Cusip Number 36559B104
PROSPECTUS NASDAQ Symbol CPGRX
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THE
CHESAPEAKE
GROWTH FUND
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a series of the Gardner Lewis Investment Trust
The investment objective of The Chesapeake Growth Fund (the "Fund") is to seek
capital appreciation through investments in equity securities, 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.
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
provides you with the basic information you should know before investing in the
Fund. The Prospectus should be read and kept for future reference.
A Statement of Additional Information containing additional information about
the Fund has been filed with the Securities and Exchange Commission and is
incorporated by reference in this Prospectus in its entirety. The Fund's address
is Post Office Drawer 69, Rocky Mount, North Carolina 27802-0069, and its
telephone number is 1-800-430-3863. A copy of the Statement of Additional
Information may be obtained at no charge by calling the Fund.
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by, any financial institution, and Fund shares are not federally insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other
agency. Investment in the Fund involves risks, including the possible loss of
principal.
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 UPON 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
December 11, 1996, supplemented September 3, 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.................................................. 9
DIVIDENDS AND DISTRIBUTIONS........................................... 10
HOW SHARES ARE VALUED................................................. 10
HOW SHARES MAY BE PURCHASED........................................... 11
HOW SHARES MAY BE REDEEMED............................................ 15
MANAGEMENT OF THE FUND................................................ 16
OTHER INFORMATION..................................................... 18
This Prospectus is not an offering of the securities herein described 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.
NOTICE: CLOSURE OF FUND TO MOST NEW INVESTORS
In December 1994, the Advisor determined that the Fund had reached an asset base
that allowed for both efficiency and maneuverability. Because the Fund did not
wish to compromise this position, the Board of Trustees of the Trust determined
that it would be advisable to close the Fund to most new investors effective
December 23, 1994. Shareholders who maintain open Fund accounts originally
established prior to December 23, 1994 (or established after that date under the
limited circumstances described below) may make additional investments in the
Fund and reinvest any dividends and capital gains distributions. Please note
under "HOW SHARES MAY BE REDEEMED" that the Board of Trustees reserves the right
to involuntarily redeem any account having a net asset value of less than
$25,000. Shareholders who originally established Fund accounts prior to December
23, 1994 (or who established such accounts after that date under the limited
circumstances described below) but who have redeemed or who redeem their Fund
account in full (i.e., close their accounts) may not make additional investments
in the Fund except under the limited circumstances described below. The Fund
will currently accept new accounts only under limited circumstances. The Fund,
in its sole discretion, may accept new Fund accounts from Trustees and officers
and their families and certain parties related thereto, including clients of the
Advisor and other investment advisors registered under the Investment Advisors
Act of 1940. These additional investments in the Fund, if accepted, will
generally be under circumstances in which the Advisor deems it appropriate to
maintain the Fund's asset base, which may be reduced from time to time by
redemptions by other shareholders or market conditions. The Fund may resume
unlimited sales of shares to the public at some future date.
<PAGE>
PROSPECTUS SUMMARY
The Fund. The Chesapeake Growth 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. See "Other
Information - Description of Shares."
Offering Price. Shares in the Fund are offered at net asset value plus a 3.0%
sales charge, which is reduced on purchases involving larger amounts. The
minimum initial investment is $25,000. The minimum subsequent investment is
$500. See "How Shares May be Purchased."
Investment Objective The investment objective of the Fund is to seek capital
appreciation through investments in and Special Risk equity securities,
consisting primarily of common and preferred stocks and securities
Considerations 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 will also contain a
significant amount of securities of smaller capitalization companies, which may
exhibit more volatility than medium and larger capitalization companies. The
Fund may borrow only under certain limited conditions (including to meet
redemption requests) and not to purchase securities. It is not the intent of the
Fund to borrow except for temporary cash requirements. Borrowing, if done, would
tend to exaggerate the effects of market and interest rate fluctuations on the
Fund's net asset value until repaid. 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 $3.5 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 1.25%. 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 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 the Fund's shares. The Distributor may sell Fund shares to or
through qualified securities dealers or others. See "Management of the Fund -
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 Fund for the current fiscal year. The information is intended to
assist the investor in understanding the various costs and expenses borne by 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
Maximum sales load imposed on purchases
(as a percentage of offering price).................................... 3.00%1
Sales load imposed on reinvested dividends................................NONE
Deferred sales load.......................................................NONE
Redemption fee*...........................................................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
(as a percentage of average net assets)
Investment advisory fees................................................1.25%2
12b-1 fees................................................................NONE
Other expenses...........................................................0.17%
Total operating expenses................................................1.42%2
EXAMPLE: You would pay the following expenses (including the maximum initial
sales charge) on a $1,000 investment in 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
------ ------- ------- --------
$44 $74 $106 $196
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 "Total operating expenses" shown above are based upon actual operating
expenses incurred by the Fund for the fiscal year ended August 31, 1996,
which were 1.42% of average net assets of the Fund.
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 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 financial data included in the table below has been derived from audited
financial statements of the Fund. The financial data for the fiscal year ended
August 31, 1996 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 years and period was
audited by other independent auditors. This information should be read in
conjunction with the Fund's latest audited annual 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.
(For a Share Outstanding Throughout each Period)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Years ended August 31,
1996 1995 1994 1993*
------ ------ ------ ------
Net Asset Value, Beginning of Period $20.70 $13.58 $11.86 $10.00
Income (loss) from investment operations
Net investment gain (loss) (0.18) (0.15) (0.05) (0.01)
Net realized and unrealized gain (loss) on investments (2.53) 7.27 1.98 1.87
------ ------ ------ ------
Total from investment operations (2.71) 7.12 1.93 1.86
------ ------ ------ ------
Distributions to shareholders from
Net investment income 0.00 0.00 (0.16) 0.00
Net realized gain from investment transactions (1.11) (0.00) (0.05) 0.00
------ ------ ------ ------
Total distributions (1.11) 0.00 (0.21) 0.00
------ ------ ------ ------
Net Asset Value, End of Period $16.88 $20.70 $13.58 $11.86
====== ====== ====== ======
Total return (12.81)% 52.45% 16.42% 29.76% (b)
Ratios/supplemental data
Net Assets, End of Period (000s) $460,307 $460,286 $179,223 $25,421
Ratio of expenses to average net assets
Before expense reimbursements and waived fees 1.42% 1.43% 1.57% 2.29% (b)
After expense reimbursements and waived fees 1.42% 1.43% 1.49% 1.54% (b)
Ratio of net investment income (loss) to average net assets
Before expense reimbursements and waived fees (1.05)% (1.07)% (0.87)% (1.22)%(b)
After expense reimbursements and waived fees (1.05)% (1.07)% (0.79)% (0.47)%(b)
Portfolio turnover rate 110.04% 75.42% 66.03% 45.95%
</TABLE>
* For the period from January 4, 1993 (commencement of operations) to August
31, 1993.
(a) Does not reflect the maximum sales charge of 3.00%.
(b) Annualized.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
Investment Objective. The investment objective of the Fund is to seek capital
appreciation through investments in equity securities, 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. The Fund's
investment objective and fundamental investment limitations discussed 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 of
those companies which the Advisor feels show superior prospects for growth. The
Advisor will focus attention on those 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 are 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. Many of the portfolio companies will be small
capitalization companies, which may exhibit more volatility than medium and
large capitalization companies. 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 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 19 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 portfolio will be comprised primarily of common stocks, and may include
preferred stocks, participating and non-participating preferred stocks, and
convertible preferred stock as well as convertible debt. 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.
The Fund will normally be at least 90% invested in equity securities. As a
temporary defensive position, however, when the Advisor determines that market
conditions so warrant, the Fund may invest up to 100% of its total assets in
investment grade bonds, U.S. Government Securities, repurchase agreements, or
money market instruments. When the Fund invests in investment grade bonds, U.S.
Government Securities, repurchase agreements, or money market instruments as a
temporary defensive measure, it is not pursuing its investment objective. Under
normal circumstances, however, money market or repurchase agreement instruments
will typically represent a portion of the Fund's portfolio, as funds awaiting
investment, to accumulate cash for anticipated purchases of portfolio securities
and to provide for shareholder redemptions and operational expenses of the Fund.
Money Market Instruments. Money market instruments mature in thirteen months or
less from the date of purchase and may include U.S. Government Securities and
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 securities 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. See the Statement of Additional Information for a more detailed
description of money market instruments.
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, 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.
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 (the "1940 Act").
The Fund may invest up to 10% of its total assets in foreign securities. The
same factors would be considered in selecting foreign securities as with
domestic securities. Foreign securities investment presents special
considerations not typically associated with investments 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 United States securities laws against such issuers.
Favorable or unfavorable differences between U.S. and foreign economies could
affect foreign securities values. The United States Government has, in the past,
discouraged certain foreign investments by United States investors through
taxation or other restrictions, and it is possible that such restrictions could
be imposed again. Foreign securities markets have substantially less volume than
the New York Stock Exchange and securities of some foreign companies are less
liquid and more volatile than securities of comparable U.S. companies. In
addition to the fluctuation inherent in any equity investment, there is an
additional risk of fluctuation when valuing foreign securities based solely on
the relative exchange rates between U.S. currency (the valuation method for the
Fund) and the currency in which the foreign security is traded. While the share
value of the foreign security may increase, its value to the Fund may decrease
due to changes in currency exchange rates.
Because of the inherent risk of foreign securities over domestic issues, the
Fund will generally limit foreign investments to those traded domestically as
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.
The Fund may invest in both sponsored and unsponsored ADRs. Unsponsored ADR
programs are organized independently and without the cooperation of the issuer
of the underlying foreign securities. As a result, available information
concerning the issuer may not be as current as for sponsored ADRs, and the
prices of unsponsored ADRs may be more volatile than if such instruments were
sponsored by the issuer. The issuers of the securities underlying unsponsored
ADRs are not obligated to disclose material information in the U.S. and,
therefore, there may be no correlation between such information and the market
value of the ADRs. Because of the additional risks inherent in unsponsored ADRs,
the Fund will tend to invest in sponsored ADRs over unsponsored ADRs, to the
extent it invests in ADRs.
ADRs purchased by the Fund, if any, will not be considered foreign securities
for purposes of the 10% limit on investments in foreign securities. To the
extent the Fund invests in other foreign securities, subject to the 10% limit,
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. The Fund will only invest in other investment companies by
purchase of such securities on the open market where no commission or profit to
a sponsor or dealer results from the purchase other than the customary broker's
commissions or when the purchase is part of a plan of merger, consolidation,
reorganization, or acquisition. 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.
The Advisor will waive its advisory fee for that portion of the Fund's assets
invested in other investment companies, except when such purchase is part of a
plan of merger, consolidation, reorganization, or acquisition.
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.
To the extent that the major portion of the Fund's portfolio consists of common
stocks, it may be expected that the net asset value will be subject to greater
fluctuation than a portfolio containing mostly fixed income securities. To the
extent that the Advisor seeks to identify the securities of companies which are
undergoing internal change, such as implementing new strategies or introducing
new technologies, investment in the Fund may involve greater than average risk
due to the unproven nature of such securities. These securities will include a
significant amount of securities of small capitalization companies. To the
extent the Fund's assets are invested in small capitalization companies, that
portion of the Fund's portfolio may exhibit more volatility than the portion
invested in medium and large capitalization companies. Because there is risk in
any investment, there can be no assurance the Fund will achieve its investment
objective.
The Fund sells portfolio securities in order to take advantage of investment
opportunities. Nevertheless, by utilizing the approach to investing described
herein, portfolio turnover in the Fund is expected to average between 75% and
100% and will generally not exceed 125%. 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. The degree of portfolio activity may also have an effect on the tax
consequences of capital gain distributions. See "Financial Highlights" for the
Fund's portfolio turnover rate for prior fiscal periods.
Borrowing. The Fund may borrow, temporarily, up to 5% of its total assets for
extraordinary or emergency purposes and 15% of its total assets to meet
redemption requests, which might otherwise require untimely disposition of
portfolio holdings. To the extent the Fund borrows for these purposes, the
effects of market price fluctuations on portfolio net asset value will be
exaggerated. If, while such borrowing is in effect, the value of the Fund's
assets declines, the Fund could be forced to liquidate portfolio securities when
it is disadvantageous to do so. The Fund would incur interest and other
transaction costs in connection with borrowing. The Fund will borrow only from a
bank. The Fund will not make any investments if the borrowing exceeds 5% of its
assets until such time as repayment has been made to bring the total borrowing
below 5% of its total assets.
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 generally cannot
be sold to the public without registration under the federal securities laws.
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. This requirement must be met unless the Fund enters
into offsetting contracts for the forward sale of other securities it owns.
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 which, together with its investment objective, are
fundamental policies which may not be changed without shareholder approval. Some
of these restrictions are that the Fund will not: (1) issue senior securities,
borrow money or pledge its assets, except that it may borrow from banks as a
temporary measure (a) for extraordinary or emergency purposes, in amounts not
exceeding 5% of the Fund's total assets or, (b) in order to meet redemption
requests, in amounts not exceeding 15% of its total assets. The Fund will not
make any investments if borrowing exceeds 5% of its total assets until such time
as total borrowing represents less than 5% of Fund 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; (5) invest in oil, gas or mineral leases or
exploration programs, or real estate (except the Fund may invest in readily
marketable securities of companies that own or deal in such things); (6) invest
more than 5% of its total assets at market in the securities of any one issuer
nor hold more than 10% of the voting stock of any issuer; (7) invest in
restricted securities; (8) invest more than 10% of the Fund's assets in foreign
securities (excluding ADRs), and (9) invest more than 25% of the Fund's total
assets in the securities of issuers in any one industry (other than U.S.
Government Securities). 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. In order to permit the sale of the Fund's shares
in certain states, the Fund may make commitments that are more restrictive than
the investment policies and limitations described above and in the Statement of
Additional Information. Such commitments may have an effect on the investment
performance of the Fund. Should the Fund determine that any such commitment is
no longer in the best interests of the Fund, it may revoke the commitment and
terminate sales of its shares in the state involved.
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, 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. The Fund may pay dividends, if any, and
distribute capital gains, if any, at least annually. 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 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 for 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
regarding 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 distribution 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 regarding the
payment of any dividends or the realization of any gains.
HOW SHARES ARE VALUED
Net asset value 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, less all of
its liabilities, divided by the number of its outstanding shares.
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.
Prices for securities traded on foreign exchanges will be converted to the
equivalent price in U.S. currency using the published currency exchange rates
available at the time of valuation. Unlisted securities for which market
quotations are readily available are valued at the latest quoted sales price, if
available, 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 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 Growth Fund, 107 North Washington Street,
Post Office Box 4365, Rocky Mount, North Carolina 2780-0365. 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.
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:
Chesapeake Growth Fund
c/o NCSS
107 North Washington Street
Post Office Box 4365
Rocky Mount, North Carolina 27803-0365
1-800-430-3863
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 as of that time. Otherwise, your order will purchase shares as of
4:00 p.m. New York 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 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 Administrator, 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 shares of the Fund equals net asset
value plus a sales charge. Capital Investment Group, Inc. (the "Distributor"),
Post Office Box 32249, Raleigh, North Carolina 27622, receives this sales charge
as Distributor and may reallot 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
------------------------ -------- --------- ---------------------
Less than $50,000............................. 3.09% 3.00% 2.80%
$50,000 but less than $250,000............... 2.04% 2.00% 1.80%
$250,000 or more.............................. 1.01% 1.00% 0.90%
</TABLE>
At times the Distributor may reallot the entire sales charge to selected
dealers. From time to time dealers who receive dealer discounts and brokerage
commissions from the Distributor may reallot 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,
investors have the privilege of combining concurrent purchases of the Fund and
another 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 $25,000, and shares in the Fund at the total
public offering price of $25,000, the sales charge would be that applicable to a
$50,000 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 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 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 by
executing a letter of intent. A letter of intent allows an investor to purchase
shares of the Fund over a 13-month period at reduced sales charges based on the
total amount intended to be purchased 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 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 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
Administrator 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
Administrator 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 shares of the Fund in shares of the Fund or in shares of
another series of the Trust affiliated with the Advisor and sold with a sales
charge, within 90 days after the redemption. If the other series 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 series 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.
Exchange Feature. Investors will have the privilege of exchanging shares of
the Fund for shares of any other series of the Trust to be established by
Advisor. An exchange is a taxable transaction and 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. 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.
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 reserve
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 Administrator 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 Administrator.
Stock Certificates. Stock certificates will not be issued for your shares.
Evidence of ownership will be given by issuance of periodic account statements
which 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 as of 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 the 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.
. Your request should be addressed to The Chesapeake Growth Fund, 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.
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. You can choose to have
redemption proceeds mailed to you at your address of record, your bank, or to
any other authorized person, or you can have the proceeds sent by bank wire to
your bank ($5,000 minimum). Shares of the Fund may not be redeemed by wire on
days in which your bank is not open for business. You can change your redemption
instructions anytime you wish by filing a letter including your 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 imposed by the Custodian for wire redemptions. The Custodian
currently charges the Fund $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 your account by redemption of shares in your
account. Your 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.
You 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 your 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
$50,000 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 your 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 your account and the Fund from fraud, signature
guarantees are required to be sure that you are the person who has authorized 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 your 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 series of the Gardner Lewis Investment
Trust (the "Trust"), a registered open-end management investment company
organized as a Massachusetts business trust in 1992. 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 $3.5 billion
in assets, providing investment advice to corporations, trusts, pension and
profit sharing plans, other business and institutional accounts, and
individuals. 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 1.25% of the average daily net asset
value of the Fund. Although the investment advisory fee is higher than that paid
by most other investment companies, the Board of Trustees believes the fee to be
comparable to advisory fees paid by many funds having similar objectives and
policies. For the fiscal year ended August 31, 1996 the Advisor was paid
investment advisory fees totalling $5,788,117 or 1.25% of the average daily net
assets of the Fund.
The Advisor supervises and implements the investment activities of the Fund,
including the making of 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 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 1993. 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." In addition to advising the Fund (and another series of
the Trust, The Chesapeake Fund, organized in 1994), the Advisor has been
rendering investment counsel, utilizing investment strategies substantially
similar to that of the Fund, to numerous other clients since the firm's
inception in 1990.
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. 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. NC 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.
Capital Investment Group, Inc. (the "Distributor"), a North Carolina
corporation, is the principal distributor of the Fund's shares pursuant to a
Distribution Agreement between the Fund and the Distributor. The Distributor
receives commissions consisting of that portion of the sales charge remaining
after the discounts which it allows to investment dealers. See "How Shares May
Be Purchased - Sales Charges."
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.
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." 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.
Shareholders of the Trust 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
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
Administrator, as transfer agent, 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. 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 total return performance data other than
average annual total return. Such data would show a percentage rate of return
encompassing all elements of return (i.e. income and capital appreciation or
depreciation), and would assume reinvestment of all dividends and capital gain
distributions. Such other total return data may be shown for the same or
different periods as those used for average annual total return. These data may
consist of a cumulative percentage rate of return, actual year-by-year rates of
return, or any combination thereof. A cumulative percentage rate of return would
show 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 all or a portion of its fees or may reimburse all or 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
GROWTH FUND
- --------------------------------------------------------------------------------
PROSPECTUS
December 11, 1996
Supplemented September 3, 1997
The Chesapeake Growth Fund
107 North Washington Street
Post Office Box 4365
Rocky Mount, North Carolina 27802-0069
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
Custodian
First Union National Bank of North Carolina
Two First Union Center
Charlotte, North Carolina 28288-1151
Distributor
Capital Investment Group, Inc.
Post Office Box 32249
Raleigh, North Carolina 27622
Independent Auditors
Deloitte & Touche LLP
2500 One PPG Place
Pittsburgh, Pennsylvania 15222-5401
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
THE CHESAPEAKE GROWTH FUND
December 11, 1996
Supplemented September 3, 1997
A series of
GARDNER LEWIS INVESTMENT TRUST
105 North Washington Street, P.O. Box 69
Rocky Mount, NC 27802-0069
Telephone 1-800-430-3863
Table of Contents
INVESTMENT OBJECTIVE AND POLICIES........................................ 2
INVESTMENT LIMITATIONS................................................... 4
NET ASSET VALUE.......................................................... 6
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION........................... 6
DESCRIPTION OF THE TRUST................................................. 6
ADDITIONAL INFORMATION CONCERNING TAXES.................................. 7
MANAGEMENT OF THE FUND................................................... 9
SPECIAL SHAREHOLDER SERVICES............................................. 12
ADDITIONAL INFORMATION ON PERFORMANCE.................................... 13
APPENDIX A - DESCRIPTION OF RATINGS...................................... 16
ANNUAL REPORT OF THE FUND FOR THE
FISCAL YEAR ENDED AUGUST 31, 1996.................................. ATTACHED
This Statement of Additional Information (the "Additional Statement") is meant
to be read in conjunction with the Prospectus dated December 11, 1996,
supplemented September 3, 1997, for The Chesapeake Growth Fund (the "Fund"), and
is incorporated by reference in its entirety into the Prospectus. Because this
Statement of Additional Information 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 Prospectus may be obtained at no charge by writing or
calling the Fund at the address and phone number shown above. Capitalized terms
used but not defined herein have the same meanings as in the Prospectus.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The following policies supplement the Fund's investment objective and policies
as set forth in the Prospectus. The Fund, organized in 1993, 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 objective.
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 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 Investment Company Act of 1940) 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 years ended August 31, 1996, 1995, and 1994, total dollar amounts
of brokerage commissions paid by the Fund were $1,177,905, $662,146, and
$308,815, 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
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 (the "1940 Act"), collateralized by the underlying security. The Trust's
Board of Trustees 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
risks in 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 a 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 obligations (including those
subject to repurchase agreements) as described herein, 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 in one of the two highest rating categories by any of the nationally
recognized securities rating organizations 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.
Forward Commitment & When-Issued Securities. The Fund may purchase securities on
a when-issued basis or for settlement at a future date if the Fund holds
sufficient assets to meet the purchase price. In such purchase transactions, the
Fund will not accrue interest on the purchased security until the actual
settlement. Similarly, if a security is sold for a forward date, the Fund will
accrue the interest until the settlement of the sale. When-issued security
purchase and forward commitments have a higher degree of risk of price movement
before settlement due to the extended time period between the execution and
settlement of the purchase or sale. As a result, the exposure to the
counterparty of the purchase or sale is increased. Although the Fund would
generally purchase securities on a forward commitment or when-issued basis with
the intention of taking delivery, the Fund may sell such a security prior to the
settlement date if the Advisor felt such action was appropriate. In such a case,
the Fund could incur a short term gain or loss.
INVESTMENT LIMITATIONS
The Fund has adopted the following 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.
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
(which shall not be deemed to include American Depository Receipts
("ADRs"));
4. Invest in the securities of any issuer if any of the officers or trustees
of the Trust or its 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, 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;
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 would be invested
in such securities;
13. Issue senior securities, borrow money or pledge its assets, except that it
may borrow from banks as a temporary measure (a) for extraordinary or
emergency purposes, in amounts not exceeding 5% of its total assets or (b)
in order to meet redemption requests, in amounts not exceeding 15% of its
total assets. The Fund will not make any further investments if borrowing
exceeds 5% of its total assets until such time as total borrowing
represents less than 5% of Fund assets;
14. Invest more than 10% of its net assets in illiquid securities; For this
purpose, illiquid securities include, among others (a) securities for which
no readily available market exists, (b) fixed time deposits that are
subject to withdrawal penalties and have maturities of more than seven
days, and (c) repurchase agreements not terminable within seven days;
15. Invest in restricted securities; and
16. Write, purchase or sell puts, calls, warrants or combinations thereof, or
purchase or sell commodities, commodities contracts, futures contracts or
related options.
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.
With respect to investments permitted in other investment companies, see
"Investment Objective and Policies - Investment Companies" in the Prospectus,
which reflects certain limitations placed on such investments, including the
Advisor's waiver of duplicative advisory fees. During any time that shares of
the Fund may be registered in the State of California, it is a fundamental
policy of the Fund that fees incurred in connection with the purchase of shares
of other investment companies will not be duplicative, management fees will not
be duplicated, and initial sales charges incurred for such purchases will not
exceed one percent (1%).
NET ASSET VALUE
The net asset value per share 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 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 deemed a business holiday on
which the net asset value of the Fund will not be calculated.
The net asset value per share of the Fund is calculated separately by adding the
value of the Fund's securities and other assets belonging to the Fund,
subtracting the liabilities charged to the Fund, and dividing the result by the
number of outstanding shares. "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. 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. 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 are
conclusive.
For the fiscal years ended August 31, 1996, 1995 and 1994, the total expenses of
the Fund, after voluntary fee waivers and expense reimbursements, if any, were
$6,589,774 (1.42% of average daily net assets), $4,339,587 (1.43% of average
daily net assets), and $1,451,705 (1.49% of average daily net assets).
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. The minimum for initial investment is $25,000 and for
any subsequent investment is $500. 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. 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, along with the information on
current purchases, rights of accumulation, and letters of intent. See "How
Shares May Be Purchased" in the Prospectus.
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, The Chesapeake Growth Fund (the
subject of this Additional Statement) and The Chesapeake Fund, both managed by
the Advisor. The number of shares of each series shall be unlimited. The Fund
issues a single class of shares, while the shares of The Chesapeake Fund are
divided into five separate classes of shares. 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. The Treasury Department may,
by regulation, exclude from qualifying income foreign currency gains that are
not directly related to the Fund's principal business of investing in stock or
securities. 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
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, 33 Chairman and Chief 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, 33 Chief Operating Officer
Trustee Turner Investment Partners (investment manager)
1235 Westlakes Drive Berwyn, Pennsylvania
Suite 350
Berwyn, Pennsylvania 19312
John L. Lewis, IV, 34 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
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), since 1992; previously,
Student
University of North Carolina
Chapel Hill, North Carolina
J. Hope Reese, 36 Comptroller
Treasurer and Assistant The Nottingham Company
Secretary Rocky Mount, North Carolina
105 North Washington Street (Administrator to the Chesapeake Core Growth Fund), 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
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 since 1992; previously
Chadds Ford, Pennsylvania 19317 International Equity Trader
Morgan Stanley & Company
New York, New York
Morgan Stanley International
_______________________________ London, England
</TABLE>
* As of December 1, 1996
** 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.
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.
Compensation Table
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
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
Frank P. Meadows III None None None None
Trustee
</TABLE>
Figures are for the calendar year ended December 31, 1995. Messrs Gardner and
Kneeley were not Trustees of the Trust during such period.
Principal Holders of Voting Securities. As of December 1, 1996, 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 the Fund. On
the same date no shareholder owned of record or is known by the Fund to
beneficially own (i.e., voting and/or investment power) 5% or more of the
outstanding shares of beneficial interest of the Fund other than the North
Carolina Trust Company, P. O. Box 1108, Greensboro, North Carolina 27402, who
owned of record for the benefit of its clients 1,541,368.319 shares of the Fund,
representing 5.35% of the Fund.
Investment Advisor. Information about Gardner Lewis Asset Management (the
"Advisor") and its duties and compensation as Advisor is contained in the
Prospectus. The Advisory Agreement is effective until April 30, 1997, and will
be renewed thereafter for periods of one year only so long as such renewal and
continuance is specifically approved at least annually by the Board of Trustees
or by vote of a majority of the Fund's outstanding voting securities, provided
the continuance is also approved by a majority of the Trustees who are not
"interested persons" of the Trust or the Advisor by vote cast in person at a
meeting called for the purpose of voting on such approval. The Advisory
Agreement is terminable by the Fund without penalty on sixty days notice by the
Board of Trustees of the Trust or by the Advisor. The Advisory Agreement
provides that it will terminate automatically in the event of its assignment.
Monthly compensation of the Advisor with regards to the Fund, based upon the
Fund's daily average net assets, is at the annual rate of 1.25%. For the fiscal
year ended August 31, 1994, the Advisor voluntarily waived a portion of its fee
in the amount of $78,506 and received the remaining $1,139,691 for services to
the Fund. For the fiscal year ended August 31, 1995, the Advisor received
$3,792,169 for services to the Fund. For the fiscal year ended August 31, 1996,
the Advisor received $5,788,117 for services to the Fund.
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 and Transfer Agent and Administration Agreement with The
Nottingham Company (the "Administrator"), a North Carolina corporation, whose
address is 105 North Washington Street, Post Office Drawer 69, Rocky Mount,
North Carolina 27802-0069. Compensation of the Administrator, based upon the
average daily net assets of the Fund, is at the following annual rates: 0.20% of
the Fund's first $25 million of average daily net assets, 0.15% on the next $25
million, and 0.075% on average daily net assets over $50 million. For the fiscal
years ended August 31, 1994, 1995, and 1996, the Fund paid an administrative fee
of $140,655, $290,417, and $397,287, respectively. In addition, the
Administrator currently receives a monthly fee of $1,750 for accounting and
recordkeeping services for the Fund. For the fiscal years ended August 31, 1994,
1995, and 1996, the Administrator received $21,000 each year for such services.
The Administrator also charges the Trust for certain costs involved with the
daily valuation of investment securities and is reimbursed for out-of-pocket
expenses.
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.
With the approval of the Trust, the Administrator has contracted with NC
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 years ended August 31, 1996, 1995 and 1994, the aggregate dollar
amount of sales charges paid on the sale of Fund shares was $106,588, $434,562,
and $127,006, respectively, from which the Distributor retained $11,174,
$40,077, and $40,766, respectively.
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.
SPECIAL SHAREHOLDER SERVICES
The Fund offers the following shareholder services:
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, shareholder certificates are not issued.
Automatic Investment Plan. 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
Administrator 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 Administrator.
Shareholders owning shares with a value of $50,000 or more 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 capability of electronically depositing the
proceeds of the systematic withdrawal directly to the shareholders' personal
bank account ($5,000 minimum per bank wire). Instructions for establishing this
service are included on 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").
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 Growth Fund
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. Transactions involving
the issuance of shares in the Fund for securities in lieu of cash will be
limited to acquisitions of securities (except for municipal debt securities
issued by state political subdivisions or their agencies or instrumentalities)
which: (a) meet the investment objective and policies of the Fund; (b) are
acquired for investment and not for resale; (c) are liquid securities which are
not restricted as to transfer either by law or liquidity of market; and (d) have
a value which is readily ascertainable (and not established only by evaluation
procedures) as evidenced by a listing on the American Stock Exchange, the New
York Stock Exchange, or NASDAQ.
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.
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 the Fund may be quoted in advertisements,
sales literature, shareholder reports or other communications to shareholders.
The Fund computes its "average annual total return" 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 its aggregate total return, 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 Fund for the year ended August 31, 1996
was (15.43)%. The average annual total return for the Fund for the three years
ended August 31, 1996 was 14.50%. The average annual total return for the Fund
since inception (January 4, 1993) through August 31, 1996 was 17.09%. The
cumulative total return for the Fund since inception through August 31, 1996 was
78.07%. These quotations assume the maximum 3.0% sales load for the Fund was
deducted from the initial investment. The average annual total return of the
Fund for the year ended August 31, 1996, for the three years ended August 31,
1996, and since inception through August 31, 1996, without deducting the maximum
3.0% sales load, was (12.81)%, 15.67%, and 18.07%, respectively. The cumulative
total return for the Fund since inception through August 31, 1996, without
deducting the maximum 3.0% sales load, was 83.58%. These performance quotations
should not be considered as representative of the Fund's performance for any
specified period in the future.
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. The
Fund may also compare its performance to the Russell 2000 Index, which is
generally considered to be representative of the performance of unmanaged common
stocks of smaller capitalization companies 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 instruments or repurchase agreements 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 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 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.
