Bylaws of the Registrant contain
provisions covering indemnification of the officers and trustees. The
following are summaries of the applicable provisions.
The Registrant's Declaration of Trust provides that every person who
is or has been a trustee, officer, employee or agent of the Registrant
and every person who serves at the trustees' request as director,
officer, employee or agent of another enterprise will be indemnified
by the Registrant to the fullest extent permitted by law against all
liabilities and against all expenses reasonably incurred or paid by
him in connection with any debt, claim, action, demand, suit,
proceeding, judgment, decree, liability or obligation of any kind in
which he becomes involved as a party or otherwise or is threatened by
virtue of his being or having been a trustee, officer, employee or
agent of the Registrant or of another enterprise at the request of the
Registrant and against amounts paid or incurred by him in the
compromise or settlement thereof.
No indemnification will be provided to a trustee or officer: (i)
against any liability to the Registrant or its shareholders by reason
of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office
("disabling conduct"); (ii) with respect to any matter as to which he
shall, by the court or other body by or before which the proceeding
was brought or engaged, have been finally adjudicated to be liable by
reason of disabling conduct; (iii) in the absence of a final
adjudication on the merits that such trustee or officer did not engage
in disabling conduct, unless a reasonable determination, based upon a
review of the facts that the person to be indemnified is not liable by
reason of such conduct, is made by vote of a majority of a quorum of
the trustees who are neither interested persons nor parties to the
proceedings, or by independent legal counsel, in a written opinion.
The rights of indemnification may be insured against by policies
maintained by the Registrant, will be severable, will not affect any
other rights to which any trustee, officer, employee or agent may now
or hereafter be entitled, will continue as to a person who has ceased
to be such trustee, officer, employee, or agent and will inure to the
benefit of the heirs, executors and administrators of such a person;
provided, however, that no person may satisfy any right of indemnity
or reimbursement except out of the property of the Registrant, and no
other person will be personally liable to provide indemnity or
reimbursement (except an insurer or surety or person otherwise bound
by contract).
Article XIV of the Registrant's Bylaws provides that the Registrant
will indemnify each trustee and officer to the full extent permitted
by applicable federal, state and local statutes, rules and regulations
and the Declaration of Trust, as amended from time to time. With
respect to a proceeding against a trustee or officer brought by or on
behalf of the Registrant to obtain a judgment or decree in its favor,
the Registrant will provide the officer or trustee with the same
indemnification, after the same determination, as it is required to
provide with respect to a proceeding not brought by or on behalf of
the Registrant.
This indemnification will be provided with respect to an action, suit
proceeding arising from an act or omission or alleged act or omission,
whether occurring before or after the adoption of Article XIV of the
Registrant's Bylaws.
ITEM 28. Business and other Connections of Investment Advisor
See the Statement of Additional Information section entitled
"Management of the Fund" and the Investment Advisor's Form ADV filed
with the Commission for the activities and affiliations of the
officers and directors of the Investment Advisor of the Registrant.
Except as so provided, to the knowledge of Registrant, none of the
directors or executive officers of the Investment Advisor is or has
been at any time during the past two fiscal years engaged in any other
business, profession, vocation or employment of a substantial nature.
The Investment Advisor currently serves as investment advisor to
numerous institutional and individual clients.
ITEM 29. Principal Underwriter
(a) Capital Investment Group, Inc. is underwriter and distributor for
The Chesapeake Growth Fund, The Chesapeake Fund, Capital Value Fund,
ZSA Asset Allocation Fund, The Brown Capital Management Equity Fund,
The Brown Capital Management Balanced Fund, The Brown Capital
Management Small Company Fund, GrandView REIT Index Fund and
GrandView Realty Growth Fund.
(b)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
Name and Principal Position(s) and Offices Position(s) and Offices
Business Address Underwriter with Registrant
- -----------------------------------------------------------------------------------------------------------
Richard K. Bryant President No position with the Trust
17 Glenwood Avenue
Raleigh, North Carolina
Elmer O. Edgerton, Jr. Vice President No position with the Trust
17 Glenwood Avenue
Raleigh, North Carolina
</TABLE>
(c) Not applicable
ITEM 30. Location of Accounts and Records
All account books and records not normally held by First Union
National Bank of North Carolina, the Custodian to the Registrant, are
held by the Registrant, in the offices of The Nottingham Company, Fund
Accountant and Administrator, North Carolina Shareholder Services,
Transfer Agent to the Registrant,. or by Gardner Lewis Asset
Management, the Advisor to the Registrant.
The address of The Nottingham Company is 105 North Washington Street,
Post Office Drawer 69, Rocky Mount, North Carolina 27802-0069. The
address of North Carolina Shareholder Services is 107 North Washington
Street. Post Office Box 4365, Rocky Mount, North Carolina 27803-0365.
The address of Gardner Lewis Asset Management is 285 Wilmington-West
Chester Pike, Chadds Ford, Pennsylvania 19317. The address of First
Union National Bank of North Carolina is Two First Union Center,
Charlotte, North Carolina 28288-1151.
ITEM 31. Management Services
The substantive provisions of the Fund Accounting, Dividend Disbursing
& Transfer Agent and Administration Agreement between the Registrant
and The Nottingham Company are discussed in Part B hereof.
ITEM 32. Undertakings
Registrant undertakes to furnish each person to whom a Prospectus is
delivered with a copy of the latest annual report to shareholders of
each series of Registrant upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Amendment to its Registration Statement
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused
this Amendment to its Registration Statement to be signed on its behalf by the
undersigned, thereto duly authorized, in the City of Rocky Mount, State of North
Carolina on the 30th day of June 1997.
GARDNER LEWIS INVESTMENT TRUST
/s/ C. Frank Watson III
By: C. Frank Watson III
Secretary
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
_*________________________________________________________________
Jack E. Brinson, Trustee
_*________________________________________________________________
W. Whitfield Gardner, Trustee and Chairman (Principal Executive Officer)
_*________________________________________________________________
Steve J. Kneeley, Trustee
_*_________________________________________________________________
J. Hope Reese, Treasurer
(Principal Financial Officer and Principal Accounting Officer)
* By: _/s/ C. Frank Watson III__________________________________________________
C. Frank Watson III
Attorney-in-Fact Dated: June 30, 1997
<PAGE>
GARDNER LEWIS INVESTMENT TRUST
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
EXHIBIT 8 CUSTODY AGREEMENT
EXHIBIT 11 CONSENT OF AUDITORS
EXHIBIT 16 COMPUTATION OF PERFORMANCE
EXHIBIT 27 FINANCIAL DATA SCHEDULE
EXHIBIT 8
CUSTODY AGREEMENT
(Mutual Funds)
THIS AGREEMENT is made as of April 14, 1997, by and between GARDNER LEWIS
INVESTMENT TRUST (the "Trust"), a Massachusetts business trust, with respect to
its existing series as of the date of this Agreement, and such other series as
shall be designated from time to time by the Trust (the "Fund" or "Funds"), and
FIRST UNION NATIONAL BANK OF NORTH CAROLINA, a national banking association (the
"Custodian").
The Trust desires that its securities and funds shall be hereafter held and
administered by the Custodian pursuant to the terms of this Agreement, and,
pursuant to a separate agreement, The Nottingham Company, Inc., a North Carolina
corporation ("Nottingham"), has agreed to perform the duties of Transfer Agent,
Accounting Services Agent, Dividend Disbursing Agent and Administrator for the
Fund.
In consideration of the mutual agreements herein, the Trust and the Custodian
agree as follows:
1. DEFINITIONS.
As used herein, the following words and phrases shall have the
meanings shown in this Section 1:
"Securities" includes stocks, shares, bonds, debentures, bills, notes,
mortgages, certificates of deposit, bank time deposits, bankers'
acceptances, commercial paper, scrip, warrants, participation
certificates, evidences of indebtedness, or other obligations and any
certificates, receipts, warrants or other instruments representing
rights to receive, purchase, or subscribe for the same, or evidencing
or representing any other rights or interests therein, or in any
property or assets.
"Oral Instructions" shall mean an authorization, instruction,
approval, item or set of data, or information of any kind transmitted
to the Custodian in person or by telephone, telegram, telecopy or
other mechanical or documentary means lacking original signature, by
an officer or employee of the Trust or an employee of Nottingham in
its capacity as Transfer Agent, Accounting Services Agent,
Administrator and Dividend Disbursing Agent who has been authorized by
a resolution of the Board of Trustees of the Trust or the Board of
Directors of Nottingham, as the case may be, to give Written
Instructions on behalf of the Trust.
"Written Instructions" shall mean an authorization, instruction,
approval, item or set of data, or information of any kind transmitted
to the Custodian containing original signatures or a copy of such
document transmitted by telecopy including transmission of such
signature, reasonably believed by the Custodian to be the signature of
an officer or employee of the Trust or an employee of Nottingham in
its capacity as Transfer Agent, Accounting Services Agent,
Administrator or Dividend Disbursing Agent who has been authorized by
a resolution of the Board of Trustees of the Trust or Board of
Directors of Nottingham, as the case may be, to give Written
Instructions on behalf of the Trust.
"Securities Depository" shall mean a system for the central handling
of securities where all securities of any particular class or series
of any issuer deposited within the system are treated as fungible and
may be transferred or pledged by bookkeeping entry without physical
delivery of securities.
"Officers' Certificate" shall mean a direction, instruction or
certification in writing signed in the name of the Trust by the
President, Secretary or Assistant Secretary, or the Treasurer or
Assistant Treasurer of the Trust, or any other persons duly authorized
to sign by the Board of Trustees or the Executive Committee of the
Trust.
"Book-Entry Securities" shall mean securities issued by the Treasury
of the United States of America and federal agencies of the United
States of America which are maintained in the book-entry system as
provided in Subpart O of Treasury Circular No. 300, 31 CFR 306,
Subpart B of 31 CFR Part 350, and the book-entry regulations of
federal agencies substantially in the form of Subpart O, and the term
Book-Entry Account shall mean an account maintained by a Federal
Reserve Bank in accordance with the aforesaid Circular and
regulations.
2. DOCUMENTS TO BE FILED BY TRUST.
The Trust shall from time to time file with the Custodian a certified
copy of each resolution of its Board of Trustees authorizing execution
of Written Instructions and the number of signatories required,
together with certified signatures of the officers and other
signatories authorized to sign, which shall constitute conclusive
evidence of the authority of the officers and other signatories
designated therein to act, and shall be considered in full force and
effect and the Custodian shall be fully protected in acting in
reliance thereon until it receives a new certified copy of a
resolution adding or deleting a person or persons with authority to
give Written Instructions. If the certifying officer is authorized to
sign Written Instructions, the certification shall also be signed by a
second officer of the Trust. The Trust also agrees that the Custodian
may rely on Written Instructions received from Nottingham as Agent for
the Trust if those Written Instructions are given by persons having
authority pursuant to resolutions of the Board of Trustees of the
Trust.
The Trust shall from time to time file with the Custodian a certified
copy of each resolution of the Board of Trustees authorizing the
transmittal of Oral Instructions and specifying the person or persons
authorized to give Oral Instructions in accordance with this
Agreement. The Trust agrees that the Custodian may rely on Oral
Instructions received from Nottingham, as agent for the Trust, if
those instructions are given by persons reasonably believed by the
Custodian to have such authority. Any resolution so filed with the
Custodian shall be considered in full force and effect and the
Custodian shall be fully protected in acting in reliance thereon until
it actually receives a new certified copy of a resolution adding or
deleting a person or persons with authority to give Oral Instructions.
If the certifying officer is authorized to give Oral Instructions, the
certification shall also be signed by a second officer of the Trust.
3. RECEIPT AND DISBURSEMENT OF FUNDS.
(a) The Custodian shall open and maintain a separate account or
accounts in the name of each Fund of the Trust, subject only to
draft or order by the Custodian acting pursuant to the terms of
this Agreement. The Custodian shall hold in safekeeping in such
account or accounts, subject to the provisions hereof, all funds
received by it from or for the account of the Trust. The Trust
will deliver or cause to be delivered to the Custodian all funds
owned by the Trust, including cash received for the issuance of
its shares during the period of this Agreement. The Custodian
shall make payments of funds to, or for the account of, the Trust
from such funds only:
(i) for the purchase of securities for the portfolio of the
Trust upon the delivery of such securities to the Custodian
(or to any bank, banking firm or trust company doing
business in the United States and designated by the
Custodian as its sub-custodian or agent for this purpose or
any foreign bank qualified under Rule 17f-5 of the
Investment Company Act of 1940 and acting as sub-custodian),
registered (if registerable) in the name of the Trust or of
the nominee of the Custodian referred to in Section 8 or in
proper form for transfer, or, in the case of repurchase
agreements entered into between the Trust and the Custodian
or other bank or broker dealer (A) against delivery of the
securities either in certificate form or through an entity
crediting the Custodian's account at the Federal Reserve
Bank with such securities or (B) upon delivery of the
receipt evidencing purchase by the Trust of securities owned
by the Custodian along with written evidence of the
agreement by the Custodian bank to repurchase such
securities from the Trust;
(ii) for the payment of interest, dividends, taxes, management or
supervisory fees, or operating expenses (including, without
limitation, Board of Trustees' fees and expenses, and fees
for legal, accounting and auditing services) and for
redemption or repurchase of shares of the Trust;
(iii)for payments in connection with the conversion, exchange or
surrender of securities owned or subscribed to by the Trust
held by or to be delivered to the Custodian;
(iv) for the payment to any bank of interest on all or any
portion of the principal of any loan made by such bank to
the Trust;
(v) for the payment to any person, firm or corporation who has
borrowed the Trust's portfolio securities the amount
deposited with the Custodian as collateral for such
borrowing upon the delivery of such securities to the
Custodian, registered (if registerable) in the name of the
Trust or of the nominee of the Custodian referred to in
Section 8 or in proper form for transfer; or
(vi) for other proper purposes of the Trust.
Before making any such payment the Custodian shall receive (and
may rely upon) Written Instructions or Oral Instructions
directing such payment and stating that it is for a purpose
permitted under the terms of this subsection (a). In respect of
item (vi), the Custodian will take such action only upon receipt
of an Officers' Certificate and a certified copy of a resolution
of the Board of Trustees or the Executive Committee of the Trust
signed by an officer of the Trust and certified by the Secretary
or an Assistant Secretary, specifying the amount of such payment,
setting forth the purpose for which such payment is to be made.
In respect of item (v), the Custodian shall make payment to the
borrower of securities loaned by the Trust of part of the
collateral deposited with the Custodian upon receipt of Written
Instructions from the Trust or Nottingham stating that the market
value of the securities loaned has declined and specifying the
amount to be paid by the Custodian without receipt or return of
any of the securities loaned by the Trust. In respect of item
(i), in the case of repurchase agreements entered into with a
bank which is a member of the Federal Reserve System, the
Custodian may transfer funds to the account of such bank, which
may be itself, prior to receipt of written evidence that the
securities subject to such repurchase agreement have been
transferred by book-entry to the Custodian's non-proprietary
account at the Federal Reserve Bank, or in the case of repurchase
agreements entered into with the Custodian, of the safekeeping
receipt and repurchase agreement, provided that such securities
have in fact been so transferred by book-entry, or in the case of
repurchase agreements entered into with the Custodian, the
safekeeping receipt is received prior to the close of business on
the same day.
(b) Notwithstanding anything herein to the contrary, the Custodian
may at any time or times with the written approval of the Board
of Trustees, appoint (and may at any time remove without the
written approval of the Trust) any other bank or trust company as
its sub-custodian or agent to carry out such of the provisions of
Subsection (a) of this Section 3 as instructions from the Trust
may from time to time request; provided, however, that the
appointment of such sub-custodian or agent shall not relieve the
Custodian of any of its responsibilities hereunder; and provided,
further, that the Custodian shall not enter into any arrangement
with any subcustodian unless such sub-custodian meets the
requirements of Section 26 of the Investment Company Act of 1940
and Rule 17f-5 thereunder, if applicable.
(c) The Custodian is hereby authorized to endorse and collect all
checks, drafts or other orders for the payment of money received
by the Custodian for the accounts of the Trust.
4. RECEIPT OF SECURITIES.
(a) The Custodian shall hold in safekeeping in a separate account,
and physically segregated at all times from those of any other
persons, firms, corporations or trusts or any other series of the
Trust, pursuant to the provisions hereof, all securities received
by it from or for the account of each series of the Trust, and
the Trust will deliver or cause to be delivered to the Custodian
all securities owned by the Trust. All such securities are to be
held or disposed of by the Custodian under, and subject at all
times to the instructions pursuant to, the terms of this
Agreement. The Custodian shall have no power or authority to
assign, hypothecate, pledge, lend or otherwise dispose of any
such securities and investments, except pursuant to instructions
and only for the account of the Trust as set forth in Section 5
of this Agreement.
(b) Notwithstanding anything herein to the contrary, the Custodian
may at any time or times with the written approval of the Board
of Trustees, appoint (and may at any time without the written
approval of such Board of Trustees remove) any other bank or
trust company as its sub-custodian or agent to carry out such of
the provisions of Subsection (a) of this Section 4 and of Section
5 of this Agreement, as instructions may from time to time
request, provided, however, that the appointment of such
sub-custodian or agent shall not relieve the Custodian of any of
its responsibilities hereunder, and provided, further, that the
Custodian shall not enter into arrangement with any sub-custodian
unless such sub-custodian meets the requirements of Section 26 of
the Investment Company Act of 1940 or Rule 17f-5 thereunder, if
applicable.
5. TRANSFER, EXCHANGE, REDELIVERY, ETC. OF SECURITIES.
The Custodian shall have sole power to release or deliver any
Securities of the Trust held by it pursuant to this Agreement. The
Custodian agrees to transfer, exchange or deliver Securities held by
it on behalf of the Trust hereunder only:
(a) for sales of such Securities for the account of the Trust upon
receipt by the Custodian of Payment therefor;
(b) when such securities mature or are called, redeemed or retired or
otherwise become payable;
(c) for examination by any broker selling any such securities in
accordance with "street delivery" custom;
(d) in exchange for or upon conversion into other Securities alone or
other securities and cash whether pursuant to any plan of merger,
consolidation, reorganization, recapitalization or readjustment,
or otherwise;
(e) upon conversion of such Securities pursuant to their terms into
other Securities;
(f) upon exercise of subscription, purchase or other similar rights
represented by such Securities;
(g) for the purpose of exchanging interim receipts for temporary
Securities for definitive securities;
(h) for the purpose of effecting a loan of the portfolio Securities
to any person, firm, corporation or trust upon the receipt by the
Custodian of cash or cash equivalent collateral at least equal to
the market value of the securities loaned;
(i) to any bank for the purpose of collateralizing the obligation of
the Trust to repay any moneys borrowed by the Trust from such
bank; provided, however, that the Custodian may at the option of
such lending bank keep such collateral in its possession, subject
to the rights of such bank given to it by virtue of any
promissory note or agreement executed and delivered by the Trust
to such bank; or
(j) for other proper purposes of the Trust.
As to any deliveries made by the Custodian pursuant to items (a), (b),
(c), (d), (e), (f), (g) and (h), Securities or funds receivable in
exchange therefor shall be deliverable to the Custodian. Before making
any such transfer, exchange or delivery, the Custodian shall receive
(and may rely upon) instructions requesting such transfer, exchange,
or delivery and stating that it is for a purpose permitted under the
terms (a), (b), (c), (d), (e), (f), (g), (h), or (i) of this Section
5, and, in respect of item (j), upon receipt of instructions of a
certified copy of a resolution of the Board of Trustees of the Trust,
signed by an officer of the Trust and certified by its Secretary or an
Assistant Secretary, specifying the Securities to be delivered,
setting forth the purpose for which such delivery is to be made,
declaring such purpose to be a proper purpose of the Trust, and naming
the person or persons to whom delivery of such Securities shall be
made. In respect of item (h), the instructions shall state the market
value of the Securities to be loaned and the corresponding amount of
collateral to be deposited with the Custodian; thereafter, upon
receipt of instructions stating that the market value of the
Securities loaned has increased and specifying the amount of increase,
the Custodian shall collect from the borrower additional cash
collateral in such amount.
6. FEDERAL RESERVE BOOK-ENTRY SYSTEM.
Notwithstanding any other provisions of this Agreement, it is expressly
understood and agreed that the Custodian is authorized in the
performance of its duties hereunder to deposit in the book-entry
deposit system operated by the Federal Reserve Bank (the "System"),
United States government, instrumentality and agency securities and any
other Securities deposited in the System and to use the facilities of
the System, as permitted by Rule 17f-4 under the Investment Company Act
of 1940, in accordance with the following terms and provisions:
(a) The Custodian may keep Securities of the Trust in the System
provided that such Securities are represented in an account
("Account") of the Custodian's in the System which shall not
include any assets of the Custodian other than assets held in a
fiduciary or custodian capacity.
(b) The records of the Custodian with respect to the participation in
the System through the Custodian shall identify by Book-Entry
Securities belonging to the Trust which are included with other
Securities deposited in the Account and shall at all times during
the regular business hours of the Custodian be open for
inspection by duly authorized officers, employees or agents of
the Trust and employees and agents of the Securities and Exchange
Commission.
(c) The Custodian shall pay for Securities purchased for the account
of the Trust upon:
(i) receipt of advice from the System that such Securities have
been transferred to the Account; and
(ii) the making of an entry on the records of the Custodian to
reflect such payment and transfer for the account of the
Trust. The Custodian shall transfer Securities sold for the
account of the Trust upon:
(1) receipt of advice from the System that payment for such
Securities has been transferred to the Account; and
(2) the making of an entry on the records of the Custodian
to reflect such transfer and payment for the account of
the Trust. The Custodian shall send the Trust a
confirmation of any transfers to or from the account of
the Trust.
(d) The Custodian will provide the Trust with any report obtained by
the Custodian on the System's accounting system, internal
accounting control and procedures for safeguarding Securities
deposited in the System. The Custodian will provide the Trust
with reports by independent public accountants on the accounting
system, internal accounting control and procedures for
safeguarding Securities, including Securities deposited in the
System relating to the services provided by the Custodian under
this Agreement; such reports shall detail material inadequacies
disclosed by such examination, and, if there are no such
inadequacies, shall so state, and shall be of such scope and in
such detail as the Trust may reasonably require and shall be of
sufficient scope to provide reasonable assurance that any
material inadequacies would be disclosed.
7. USE OF CLEARING FACILITIES.
Notwithstanding any other provisions of the Agreement, the Custodian
may, in connection with transactions in portfolio Securities by the
Trust, use the facilities of the Depository Trust Company ("DTC"), and
the Participants Trust Company ("PTC"), as permitted by Rule 17f-4
under the Investment Company Act of 1940, if such facilities have been
approved by the Board of Trustees of the Trust in accordance with the
following:
(a) DTC and PTC may be used to receive and hold eligible Securities
owned by the Trust;
(b) payment for Securities purchased may be made through the clearing
medium employed by DTC and PTC for transactions of participants
acting through them;
(c) Securities of the Trust deposited in DTC and PTC will at all
times be segregated from any assets and cash controlled by the
Custodian in other than a fiduciary or custodian capacity but may
be commingled with other assets held in such capacities. Subject
to the provisions of the Agreement with regard to instructions,
the Custodian will pay out money only upon receipt of Securities
or notification thereof and will deliver Securities only upon the
receipt of money or notification thereof;
(d) all books and records maintained by the Custodian which relate to
the participation in DTC and PTC shall identify by Book-Entry
Securities belonging to the Trust which are deposited in DTC and
PTC and shall at all times during the Custodian's regular
business hours be open to inspection by the duly authorized
officers, employees, agents and auditors, and the Trust will be
furnished with all the information in respect of the services
rendered to it as it may require;
(e) the Custodian will make available to the Trust copies of any
internal control reports concerning DTC and PTC delivered to it
by either internal or external auditors within ten days after
receipt of such a report by the Custodian; and
(f) confirmations of transactions using the facilities of DTC and PTC
shall be provided as set forth in Rule 17f-4 of the Investment
Company Act of 1940.
8. CUSTODIAN'S ACTS WITHOUT INSTRUCTIONS.
Unless and until the Custodian receives instructions to the contrary,
the Custodian shall on behalf of the Trust:
(a) Present for payment all coupons and other income items held by it
for the account of the Trust which call for payment upon
presentation and hold the funds received by it upon such payment
for the Trust;
(b) collect interest and cash dividends received, with notice to the
Trust, for the accounts of the Trust;
(c) hold for the accounts of the Trust hereunder all stock dividends,
rights and similar Securities issued with respect to any
securities held by it hereunder;
(d) execute as agent on behalf of the Trust all necessary ownership
certificates required by the Internal Revenue Code or the Income
Tax Regulations of the United States Treasury Department or under
the laws of any state now or hereafter in effect, inserting the
name of such certificates as the owner of the Securities covered
thereby, to the extent it may lawfully do so;
(e) transmit promptly to the Trust all reports, notices and other
written information received by the Custodian from or concerning
issuers of the portfolio Securities; and
(f) collect from the borrower the Securities loaned and delivered by
the Custodian pursuant to item (h) of Section 5 hereof, any
interest or cash dividends paid on such Securities, and all stock
dividends, rights and similar Securities issued with respect to
any such loaned Securities.
With respect to Securities of foreign issuers, it is expected that the
Custodian will use its best efforts to effect collection of dividends,
interest and other income, and to notify the Trust of any call for
redemption, offer of exchange, right of subscription, reorganization,
or other proceedings affecting such Securities, or any default in
payments due thereon. It is understood, however, that the Custodian
shall be under no responsibility for any failure or delay in effecting
such collections or giving such notice with respect to Securities of
foreign issuers, regardless of whether or not the relevant information
is published in any financial service available to it unless (a) such
failure or delay is due to the Custodians' or any sub-custodians'
negligence or (b) any relevant sub-custodian has acted in accordance
with established industry practices. Collections of income in foreign
currency are, to the extent possible, to be converted into United
States dollars unless otherwise instructed in writing, and in effecting
such conversion the Custodian may use such methods or agencies as it
may see fit, including the facilities of its own foreign division at
customary rates. All risk and expenses incident to such collection and
conversion is for the accounts of the Trust and the Custodian shall
have no responsibility for fluctuations in exchange rates affecting any
such conversion.
9. REGISTRATION OF SECURITIES.
Except as otherwise directed by instructions, the Custodian shall
register all Securities, except such as are in bearer form, in the name
of a registered nominee of the Custodian, as defined in the Internal
Revenue Code and any Regulation of the Treasury Department issued
thereunder or in any provision of any subsequent Federal tax law
exempting such transaction from liability for stock transfer taxes, and
shall execute and deliver all such certificates in connection therewith
as may be required by such laws or Regulations or under the laws of any
State. The Custodian shall use its best efforts to the end that the
specific securities held by it hereunder shall be at all times
identifiable in its records.
The Trust or Nottingham shall from time to time furnish to the
Custodian appropriate instruments to enable the Custodian to hold or
deliver in proper form for transfer, or to register in the name of its
registered nominee, any securities which it may hold for the accounts
of the Trust and which may from time to time be registered in the name
of the Trust.
10. SEGREGATED ACCOUNT.
The Custodian shall upon receipt of written instructions from the Trust
or Nottingham establish and maintain a segregated account or accounts
for and on behalf of the Trust, into which account or accounts may be
transferred cash and/or Securities, including Securities maintained in
an account by the Custodian pursuant to Section 4 hereof,
(i) in accordance with the provisions of any agreement among the
Trust, the Custodian and a broker-dealer registered under the
Securities and Exchange Act of 1934 and a member of the NASD (or
any futures commission merchant registered under the Commodity
Exchange Act), relating to compliance with the rules of The
Options Clearing Corporation and of any registered national
securities exchange (or the commodity Futures Trading Commission
or any registered contract market), or of any similar
organization or organizations, regarding escrow or other
arrangements in connection with transactions by the Trust;
(ii) for purposes of segregating cash or government securities in
connection with options purchased, sold or written by the Trust
or commodity futures contracts or options thereon purchased or
sold by the Trust;
(iii)for the purposes of compliance by the Trust with the procedures
required by the Investment Company Act Release No. 10666, or any
subsequent release or releases of the Securities and Exchange
Commission relating to the maintenance of segregated accounts by
registered investment companies; and
(iv) for other proper corporate purposes, but only, in the case of
clause (iv), upon receipt of, in addition to an Officer's
Certificate, a certified copy of a resolution of the Board of
Trustees signed by an officer of the Trust and certified by the
Secretary or an Assistant Secretary, setting forth the purpose or
purposes of such segregated account and declaring such purposes
to be proper corporate purposes.
11. VOTING AND OTHER ACTIONS.
Neither the Custodian nor any nominee of the Custodian shall vote any
of the Securities held hereunder by or for the accounts of the Trust,
except in accordance with instructions. The Custodian shall execute and
deliver, or cause to be executed and delivered, to the appropriate
investment advisor of each series of the Trust, all notices, proxies
and proxy soliciting materials with relation to such Securities
(excluding any Securities loaned and delivered by the Custodian
pursuant to item (h) of Section 5 hereof), such proxies to be executed
by the registered holder of such Securities (if registered otherwise
than in the name of the Trust), but without indicating the manner in
which such proxies are to be voted. Such proxies shall be delivered by
regular mail to the appropriate investment advisor of each series of
the Trust.
12. TRANSFER TAX AND OTHER DISBURSEMENTS.
The Trust shall pay or reimburse the Custodian from time to time for
any transfer taxes payable upon transfers of securities made hereunder
and for all other necessary and proper disbursements and expenses made
or incurred by the Custodian in the performance of this Agreement. The
Custodian shall execute and deliver such certificates in connection
with Securities delivered to it or by it under this Agreement as may be
required under the provisions of the Internal Revenue Code and any
Regulations of the Treasury Department issued thereunder, or under the
laws of any State, to exempt from taxation any exemptible transfers
and/or deliveries of any such securities.
13. CONCERNING THE CUSTODIAN.
(a) The Custodian's compensation shall be paid by the Trust. The
Custodian shall not be liable for any action taken in good faith
upon receipt of instructions as herein defined or a certified
copy of any resolution of the Board of Trustees, and may rely on
the genuineness of any such document which it may in good faith
believe to have been validly executed.
(b) The Custodian shall not be liable for any loss or damage,
resulting from its action or omission to act or otherwise, except
for any such loss or damage arising out of its own negligence or
willful misconduct and except that the Custodian shall be
responsible for the acts of any sub-custodian, or agent appointed
hereunder and approved by the Board of Trustees of the Trust. At
any time, the Custodian may seek advice from legal counsel for
the Trust whose legal fees shall be paid at the sole expense of
the Trust, with respect to any matter arising in connection with
this Agreement, and it shall not be liable for any action taken
or not taken or suffered by it in good faith in accordance with
the opinion of counsel for the Trust. The Trust and not the
Custodian shall be responsible for any fee or charges by counsel
for the Trust in connection with any such opinion rendered to the
Custodian.
(c) Without limiting the generality of the foregoing, the Custodian
shall be under no duty or obligation to inquire into, and shall
not be liable for:
(i) The validity of the issue of any Securities purchased by or
for the Trust, the legality of the purchase thereof, or the
propriety of the amount paid therefor;
(ii) The legality of the issue or sale of any Securities by or
for the Trust, or the propriety of the amount for which the
same are sold;
(iii)The legality of the issue or sale of any shares of the
Trust, or the sufficiency of the amount to be received
therefor;
(iv) The legality of the redemption of any shares of the Trust,
or the propriety of the amount to be paid therefor;
(v) The legality of the declaration of any dividend or
distribution by the Trust, or the legality of the issue of
any Securities of the Trust in payment of any dividend or
distribution in shares;
(vi) The legality of the delivery of any Securities held for the
Trust for the purpose of collateralizing the obligation of
the Trust to repay any moneys borrowed by the Trust; or
(vii)The legality of the delivery of any Securities held for the
Trust for the purpose of lending said securities to any
person, firm or corporation.
(d) The Custodian shall not be under any duty or obligation to take
action to effect collection of any amount, if the Securities upon
which such amount is payable are in default, or if payment is
refused after due demand or presentation by the Custodian on
behalf of the Trust, unless and until
(i) the Custodian shall be directed to take such action by
written instructions signed in the name of the Trust on
behalf of the Trust by one of its executive officers; and
(ii) the Custodian shall be assured to its satisfaction of
reimbursement of its costs and expenses in connection with
any such action.
(e) The Custodian shall not be under any duty or obligation to
ascertain whether any securities at any time delivered to or held
by it for the account of the Trust, are such as may properly be
held by the Trust under the provisions of the Trust's Declaration
of Trust or By-Laws as amended from time to time.
(f) The Trust agrees to indemnify and hold harmless the Custodian and
its nominees, sub-custodians, depositories and agent from all
taxes, charges, expenses, assessments, liabilities, and losses
(including counsel fees) incurred or assessed against it or its
nominees, sub-custodians, depositories and agents in connection
with the performance of this Agreement, except such as may arise
from its or its nominee's, sub-custodian's, depositories' and
agent's own negligent action, negligent failure to act, breach of
this agreement or willful misconduct. The Custodian is authorized
to charge any account of the Trust for such items; provided,
however, that, except for overdrafts as to which the Custodian
shall have the immediate right of offset, prior to charging any
such account for such items, the Custodian shall first have
forwarded an invoice for such item to the Trust and 30 days shall
have elapsed from the date of such invoice to the Trust without
payment of the same having been received by the Custodian. In the
event of any advance of funds for any purpose made by the
Custodian resulting from orders or instructions of the Trust, or
in the event that the Custodian or its nominees, sub-custodians,
depositories and agents shall incur or be assessed any taxes,
charges, expenses, assessments, claims or liabilities in
connection with the performance of this Agreement, except such as
may arise from its or its nominee's own negligent action,
negligent failure to act or willful misconduct any property at
any time held for the accounts of the Trust shall be security
therefor. Nothing in this paragraph, however, shall be deemed to
apply to transaction and asset holding fees or out of pocket
expenses of the Custodian which are payable by Nottingham, and as
to such fees and expenses the Custodian shall have no right of
offset or security under this paragraph.
(g) The Custodian agrees to indemnify and hold harmless the Trust and
Trust's Trustees and officers from all taxes, charges, expenses,
assessments, claims liabilities, and losses (including counsel
fees) incurred or assumed against any of them as a result of any
breach or violation of this Agreement by the Custodian or any act
or omission by the Custodian or its Trustees, officers, employees
and agents and resulting from their negligence or willful
misconduct.
(h) In the event that, pursuant to this Agreement, instructions
direct the Custodian to pay for securities on behalf of the
Trust, the Trust hereby grants to the Custodian a security
interest in such Securities, until the Custodian has been
reimbursed by the Trust in immediately available funds. The
instructions designating the Securities to be paid for shall be
considered the requisite description and designation of the
Securities pledged to the Custodian for purposes of the
requirements of the Uniform Commercial Code.
(i) The Custodian represents that it is qualified to act as such
under section 26(a) of the Investment Company Act of 1940.
14. REPORTS BY THE CUSTODIAN.
(a) The Custodian shall furnish the Trust and the appropriate
investment advisor of each series of the Trust, daily with a
statement summarizing all transactions and entries for the
accounts of the Trust. The Custodian shall furnish the Trust at
the end of every month with a list of the portfolio Securities
held by it as Custodian for the Trust, adjusted for all
commitments confirmed by instructions as of such time. The books
and records of the Custodian pertaining to its actions under this
Agreement shall be open to inspection and audit at reasonable
times by officers of the Trust, its independent public
accountants and officers of its investment advisers.
(b) The Custodian will maintain such books and records relating to
transactions effected by it as are required by the Investment
Company Act of 1940, as amended, and any rule or regulation
thereunder; or by any other applicable provision of the law to be
maintained by the Trust or its Custodian, with respect to such
transactions, and preserving or causing to be preserved, any such
books and records for such periods as may be required by any such
rule or regulation.
15. TERMINATION OR ASSIGNMENT.
This agreement may be terminated by the Trust, or by the Custodian, on
sixty (60) days' notice, given in writing and sent by registered mail
to the Custodian, or to the Trust, as the case may be, at the address
hereinafter set forth. Upon any termination of this Agreement, pending
appointment by the Trust of a successor to the Custodian or a vote of
the shareholders of the Trust to dissolve or to function without a
Custodian of its funds, the Custodian shall not deliver funds,
Securities or other property of the Trust to the Trust, but may
deliver them to a bank or trust company of its own selection having an
aggregate capital, surplus, and undivided profits, as shown by its
last published report of not less than ten million dollars
($10,000,000) and otherwise qualified to act as a custodian to a
registered investment company as a Custodian for the Trust to be held
under terms similar to those of this Agreement; provided, however,
that the Custodian shall not be required to make any such delivery or
payment until full payment shall have been made to the Custodian of
all its contractual fees, compensations, costs and expenses, except
for fees and expenses all as set forth in Section 13 of this
Agreement.
16. MISCELLANEOUS.
(a) Any notice or other instrument in writing, authorized or required
by this Agreement to be given to the Custodian, shall be
sufficiently given if addressed to the Custodian and mailed or
delivered to it at its office at First Union National Bank of
North Carolina, 401 South Tryon Street, Charlotte, North Carolina
28288, or at such other place as the Custodian may from time to
time designate in writing.
(b) Any notice or other instrument in writing, authorized or required
by this Agreement to be given to the Trust, shall be sufficiently
given if addressed to the Trust and mailed or delivered to it at
105 N. Washington Street, Rocky Mount, North Carolina 27802, or
at-such other place as the Trust may from time to time designate
in writing.
(c) This Agreement may not be amended or modified in any manner
except by a written agreement executed by both parties with the
same formality as this Agreement, and authorized or approved by a
resolution of the Board of Trustees of the Trust.
(d) This Agreement shall extend to and shall be binding upon the
parties hereto and their respective successors and assigns,
provided, however, that this Agreement shall not be assignable by
the Trust without the written consent of the Custodian or by the
Custodian without the written consent of the Trust, authorized or
approved by a resolution of its Board of Trustees.
(e) This Agreement may be executed in any number of counterparts,
each of which shall be deemed to be an original, but such
counterparts shall, together, constitute but one instrument.
(f) This Agreement and the rights and obligations of the Trust and
the Custodian hereunder shall be construed and interpreted in
accordance with the laws of the State of North Carolina.
(g) The Declaration of Trust of the Trust has been filed with the
Secretary of State of the Commonwealth of Massachusetts. The
obligations of the Trust on behalf of the Funds are not
personally binding upon, nor shall resort be had to the private
property of any of the Trustees, shareholders, officers,
employees or agents of the Trust, but only the Trust's property
shall be bound.
<PAGE>
IN WITNESS WHEREOF, the Trust and the Custodian have caused this Agreement to be
signed and witnessed by duly authorized persons as of the date first written
above. Executed in several counterparts, each of which is an original.
Attest: FIRST UNION NATIONAL BANK OF NORTH CAROLINA
_____________________
By:_________________________________________
Title:______________________________________
Attest: GARDNER LEWIS INVESTMENT TRUST
_____________________
By: \s\ J. Hope Reese
Title: TREASURER
EXHIBIT 16
THE CHESAPEAKE FUND
COMPUTATION OF PERFORMANCE DATA
The Fund computes the "average annual total return" of each Class of the Fund by
determining the average annual compounded rates of return during specified
periods that equate the initial amount invested to the ending redeemable value
of such investment. This is done by determining the ending redeemable value of a
hypothetical $1,000 initial payment. This calculation is as follows:
P(1+T)n = ERV
Where: T = average annual total return.
ERV= ending redeemable value at the end of the period covered by
the computation of a hypothetical $1,000 payment made at the
beginning of the period.
P = hypothetical initial payment of $1,000 from which the
maximum sales load is deducted. N = period covered by the
computation, expressed in terms of years.
The Fund may also compute the aggregate total return of each Class of the Fund,
which is calculated in a similar manner, except that the results are not
annualized.
The calculation of average annual total return and aggregate total return assume
that the maximum sales load is deducted from the initial $1,000 investment at
the time it is made and that there is a reinvestment of all dividends and
capital gain distributions on the reinvestment dates during the period. The
ending redeemable value is determined by assuming complete redemption of the
hypothetical investment and the deduction of all nonrecurring charges at the end
of the period covered by the computations. The Fund may also quote other total
return information that does not reflect the effects of the sales load.
The average annual total return for the Institutional Shares of the Fund for the
year ended February 28, 1997 and since inception (April 6, 1994 to February 28,
1997) was 12.53% and 18.75%, respectively. The cumulative total return for the
Institutional Shares of the Fund since inception through February 28, 1997 was
64.66%.
The cumulative total return for the Super-Institutional Shares of the Fund since
inception (June 12, 1996 through February 29, 1997) was 4.89%.
The average annual total return for the Series A, Series C, and Series D
Investor Shares of the Fund for the year ended February 28, 1997 was 8.84%,
11.30% and 9.92% respectively. The average annual total return since inception
(April 7, 1995 to February 29, 1997) for the Series A, Series C, and Series D
Investor Shares of the Fund was 17.04%, 18.08% and 17.60% respectively. Without
reflecting the effects of the maximum sales load, the average annual total
return for the Series A and Series D Investor Shares for the one year period
ended February 28, 1997 was 12.21% and 11.59% resepctively. Without reflecting
the effects of the maximum sales load, the average annual total return for the
Series A and Series D Investor Shares since inception (April 7, 1995 to February
29, 1997) was 18.93% and 18.54% resepctively. The cumulative total return for
the Series A, Series C, and Series D Investor Shares since inception (April 7,
1995 to February 29, 1997) was 34.81%, 37.09% and 36.05% respectively. Without
reflecting the effects of the maximum sales load, the cumulative total return
for the Series A and Series D Investor Shares since inception (April 7, 1995 to
February 29, 1997) was 38.98% and 38.12% resepctively.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Average Annual Total Return - Institutional Shares:
Inception through February 28, 1997 Year ended February 28, 1997
1,000(1+T)2.90 = 1,646.61 1,000(1+T)1 = 1,125.26
T = (1,646.61/1,000)2.90 - 1 T = (1,125.26/1,000)1 - 1
T = 0.1875 T = 0.1253
T = 18.75% T = 12.53%
ERV = 1,646.61 ERV = 1,125.26
P = 1,000 P = 1,000
n = 2.90 n = 1
Average Annual Total Return - Series A Shares:
Inception through February 28, 1997 Year ended February 28, 1997
1,000(1+T)1.90 = 1,348.07 1,000(1+T)1 = 1,088.39
T = (1,348.07/1,000)1.90 - 1 T = (1,088.39/1,000)1 - 1
T = 0.1704 T = 0.0884
T = 17.04% T = 8.84
ERV = 1,348.07 ERV = 1,088.39
P = 1,000 P = 1,000
n = 1.90 n = 1
without maximum sales load of 3.00%
Inception through February 28, 1997 Year ended February 28, 1997
1,000(1+T)1.90 = 1,389.77 1,000(1+T)1 = 1,122.05
T = (1,389.77/1,000)1.90 - 1 T = (1,122.05/1,000)1 - 1
T = 0.1893 T = .1221
T = 18.93% T = 12.21
ERV = 1,389.77 ERV = 1,122.05
P = 1,000 P = 1,000
n = 1.90 n = 1
Average Annual Total Return - Series C Shares:
Inception through February 28, 1997 Year ended February 28, 1997
1,000(1+T)1.90 = 1,370.93 1,000(1+T)1 = 1,112.97
T = (1,370.93/1,000)1.90 - 1 T = (1,112.97/1,000)1 - 1
T = 0.1808 T = 0.1130
T = 18.08% T = 11.30
ERV = 1,370.93 ERV = 1,112.97
P = 1,000 P = 1,000
n = 1.90 n = 1
Average Annual Total Return - Series D Shares:
Inception through February 28, 1997 Year ended February 28, 1997
1,000(1+T)1.90 = 1,000 1,000(1+T)1 = 1,099.15
T = (1,360.46/1,000)1.90 - 1 T = (1,099.15/1,000)1 - 1
T = 0.1760 T = 0.0992
T = 17.60% T = 9.92
ERV = 1,360.46 ERV = 1,099.15
P = 1,000 P = 1,000
n = 1.90 n = 1
without maximum sales load of 1.50%
Inception through February 28, 1997 Year ended February 28, 1997
1,000(1+T)1.90 = 1,381.18 1,000(1+T)1 = 1,115.89
T = (1,381.18/1,000)1.90 - 1 T = (1,115.89/1,000)1 - 1
T = 0.1854 T = .1159
T = 18.54% T = 11.59%
ERV = 1,381.18 ERV = 1,115.89
P = 1,000 P = 1,000
n = 1.90 n = 1
</TABLE>
Cumulative Total Return
(ERV - P)/P = TR
Where: ERV = ending redeemable value at the end of the period
covered by the computation of a hypothetical $1,000
payment made at the beginning of the period
P = hypothetical initial payment of $1,000 from which the
maximum sales load is deducted
TR = total return
Inception through February 28, 1997 - Institutional Shares
(1,646.61 - 1,000)/1,000 = 0.6466
ERV = 1,646.61
P = 1,000
TR = 64.66%
Inception through February 28, 1997 - Series A Investor Shares - with 3% sales
load
(1,348.07 - 1,000)/1,000 = 0.3481
ERV = 1,348.07
P = 1,000
TR = 34.81%
With out sales load
(1,389.77 - 1,000)/1,000 = 0.3898
ERV = 1,389.77
P = 1,000
TR = 38.98%
Inception through February 28, 1997 - Series C Investor Shares
(1,370.93 - 1,000)/1,000 = 0.3709
ERV = 1,370.93
P = 1,000
TR = 37.09%
Inception through February 28, 1997 - Series D Investor Shares - with 1.5% sales
load
(1,360.46 - 1,000)/1,000 = 0.3605
ERV = 1,360.46
P = 1,000
TR = 36.05%
With out sales load
(1,381.18 - 1,000)/1,000 = 0.3812
ERV = 1,381.18
P = 1,000
TR = 38.12%
Inception through February 28, 1997 - Super-Institutional Shares
(1,048.94 - 1,000)/1,000 = 0.0489
ERV = 1,048.94
P = 1,000
TR = 4.89%
EXHIBIT 11
CONSENT OF AUDITORS
INDEPENDENT AUDITORS' CONSENT
To the Board of Trustees and Shareholders of
Gardner Lewis Investment Trust
We consent to the incorporation by reference in Post Effective Amendment No.13
to Registrations Statement (No. 33-53800) of The Chesapeake Fund of our report
dated March 26, 1997, appearing in the Prospectuses, which are a part of such
Registration Statement, and to the reference to us under the heading "Financial
Highlights" in such Prospectus.
\s\ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
June 30, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> SUPER INST SHARES
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 198,028,657
<INVESTMENTS-AT-VALUE> 227,555,281
<RECEIVABLES> 5,736,986
<ASSETS-OTHER> 116,492
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 233,408,759
<PAYABLE-FOR-SECURITIES> 1,643,745
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 224,083
<TOTAL-LIABILITIES> 1,867,828
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 202,300,431
<SHARES-COMMON-STOCK> 5,792,346
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (286,124)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 29,526,624
<NET-ASSETS> 231,540,931
<DIVIDEND-INCOME> 300,920
<INTEREST-INCOME> 394,366
<OTHER-INCOME> 0
<EXPENSES-NET> 2,561,976
<NET-INVESTMENT-INCOME> (1,866,690)
<REALIZED-GAINS-CURRENT> 4,887,131
<APPREC-INCREASE-CURRENT> 17,077,631
<NET-CHANGE-FROM-OPS> 20,098,072
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,792,346
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 98,902,876
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (5,173,255)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (391,310)
<GROSS-ADVISORY-FEES> 1,940,587
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,597,560
<AVERAGE-NET-ASSETS> 82,175,287
<PER-SHARE-NAV-BEGIN> 15.53
<PER-SHARE-NII> (0.07)
<PER-SHARE-GAIN-APPREC> 0.83
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 16.29
<EXPENSE-RATIO> 1.04
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> INST SHARES
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 198,028,657
<INVESTMENTS-AT-VALUE> 227,555,281
<RECEIVABLES> 5,736,986
<ASSETS-OTHER> 116,492
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 233,408,759
<PAYABLE-FOR-SECURITIES> 1,643,745
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 224,083
<TOTAL-LIABILITIES> 1,867,828
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 202,300,431
<SHARES-COMMON-STOCK> 4,787,965
<SHARES-COMMON-PRIOR> 5,554,687
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (286,124)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 29,526,624
<NET-ASSETS> 231,540,931
<DIVIDEND-INCOME> 300,920
<INTEREST-INCOME> 394,366
<OTHER-INCOME> 0
<EXPENSES-NET> 2,561,976
<NET-INVESTMENT-INCOME> (1,866,690)
<REALIZED-GAINS-CURRENT> 4,887,131
<APPREC-INCREASE-CURRENT> 17,077,631
<NET-CHANGE-FROM-OPS> 20,098,072
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,194,039
<NUMBER-OF-SHARES-REDEEMED> 1,960,761
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 98,902,876
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (5,173,255)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (391,310)
<GROSS-ADVISORY-FEES> 1,940,587
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,597,560
<AVERAGE-NET-ASSETS> 76,597,941
<PER-SHARE-NAV-BEGIN> 14.45
<PER-SHARE-NII> (0.13)
<PER-SHARE-GAIN-APPREC> 1.94
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 16.26
<EXPENSE-RATIO> 1.22
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> CLASS A SHARES
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 198,028,657
<INVESTMENTS-AT-VALUE> 227,555,281
<RECEIVABLES> 5,736,986
<ASSETS-OTHER> 116,492
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 233,408,759
<PAYABLE-FOR-SECURITIES> 1,643,745
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 224,083
<TOTAL-LIABILITIES> 1,867,828
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 202,300,431
<SHARES-COMMON-STOCK> 2,433,384
<SHARES-COMMON-PRIOR> 2,257,961
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (286,124)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 29,526,624
<NET-ASSETS> 231,540,931
<DIVIDEND-INCOME> 300,920
<INTEREST-INCOME> 394,366
<OTHER-INCOME> 0
<EXPENSES-NET> 2,561,976
<NET-INVESTMENT-INCOME> (1,866,690)
<REALIZED-GAINS-CURRENT> 4,887,131
<APPREC-INCREASE-CURRENT> 17,077,631
<NET-CHANGE-FROM-OPS> 20,098,072
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 886,587
<NUMBER-OF-SHARES-REDEEMED> 711,164
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 98,902,876
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (5,173,255)
<OVERDISTRIB-NII-PRIOR> 0
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<SERIES>
<NUMBER> 4
<NAME> CLASS C SHARES
<S> <C>
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<SERIES>
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<NAME> CLASS D SHARES
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</TABLE>
