Cusip Number 36559B104 NASDAQ Symbol CPGRX
________________________________________________________________________________
THE CHESAPEAKE AGGRESSIVE GROWTH
FUND
A series of
Gardner Lewis Investment Trust
________________________________________________________________________________
Prospectus
December 31, 1998
The Chesapeake Aggressive Growth Fund seeks capital appreciation. Current income
is a secondary consideration in selecting portfolio investments. In seeking to
achieve its objective, this Fund will invest primarily in equity securities of
small capitalization companies.
Advisor
Gardner Lewis Asset Management
285 Wilmington-West Chester Pike
Chadds Ford, Pennsylvania 19317
1-800-430-3863
Neither the Securities and Exchange Commission nor any other regulatory body has
approved the securities being offered by this prospectus or determined whether
this prospectus is accurate and complete. It is unlawful for anyone to make any
representation to the contrary.
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TABLE OF CONTENTS
THE FUND ......................................................................2
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INVESTMENT OBJECTIVE.....................................................2
PRINCIPAL INVESTMENT STRATEGIES..........................................2
PRINCIPAL RISKS OF INVESTING IN THE FUND.................................3
BAR CHART AND PERFORMANCE TABLE..........................................4
FEES AND EXPENSES OF THE FUND............................................5
FINANCIAL HIGHLIGHTS.....................................................6
MANAGEMENT OF THE FUND.........................................................7
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THE INVESTMENT ADVISOR...................................................7
THE ADMINISTRATOR........................................................7
THE TRANSFER AGENT.......................................................7
THE DISTRIBUTOR..........................................................8
INVESTING IN THE FUND..........................................................8
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MINIMUM INVESMENT........................................................8
PURCHASE AND REDEMPTION PRICE............................................8
PURCHASING SHARES........................................................9
REDEEMING YOUR SHARES...................................................11
OTHER IMPORTANT INVESTMENT INFORMATION........................................13
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DIVIDENDS, DISTRIBUTIONS AND TAXES......................................13
YEAR 2000...............................................................14
ADDITIONAL INFORMATION..........................................Back Cover
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. As conditions change in the securities markets, the Board of
Trustees may or may not determine to reopen the Fund to new shareholders.
Existing shareholders may continue to make additional investments.
<PAGE>
THE FUND
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INVESTMENT OBJECTIVE
The investment objective of The Chesapeake Aggressive Growth Fund (the "Fund")
is to seek capital appreciation. Current income is a secondary consideration in
selecting portfolio investments. In seeking to achieve its objective, this Fund
will invest primarily in equity securities of small capitalization companies.
PRINCIPAL INVESTMENT STRATEGIES
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. 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, and interest rates.
In selecting portfolio companies, the Advisor uses analyses, 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;
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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.
PRINCIPAL RISKS OF INVESTING IN THE FUND
The Fund is intended for aggressive investors seeking above-average gains and
willing to accept the risks involved in investing in the securities of small-cap
companies.
Small-Cap Stocks. Investing in the securities of small-cap companies generally
involves greater risk than investing in larger, more established companies. This
greater risk is, in part, attributable to the fact that the securities of
small-cap companies usually have more limited marketability and therefore, may
be more volatile than securities of larger, more established companies or the
market averages in general. Because small-cap companies normally have fewer
shares outstanding than larger companies, it may be more difficult to buy or
sell significant amounts of such shares without an unfavorable impact on
prevailing prices. Another risk factor is that small-cap companies often have
limited product lines, markets or financial resources and may lack management
depth. Additionally, small-cap companies are typically subject to greater
changes in earnings and business prospects than are larger, more established
companies and there typically is less publicly available information concerning
small-cap companies than for larger, more established companies.
Although investing in securities of small companies offers potential
above-average returns if the companies are successful, the risk exists that the
companies will not succeed and the prices of the companies' shares could
significantly decline in value. Therefore, an investment in the Fund may involve
a greater degree of risk than an investment in other mutual funds that seek
capital growth by investing in more established, larger companies.
Fluctuation in Value. To the extent that the majority of the Fund's portfolio
consists of common stocks, it is expected that the Fund's net asset value will
be subject to greater price fluctuation than a portfolio containing mostly fixed
income securities. To the extent that the Fund invests in securities of
companies that 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. As
noted above, the Fund may invest a significant portion of its assets in the
securities of small capitalization companies. To the extent the Fund's assets
are invested in small capitalization companies, the Fund may exhibit more
volatility than if it were invested in large capitalization companies. Because
there is risk in any investment, there can be no assurance the Fund will achieve
its investment objective.
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Portfolio Turnover. The Fund sells portfolio securities without regard to the
length of time they have been held 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 periods.
BAR CHART AND PERFORMANCE TABLE
The bar chart and table shown below provide an indication of the risks of
investing in the Chesapeake Aggressive Growth Fund by showing (on a calendar
year basis) changes in the Fund's average annual total returns from year to year
and by showing (on a calendar year basis) how the Fund's average annual returns
for one year and since inception compare to those of a broad-based securities
market index. How the Fund has performed in the past is not necessarily an
indication of how the Fund will perform in the future.
[BAR CHART REPRESENTATION HERE OF CALENDAR YEAR RETURNS]:
Year to Year Total Returns
Year Return
---- ------
1994 6.99%
1995 30.25%
1996 10.83%
1997 15.18%
o During the 4-year period shown in the bar chart, the highest return for a
quarter was 19.54% (quarter ended June 30, 1997).
o During the 4-year period shown in the bar chart, the lowest return for a
quarter was -15.09% (quarter ended December 30, 1997).
o The year-to-date average annual total return of the Fund, as of the most
recent fiscal quarter ended August 31, 1998, was -25.86%.
o Sales loads are not reflected in the chart above. If these amounts were
reflected, returns would be less than those shown.
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Average Annual Total Returns Past 1 Year Since Inception
Period ended December 31, 1997
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The Chesapeake Aggressive Growth Fund 15.18% 18.89%
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S&P 500 * 33.36% 20.31%
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* The S&P 500 is the Standard & Poor's Composite Index of 500 Stocks, a
widely recognized, unmanaged index of Common Stock Prices
FEES AND EXPENSES OF THE FUND
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund:
Shareholder Fees
(fees paid directly from your investment)
-----------------------------------------
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) ........................ 3.00%
Redemption fee ............................................ None
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
---------------------------------------------
Management Fees............................................ 1.25%
Distribution and/or Service (12b-1) Fees................... None
Other Expenses............................................. 0.15%
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Total ..................................................... 1.40%
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Example. This Example shows you the expenses you may pay over time by investing
in the Fund. Since all funds use the same hypothetical conditions, it should
help you compare the costs of investing in the Fund versus other funds. The
Example assumes the following conditions:
(1) You invest $10,000 in the Fund for the periods shown;
(2) You reinvest all dividends and distributions;
(3) You redeem all of your shares at the end of those periods;
(4) You earn a 5% total return; and
(5) The Fund's expenses remain the same.
Although your actual costs may be higher or lower, the following table shows you
what your costs may be under the conditions listed above as well as those upon
redemption.
- ------------------------ ------------ ------------- ------------- --------------
Period Invested 1 Year 3 Years 5 Years 10 Years
======================== ============ ============= ============= ==============
Your Costs $438 $730 $1,043 $1,929
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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 years ended
August 31, 1998, 1997, and 1996, has been audited by Deloitte & Touche LLP,
independent auditors, whose report covering such periods 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.
<TABLE>
<S> <C> <C> <C> <C> <C>
(For a Share Outstanding Throughout Each Period)
- --------------------------------------------------- --------------- --------------- --------------- --------------- ---------------
Year Ended Year Ended Year Ended Year Ended Year Ended
August 31, August 31, August 31, August 31, August 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
- --------------------------------------------------- --------------- --------------- --------------- --------------- ---------------
- --------------------------------------------------- --------------- --------------- --------------- --------------- ---------------
Net Asset Value, Beginning of Period $22.44 $16.88 $20.70 $13.58 $11.86
- --------------------------------------------------- --------------- --------------- --------------- --------------- ---------------
- --------------------------------------------------- --------------- --------------- --------------- --------------- ---------------
Income (loss) from investment operations
Net investment loss (0.24) (0.22) (0.18) (0.15) (0.05)
Net realized and unrealized gain (loss)
on investments (6.02) 6.84 (2.53) 7.27 1.98
---- ---- ------ ---- ----
Total from investment operations (6.26) 6.62 (2.71) 7.12 1.93
---- ---- ------ ---- ----
- --------------------------------------------------- --------------- --------------- --------------- --------------- ---------------
- --------------------------------------------------- --------------- --------------- --------------- --------------- ---------------
Distributions to shareholders from
Net investment income 0.00 0.00 0.00 0.00 (0.16)
Net realized gain from investment transactions (2.88) (1.06) (1.11) 0.00 (0.05)
---- ---- ------ ---- ----
Total distributions (2.88) (1.06) (1.11) 0.00 (0.21)
---- ---- ------ ---- ----
- --------------------------------------------------- --------------- --------------- --------------- --------------- ---------------
- --------------------------------------------------- --------------- --------------- --------------- --------------- ---------------
Net Asset Value, End of Period $13.30 $22.44 $16.88 $20.70 $13.58
====== ====== ====== ====== ======
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Total return (a) (32.12)% 41.14% (12.81)% 52.45% 16.42%
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Ratios/supplemental data
- --------------------------------------------------- --------------- --------------- --------------- --------------- ---------------
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Net Assets, End of Period $369,803,592 $613,488,902 $460,307,496 $460,286,044 $179,222,758
============ ============ ============ ============ ============
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Ratio of expenses to average net assets
Before expense reimbursements and waived fees 1.40% 1.42% 1.42% 1.43% 1.57%
After expense reimbursements and waived fees 1.40% 1.42% 1.42% 1.43% 1.49%
- --------------------------------------------------- --------------- --------------- --------------- --------------- ---------------
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Ratio of net investment loss to average net assets
Before expense reimbursements and waived fees (1.15)% (1.17)% (1.05)% (1.07)% (0.87)%
After expense reimbursements and waived fees (1.15)% (1.17)% (1.05)% (1.07)% (0.79)%
- --------------------------------------------------- --------------- --------------- --------------- --------------- ---------------
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Portfolio turnover rate 86.18% 115.51% 110.04% 75.42% 66.03%
- --------------------------------------------------- --------------- --------------- --------------- --------------- ---------------
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Average commission rate paid (b) $0.0580 $0.0568 ____ ____ ____
- --------------------------------------------------- --------------- --------------- --------------- --------------- ---------------
(a) Does not reflect the maximum sales charge of 3.00%.
(b) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged. This
disclosure was not required for fiscal years of the Fund ended prior to
August 31, 1997.
</TABLE>
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MANAGEMENT OF THE FUND
----------------------
THE INVESTMENT ADVISOR
The Fund's Advisor is Gardner Lewis Asset Management, established as a Delaware
corporation in 1990 and converted to a Pennsylvania limited partnership in 1994,
is controlled by W. Whitfield Gardner. Mr. Gardner and John L. Lewis, IV are
principals of the Advisor and executive officers of the Trust. They are 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. 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 Compensation. As full compensation for the investment advisory
services provided to the Fund, the Fund pays the Advisor monthly compensation
based on the Fund's daily average net assets at the annual rate of 1.25%.
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.
Brokerage Practices. In selecting brokers and dealers to execute portfolio
transactions, the Advisor may consider research and brokerage services furnished
to the Advisor or its affiliates. Subject to seeking the most favorable net
price and execution available, the Advisor may also consider sales of shares of
the Fund as a factor in the selection of brokers and dealers. The Advisor may
choose to take advantage of certain soft dollar or commission rebate programs.
Any program chosen by the Advisor will be reviewed by the Board of Trustees,
subject to the provisions and guidelines as clearly outlined in the securities
laws and legal precedent of the United States.
THE ADMINISTRATOR
The Nottingham Company assists the Trust in the performance of its
administrative responsibilities to the Fund, coordinates the services of each
vendor of services to the Fund, and provides the Fund with other necessary
administrative, fund accounting and compliance services. In addition, the
Administrator makes available the office space, equipment, personnel and
facilities required to provide such services to the Fund.
THE TRANSFER AGENT
NC Shareholder Services, LLC ("NCSS") serves as the transfer agent and dividend
disbursing agent of the Fund. As indicated later in the section of this
Prospectus, "Investing in the Fund," NCSS will handle your orders to purchase
and redeem shares of the Fund, and will disburse dividends paid by the Fund.
<PAGE>
THE DISTRIBUTOR
Capital Investment Group, Inc. is the principal underwriter and distributor of
the Fund's shares and serves as the Fund's exclusive agent for the distribution
of Fund shares. Capital Investment Group, Inc. may sell the Fund's shares to or
through qualified securities dealers or others.
Other Expenses. In addition to the management fees, the Fund pays all expenses
not assumed by the Fund's Advisor, including, without limitation: the fees and
expenses of its independent auditors and of its legal counsel; the costs of
printing and mailing to shareholders annual and semi-annual reports, proxy
statements, prospectuses, statements of additional information and supplements
thereto; the costs of printing registration statements; bank transaction charges
and custodian's fees; any proxy solicitors' fees and expenses; filing fees; any
federal, state or local income or other taxes; any interest; any membership fees
of the Investment Company Institute and similar organizations; fidelity bond and
Trustees' liability insurance premiums; and any extraordinary expenses, such as
indemnification payments or damages awarded in litigation or settlements made.
All general Trust expenses are allocated among and charged to the assets of each
separate series of the Trust, such as the Fund, on a basis that the Trustees
deem fair and equitable, which may be on the basis of relative net assets of
each series or the nature of the services performed and relative applicability
to each series.
INVESTING IN THE FUND
---------------------
MINIMUM INVESTMENT
Shares of the Fund are sold subject to a sales charge of 3.00%, so that the term
"offering price" includes the front-end sales load. Shares are redeemed at net
asset value. The minimum initial investment is $25,000 and the minimum
additional investment is $500 ($100 for those participating in the automatic
investment plan.) The Fund may, in the Advisor's sole discretion, accept certain
accounts with less than the minimum investment.
PURCHASE AND REDEMPTION PRICE
Determining the Fund's Net Asset Value. The price at which you purchase or
redeem shares is based on the next calculation of net asset value after an order
is received in good form. The Fund's net asset value per share is calculated by
dividing the value of the Fund's total assets, less liabilities (including Fund
expenses, which are accrued daily), by the total number of outstanding shares of
that Fund. The net asset value per share of the Fund is normally determined at
the time regular trading closes on the New York Stock Exchange (currently 4:00
p.m. Eastern time, Monday through Friday), except on business holidays when the
New York Stock Exchange is closed.
In valuing the Fund's total assets, portfolio securities are generally valued at
their market value. Instruments with maturities of 60 days or less are valued at
amortized cost, which approximates market value. Securities and assets for which
representative market quotations are not readily available are valued at fair
value as determined in good faith under policies approved by the Board of
Trustees.
<PAGE>
Other Matters. All redemption requests will be processed and payment with
respect thereto will normally be made within seven days after tenders. The Fund
may suspend redemption, if permitted by the 1940 Act, for any period during
which the New York Stock Exchange is closed or during which trading is
restricted by the Securities Exchange Commission ("SEC") or if the SEC declares
that an emergency exists. Redemptions may also be suspended during other periods
permitted by the SEC for the protection of the Fund's shareholders.
Additionally, during drastic economic and market changes, telephone redemption
privileges may be difficult to implement. Also, if the Trustees determine that
it would be detrimental to the best interest of the Fund's remaining
shareholders to make payment in cash, the Fund may pay redemption proceeds in
whole or in part by a distribution-in-kind of readily marketable securities.
PURCHASING SHARES
Regular Mail Orders. Payment for shares must be made by check or money order
from a U.S. bank and payable in U.S. dollars. If checks are returned due to
insufficient funds or other reasons, the Fund will charge a $20 fee or may
redeem shares of the Fund already owned by the purchaser to recover any such
loss. For regular mail orders, please complete the attached Fund Shares
Application and mail it, along with your check made payable to "The Chesapeake
Aggressive Growth Fund," to:
The Chesapeake Aggressive Growth Fund
c/o NC Shareholder Services, LLC
107 North Washington Street
Post Office Box 4365
Rocky Mount, North Carolina 27803-0365
The application must contain your social security number and Taxpayer
Identification Number ("TIN"). If you have applied for a social security number
or TIN at the time of completing your account application but do not have such
number yet, please indicate this on the application. Taxes are not withheld from
distributions to U.S.
investors if certain IRS requirements regarding the TIN are met.
Bank Wire Orders. Purchases may also be made through bank wire orders. To
establish a new account or add to an existing account by wire, please call the
Fund at 1-800-430-3863, before wiring funds, to advise the Fund of the
investment, dollar amount, and the account identification number. Additionally,
please have your bank use the following wire instructions:
First Union National Bank of North Carolina
Charlotte, North Carolina
ABA # 053000219
For: The Chesapeake Aggressive Growth Fund
Acct. # 2000000861894
For further credit to (shareholder's name and SS# or EIN#)
<PAGE>
Additional Investments. You may also add to your account by mail or wire at any
time by purchasing shares at the then current public offering price. The minimum
additional investment is $500. Before adding funds by bank wire, please call the
Fund at 1-800-430-3863 and follow the above directions for wire purchases. Mail
orders should include, if possible, the "Invest by Mail" stub which is attached
to your Fund confirmation statement. Otherwise, please identify your account in
a letter accompanying your purchase payment.
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
fund will automatically charge the checking account for the amount specified
($100 minimum), which will be automatically invested in shares at the public
offering price on or about the 21st day of the month. The shareholder may change
the amount of the investment or discontinue the plan at any time by writing to
the Fund.
Exchange Feature. You may exchange shares of the Fund for shares of any other
series of the Trust offered for sale in the state in which you reside. Shares
may be exchanged for shares of any other series of the Trust at the net asset
value plus the percentage difference between that series' sales charge and any
sales charge, if any, previously paid in connection with the shares being
exchanged. Prior to making an investment decision or giving us your instructions
to exchange shares, please read the prospectus for the series in which you wish
to invest.
A pattern of frequent purchase and redemption transactions is considered by the
Advisor to not be in the best interest 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 Board of Trustees reserves the right to suspend or terminate, or amend the
terms of, the exchange privilege upon 60 days written notice to the
shareholders.
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.
Rights of Accumulation. The sales charge applicable to a current purchase of
shares of the Fund by a person listed above is determined by adding the purchase
price of shares to be purchased to the aggregate value of shares of the Funds
previously purchased and then owned, provided the Distributor is notified by
such person or his or her broker-dealer each time a purchase is made which would
so qualify. For example, a person who is purchasing Chesapeake Aggressive Growth
Fund shares with an aggregate value of $50,000 and who currently owns shares of
other Chesapeake Funds with a value of $200,000 would pay a sales charge of
2.50% of the offering price on the new investment.
<PAGE>
Letter of Intent. Sales charges may also be reduced through an agreement to
purchase a specified quantity of shares over a designated thirteen-month period
by completing the "Letter of Intent" section of the Account Application.
Information about the "Letter of Intent" procedure, including its terms, is
contained in the Statement of Additional Information and on the Account
Application.
Group Plans. Shares of the Funds may be sold at a reduced or eliminated sales
charge to certain Group Plans under which a sponsoring organization makes
recommendations to, permits group solicitation of, or otherwise facilitates
purchases by, its employees, members or participants. Information about such
arrangements is available from the Distributor.
Stock Certificates. You do not have the option of receiving stock certificates
for your shares. Evidence of ownership will be given by issuance of periodic
account statements that will show the number of shares owned.
REDEEMING YOUR SHARES
Regular Mail Redemptions. Regular mail redemption request should be addressed
to:
The Chesapeake Aggressive Growth Fund
c/o NC Shareholder Services, LLC
107 North Washington Street
Post Office Box 4365
Rocky Mount, North Carolina 27803-0365.
Regular mail redemption request should include:
1) Your letter of instruction specifying the account number and number of
shares, or the 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 normally will be sent to you within 7 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 receipt of the request for redemption will be used in
processing the redemption request.
<PAGE>
Telephone and Bank Wire Redemptions. You may also redeem shares by telephone and
bank wire under certain limited conditions. The Fund will redeem shares in this
manner when so requested by the shareholder only if the shareholder confirms
redemption instructions in writing.
The Fund may rely upon confirmation of redemption requests transmitted via
facsimile (FAX# 252-972-1908). 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.
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). Redemption proceeds can not be wired 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 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 $10.00 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.
<PAGE>
Small Accounts. All shares are purchased and redeemed in accordance with the
Fund's Amended and Restated Declaration of Trust and By-Laws. The Board of
Trustees reserves the right to redeem involuntarily 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 60-days written notice. If the shareholder
brings his account net asset value up to at least $25,000 during the notice
period, the account will not be redeemed. Redemptions from retirement plans may
be subject to federal income tax withholding.
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 to change exchange privileges or telephone and bank wire redemption
service other than through your initial account application, and (3) redemption
requests 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 change
of registration, establishment or change in exchange privileges, or redemption
request.
Systematic Withdrawal Plan. A shareholder who owns shares of the Fund valued at
$50,000 or more at the current offering price 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. The shareholder may establish this service whether dividends and
distributions are reinvested in shares of the Fund or paid in cash. Call or
write the Fund for an application form.
OTHER IMPORTANT INVESTMENT INFORMATION
--------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
Under current federal income tax law, the Fund believes that it is entitled, and
the Fund intends that it shall be treated as a regulated investment company
("RIC") under Subchapter M of the Code. As a RIC, a Fund will not be subject to
federal tax on its net investment income and net realized capital gains to the
extent such income and gains are timely distributed to its shareholders.
Accordingly, the Fund intends to distribute all of its net investment income and
net realized capital gains to its shareholders. Unless otherwise instructed by
shareholders, all dividend distributions will be reinvested in full and
fractional shares of the Fund to which they relate.
Although the Fund intends that it will be operated so that there will be no
federal income or excise tax liability, if any such liability is incurred as a
result of failing to qualify as a RIC, the investment performance will be
adversely affected by the tax liability incurred and paid. In addition,
investing in foreign securities and currencies may be subject to foreign taxes
which could reduce the investment performance of the Fund.
Certain additional tax information appears in the Statement of Additional
Information.
<PAGE>
YEAR 2000
Like other mutual funds, the Fund and the service providers for the Fund rely
heavily on the reasonably consistent operation of their computer systems. Many
software programs and certain computer hardware in use today, cannot properly
process information after December 31, 1999, because of the method by which
dates are encoded and calculated in such programs and hardware. This problem,
commonly referred to as the "Year 2000 Issue," could, among other things,
negatively impact the processing of trades, the distribution of securities, the
pricing of securities and other investment-related and settlement activities.
The Trust is currently obtaining and assessing information with respect to the
actions that have been taken and the actions that are planned to be taken by
each of its service providers to prepare their computer systems for the Year
2000. While the Trust expects that each of the Trust's service providers will
have adapted their computer systems to address the Year 2000 Issue, there can be
no assurance that this will be the case or that the steps taken by the Trust
will be sufficient to avoid any adverse impact to the Trust and each of its
funds.
<PAGE>
ADDITIONAL INFORMATION
THE CHESAPEAKE AGGRESSIVE GROWTH FUND
Additional information about the Fund is available in the Fund's Statement of
Additional Information. The Fund's Annual and Semi-annual Reports include a
discussion of market conditions and investment strategies that significantly
affected the Fund's performance during its last fiscal year.
These reports are available free of charge upon request by contacting us:
By telephone: 1-800-430-3863
By mail: The Chesapeake Aggressive Growth Fund
c/o NC Shareholder Services, LLC
107 North Washington Street
Post Office Box 4365
Rocky Mount, NC 27803-0365
By e-mail: [email protected]
On the Internet: www.ncfunds.com
---------------
Information about the Fund can also be reviewed and copied at the Securities
Exchange Commission's ("Commission") Public Reference Room in Washington, D.C.
Inquiries on the operations of the public reference room may be made by calling
the Commission at 1-800-SEC-0330. Reports and other information about the Fund
are available on the Commission's Internet sit at http://www.sec.gov and copies
of this information may be obtained, upon payment of a duplicating fee, by
writing the Public Reference Section of the Commission, Washington, D.C.
20549-6009.
Investment Company Act file number 811-07324.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
THE CHESAPEAKE AGGRESSIVE GROWTH FUND
December 31, 1998
A series of
GARDNER LEWIS INVESTMENT TRUST
107 North Washington Street, P.O. Box 4365
Rocky Mount, NC 27803-0365
Telephone 1-800-430-3863
Table of Contents
INVESTMENT OBJECTIVE AND POLICIES............................................. 2
INVESTMENT LIMITATIONS........................................................ 3
MANAGEMENT AND SERVICE PROVIDERS.............................................. 4
Trustees and Officers................................................ 4
Investment Advisor................................................... 6
Administrator........................................................ 6
Transfer Agent....................................................... 7
Distributor.......................................................... 7
Custodian............................................................ 7
Independent Auditors................................................. 7
Legal Counsel........................................................ 8
ADDITIONAL INFORMATION ON PERFORMANCE......................................... 8
PORTFOLIO TRANSACTIONS........................................................ 9
SPECIAL SHAREHOLDER SERVICES................................................. 11
PURCHASES OF SHARES.......................................................... 12
REDEMPTION OF SHARES......................................................... 15
NET ASSET VALUE.............................................................. 15
ADDITIONAL TAX INFORMATION................................................... 16
CAPITAL SHARES AND VOTING.................................................... 17
APPENDIX A................................................................... 19
ANNUAL REPORT OF THE FUND FOR THE
FISCAL YEAR ENDED AUGUST 31, 1998...................................... ATTACHED
This Statement of Additional Information (the "Additional Statement") is meant
to be read in conjunction with the Prospectus dated December 31, 1998, for The
Chesapeake Aggressive 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 Fund is a diversified series of the Gardner Lewis Investment Trust (the
"Trust"), a registered open-end management company. The Trust is an
unincorporated business trust organized under Massachusetts law on August 12,
1992. The primary investment strategies and risks of the Fund are described in
the Prospectus. In addition to the principal investment strategies discussed in
the Fund's Prospectus, the Fund may also employ the use of the financial
instruments described below in order to achieve its objective. The strategies
set forth below are not principle strategies of the Fund.
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, as amended (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.
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.
<PAGE>
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;
<PAGE>
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.
MANAGEMENT SERVICE PROVIDERS
The Trust's Board of Trustees (the "Trustees") are responsible for the
management and supervision of the Fund. The Trustees approve all significant
agreements between the Trust, on behalf of the Fund, and those companies that
furnish services to the Fund. This section of the Statement of Additional
Information provides the persons who serve as Trustees and Officers to the Trust
and Fund, respectively, as well as the entities that provide services to the
Fund.
Trustees and Officers. Following are the Trustees and Officers of the Trust,
their age, their present position with the Trust or the Fund, and their
principal occupation during the past five years. Those Trustees who are
"interested persons" (as defined in the 1940 Act) by virtue of their affiliation
with either the Trust or the Advisor, are noted by an asterisk (*).
<PAGE>
<TABLE>
<S> <C> <C>
- -------------------------------------------- ----------------------- --------------------------------------------
- -------------------------------------------- ----------------------- --------------------------------------------
Name, Age, and Address Position(s) with Principal Occupation(s)
The Fund During Past 5 Years
- -------------------------------------------- ----------------------- --------------------------------------------
- -------------------------------------------- ----------------------- --------------------------------------------
Jack E. Brinson, 66 Trustee President, Brinson Investment Co.
1105 Panola Street (personal investments)
Tarboro, North Carolina President, Brinson Chevrolet, Inc.
(auto dealership)
Tarboro, North Carolina
- -------------------------------------------- ----------------------- --------------------------------------------
W. Whitfield Gardner, 35 Trustee* Chairman and Chief Executive Officer
Chief Executive Officer Chief Executive Gardner Lewis Asset Management
The Chesapeake Funds Officer (Advisor to the Chesapeake Funds)
285 Wilmington-West Chester Pike Chadds Ford, Pennsylvania
Chadds Ford, Pennsylvania 19317
- -------------------------------------------- ----------------------- --------------------------------------------
Stephen J. Kneeley, 35 Trustee Chief Operating Officer
1235 Westlakes Drive Turner Investment Partners
Suite 350 (investment manager)
Berwyn, Pennsylvania 19312 Berwyn, Pennsylvania
- -------------------------------------------- ----------------------- --------------------------------------------
John L. Lewis, IV, 35 President President
The Chesapeake Funds Gardner Lewis Asset Management
285 Wilmington-West Chester Pike (Advisor to the Chesapeake Funds)
Chadds Ford, Pennsylvania 19317 Chadds Ford, Pennsylvania
- -------------------------------------------- ----------------------- --------------------------------------------
C. Frank Watson, III, 28 Secretary Vice President
105 North Washington Street Assistant Treasurer The Nottingham Company
Rocky Mount, North Carolina 27802 (Administrator to the Fund)
Rocky Mount, North Carolina
- -------------------------------------------- ----------------------- --------------------------------------------
Julian G. Winters, 30 Treasurer Legal and Compliance Director
105 North Washington Street Assistant Secretary The Nottingham Company
Rocky Mount, North Carolina 27802 (Administrator to the Fund)
Rocky Mount, North Carolina since 1996;
previously, Operations Manager
Tar Heel Medical, Inc.
(pharmaceutical supplier)
Nashville, North Carolina
- -------------------------------------------- ----------------------- --------------------------------------------
William D. Zantzinger, 37 Vice President Director of Trading
The Chesapeake Funds Gardner Lewis Asset Management
285 Wilmington-West Chester Pike (Advisor to the Chesapeake Funds)
Chadds Ford, Pennsylvania 19317 Chadds Ford, Pennsylvania
- -------------------------------------------- ----------------------- --------------------------------------------
</TABLE>
Compensation. The officers of the Trust will not receive compensation from the
Trust for performing the duties of their offices. Each Trustee who is not an
"interested person" of the Trust receives a fee of $7,500 each year plus $400
per series of the Trust per meeting attended in person and $150 per series of
the Trust per meeting attended by telephone. All Trustees are reimbursed for any
out-of-pocket expenses incurred in connection with attendance at meetings.
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------- -------------------- ------------------------ ---------------------- ---------------------------
- ------------------------------- -------------------- ------------------------ ---------------------- ---------------------------
Name of Person and Aggregate Pension or Retirement Estimated Annual Total Compensation From
Position Compensation Benefits Accrued As Benefits Upon Fund and Fund Complex
Part of Fund Expenses Retirement Paid to Directors
- ------------------------------- -------------------- ------------------------ ---------------------- ---------------------------
- ------------------------------- -------------------- ------------------------ ---------------------- ---------------------------
Jack E. Brinson $10,400 None None $10,400
Trustee
- ------------------------------- -------------------- ------------------------ ---------------------- ---------------------------
W. Whitfield Gardner None None None None
Trustee
- ------------------------------- -------------------- ------------------------ ---------------------- ---------------------------
Steven J. Kneeley $10,400 None None $10,400
Trustee
- ------------------------------- -------------------- ------------------------ ---------------------- ---------------------------
</TABLE>
*Figures are for the fiscal year ended August 31, 1998.
Principal Holders of Voting Securities. As of December 7, 1998, 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 1,499,669.897 shares of the Fund,
representing 6.052% of the Fund.
Investment Advisor. Information about Gardner Lewis Asset Management (the
"Advisor"), 285 Wilmington-West Chester Pike, Chadds Ford, Pennsylvania 19317
and its duties and compensation as Advisor is contained in the Prospectus. The
Advisory Agreement is effective for a one-year term, 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, 1996, the Advisor received $5,788,117 for services to the
Fund. For the fiscal year ended August 31, 1997, the Advisor received $6,475,547
for services to the Fund. For the fiscal year ended August 31, 1998, the Advisor
received $7,337,649 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.
The employees of the Advisor control the Advisor. W. Whitfield Gardner, John L.
Lewis, IV and William D. Zantzinger are affiliated persons of the Fund and the
Advisor.
Administrator. The Trust has entered into a Fund Accounting and Compliance
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.
The Administrator will perform the following services for the Fund: (1)
coordinate with the Custodian and monitor the services it provides to the Fund;
(2) coordinate with and monitor any other third parties furnishing services to
the Fund; (3) provide the Fund with necessary office space, telephones and other
communications facilities and personnel competent to perform administrative and
clerical functions for the Fund; (4) supervise the maintenance by third parties
of such books and records of the Fund as may be required by applicable federal
or state law; (5) prepare or supervise the preparation by third parties of all
federal, state and local tax returns and reports of the Fund required by
applicable law; (6) prepare and, after approval by the Trust, file and arrange
for the distribution of proxy materials and periodic reports to shareholders of
the Fund as required by applicable law; (7) prepare and, after approval by the
Trust, arrange for the filing of such registration statements and other
documents with the Securities and Exchange Commission and other federal and
state regulatory authorities as may be required by applicable law; (8) review
and submit to the officers of the Trust for their approval invoices or other
requests for payment of Fund expenses and instruct the Custodian to issue checks
in payment thereof; and (9) take such other action with respect to the Fund as
may be necessary in the opinion of the Administrator to perform its duties under
the agreement. The Administrator will also provide certain accounting and
pricing services for the Fund.
<PAGE>
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, 1996, 1997, and 1998, the Fund paid an administrative fee of $397,287,
$499,572 and $535,138, 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, 1996, 1997, and 1998 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.
Transfer Agent. The Trust has entered into a Dividend Disbursing and Transfer
Agent Agreement 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 address of the Transfer Agent
is 107 North Washington Street, Post Office Box 4365, Rocky Mount, North
Carolina 27803-0365. As compensation for its services, the Transfer Agent
receives a shareholder administration fee of $50,000 per year, annualized on an
August 31 fiscal year basis.
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, 1998, 1997, and 1996, the aggregate dollar
amount of sales charges paid on the sale of Fund shares was $52,930, $16,961,
and $106,588, respectively, from which the Distributor retained $1,770, $1,480,
and $11,174, 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.
Independent auditors audit the financial statements of the Fund at least once
each year. Shareholders will receive annual audited and semi-annual (unaudited)
reports when published and written confirmation of all transactions in their
account. A copy of the most recent Annual Report will accompany the Statement of
Additional Information whenever a shareholder or a prospective investor requests
it.
Legal Counsel. Dechert Price & Rhoads serves as legal counsel to the Capital
Management Investment Trust and the Fund.
<PAGE>
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, 1998
was (34.15)%. The average annual total return for the Fund for the five years
ended August 31, 1998 was 7.54%. The average annual total return for the Fund
since inception (January 4, 1993) through August 31, 1998 was 9.90%. The
cumulative total return for the Fund since inception through August 31, 1998 was
70.61%. 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, 1998, for the five years ended August 31,
1998, and since inception through August 31, 1998, without deducting the maximum
3.0% sales load, was (32.12)%, 8.19%, and 10.50%, respectively. The cumulative
total return for the Fund since inception through August 31, 1998, without
deducting the maximum 3.0% sales load, was 75.89%. 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.
<PAGE>
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.
PORTFOLIO 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.
<PAGE>
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 1940 Act) acting as principal, except to the extent permitted
by the Securities and Exchange Commission ("SEC"). In addition, the Fund will
not purchase securities during the existence of any underwriting or selling
group relating thereto of which the Advisor, or an affiliated person of the
Advisor, is a member, except to the extent permitted by the SEC. Under certain
circumstances, the Fund may be at a disadvantage because of these limitations in
comparison with other investment companies that have similar investment
objectives but are not subject to such limitations.
Investment decisions for the Fund will be made independently from those for any
other series of the Trust, if any, and for any other investment companies and
accounts advised or managed by the Advisor. Such other investment companies and
accounts may also invest in the same securities as the Fund. To the extent
permitted by law, the Advisor may aggregate the securities to be sold or
purchased for the Fund with those to be sold or purchased for other investment
companies or accounts in executing transactions. When a purchase or sale of the
same security is made at substantially the same time on behalf of the Fund and
another investment company or account, the transaction will be averaged as to
price and available investments allocated as to amount, in a manner which the
Advisor believes to be equitable to the Fund and such other investment company
or account. In some instances, this investment procedure may adversely affect
the price paid or received by the Fund or the size of the position obtained or
sold by the Fund.
For the fiscal years ended August 31, 1998, 1997, and 1996, total dollar amounts
of brokerage commissions paid by the Fund were $1,218,318, $1,205,910,
and $1,177,905, respectively.
<PAGE>
SPECIAL SHAREHOLDER SERVICES
The Fund offers the following shareholder services:
Regular Account. The regular account allows for voluntary investments to be made
at any time. Available to individuals, custodians, corporations, trusts,
estates, corporate retirement plans and others, investors are free to make
additions and withdrawals to or from their account as often as they wish. When
an investor makes an initial investment in the Fund, a shareholder account is
opened in accordance with the investor's registration instructions. Each time
there is a transaction in a shareholder account, such as an additional
investment or the reinvestment of a dividend or distribution, the shareholder
will receive a confirmation statement showing the current transaction and all
prior transactions in the shareholder account during the calendar year to date,
along with a summary of the status of the account as of the transaction date. As
stated in the Prospectus, 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
Fund will automatically charge the checking account for the amount specified
($100 minimum) which will be automatically invested in shares at the public
offering price on or about the 21st day of the month. The shareholder may change
the amount of the investment or discontinue the plan at any time by writing to
the Fund.
Systematic Withdrawal Plan. 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 Aggressive 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.
<PAGE>
Redemptions in Kind. The Fund does not intend, under normal circumstances, to
redeem its securities by payment in kind. It is possible, however, that
conditions may arise in the future which would, in the opinion of the Trustees,
make it undesirable for the Fund to pay for all redemptions in cash. In such
case, the Board of Trustees may authorize payment to be made in readily
marketable portfolio securities of the Fund. Securities delivered in payment of
redemptions would be valued at the same value assigned to them in computing the
net asset value per share. Shareholders receiving them would incur brokerage
costs when these securities are sold. An irrevocable election has been filed
under Rule 18f-1 of the 1940 Act, wherein the Fund committed itself to pay
redemptions in cash, rather than in kind, to any shareholder of record of the
Fund who redeems during any ninety-day period, the lesser of (a) $250,000 or (b)
one percent (1%) of the Fund's net asset value at the beginning of such period.
Transfer of Registration. To transfer shares to another owner, send a written
request to the Fund at the address shown herein. Your request should include the
following: (1) the Fund name and existing account registration; (2) signature(s)
of the registered owner(s) exactly as the signature(s) appear(s) on the account
registration; (3) the new account registration, address, social security or
taxpayer identification number and how dividends and capital gains are to be
distributed; (4) signature guarantees (See the Prospectus under the heading
"Signature Guarantees"); and (5) any additional documents which are required for
transfer by corporations, administrators, executors, trustees, guardians, etc.
If you have any questions about transferring shares, call or write the Fund.
PURCHASE OF SHARES
The purchase price of shares of the Fund is the net asset value next determined
after the order is received. Net asset value per share is calculated for
purchases and redemption of shares of the Fund by dividing the value of total
Fund assets, less liabilities (including Fund expenses, which are accrued
daily), by the total number of outstanding shares of that Fund. The net asset
value per share of the Fund is determined at the time trading closes on the New
York Stock Exchange (currently 4:00 p.m. Eastern time, Monday through Friday),
except on business holidays when the New York Stock Exchange is closed.
The Fund reserves the right in its sole discretion (i) to suspend the offering
of its shares, (ii) to reject purchase orders when in the judgment of management
such rejection is in the best interest of the Fund and its shareholders, and
(iii) to reduce or to waive the minimum for initial and subsequent investments
under circumstances where certain economies can be achieved in sales of Fund
shares.
Sales Charges. The public offering price of shares of the Fund equals net asset
value plus a sales charge. The Distributor receives this sales charge and may
reallow it in the form of dealer discounts and brokerage commissions as follows:
<TABLE>
<S> <C> <C> <C>
- ------------------------------------- ------------------------- ------------------------- -----------------------------------
- ------------------------------------- ------------------------- ------------------------- -----------------------------------
Amount of Transaction At Public Charge As % of Net Sales Charge As % of Sales Dealers Discounts and
Offering Price Amount Invested Public Offering Price Brokerage Commissions as % of
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>
From time to time dealers who receive dealer discounts and brokerage commissions
from the Distributor may reallow all or a portion of such dealer discounts and
brokerage commissions to other dealers or brokers. Pursuant to the terms of the
Distribution Agreement, the sales charge payable to the Distributor and the
dealer discounts may be suspended, terminated or amended.
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.
<PAGE>
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 backdating 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.
<PAGE>
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. Clients of investment advisors and financial planners may also purchase
shares at net asset value if the investment advisor or financial planner has
made arrangements to permit them to do so with the Distributor. 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 may exchange shares of the Fund for shares of any other comparable
series of the Trust. Shares of the Fund may be exchanged at the net asset value
plus the percentage difference between that series' sales charge and any sales
charge previously paid in connection with the shares being exchanged. For
example, if a 2% sales charge was paid on shares that are exchanged into a
series with a 3% sales charge, there would be an additional sales charge of 1%
on the exchange. Exchanges may only be made by investors in states where shares
of the other series are qualified for sale. An investor may direct the Fund to
exchange his shares by writing to the Fund at its principal office. The request
must be signed exactly as the investor's name appears on the account, and it
must also provide the account number, number of shares to be exchanged, the name
of the series to which the exchange will take place and a statement as to
whether the exchange is a full or partial redemption of existing shares.
Notwithstanding the foregoing, exchanges of shares may only be within the same
class or type of class of shares involved. For example, Investor Shares may not
be exchanged for Institutional 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 Board of
Trustees of the Trust also reserves the right to suspend or terminate, or amend
the terms of, the exchange privilege upon 60 days written notice to the
shareholders.
The Fund may enter into agreements with one or more brokers, including discount
brokers and other brokers associated with investment programs, including mutual
fund "supermarkets," pursuant to which such brokers may be authorized to accept
on the Fund's behalf purchase and redemption orders that are in "good form."
Such brokers may be authorized to designate other intermediaries to accept
purchase and redemption orders on the Fund's behalf. Under such circumstances,
the Fund will be deemed to have received a purchase or redemption order when an
authorized broker or, if applicable, a broker's authorized designee, accepts the
order. Such orders will be priced at the Fund's net asset value next determined
after they are accepted by an authorized broker or the broker's designee.
<PAGE>
REDEMPTION OF SHARES
The Fund may suspend redemption privileges or postpone the date of payment (i)
during any period that the New York Stock Exchange (the "NYSE") is closed for
other than customary weekend and holiday closings, or that trading on the NYSE
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 practical for
the Fund to dispose of securities owned by it, or to determine fairly the value
of its assets; and (iii) for such other periods as the Commission may permit.
The Fund may also suspend or postpone the recordation of the transfer of shares
upon the occurrence of any of the foregoing conditions. Any redemption may be
more or less than the shareholder's cost depending on the market value of the
securities held by the Fund. No charge is made by the Fund for redemptions other
than the possible charge for wiring redemption proceeds.
In addition to the situations described in the Prospectus under "How to Redeem
Shares," 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.
NET ASSET VALUE
The net asset value per share of the Fund is determined at the time trading
closes on the New York Stock Exchange (currently 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, Martin Luther King, Jr. 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.
In valuing the Fund's total assets, portfolio securities are generally valued at
their market value. Instruments with maturities of sixty days or less are valued
at amortized costs, which approximates market value. Securities and assets for
which representative market quotations are not readily available are valued at
fair value as determined in good faith under policies approved by the Trustees.
<PAGE>
ADDITIONAL TAX INFORMATION
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. 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.
The Fund, and any other series of the Trust, will be treated as a separate
corporate entity under the Code. The Fund intends to qualify and to remain
qualified as a regulated investment company. To so qualify, the Fund 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 the Fund 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 Fund's business of
investing in such stock, securities, or currencies. Any income derived by the
Fund from a partnership or trust is treated as derived with respect to the
Fund's 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 Fund in the same manner as by the
partnership or trust.
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.
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 Fund's taxable year. Shareholders should note that upon the
sale or exchange of Fund 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 distribute currently an amount equal to specified percentages of their
ordinary taxable income and capital gain net income (excess of capital gains
over capital losses). 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.
<PAGE>
If for any taxable year the Fund does not qualify for the special federal income
tax treatment afforded to 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 Fund's
current and accumulated earnings and profits.
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 include properly 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.
Dividends paid by the Fund derived from net investment income or net short-term
capital gains are taxable to shareholders as ordinary income, whether received
in cash or reinvested in additional shares. Long-term capital gains
distributions, if any, are taxable as long-term capital gains, whether received
in cash or reinvested in additional shares, regardless of how long Fund shares
have been held.
Under current tax law, certain types of expenses incurred by the Fund must be
proportionately allocated as additional income to shareholders. As a result, the
amounts reportable by the Fund as taxable income, if any, may exceed the
dividends actually paid. Such proportionate allocation of Fund expenses, if any,
will be identified when tax information is distributed by the Fund. The Fund
will send shareholders information each year on the tax status of dividends and
disbursements. A dividend or capital gains distribution paid shortly after
shares have been purchased, although in effect a return of investment, is
subject to federal income taxation. Dividends from net investment income, along
with capital gains, will be taxable to shareholders, whether received in cash or
shares and no matter how long you have held Fund shares, even if they reduce the
net asset value of shares below your cost and thus, in effect, result in a
return of a part of your investment.
<PAGE>
CAPITAL SHARES AND VOTING
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 three series: The Chesapeake Aggressive Growth Fund (the subject of
this Additional Statement), The Chesapeake Growth Fund, and The Chesapeake Core
Growth Fund, all managed by the Advisor. The number of shares of each series
shall be unlimited. The Fund and The Chesapeake Core Growth Fund both issue a
single class of shares, while the shares of The Chesapeake Growth 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.
<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 Services. The following summarizes the highest four
ratings used by Standard & Poor's Ratings Services ("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 of the obligor to meet its
financial commitment on the obligation.
AA - Debt rated AA differs from AAA issues only in a small degree. The
obligor's capacity to meet its financial commitment on the obligation is
very strong.
A - Debt rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in
higher-rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still strong.
BBB - Debt rated BBB exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to
lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
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 having
significant speculative characteristics with respect to the obligor's capacity
to meet its financial commitment on 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 may be 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 short term notes and
indicates strong capacity to pay principal and interest. An issue determined to
possess a very strong capacity to pay debt service is given a plus (+)
designation. The rating SP-2 indicates a satisfactory capacity to pay principal
and interest, with some vulnerability to adverse financial and economic changes
over the term of the notes.
<PAGE>
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 supporting institutions) are considered to have a
superior ability for repayment of short-term promissory obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and well
established access to a range of financial markets and assured sources of
alternative liquidity. Issuers rated Prime-2 (or supporting institutions) are
considered to have a strong ability 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.
<PAGE>
The following summarizes the two highest ratings 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.
MIG-2; VMIG-2 - Obligations bearing these designations are of a high
quality with ample margins of protection.
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.
<PAGE>
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. A "ratings outlook" is used to describe the
most likely direction of any rating change over the intermediate term. It is
described as "Positive" or "Negative". The absence of a designation indicates a
stable outlook.
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 two 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+.
The term symbol "LOC" indicates that the rating is based on a letter of credit
issued by a commercial bank.