SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
REGISTRATION NO. 333-76407
PRE-EFFECTIVE AMENDMENT NO. 1
and
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
REGISTRATION NO. 811-9293
AMENDMENT NO. 1
DAVIS VARIABLE ACCOUNT FUND, INC.
124 East Marcy Street
Santa Fe, New Mexico 87501
(1-505-820-3000)
Agents For Service: Thomas D. Tays, Esq.
Davis Selected Advisers, L.P.
124 East Marcy Street
Santa Fe, New Mexico 87501
1-505-820-3055
-or-
Sheldon R. Stein, Esq.
D'Ancona & Pflaum LLC
111 East Wacker Drive, Suite 2800
Chicago IL 6060130
(1-312-602-2014)
It is proposed that this filing will become effective:
___ Immediately upon filing pursuant to paragraph (b)
___ On _______, pursuant to paragraph (b)
___ 60 days after filing pursuant to paragraph (a)(1)
___ On ____________, pursuant to paragraph (a) of
Rule 485
___ 75 days after filing pursuant to paragraph (a)(2)
_X_ On July 1, 1999, pursuant to paragraph (a)(3) of
Rule 485
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RULE 473 DELAYING AMENDMENT REVOKED: This registration statement shall
hereafter become effective in accordance with the provisions of section 8(a) of
the Securities Act of 1933.
REQUEST FOR ACCELERATION. Pursuant to Rule 461 of the Securities Act of 1933
the Registrant (Davis Variable Account Fund, Inc.) and its principal
underwriter (Davis Distributors, LLC) request acceleration of the effective
date to July 1, 1999. The Registrant and the principal underwriter are aware of
their obligations under the Securities Act of 1933. The accompanying
transmittal letter includes signatures of the Registrant and principal
underwriter.
Title of Securities being Registered: Common Stock of:
DAVIS VALUE PORTFOLIO;
DAVIS FINANCIAL PORTFOLIO; AND
DAVIS REAL ESTATE PORTFOLIO
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FORM N-1A
DAVIS VALUE PORTFOLIO
DAVIS FINANCIAL PORTFOLIO
AND
DAVIS REAL ESTATE PORTFOLIO
AUTHORIZED SERIES OF
DAVIS VARIABLE ACCOUNT FUND, INC.
PRE-EFFECTIVE AMENDMENT NO. 1 TO REGISTRATION
STATEMENT NO. 333-76407 UNDER THE SECURITIES ACT OF 1933
AND AMENDMENT NO. 1 UNDER THE INVESTMENT COMPANY ACT
OF 1940 TO REGISTRATION STATEMENT NO. 811-9293.
CROSS REFERENCE SHEET
N-1A
ITEM NO. PART A CAPTION OR PLACEMENT: PROSPECTUS FOR EACH PORTFOLIO
1. Front and Back Cover pages
2. Overview of the Fund:
Investment Objective and Strategy
Determining if this Fund is Right for You
Principal Risks
Past Performance
3. Overview of the Fund: Expenses of the Fund
4. How We Manage the Fund
5. Annual Report, not applicable to a new Fund
6. Who is Responsible for Your Davis Account
7. Not applicable
8. Information Concerning Shares In the Fund
9. Financial Highlights, not applicable to a new Fund
N-1A
Item No. PART B CAPTION OR PLACEMENT:
STATEMENT OF ADDITIONAL INFORMATION
10 Cover Page
11 Organization of the Company
12 Portfolio Securities
Other Investment Practices
Investment Restrictions
13 Directors and Officers
Directors Compensation Table
14 Certain Shareholders of the Fund
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15 Investment Advisory Services
Distribution of Company Shares
Other Important Service Providers
16 Portfolio Transactions
17 Organization of the Company
18 Contained in the Prospectuses
19 Federal Income Taxes
20 Distribution of Company Shares
21 Performance Data
22 Annual Report Incorporated by Reference
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DAVIS VALUE PORTFOLIO
(part of Davis Variable Account Fund, Inc.)
July 1, 1999
A mutual fund sold exclusively to insurance company separate accounts for
variable annuity and variable life insurance contracts.
The Securities and Exchange Commission has not approved or disapproved of these
securities. The Securities and Exchange Commission has not determined whether
this prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
Over 25 Years Of Reliable Investing
Managed by Davis Selected Advisers, L.P.
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TABLE OF CONTENTS
Overview of the Fund
Investment Objective and Strategy
Determining If This Fund Is Right for You
Principal Risks
Past Performance
Expenses of the Fund
Who Is Responsible for the Fund
How We Manage the Fund
Davis Selected Advisers' Performance History
How We Invest the Fund's Assets
How We Manage Risk
Information Concerning Shares in the Fund
Other Fund Documents
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OVERVIEW OF DAVIS VALUE PORTFOLIO
INVESTMENT OBJECTIVE AND STRATEGY
Davis Value Portfolio's investment objective is growth of capital. The Fund
invests primarily in common stock of U.S. companies with market capitalizations
of at least $5 billion.
Our portfolio managers use the Davis investment philosophy to select common
stock of quality overlooked-growth companies at value prices and to hold them
for the long-term. We look for companies with sustainable growth rates selling
at modest price-earnings multiples that we hope will expand as other investors
recognize the company's true worth. We believe that if you combine a
sustainable growth rate with a gradually expanding multiple, these rates
compound and can generate returns that could exceed average returns earned by
investing in large capitalization domestic stocks.
You can find more detailed information about the types of securities that the
Fund buys in the section called HOW WE MANGE THE FUND.
DETERMINING IF THIS FUND IS RIGHT FOR YOU
YOU SHOULD CONSIDER INVESTING IN THIS FUND IF:
o You are seeking long-term growth of capital.
o You are more comfortable with established, well-known companies.
o You are investing for the long-term (five years or more).
YOU SHOULD NOT INVEST IN THIS FUND IF:
o You are worried about the possibility of sharp price swings and
dramatic market declines.
o You are interested in earning current income.
o You are investing for the short-term (less than five years).
PRINCIPAL RISKS
If you buy shares of Davis Value Portfolio, you may lose some or all of the
money that you invest.
THE PRINCIPAL RISKS OF INVESTING IN ANY MUTUAL FUND ARE:
o NOT INSURED. Mutual funds are not insured by the Federal Deposit Insurance
Corporation ("FDIC") or any other agency, unlike bank deposits such as CDs
or savings accounts.
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o NO GUARANTEE. No mutual fund can guarantee that it will meet its investment
objectives.
o POSSIBLE LOSS OF INVESTMENT. A mutual fund cannot guarantee its
performance, nor assure you that the market value of your investment will
increase. You may lose the money you invest, and the fund will not
reimburse you for any of these losses.
o VOLATILITY. The price of fund shares will increase or decrease with changes
in the value of the fund's underlying investments.
THE PRINCIPAL RISKS OF INVESTING IN DAVIS VALUE PORTFOLIO ARE:
o MARKET RISK. The market value of shares of common stock can change rapidly
and unpredictably as a result of political or economic events having little
or nothing to do with the issuer.
o COMPANY RISK. The price of a common stock varies with the success and
failure of its issuer. As a result, the success of the companies in which
the Fund invests largely determines the Fund's performance.
o POTENTIAL CONFLICTS. Although it is unlikely, there potentially may be
differing interests involving the Fund among owners of variable annuity and
variable life insurance contracts issued by different insurance companies,
or even the same insurance company. Davis Selected Advisers will monitor
events for any potential conflicts.
You can find more detailed information about the risks of the Fund's particular
investments in the section called HOW WE MANAGE THE FUND.
PAST PERFORMANCE
Davis Value Portfolio began selling shares to the public on July 1, 1999. The
past performance of the Fund will be included in the next annual update of its
prospectus after it has been offered to the public for a full calendar year.
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EXPENSES OF THE FUND
These expenses present the cost of investing in the Fund and do NOT reflect any
of the fees or expenses of your variable annuity or variable insurance contract.
ESTIMATED ANNUAL FUND OPERATING EXPENSES
(For the year ended December 31, 1999)
(Deducted from Davis Value Portfolio's Assets)
Management Fees 0.75%
Distribution (12b-1) Fees (1) None
Other Expenses (2) 0.30 %
Total Annual Operating Expenses 1.05%
(1) The Fund has adopted a plan under Rule 12b-1 allowing the payment of up to
0.25% for distribution expenses. The Fund does not intend to make any payments
under this plan at the current time.
(2) "Other Expenses" are based upon estimated operating expenses for the first
fiscal year.
EXPENSE EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
This example assumes a $10,000 allocation to the Fund for the time periods
indicated and does NOT reflect any of the fees or expenses of your variable
annuity or variable insurance contract. The example also assumes a hypothetical
5% return each year, and assumes that the Fund's operating expenses remain the
same. Although the Fund's actual costs and performance may be higher or lower,
based on these assumptions your costs would be:
1 Year 3 Years
$107 $334
WHO IS RESPONSIBLE FOR YOUR DAVIS ACCOUNT
A number of entities provide services to Davis Value Portfolio. This section
shows how the Fund is organized, the entities that perform these services, and
how these entities are compensated. Additional information on the organization
of the Fund is provided in the Fund's Statement of Additional Information.
Davis Selected Advisers and Davis Value Portfolio do not control the insurance
company that issues your contract and are not responsible for anything stated
in the prospectus for your contract.
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INVESTMENT ADVISER
DAVIS SELECTED ADVISERS, LP
Referred to throughout this prospectus as "Davis Selected Advisers"
124 East Marcy Street
Santa Fe, NM 87501
o Provides investment advice for Davis Value Portfolio's investment
portfolio.
o Manages the Fund's business affairs.
o Provides day-to-day administrative services.
o Serves as investment adviser for all of the Davis Funds, other mutual
funds, and other institutional clients.
o Annual Adviser Fee (based on average net assets): 0.75%.
INVESTMENT SUB-ADVISER
DAVIS SELECTED ADVISERS-NY, INC.
Referred to throughout this prospectus as "Davis Selected Advisers-NY"
609 Fifth Avenue
New York, NY 10017
o Performs investment management and research services for Davis Value
Portfolio and other institutional clients.
o Wholly owned subsidiary of Davis Selected Advisers.
o Annual Fee: Davis Selected Advisers pays the fee, not the Fund.
CUSTODIAN AND TRANSFER AGENT
STATE STREET BANK AND TRUST COMPANY
Referred to throughout this prospectus as "State Street Bank and Trust" PO Box
8406 Boston, MA 02266-8406 o Prices Davis Value Portfolio daily. o Holds the
Fund's cash and portfolio securities.
BOARD OF DIRECTORS
The Funds' Board of Directors has general supervisory responsibilities of Davis
Variable Account Fund, Inc. The Board monitors and supervises the performance of
the investment adviser, sub-advisers and other service providers, monitors the
Funds' business and investment activities, and determines whether or not to
renew agreements with the adviser and sub-adviser.
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DISTRIBUTOR
DAVIS DISTRIBUTORS, LLC
Referred to throughout this prospectus as "Davis Distributors"
124 East Marcy Street
Santa Fe, NM 87501
o Oversees purchases of shares and promotional activities for Davis
Value Portfolio.
o Wholly owned subsidiary of Davis Selected Advisers.
o Serves as distributor for all of the Davis Funds and other mutual
funds managed by Davis Selected Advisers.
FOUNDER AND CHIEF INVESTMENT OFFICER OF THE ADVISER
SHELBY M.C. DAVIS
Responsibilities:
o Chief Investment Officer of Davis Selected Advisers.
o President of all the Davis Funds.
Other Experience:
o Served as Davis New York Venture Fund's Portfolio Manager from its inception
in 1969 until February 1997. o Served as Portfolio Manager of a growth and
income fund managed by Davis Selected Advisers from May 1993
until February 1997.
PORTFOLIO MANAGERS
CHRISTOPHER C. DAVIS
Responsibilities:
o Vice President of Davis Variable Account Fund, Inc.
o Co-Portfolio Manager of Davis Value Portfolio with Kenneth Charles
Feinberg since the Fund's inception, July 1, 1999.
o Also manages or co-manages other equity funds advised by Davis
Selected Advisers.
Other Experience:
o Portfolio Manager or Co-Portfolio Manager of various equity funds
managed by Davis Selected Advisers since October 1995.
o Assistant Portfolio Manager and research analyst working with Shelby
M.C. Davis from September 1989 to September 1995.
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KENNETH CHARLES FEINBERG
Responsibilities:
o Co-Portfolio Manager of Davis Value Portfolio with Christopher C.
Davis since the Fund's inception, July 1, 1999.
o Also co-manages other equity funds advised by Davis Selected Advisers.
Other Experience:
o Co-Portfolio Manager of various equity funds managed by Davis Selected
Advisers since May 1997.
o Research analyst at Davis Selected Advisers since December 1994.
o Assistant Vice President of Investor Relations for Continental Corp.
from 1988 to 1994.
OUR CODE OF ETHICS
We allow the officers and employees of Davis Funds and their affiliates to buy
and sell securities for their own personal accounts. However, in order to do so,
they must agree to a number of restrictions listed in our company Code of
Ethics.
HOW WE MANAGE THE FUND
DAVIS SELECTED ADVISERS' PERFORMANCE HISTORY
Davis Value Portfolio's investment objective is growth of capital. Davis
Selected Advisers has been managing portfolios in a similar style since 1969.
The performance history presented below is based on data relating to accounts
managed by Davis Selected Advisers that have investment objectives and policies
similar (although not necessarily identical) to Davis Value Portfolio, and are
advised by Davis Selected Advisers using an investment style and strategy
substantially similar to those used to manage Davis Value Portfolio.
THE PERFORMANCE INFORMATION SET FORTH BELOW FOR DAVIS SELECTED ADVISERS DOES NOT
REPRESENT THE PERFORMANCE OF DAVIS VALUE PORTFOLIO.
Davis Selected Advisers' historical performance data covers 29 years and
reflects the performance of the Davis Large Cap Equity Composite. The composite
includes all accounts ($3.5 million or larger) with investment objectives,
policies and strategies substantially similar to those used by Davis Selected
Advisers in managing the Davis Value Portfolio. As of December 31, 1998, the
composite included 19 accounts with aggregate assets of $18.27 billion. The
composite returns are reduced by the Fund's
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estimated annual operating expenses (1.05% per year). The insurance company's
charges on your contract will also reduce actual performance.
The private accounts are not subject to certain investment limitations
diversification requirements and other restrictions imposed by the 1940 Act and
the Internal Revenue Code, which if applicable may have adversely affected the
performance results.
The chart below compares the Davis Large Cap Equity Composite, an annualized
asset-weighted performance results net of advisory fees and estimated expenses,
against the S&P 500(R) Index. Davis Large Cap Equity Composite performance is
computed using an internal time-weighted rate of return for each account
(including every private account and every mutual fund in the composite),
weighted for the relative size of each account using beginning of period
values. This return is reduced by the Fund's estimated annual operating
expenses listed in the expense table. This calculation, used to measure the
performance of a composite, is different from the standardized SEC method used
to measure the performance of a single mutual fund. The S&P 500(R) Index is a
widely recognized unmanaged index of stock performance.
DAVIS LARGE CAP EQUITY COMPOSITE RETURNS VS. S & P 500 INDEX
(For the periods ending December 31, 1998)
PAST PAST PAST SINCE JANUARY 1,
ONE YEAR 5 YEARS 10 YEARS 1970
---------- ------- ----------- ----------------
DAVIS LARGE CAP
EQUITY COMPOSITE 14.80% 21.82% 20.28% 14.80%
S&P 500 INDEX 28.58% 24.03% 19.17% 13.45%
Davis Value Portfolio was recently organized and has a performance record of
less than a year. The preceding performance results should not be considered a
prediction of the future performance of Davis Value Portfolio. THE FUND'S
PERFORMANCE MAY BE EITHER HIGHER OR LOWER THAN THE DAVIS LARGE CAP EQUITY
COMPOSITE.
HOW WE INVEST THE FUND'S ASSETS
DAVIS INVESTMENT PHILOSOPHY
Davis Value Portfolio is managed using the Davis investment philosophy. The
Davis investment philosophy stresses a back-to-basics approach: we use extensive
research to buy growing companies at value prices and hold on to them for the
long-term. Over the years, Davis Selected Advisers has developed a list of ten
characteristics that we believe foster sustainable long-term growth, minimize
risk and enhance the potential for superior long-term returns. While very few
companies have all ten, we search for companies that demonstrate several of the
characteristics that are listed in the following chart.
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WHAT WE LOOK FOR IN A COMPANY
1. FIRST-CLASS MANAGEMENT. We believe that great companies are created by
great managers. In visiting companies, we look for managers with a record
of doing what they say they are going to do.
2. MANAGEMENT OWNERSHIP. Just as we invest heavily in our own funds, we look
for companies where individual managers own a significant stake.
3. STRONG RETURNS ON CAPITAL. We want companies that invest their capital
wisely and reap superior returns on those investments.
4. LEAN EXPENSE STRUCTURE. Companies that can keep costs low are able to
compete better, especially in difficult times. A low cost structure
sharply reduces the risk of owning a company's shares.
5. DOMINANT OR GROWING MARKET SHARE IN A GROWING MARKET. A company that is
increasing its share of a growing market has the best of both worlds.
6. PROVEN RECORD AS AN ACQUIRER. When an industry or market downturn occurs,
it is a good idea to own companies that can take advantage of attractive
prices to expand operations through inexpensive acquisitions.
7. STRONG BALANCE SHEET. Strong finances give a company staying power to
weather difficult economic cycles. 8. Competitive products or services. We
invest in companies with products that are not vulnerable to obsolescence.
9. SUCCESSFUL INTERNATIONAL OPERATIONS. A proven ability to expand
internationally reduces the risk of being tied too closely to the U.S.
economic cycle.
10. INNOVATION. The savvy use of technology in any business, from a food
company to an investment bank, can help reduce costs and increase sales.
OTHER SECURITIES AND INVESTMENT STRATEGIES
Davis Value Portfolio invests primarily in the common stock of large
capitalization domestic companies. There are other securities in which the Fund
may invest, and investment strategies which the Fund may employ, but they are
not principal investment strategies. The Statement of Additional Information
discusses these securities and investment strategies.
The Fund uses short-term investments to maintain flexibility while we evaluate
long-term opportunities. We also may use short-term investments for temporary
defensive purposes; in the event our portfolio managers anticipate a decline in
the market values of common stock of large capitalization domestic companies,
we may reduce our risk by investing in short-term securities until market
conditions improve. Unlike common stocks, these investments will not appreciate
in value when the market advances. In such a circumstance, the short-term
investments will not contribute to the Fund's investment objective.
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ADDITIONAL RISKS FOR THE FUND: YEAR 2000 TRANSITION ISSUES
Like all financial service providers, Davis Selected Advisers, sub-adviser,
distributor, and third parties providing investment advisory, administrative,
transfer agent, custodial and other services utilize systems that may be
affected by Year 2000 transition issues. Many computer software systems in use
today cannot distinguish the year 2000 from the year 1900 because of the way
dates are encoded and calculated.
Difficulties with Year 2000 transition issues could have a negative impact on
handling securities trades, payments of interest and dividends, pricing and
account services. Although at this time there can be no assurance that there
will be no adverse impact on the Funds, the Service Providers have advised the
Funds that they have been actively working on necessary changes to their
computer systems to prepare for the Year 2000, and expect that their systems,
and those of other parties they deal with, will be adapted in time for this
event. In addition, there can be no assurance that the companies in which the
Fund invests will not experience difficulties with Year 2000 transition issues
which may negatively affect the market value of those companies.
HOW WE MANAGE RISK
Risks are inherent in all investments. Investing in a mutual fund, even the
most conservative, involves risk, including the risk that you may receive
little or no return on your investment, or even that you may lose part or all
of your investment. Davis Value Portfolio has five strategies to minimize the
risk assumed when we invest.
FIVE STRATEGIES WE USE TO MINIMIZE RISK
1. WE PURCHASE HIGH-QUALITY GROWTH COMPANIES. Our focus on high-quality
growth companies reduces the likelihood that your investment will be tied
up in a failing company. A high-quality growth company is one that has
achieved a dominant or growing market share, and is led by first-class
management.
2. WE USE A CONSERVATIVE VALUATION STRATEGY. Once we find companies that meet
our business criteria, we determine how much to pay for their shares. We
follow a price discipline that tells us how much we can reasonably pay for
a stock. While no system can prevent all losses, this conservative
approach helps us avoid the calamitous losses that occur in bear markets.
3. WE HAVE A LONG-TERM VISION. We get to know the managers of the companies
in which we invest and understand their goals. We view temporary setbacks
as buying opportunities: when other managers sell stocks in response to
bad news, we evaluate the issuer's long-term prospects.
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4. WE DO NOT USE MARKET TIMING. We do not base our decisions to buy and sell
securities on whether we believe the stock market will rise or fall (known
as market timing). However, we can raise the level of cash in the Fund
when stock prices get too high and it becomes difficult to purchase
quality undervalued growth companies.
5. WE MAY MAKE TEMPORARY DEFENSIVE INVESTMENTS. From time to time, Davis
Value Portfolio may take temporary defensive positions in response to
adverse market, economic or political conditions. Temporary defensive
investments will not appreciate in value when the market advances. In such
a circumstance, these investments will not contribute to the Fund's
investment objective.
INFORMATION CONCERNING SHARES IN THE FUND
INVESTING IN DAVIS VALUE PORTFOLIO
The Fund is used solely as an investment vehicle for variable annuity or
variable life insurance contracts issued by certain life insurance companies.
You cannot purchase shares of the Fund directly. As an owner of a variable
annuity or variable life insurance contract that offers the Fund as an
investment option, however, you may allocate your contract values to a separate
account of the insurance company that invests in shares of the Fund.
Your variable annuity or variable life insurance contract is offered through its
own prospectus, which contains information about that contract, including how to
purchase the contract, how to allocate contract values to purchase shares in the
Fund, and how to redeem shares from the Fund.
The price at which a purchase or redemption is effected is based on the net
asset value next calculated after receipt of an order.
HOW YOUR SHARES ARE VALUED
The share price of your investment changes depending on the total value of the
Fund's investments.
Each business day, we determine the value of Fund shares by adding up the total
value of investments plus other assets (such as cash), subtracting liabilities,
and dividing the result by the total number of shares outstanding. This share
figure is known as the net asset value.
Net asset value for Davis Value Portfolio is determined each day the Fund is
open for business. A business day is any day the New York Stock Exchange is open
for trading. We calculate net asset value either at the close of the Exchange or
at 4 p.m. Eastern Time, whichever comes first.
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HOW SECURITIES IN THE PORTFOLIO ARE VALUED
We use current market valuations to value the securities in Davis Value
Portfolio:
o Securities that trade on an organized exchange are valued at the last
published sales price on the exchange. If no sales are recorded, the
securities are valued at the average of the closing bid and asked prices
on the exchange.
o Over-the-counter securities are valued at the average of closing bid and
asked prices.
o Debt securities purchased with a maturity of one year or less are usually
valued at amortized (gradually reduced) cost.
o Longer-term debt securities may be valued by an independent pricing
service.
o Securities with unavailable market quotations and other assets are valued
at "fair value"--which is determined or directed by the Board of
Directors.
The Fund may invest a portion of its assets in securities traded in foreign
markets which are closed when the U.S. market is open. The Fund's net asset
value may be determined using foreign securities prices which are several hours
old. Prices of the Fund's foreign securities may not reflect events occurring
after the foreign market was closed but before the Fund determined its net
asset value. Moreover, the value of the Fund's foreign securities may change on
days when shareholders will not be able to purchase or redeem the Fund's
shares.
The Fund may invest a portion of its assets in securities denominated in
foreign currencies. The value of securities denominated in foreign currencies
and traded in foreign markets will have their value converted into the U.S.
dollar equivalents at the prevailing market rate as computed by State Street
Bank and Trust. Fluctuation in the value of foreign currencies in relation to
the U.S. dollar may affect the net asset value of the Fund's shares even if
there has not been any change in the foreign currency price of the Fund's
investments.
ADMINISTRATIVE SERVICE AND DISTRIBUTION FEES
Davis Selected Advisers or its affiliates will pay a fee to the insurance
companies offering the Fund as an investment vehicle for variable annuity or
variable life insurance contracts issued by the life insurance companies. The
fee is equal, on an annualized basis, to 20 basis points (0.20%) per annum of
the average aggregate amount invested by the insurance company in Davis
Variable Account Fund, Inc. Such payments will be made monthly, and only when
the average aggregate amount invested exceeds $1,000,000. The fee increases to
25 basis points (0.25%) when the average aggregate amount invested exceeds
$300,000,000. Such payments are for administrative services and investor
support services, and do not constitute payment for investment advisory,
distribution or other services. Payment of such amounts by Davis Selected
Advisers or its affiliates does not increase the fees paid by the Fund or its
shareholders.
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The Fund has adopted a plan under Rule 12b-1 that, in the future, would allow
the Fund to pay distribution and other fees for the distribution of its shares
and for services provided to shareholders or shareholders of the insurance
separate accounts investing in the Fund. At the current time Davis Value
Portfolio is not paying any distribution fees. In the future the Fund may pay
up to 0.25% of average annual net assets. Because these fees would be paid out
of the Fund's assets on an ongoing basis, over time these fees may increase the
cost of your investment and may cost you more than paying other types of sales
charges.
TAXES
Davis Value Portfolio has elected to be taxed as a "regulated investment
company" under the provisions of Subchapter M of the Internal Revenue Code of
1986, as amended ("the Code"). If the Fund continues to qualify as a "regulated
investment company" and complies with the appropriate provisions of the Code, it
will pay no federal income taxes on the amounts it distributes.
Because the shareholders of the Fund are insurance companies (such as the one
that issues your contract), no discussion of the federal income tax consequences
to shareholders is included herein. For information about the federal income tax
consequences of purchasing the contracts, see the prospectus for your contract.
DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS
Net investment income and net realized capital gains are distributed to
shareholders at least annually.
Davis Value Portfolio intends to distribute substantially all of its net
investment income, if any, in dividends to its shareholders. For dividend
purposes, net investment income consists of all dividends or interest earned by
the Fund's investments, minus the Fund's expenses (including the advisory fee).
All of the Fund's net realized capital gains, if any, are distributed
periodically, no less frequently than annually. All dividends and distributions
of the Fund are reinvested in additional shares of the Fund at net asset value.
VOTING RIGHTS
Since the shares of the Fund are owned by your insurance company and not by you
directly, you will not vote shares of the Fund. Your insurance company will vote
the shares that it holds as required by state and federal law. Your contract
prospectus contains more information on your rights regarding instructions to
your insurance company on how to vote Fund shares held in connection with your
contract.
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OTHER FUND DOCUMENTS
For more information about Davis Value Portfolio, request a free copy of the
Statement of Additional Information or, when they become available, the Annual
and Semi-Annual Reports. The STATEMENT OF ADDITIONAL INFORMATION provides more
detailed information about the Fund and its management and operations. When
they become available, an ANNUAL REPORT will discuss the market conditions and
investment strategies that will have significantly affected Fund performance
during the last year, and a SEMI-ANNUAL REPORT will update information provided
in the Annual Report for the following six months.
Davis Value Portfolio's Statement of Additional Information has been filed with
the Securities and Exchange Commission, is incorporated by reference, and is
legally a part of this prospectus. The Annual Report, which will be filed when
it is available, will legally become a part of this prospectus.
WHERE YOU CAN GET THESE DOCUMENTS:
o FROM YOUR INSURANCE COMPANY OR YOUR ACCOUNT REPRESENTATIVE. Your Insurance
Company or Account Representative can provide you with copies of these
documents.
o VIA THE INTERNET. Visit the SEC web site (www.sec.gov).
o FROM THE SEC. The SEC's Public Reference Room in Washington DC. For more
information on the operations of the Public Reference Room call
1-800-SEC-0330. Additional copies of this information can be obtained, for
a duplicating fee, by writing the Public Reference Section of the SEC,
Washington DC 20549-6009.
Investment Company Act File No. 811-xxxx
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DAVIS FINANCIAL PORTFOLIO
(part of Davis Variable Account Fund, Inc.)
July 1, 1999
A mutual fund sold exclusively to insurance company separate accounts for
variable annuity and variable life insurance contracts.
The Securities and Exchange Commission has not approved or disapproved of these
securities. The Securities and Exchange Commission has not determined whether
this prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
Over 25 Years Of Reliable Investing
Managed by Davis Selected Advisers, L.P.
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TABLE OF CONTENTS
Overview of the Fund
Investment Objective and Strategy
Determining If This Fund Is Right for You
Principal Risks
Past Performance
Expenses of the Fund
Who Is Responsible for the Fund
How We Manage the Fund
Davis Selected Advisers' Performance History
How We Invest the Fund's Assets
How We Manage Risk
Information Concerning Shares in the Fund
Other Fund Documents
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OVERVIEW OF DAVIS FINANCIAL PORTFOLIO
INVESTMENT OBJECTIVE AND STRATEGY
Davis Financial Portfolio's investment objective is growth of capital. The Fund
invests primarily in common stock of financial companies. During normal market
conditions, at least 65% of the Fund's assets are invested in companies that are
"principally engaged" in financial services.
A company is "principally engaged" in financial services if it owns financial
services-related assets that constitute at least 50% of the value of all of its
assets, or if it derives at least 50% of its revenues from providing financial
services. Companies in the financial services industry include commercial banks,
industrial banks, savings institutions, finance companies, diversified financial
services companies, investment banking firms, securities brokerage houses,
investment advisory companies, leasing companies, insurance companies and
companies providing similar services.
Our portfolio managers use the Davis investment philosophy to select common
stock of quality overlooked-growth companies at value prices and to hold them
for the long-term. We look for financial services companies with sustainable
growth rates selling at modest price-earnings multiples that we hope will expand
as other investors recognize the company's true worth. We believe that if you
combine a sustainable growth rate with a gradually expanding multiple, these
rates compound and can generate returns that could exceed average returns earned
by investing in a portfolio of financial services companies.
You can find more detailed information about the types of securities that the
Fund buys in the section called HOW WE MANAGE THE FUND.
DETERMINING IF THIS FUND IS RIGHT FOR YOU
YOU SHOULD CONSIDER INVESTING IN THIS FUND IF:
o You are seeking long-term growth of capital.
o You believe that the financial services sector offers attractive long-term
growth opportunities.
o You are investing for the long-term (five years or more).
YOU SHOULD NOT INVEST IN THIS FUND IF:
o You are worried about the possibility of sharp price swings and dramatic
market declines.
o You are interested in earning current income.
o You do not wish to invest in a concentrated portfolio of financial
services companies.
o You are investing for the short-term (less than five years).
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PRINCIPAL RISKS
If you buy shares of Davis Financial Portfolio, you may lose some or all of the
money that you invest.
THE PRINCIPAL RISKS OF INVESTING IN ANY MUTUAL FUND ARE:
o NOT INSURED. Mutual funds are not insured by the Federal Deposit Insurance
Corporation ("FDIC") or any other agency, unlike bank deposits such as CDs
or savings accounts.
o NO GUARANTEE. No mutual fund can guarantee that it will meet its
investment objectives.
o POSSIBLE LOSS OF INVESTMENT. A mutual fund cannot guarantee its
performance, nor assure you that the market value of your investment will
increase. You may lose the money you invest, and the fund will not
reimburse you for any of these losses.
o VOLATILITY. The price of fund shares will increase or decrease with
changes in the value of the fund's underlying investments.
THE PRINCIPAL RISKS OF INVESTING IN DAVIS FINANCIAL PORTFOLIO ARE:
o MARKET RISK. The market value of shares of common stock can change rapidly
and unpredictably as a result of political or economic events having little
or nothing to do with the issuer.
o COMPANY RISK. The price of a common stock varies with the success and
failure of its issuer. As a result, the success of the companies in which
the Fund invests largely determines the Fund's performance.
o POTENTIAL CONFLICTS. Although it is unlikely, there potentially may be
differing interests involving the Fund among owners of variable annuity and
variable life insurance contracts issued by different insurance companies,
or even the same insurance company. Davis Selected Advisers will monitor
events for any potential conflicts.
o CONCENTRATED FINANCIAL SERVICES PORTFOLIO. Davis Financial Portfolio
invests primarily in a single industry. Any fund that has a concentrated
portfolio is particularly vulnerable to the risks of its target sector.
Risks of investing in the financial services sector include:
o REGULATORY ACTIONS. Financial services companies may suffer a setback
if regulators change the rules under which they operate.
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o CHANGES IN INTEREST RATES. Unstable interest rates can have a
disproportionate effect on the financial services industry.
o CONCENTRATION OF LOANS. Financial services companies whose securities
Davis Financial Portfolio purchases may themselves have concentrated
portfolios, such as a high level of loans to real estate developers,
which makes them vulnerable to economic conditions that affect that
industry.
o COMPETITION. The financial services industry has become increasingly
competitive.
You can find more detailed information about the risks of the Fund's particular
investments in the section called HOW WE MANAGE THE FUND.
PAST PERFORMANCE
Davis Financial Portfolio began selling shares to the public on July 1, 1999.
The past performance of the Fund will be included in the next annual update of
its prospectus after it has been offered to the public for a full calendar year.
EXPENSES OF THE FUND
These expenses present the cost of investing in the Fund and do NOT reflect any
of the fees or expenses of your variable annuity or variable insurance contract.
ESTIMATED ANNUAL FUND OPERATING EXPENSES
(For the year ended December 31, 1999)
(Deducted from Davis Financial Portfolio's Assets)
Management Fees 0.75%
Distribution (12b-1) Fees (1) None
Other Expenses (2) 0.30 %
Total Annual Operating Expenses 1.05%
(1) The Fund has adopted a plan under Rule 12b-1 allowing the payment of up to
0.25% for distribution expenses. The Fund does not intend to make any payments
under this plan at the current time.
(2) "Other Expenses" are based upon estimated operating expenses for the first
fiscal year.
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EXPENSE EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
This example assumes a $10,000 allocation to the Fund for the time periods
indicated and does NOT reflect any of the fees or expenses of your variable
annuity or variable insurance contract. The example also assumes a hypothetical
5% return each year, and assumes that the Fund's operating expenses remain the
same. Although the Fund's actual costs and performance may be higher or lower,
based on these assumptions your costs would be:
1 YEAR 3 YEARS
$107 $334
WHO IS RESPONSIBLE FOR YOUR DAVIS ACCOUNT
A number of entities provide services to Davis Financial Portfolio. This
section shows how the Fund is organized, the entities that perform these
services, and how these entities are compensated. Additional information on the
organization of the Fund is provided in the Fund's Statement of Additional
Information. Davis Selected Advisers and Davis Financial Portfolio do not
control the insurance company that issues your contract and are not responsible
for anything stated in the prospectus for your contract.
INVESTMENT ADVISER
DAVIS SELECTED ADVISERS, LP
Referred to throughout this prospectus as "Davis Selected Advisers"
124 East Marcy Street
Santa Fe, NM 87501
o Provides investment advice for Davis Financial Portfolio's investment
portfolio.
o Manages the Fund's business affairs.
o Provides day-to-day administrative services.
o Serves as investment adviser for all of the Davis Funds, other mutual
funds, and other institutional clients.
o Annual Adviser Fee (based on average net assets): 0.75%.
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INVESTMENT SUB-ADVISER
DAVIS SELECTED ADVISERS-NY, INC.
Referred to throughout this prospectus as "Davis Selected Advisers-NY"
609 Fifth Avenue
New York, NY 10017
o Performs investment management and research services for Davis Financial
Portfolio and other institutional clients.
o Wholly owned subsidiary of Davis Selected Advisers.
o Annual Fee: Davis Selected Advisers pays the fee, not the Fund.
CUSTODIAN AND TRANSFER AGENT
STATE STREET BANK AND TRUST COMPANY
Referred to throughout this prospectus as "State Street Bank and Trust" PO Box
8406 Boston, MA 02266-8406 o Prices Davis Financial Portfolio daily. o Holds the
Fund's cash and portfolio securities.
BOARD OF DIRECTORS
The Funds' Board of Directors has general supervisory responsibilities of Davis
Variable Account Fund, Inc. The Board monitors and supervises the performance of
the investment adviser, sub-advisers and other service providers, monitors the
Funds' business and investment activities, and determines whether or not to
renew agreements with the adviser and sub-adviser.
DISTRIBUTOR
DAVIS DISTRIBUTORS, LLC
Referred to throughout this prospectus as "Davis Distributors"
124 East Marcy Street
Santa Fe, NM 87501
o Oversees purchases of shares and promotional activities for Davis
Financial Portfolio.
o Wholly owned subsidiary of Davis Selected Advisers.
o Serves as distributor for all of the Davis Funds and other mutual funds
managed by Davis Selected Advisers.
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FOUNDER AND CHIEF INVESTMENT OFFICER OF THE ADVISER
SHELBY M.C. DAVIS
Responsibilities:
o Chief Investment Officer of Davis Selected Advisers.
o President of all the Davis Funds.
OTHER EXPERIENCE:
o Served as Davis New York Venture Fund's Portfolio Manager from its
inception in 1969 until February 1997.
o Served as Portfolio Manager of a growth and income fund managed by Davis
Selected Advisers from May 1993 until February 1997.
PORTFOLIO MANAGERS
CHRISTOPHER C. DAVIS
Responsibilities:
o Vice President of Davis Variable Account Fund, Inc.
o Co-Portfolio Manager of Davis Financial Portfolio with Kenneth Charles
Feinberg since the Fund's inception, July 1, 1999.
o Also manages or co-manages other equity funds advised by Davis Selected
Advisers.
Other Experience:
o Portfolio Manager or Co-Portfolio Manager of various equity funds managed
by Davis Selected Advisers since October 1995.
o Assistant Portfolio Manager and research analyst working with Shelby M.C.
Davis from September 1989 to September 1995.
KENNETH CHARLES FEINBERG
Responsibilities:
o Co-Portfolio Manager of Davis Financial Portfolio with Christopher C. Davis
since the Fund's inception, July 1, 1999.
o Also co-manages other equity funds advised by Davis Selected Advisers.
Other Experience:
o Co-Portfolio Manager of various equity funds managed by Davis Selected
Advisers since May 1997.
o Research analyst at Davis Selected Advisers since December 1994.
o Assistant Vice President of Investor Relations for Continental Corp. from
1988 to 1994.
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OUR CODE OF ETHICS
We allow the officers and employees of Davis Funds and their affiliates to buy
and sell securities for their own personal accounts. However, in order to do
so, they must agree to a number of restrictions listed in our company Code of
Ethics.
HOW WE MANAGE THE FUND
DAVIS SELECTED ADVISERS' PERFORMANCE HISTORY
Davis Financial Portfolio's investment objective is growth of capital. Davis
Selected Advisers has been managing portfolios in a similar style since May
1991. The performance history presented below is based on data relating to
accounts managed by Davis Selected Advisers that have investment objectives and
policies similar (although not necessarily identical) to Davis Financial
Portfolio, and are advised by Davis Selected Advisers using an investment style
and strategy substantially similar to those used for managing Davis Financial
Portfolio.
THE PERFORMANCE INFORMATION SET FORTH BELOW FOR DAVIS SELECTED ADVISERS DOES NOT
REPRESENT THE PERFORMANCE OF DAVIS FINANCIAL PORTFOLIO.
Davis Selected Advisers' historical performance data covers the period from July
1, 1991 through December 31, 1998 and reflects the performance of the Davis
Financial Composite. The composite includes all accounts ($3.5 million or
larger) with investment objectives, policies and strategies substantially
similar to those used by Davis Selected Advisers in managing the Davis Financial
Portfolio. As of December 31, 1998, the composite included five accounts with
aggregate assets of approximately $1 billion. The composite returns are reduced
by the Fund's estimated annual operating expenses (1.05% per year). The
insurance company's charges on your contract will also reduce actual
performance.
The private accounts are not subject to certain investment limitations
diversification requirements and other restrictions imposed by the 1940 Act and
the Internal Revenue Code, which if applicable may have adversely affected the
performance results.
The chart below compares the Davis Financial Composite, an annualized
asset-weighted performance results net of advisory fees and estimated expenses,
against the S&P 500(R) Index. Davis Financial Composite performance is computed
using an internal time-weighted rate of return for each account (including every
private account and every mutual fund in the composite), weighted for the
relative size of each account using beginning of period values. This return is
reduced by the Fund's estimated annual operating expenses listed in the expense
table. This calculation, used to measure the
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the performance of a composite, is different from the standardized SEC method
used to measure the performance of a single mutual fund. The S&P 500(R) Index
is a widely recognized unmanaged index of stock performance.
DAVIS FINANCIAL COMPOSITE RETURNS VS. S & P 500 INDEX
(For the periods ending December 31, 1998)
<TABLE>
<CAPTION>
PAST PAST PAST SINCE JANUARY 1,
ONE YEAR 3 YEARS 5 YEARS 1992
- ---------------------------- ------------- ---------- ------------ ----------------
<S> <C> <C> <C> <C>
DAVIS FINANCIAL COMPOSITE 14.31% 29.74% 25.83% 25.34%
S&P 500 INDEX 28.59% 28.13% 24.03% 19.47%
</TABLE>
Davis Financial Portfolio was recently organized and has a performance record of
less than a year. The preceding performance results should not be considered a
prediction of the future performance of Davis Financial Portfolio. THE FUND'S
PERFORMANCE MAY BE EITHER HIGHER OR LOWER THAN THE DAVIS FINANCIAL COMPOSITE.
HOW WE INVEST THE FUND'S ASSETS
DAVIS INVESTMENT PHILOSOPHY
Davis Financial Portfolio is managed using the Davis investment philosophy. The
Davis investment philosophy stresses a back-to-basics approach: we use extensive
research to buy growing companies at value prices and hold on to them for the
long-term. Over the years, Davis Selected Advisers has developed a list of ten
characteristics that we believe foster sustainable long-term growth, minimize
risk and enhance the potential for superior long-term returns. While very few
companies have all ten, we search for companies that demonstrate several of the
characteristics that are listed in the following chart.
WHAT WE LOOK FOR IN A COMPANY
1. FIRST-CLASS MANAGEMENT. We believe that great companies are created by
great managers. In visiting companies, we look for managers with a record
of doing what they say they are going to do.
2. MANAGEMENT OWNERSHIP. Just as we invest heavily in our own funds, we look
for companies where individual managers own a significant stake.
3. STRONG RETURNS ON CAPITAL. We want companies that invest their capital
wisely and reap superior returns on those investments.
4. LEAN EXPENSE STRUCTURE. Companies that can keep costs low are able to
compete better, especially in difficult times. A low cost structure sharply
reduces the risk of owning a company's shares.
5. DOMINANT OR GROWING MARKET SHARE IN A GROWING MARKET. A company that is
increasing its share of a growing market has the best of both worlds.
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6. PROVEN RECORD AS AN ACQUIRER. When an industry or market downturn occurs,
it is a good idea to own companies that can take advantage of attractive
prices to expand operations through inexpensive acquisitions.
7. STRONG BALANCE SHEET. Strong finances give a company staying power to
weather difficult economic cycles.
8. COMPETITIVE PRODUCTS OR SERVICES. We invest in companies with products
that are not vulnerable to obsolescence.
9. SUCCESSFUL INTERNATIONAL OPERATIONS. A proven ability to expand
internationally reduces the risk of being tied too closely to the U.S.
economic cycle.
10. INNOVATION. The savvy use of technology in any business, from a food
company to an investment bank, can help reduce costs and increase sales.
OTHER SECURITIES AND INVESTMENT STRATEGIES
Davis Financial Portfolio invests primarily in the common stock of financial
services companies. There are other securities in which the Fund may invest, and
investment strategies which the Fund may employ, but they are not principal
investment strategies. The Statement of Additional Information discusses these
securities and investment strategies.
The Fund uses short-term investments to maintain flexibility while we evaluate
long-term opportunities. We also may use short-term investments for temporary
defensive purposes; in the event our portfolio managers anticipate a decline in
the market values of common stock of large-capitalization domestic companies, we
may reduce our risk by investing in short-term securities until market
conditions improve. Unlike common stocks, these investments will not appreciate
in value when the market advances. In such a circumstance, the short-term
investments will not contribute to the Fund's investment objective.
ADDITIONAL RISKS FOR THE FUND: YEAR 2000 TRANSITION ISSUES
Like all financial service providers, Davis Selected Advisers, sub-adviser,
distributor, and third parties providing investment advisory, administrative,
transfer agent, custodial and other services utilize systems that may be
affected by Year 2000 transition issues. Many computer software systems in use
today cannot distinguish the year 2000 from the year 1900 because of the way
dates are encoded and calculated.
Difficulties with Year 2000 transition issues could have a negative impact on
handling securities trades, payments of interest and dividends, pricing and
account services. Although at this time there can be no assurance that there
will be no adverse impact on the Funds, the Service Providers have advised the
Funds that they have been actively working on necessary changes to their
computer systems to prepare for the Year 2000, and expect that their systems,
and those of other parties they deal with, will be adapted in time for this
event. In addition, there can be no assurance that the companies in which
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the Fund invests will not experience difficulties with Year 2000 transition
issues which may negatively affect the market value of those companies.
HOW WE MANAGE RISK
Risks are inherent in all investments. Investing in a mutual fund, even the most
conservative, involves risk, including the risk that you may receive little or
no return on your investment or even that you may lose part or all of your
investment. Davis Financial Portfolio has five strategies to minimize the risk
assumed when we invest.
FIVE STRATEGIES WE USE TO MINIMIZE RISK
1. WE PURCHASE HIGH-QUALITY GROWTH COMPANIES. Our focus on high-quality growth
companies reduces the likelihood that your investment will be tied up in a
failing company. A high-quality growth company is one that has achieved a
dominant or growing market share, and is led by first-class management.
2. WE USE A CONSERVATIVE VALUATION STRATEGY. Once we find companies that meet
our business criteria, we determine how much to pay for their shares. We
follow a price discipline that tells us how much we can reasonably pay for
a stock. While no system can prevent all losses, this conservative approach
helps us avoid the calamitous losses that occur in bear markets.
3. WE HAVE A LONG-TERM VISION. We get to know the managers of the companies in
which we invest and understand their goals. We view temporary setbacks as
buying opportunities: when other managers sell stocks in response to bad
news, we evaluate the issuer's long-term prospects.
4. WE DO NOT USE MARKET TIMING. We do not base our decisions to buy and sell
securities on whether we believe the stock market will rise or fall (known
as market timing). However, we can raise the level of cash in the Fund when
stock prices get too high and it becomes difficult to purchase quality
undervalued-growth companies.
5. WE MAY MAKE TEMPORARY DEFENSIVE INVESTMENTS. From time to time, Davis
Financial Portfolio may take temporary defensive positions in response to
adverse market, economic or political conditions. Temporary defensive
investments will not appreciate in value when the market advances. In such
a circumstance, these investments will not contribute to the Fund's
investment objective.
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INFORMATION CONCERNING SHARES IN THE FUND
INVESTING IN DAVIS FINANCIAL PORTFOLIO
The Fund is used solely as an investment vehicle for variable annuity or
variable life insurance contracts issued by certain life insurance companies.
You cannot purchase shares of the Fund directly. As an owner of a variable
annuity or variable life insurance contract that offers the Fund as an
investment option, however, you may allocate your contract values to a separate
account of the insurance company that invests in shares of the Fund.
Your variable annuity or variable life insurance contract is offered through its
own prospectus, which contains information about that contract, including how to
purchase the contract, how to allocate contract values to purchase shares in the
Fund, and how to redeem shares from the Fund.
The price at which a purchase or redemption is effected is based on the net
asset value next calculated after receipt of an order.
HOW YOUR SHARES ARE VALUED
The share price of your investment changes depending on the total value of the
Fund's investments.
Each business day, we determine the value of Fund shares by adding up the total
value of investments plus other assets (such as cash), subtracting liabilities,
and dividing the result by the total number of shares outstanding. This share
figure is known as the net asset value.
Net asset value for Davis Financial Portfolio is determined each day the Fund is
open for business. A business day is any day the New York Stock Exchange is open
for trading. We calculate net asset value either at the close of the Exchange or
at 4 p.m. Eastern Time, whichever comes first.
HOW SECURITIES IN THE PORTFOLIO ARE VALUED
We use current market valuations to value the securities in Davis Financial
Portfolio:
o Securities that trade on an organized exchange are valued at the last
published sales price on the exchange. If no sales are recorded, the
securities are valued at the average of the closing bid and asked prices
on the exchange.
o Over-the-counter securities are valued at the average of closing bid and
asked prices.
o Debt securities purchased with a maturity of one year or less are usually
valued at amortized (gradually reduced) cost.
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o Longer-term debt securities may be valued by an independent pricing
service.
o Securities with unavailable market quotations and other assets are valued
at "fair value"--which is determined or directed by the Board of
Directors.
The Fund may invest a portion of its assets in securities traded in foreign
markets which are closed when the U.S. market is open. The Fund's net asset
value may be determined using foreign securities prices which are several hours
old. Prices of the Fund's foreign securities may not reflect events occurring
after the foreign market was closed but before the Fund determined its net
asset value. Moreover, the value of the Fund's foreign securities may change on
days when shareholders will not be able to purchase or redeem the Fund's
shares.
The Fund may invest a portion of its assets in securities denominated in
foreign currencies. The value of securities denominated in foreign currencies
and traded in foreign markets will have their value converted into the U.S.
dollar equivalents at the prevailing market rate as computed by State Street
Bank and Trust. Fluctuation in the value of foreign currencies in relation to
the U.S. dollar may affect the net asset value of the Fund's shares even if
there has not been any change in the foreign currency price of the Fund's
investments.
ADMINISTRATIVE SERVICE AND DISTRIBUTION FEES
Davis Selected Advisers or its affiliates will pay a fee to the insurance
companies offering the Fund as an investment vehicle for variable annuity or
variable life insurance contracts issued by the life insurance companies. The
fee is equal, on an annualized basis, to 20 basis points (0.20%) per annum of
the average aggregate amount invested by the insurance company in Davis
Variable Account Fund, Inc. Such payments will be made monthly, and only when
the average aggregate amount invested exceeds $1,000,000. The fee increases to
25 basis points (0.25%) when the average aggregate amount invested exceeds
$300,000,000. Such payments are for administrative services and investor
support services, and do not constitute payment for investment advisory,
distribution or other services. Payment of such amounts by Davis Selected
Advisers or its affiliates does not increase the fees paid by the Fund or its
shareholders.
The Fund has adopted a plan under Rule 12b-1 that, in the future, would allow
the Fund to pay distribution and other fees for the distribution of its shares
and for services provided to shareholders or shareholders of the insurance
separate accounts investing in the Fund. At the current time Davis Financial
Portfolio is not paying any distribution fees. In the future the Fund may pay
up to 0.25% of average annual net assets. Because these fees would be paid out
of the Fund's assets on an ongoing basis, over time these fees may increase the
cost of your investment and may cost you more than paying other types of sales
charges.
TAXES
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Davis Financial Portfolio has elected to be taxed as a "regulated investment
company" under the provisions of Subchapter M of the Internal Revenue Code of
1986, as amended ("the Code"). If the Fund continues to qualify as a "regulated
investment company" and complies with the appropriate provisions of the Code,
it will pay no federal income taxes on the amounts it distributes.
Because the shareholders of the Fund are insurance companies (such as the one
that issues your contract), no discussion of the federal income tax
consequences to shareholders is included herein. For information about the
federal income tax consequences of purchasing the contracts, see the prospectus
for your contract.
DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS
Net investment income and net realized capital gains are distributed to
shareholders at least annually.
Davis Financial Portfolio intends to distribute substantially all of its net
investment income, if any, in dividends to its shareholders. For dividend
purposes, net investment income consists of all dividends or interest earned by
the Fund's investments, minus the Fund's expenses (including the advisory fee).
All of the Fund's net realized capital gains, if any, are distributed
periodically, no less frequently than annually. All dividends and distributions
of the Fund are reinvested in additional shares of the Fund at net asset value.
VOTING RIGHTS
Since the shares of the Fund are owned by your insurance company and not by you
directly, you will not vote shares of the Fund. Your insurance company will vote
the shares that it holds as required by state and federal law. Your contract
prospectus contains more information on your rights regarding instructions to
your insurance company on how to vote Fund shares held in connection with your
contract.
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OTHER FUND DOCUMENTS
For more information about Davis Financial Portfolio, request a free copy of the
Statement of Additional Information or, when they become available, the Annual
and Semi-Annual Reports. The STATEMENT OF ADDITIONAL INFORMATION provides more
detailed information about the Fund and its management and operations. When they
become available, an ANNUAL REPORT will discuss the market conditions and
investment strategies that will have significantly affected Fund performance
during the last year, and a SEMI-ANNUAL REPORT will update information provided
in the Annual Report for the following six months.
Davis Financial Portfolio's Statement of Additional Information has been filed
with the Securities and Exchange Commission, is incorporated by reference, and
is legally a part of this prospectus. The Annual Report, which will be filed
when it is available, will legally become a part of this prospectus.
WHERE YOU CAN GET THESE DOCUMENTS:
O FROM YOUR INSURANCE COMPANY OR YOUR ACCOUNT REPRESENTATIVE. Your Insurance
Company or Account Representative can provide you with copies of these
documents.
O VIA THE INTERNET. Visit the SEC web site (www.sec.gov).
O FROM THE SEC. The SEC's Public Reference Room in Washington DC. For more
information on the operations of the Public Reference Room call
1-800-SEC-0330. Additional copies of this information can be obtained, for
a duplicating fee, by writing the Public Reference Section of the SEC,
Washington DC 20549-6009.
Investment Company Act File No. 811-xxxx
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DAVIS REAL ESTATE PORTFOLIO
(part of Davis Variable Account Fund, Inc.)
July 1, 1999
A mutual fund sold exclusively to insurance company separate accounts for
variable annuity and variable life insurance contracts.
The Securities and Exchange Commission has not approved or disapproved of these
securities. The Securities and Exchange Commission has not determined whether
this prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
Over 25 Years Of Reliable Investing
Managed by Davis Selected Advisers, L.P.
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TABLE OF CONTENTS
Overview of the Fund
Investment Objective and Strategy
Determining If This Fund Is Right for You
Principal Risks
Past Performance
Expenses of the Fund
Who Is Responsible for the Fund
How We Manage the Fund
Davis Selected Advisers' Performance History
How We Invest the Fund's Assets
How We Manage Risk
Information Concerning Shares in the Fund
Other Fund Documents
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OVERVIEW OF DAVIS REAL ESTATE PORTFOLIO
INVESTMENT OBJECTIVE AND STRATEGY
Davis Real Estate Portfolio's investment objective is total return through a
combination of growth and income. During normal market conditions, at least 65%
of the Fund's assets are invested in "real estate securities," which are
securities issued by companies that are "principally engaged" in the real estate
industry. The Fund does not invest directly in real estate.
A company is "principally engaged" in the real estate industry if it owns real
estate or real estate-related assets that constitute at least 50% of the value
of all of its assets, or if it derives at least 50% of its revenues or net
profits from owning, financing, developing, managing, or selling real estate, or
from offering products or services that are related to real estate. Issuers of
real estate securities include real estate investment trusts (known as "REITs"),
brokers, developers, lenders, and companies with substantial real estate
holdings such as paper, lumber, hotel, and entertainment companies.
Most of Davis Real Estate Portfolio's real estate securities are, and likely
will continue to be, interests in REITs. REITs pool investors' funds to make
real estate-related investments, such as buying interests in income-producing
property or making loans to real estate developers.
Davis Real Estate Portfolio focuses on REITs and other companies with
first-class management teams who view real estate as a means of producing steady
increases in income and strong returns on capital. We concentrate heavily on
valuation, looking for companies that sell at less than the present value of
their expected cash flow over the next few years.
DETERMINING IF THIS FUND IS RIGHT FOR YOU
YOU SHOULD CONSIDER INVESTING IN THIS FUND IF:
o You are seeking total return through a combination of growth and income. o You
believe that the real estate sector offers attractive long-term growth
opportunities. o You want to diversify your traditional stock and bond portfolio
with real estate securities.
o You are investing for the long-term (five years or more).
YOU SHOULD NOT INVEST IN THIS FUND IF:
o You are worried about the possibility of sharp price swings and dramatic
market declines.
o You do not wish to invest in a concentrated portfolio of real estate
companies.
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o You are investing for the short-term (less than five years).
PRINCIPAL RISKS
If you buy shares of Davis Real Estate Portfolio, you may lose some or all of
the money that you invest.
THE PRINCIPAL RISKS OF INVESTING IN ANY MUTUAL FUND ARE:
o NOT INSURED. Mutual funds are not insured by the Federal Deposit Insurance
Corporation ("FDIC") or any other agency, unlike bank deposits such as CDs
or savings accounts.
o NO GUARANTEE. No mutual fund can guarantee that it will meet its
investment objectives.
o POSSIBLE LOSS OF INVESTMENT. A mutual fund cannot guarantee its
performance, nor assure you that the market value of your investment will
increase. You may lose the money you invest, and the fund will not
reimburse you for any of these losses.
o VOLATILITY. The price of fund shares will increase or decrease with changes
in the value of the fund's underlying investments.
THE PRINCIPAL RISKS OF INVESTING IN DAVIS REAL ESTATE PORTFOLIO ARE:
o MARKET RISK. The market value of shares of common stock can change rapidly
and unpredictably as a result of political or economic events having little
or nothing to do with the issuer.
o COMPANY RISK. The price of a common stock varies with the success and
failure of its issuer. As a result, the success of the companies in which
the Fund invests largely determines the Fund's performance.
o POTENTIAL CONFLICTS. Although it is unlikely, there potentially may be
differing interests involving the Fund among owners of variable annuity and
variable life insurance contracts issued by different insurance companies,
or even the same insurance company. Davis Selected Advisers will monitor
events for any potential conflicts.
o CONCENTRATED REAL ESTATE PORTFOLIO. Davis Real Estate Portfolio invests
primarily in one industry. Any fund that has a concentrated portfolio is
particularly vulnerable to the risks of its selected industry. Real estate
securities are susceptible to the many risks associated with the direct
ownership of real estate, including:
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o Declines in property values--because of changes in the economy or the
surrounding area or because a particular region has become less appealing
to tenants.
o Increases in property taxes, operating expenses, interest rates, or
competition.
o Overbuilding.
o Changes in zoning laws.
o Losses from casualty or condemnation.
You can find more detailed information about the risks of the Fund's particular
investments in the section called HOW WE MANAGE THE FUND.
PAST PERFORMANCE
Davis Real Estate Portfolio began selling shares to the public on July 1, 1999.
The past performance of the Fund will be included in the next annual update of
its prospectus after it has been offered to the public for a full calendar year.
EXPENSES OF THE FUND
These expenses present the cost of investing in the Fund and do NOT reflect any
of the fees or expenses of your variable annuity or variable insurance contract.
ESTIMATED ANNUAL FUND OPERATING EXPENSES
(For the year ended December 31, 1999)
(Deducted from Davis Real Estate Portfolio's Assets)
Nanagement Fees 0.75%
Distribution (12b-1) Fees (1) None
Other Expenses (2) 0.30 %
Total Annual Operating Expenses 1.05%
(1) The Fund has adopted a plan under Rule 12b-1 allowing the payment of up to
0.25% for distribution expenses. The Fund does not intend to make any payments
under this plan at the current time.
(2) "Other Expenses" are based upon estimated operating expenses for the first
fiscal year.
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EXPENSE EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
This example assumes a $10,000 allocation to the Fund for the time periods
indicated and does NOT reflect any of the fees or expenses of your variable
annuity or variable insurance contract. The example also assumes a hypothetical
5% return each year, and assumes that the Fund's operating expenses remain the
same. Although the Fund's actual costs and performance may be higher or lower,
based on these assumptions your costs would be:
1 YEAR 3 YEARS
$107 $334
WHO IS RESPONSIBLE FOR YOUR DAVIS ACCOUNT
A number of entities provide services to Davis Real Estate Portfolio. This
section shows how the Fund is organized, the entities that perform these
services, and how these entities are compensated. Additional information on the
organization of the Fund is provided in the Fund's Statement of Additional
Information. Davis Selected Advisers and Davis Real Estate Portfolio do not
control the insurance company that issues your contract and are not responsible
for anything stated in the prospectus for your contract.
INVESTMENT ADVISER
DAVIS SELECTED ADVISERS, LP
Referred to throughout this prospectus as "Davis Selected Advisers"
124 East Marcy Street
Santa Fe, NM 87501
o Provides investment advice for Davis Real Estate Portfolio's investment
portfolio.
o Manages the Fund's business affairs.
o Provides day-to-day administrative services.
o Serves as investment adviser for all of the Davis Funds, other mutual
funds, and other institutional clients.
o Annual Adviser Fee (based on average net assets): 0.75%.
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INVESTMENT SUB-ADVISER
DAVIS SELECTED ADVISERS-NY, INC.
Referred to throughout this prospectus as "Davis Selected Advisers-NY"
609 Fifth Avenue
New York, NY 10017
o Performs investment management and research services for Davis Real Estate
Portfolio and other institutional clients.
o Wholly owned subsidiary of Davis Selected Advisers.
o Annual Fee: Davis Selected Advisers pays the fee, not the Fund.
CUSTODIAN AND TRANSFER AGENT
STATE STREET BANK AND TRUST COMPANY
Referred to throughout this prospectus as "State Street Bank and Trust" PO Box
8406 Boston, MA 02266-8406 o Prices Davis Real Estate Portfolio daily. o Holds
the Fund's cash and portfolio securities.
BOARD OF DIRECTORS
The Funds' Board of Directors has general supervisory responsibilities of Davis
Variable Account Fund, Inc. The Board monitors and supervises the performance
of the investment adviser, sub-advisers and other service providers, monitors
the Funds' business and investment activities, and determines whether or not to
renew agreements with the adviser and sub-adviser.
DISTRIBUTOR
DAVIS DISTRIBUTORS, LLC
Referred to throughout this prospectus as "Davis Distributors"
124 East Marcy Street
Santa Fe, NM 87501
o Oversees purchases of shares and promotional activities for Davis Real
Estate Portfolio.
o Wholly owned subsidiary of Davis Selected Advisers.
o Serves as distributor for all of the Davis Funds and other mutual funds
managed by Davis Selected Advisers.
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FOUNDER AND CHIEF INVESTMENT OFFICER OF THE ADVISER
SHELBY M.C. DAVIS
Responsibilities:
o Chief Investment Officer of Davis Selected Advisers.
o President of all the Davis Funds.
Other Experience:
o Served as Davis New York Venture Fund's Portfolio Manager from its inception
in 1969 until February 1997. o Served as Portfolio Manager of a growth and
income fund managed by Davis Selected Advisers from May 1993
until February 1997.
PORTFOLIO MANAGER
ANDREW A. DAVIS
Responsibilities:
o Portfolio Manager of Davis Real Estate Portfolio since its inception, July 1,
1999. o Also manages or co-manages other Davis equity funds.
Other Experience:
o Portfolio Manager or Co-Portfolio Manager of various equity funds managed
by Davis Selected Advisers since January 1994.
o Vice President and head of convertible securities research at PaineWebber,
Incorporated for six years.
OUR CODE OF ETHICS
We allow the officers and employees of Davis Funds and their affiliates to buy
and sell securities for their own personal accounts. However, in order to do so,
they must agree to a number of restrictions listed in our company Code of
Ethics.
HOW WE MANAGE THE FUND
DAVIS SELECTED ADVISERS' PERFORMANCE HISTORY
Davis Real Estate Portfolio's investment objective is total return through a
combination of growth and income. Davis Selected Advisers has been managing
portfolios in a similar style since January 1994. The performance history
presented below is based on data relating to accounts managed by Davis Selected
Advisers that have investment objectives and policies similar (although not
necessarily identical) to Davis Real Estate
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Portfolio, and are advised by Davis Selected Advisers using an investment style
and strategy substantially similar to those used to manage Davis Real Estate
Portfolio.
THE PERFORMANCE INFORMATION SET FORTH BELOW FOR DAVIS SELECTED ADVISERS DOES
NOT REPRESENT THE PERFORMANCE OF DAVIS REAL ESTATE PORTFOLIO.
Davis Selected Advisers' historical performance data covers four years and
reflects the performance of the Davis Real Estate Composite. The composite
includes all accounts with investment objectives, policies and strategies
substantially similar to those used by Davis Selected Advisers in managing the
Davis Real Estate Portfolio. As of December 31, 1998, the composite included
six accounts with aggregate assets of $479.6 million. The composite returns are
reduced by the Fund's estimated annual operating expenses (1.05% per year). The
insurance company's charges on your contract will also reduce actual
performance.
The private accounts are not subject to certain investment limitations
diversification requirements and other restrictions imposed by the 1940 Act and
the Internal Revenue Code, which if applicable may have adversely affected the
performance results.
The chart below compares the Davis Real Estate Composite, an annualized
asset-weighted performance results net of advisory fees and estimated expenses,
against the S&P 500(R) Index. Davis Real Estate Composite performance is
computed using an internal time-weighted rate of return for each account
(including every private account and every mutual fund in the composite),
weighted for the relative size of each account using beginning of period
values. This return is reduced by the Fund's estimated annual operating
expenses listed in the expense table. This calculation, used to measure the
performance of a composite, is different from the standardized SEC method used
to measure the performance of a single mutual fund. The S&P 500(R) Index is a
widely recognized unmanaged index of stock performance.
DAVIS REAL ESTATE COMPOSITE RETURNS VS. S&P 500 INDEX
(For the periods ending December 31, 1998)
PAST ONE YEAR PAST 3 YEARS SINCE JANUARY 1,
1995
DAVIS REAL ESTATE
COMPOSITE (15.55)% 13.44% 14.64%
S&P 500 INDEX 28.58% 28.13% 30.43%
Davis Real Estate Portfolio was recently organized and has a performance record
of less than a year. The preceding performance results should not be considered
a prediction of the future performance of Davis Real Estate Portfolio. THE
FUND'S PERFORMANCE MAY BE EITHER HIGHER OR LOWER THAN THE DAVIS REAL ESTATE
COMPOSITE.
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HOW WE INVEST THE FUND'S ASSETS
DAVIS INVESTMENT PHILOSOPHY
Davis Real Estate Portfolio is managed using the Davis investment philosophy.
The Davis investment philosophy stresses a back-to-basics approach: we use
extensive research to buy growing companies at value prices and hold on to them
for the long-term. Over the years, Davis Selected Advisers has developed a list
of ten characteristics that we believe foster sustainable long-term growth,
minimize risk and enhance the potential for superior long-term returns. While
very few companies have all ten, we search for companies that demonstrate
several of the characteristics that are listed in the following chart.
WHAT WE LOOK FOR IN A COMPANY
1. FIRST-CLASS MANAGEMENT. We believe that great companies are created by
great managers. In visiting companies, we look for managers with a record
of doing what they say they are going to do.
2. MANAGEMENT OWNERSHIP. Just as we invest heavily in our own funds, we look
for companies where individual managers own a significant stake.
3. STRONG RETURNS ON CAPITAL. We want companies that invest their capital
wisely and reap superior returns on those investments.
4. LEAN EXPENSE STRUCTURE. Companies that can keep costs low are able to
compete better, especially in difficult times. A low cost structure
sharply reduces the risk of owning a company's shares.
5. DOMINANT OR GROWING MARKET SHARE IN A GROWING MARKET. A company that is
increasing its share of a growing market has the best of both worlds.
6. PROVEN RECORD AS AN ACQUIRER. When an industry or market downturn occurs,
it is a good idea to own companies that can take advantage of attractive
prices to expand operations through inexpensive acquisitions.
7. STRONG BALANCE SHEET. Strong finances give a company staying power to
weather difficult economic cycles.
8. COMPETITIVE PRODUCTS OR SERVICES. We invest in companies with products
that are not vulnerable to obsolescence. 9. Successful international
operations. A proven ability to expand internationally reduces the risk of
being tied too closely to the U.S. economic cycle. 10. Innovation. The
savvy use of technology in any business, from a food company to an
investment bank, can help reduce costs and increase sales.
OTHER SECURITIES AND INVESTMENT STRATEGIES
Davis Real Estate Portfolio invests primarily in the common stock of real estate
companies. There are other securities in which Davis Real Estate Portfolio may
invest, and investment strategies which the Fund may employ, but they are not
principal
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investment strategies. The Statement of Additional Information discusses these
securities and investment strategies.
The Fund uses short-term investments to maintain flexibility while we evaluate
long-term opportunities. We also may use short-term investments for temporary
defensive purposes; in the event our portfolio managers anticipate a decline in
the market values of common stock of large capitalization domestic companies,
we may reduce our risk by investing in short-term securities until market
conditions improve. Unlike common stocks, these investments will not appreciate
in value when the market advances. In such a circumstance, the short-term
investments will not contribute to the Fund's investment objective.
ADDITIONAL RISKS FOR THE FUND: YEAR 2000 TRANSITION ISSUES
Like all financial service providers, Davis Selected Advisers, sub-adviser,
distributor, and third parties providing investment advisory, administrative,
transfer agent, custodial and other services utilize systems that may be
affected by Year 2000 transition issues. Many computer software systems in use
today cannot distinguish the year 2000 from the year 1900 because of the way
dates are encoded and calculated.
Difficulties with Year 2000 transition issues could have a negative impact on
handling securities trades, payments of interest and dividends, pricing and
account services. Although at this time there can be no assurance that there
will be no adverse impact on the Funds, the Service Providers have advised the
Funds that they have been actively working on necessary changes to their
computer systems to prepare for the Year 2000, and expect that their systems,
and those of other parties they deal with, will be adapted in time for this
event. In addition, there can be no assurance that the companies in which the
Fund invests will not experience difficulties with Year 2000 transition issues
which may negatively affect the market value of those companies.
HOW WE MANAGE RISK
Risks are inherent in all investments. Investing in a mutual fund, even the most
conservative, involves risk, including the risk that you may receive little or
no return on your investment or even that you may lose part or all of your
investment. Davis Real Estate Portfolio has five strategies to minimize the risk
assumed when we invest.
FIVE STRATEGIES WE USE TO MINIMIZE RISK
1. WE PURCHASE HIGH-QUALITY GROWTH COMPANIES. Our focus on high-quality
growth companies reduces the likelihood that your investment will be tied
up in a failing company. A high-quality growth company is one that has
achieved a dominant or growing market share, and is led by first-class
management.
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2. WE USE A CONSERVATIVE VALUATION STRATEGY. Once we find companies that meet
our business criteria, we determine how much to pay for their shares. We
follow a price discipline that tells us how much we can reasonably pay for
a stock. While no system can prevent all losses, this conservative
approach helps us avoid the calamitous losses that occur in bear markets.
3. WE HAVE A LONG-TERM VISION. We get to know the managers of the companies
in which we invest and understand their goals. We view temporary setbacks
as buying opportunities: when other managers sell stocks in response to
bad news, we evaluate the issuer's long-term prospects.
4. We do not use market timing. We do not base our decisions to buy and sell
securities on whether we believe the stock market will rise or fall (known
as market timing). However, we can raise the level of cash in the Fund
when stock prices get too high and it becomes difficult to purchase
quality undervalued growth companies.
5. We may make temporary defensive investments. From time to time, Davis Real
Estate Portfolio may take temporary defensive positions in response to
adverse market, economic or political conditions. Temporary defensive
investments will not appreciate in value when the market advances. In such
a circumstance, these investments will not contribute to the Fund's
investment objective.
INFORMATION CONCERNING SHARES IN THE FUND
INVESTING IN DAVIS REAL ESTATE PORTFOLIO
The Fund is used solely as an investment vehicle for variable annuity or
variable life insurance contracts issued by certain life insurance companies.
You cannot purchase shares of the Fund directly. As an owner of a variable
annuity or variable life insurance contract that offers the Fund as an
investment option, however, you may allocate your contract values to a separate
account of the insurance company that invests in shares of the Fund.
Your variable annuity or variable life insurance contract is offered through
its own prospectus, which contains information about that contract, including
how to purchase the contract, how to allocate contract values to purchase
shares in the Fund, and how to redeem shares from the Fund.
The price at which a purchase or redemption is effected is based on the net
asset value next calculated after receipt of an order.
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HOW YOUR SHARES ARE VALUED
The share price of your investment changes depending on the total value of the
Fund's investments.
Each business day, we determine the value of Fund shares by adding up the total
value of investments plus other assets (such as cash), subtracting liabilities,
and dividing the result by the total number of shares outstanding. This share
figure is known as the net asset value.
Net asset value for Davis Real Estate Portfolio is determined each day the Fund
is open for business. A business day is any day the New York Stock Exchange is
open for trading. We calculate net asset value either at the close of the
Exchange or at 4 p.m. Eastern Time, whichever comes first.
HOW SECURITIES IN THE PORTFOLIO ARE VALUED
We use current market valuations to value the securities in Davis Real Estate
Portfolio:
o Securities that trade on an organized exchange are valued at the last
published sales price on the exchange. If no sales are recorded, the
securities are valued at the average of the closing bid and asked prices
on the exchange.
o Over-the-counter securities are valued at the average of closing bid and
asked prices.
o Debt securities purchased with a maturity of one year or less are usually
valued at amortized (gradually reduced) cost.
o Longer-term debt securities may be valued by an independent pricing
service.
o Securities with unavailable market quotations and other assets are valued
at "fair value"--which is determined or directed by the Board of
Directors.
The Fund may invest a portion of its assets in securities traded in foreign
markets which are closed when the U.S. market is open. The Fund's net asset
value may be determined using foreign securities prices which are several hours
old. Prices of the Fund's foreign securities may not reflect events occurring
after the foreign market was closed but before the Fund determined its net
asset value. Moreover, the value of the Fund's foreign securities may change on
days when shareholders will not be able to purchase or redeem the Fund's
shares.
The Fund may invest a portion of its assets in securities denominated in
foreign currencies. The value of securities denominated in foreign currencies
and traded in foreign markets will have their value converted into the U.S.
dollar equivalents at the prevailing market rate as computed by State Street
Bank and Trust. Fluctuation in the value of foreign currencies in relation to
the U.S. dollar may affect the net asset value of the Fund's shares even if
there has not been any change in the foreign currency price of the Fund's
investments.
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ADMINISTRATIVE SERVICE AND DISTRIBUTION FEES
Davis Selected Advisers or its affiliates will pay a fee to the insurance
companies offering the Fund as an investment vehicle for variable annuity or
variable life insurance contracts issued by the life insurance companies. The
fee is equal, on an annualized basis, to 20 basis points (0.20%) per annum of
the average aggregate amount invested by the insurance company in Davis Variable
Account Fund, Inc. Such payments will be made monthly, and only when the average
aggregate amount invested exceeds $1,000,000. The fee increases to 25 basis
points (0.25%) when the average aggregate amount invested exceeds $300,000,000.
Such payments are for administrative services and investor support services, and
do not constitute payment for investment advisory, distribution or other
services. Payment of such amounts by Davis Selected Advisers or its affiliates
does not increase the fees paid by the Fund or its shareholders.
The Fund has adopted a plan under Rule 12b-1 that, in the future, would allow
the Fund to pay distribution and other fees for the distribution of its shares
and for services provided to shareholders or shareholders of the insurance
separate accounts investing in the Fund. At the current time Davis Real Estate
Portfolio is not paying any distribution fees. In the future the Fund may pay up
to 0.25% of average annual net assets. Because these fees would be paid out of
the Fund's assets on an ongoing basis, over time these fees may increase the
cost of your investment and may cost you more than paying other types of sales
charges.
TAXES
Davis Real Estate Portfolio has elected to be taxed as a "regulated investment
company" under the provisions of Subchapter M of the Internal Revenue Code of
1986, as amended ("the Code"). If the Fund continues to qualify as a "regulated
investment company" and complies with the appropriate provisions of the Code, it
will pay no federal income taxes on the amounts it distributes.
Because the shareholders of the Fund are insurance companies (such as the one
that issues your contract), no discussion of the federal income tax consequences
to shareholders is included herein. For information about the federal income tax
consequences of purchasing the contracts, see the prospectus for your contract.
DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS
Net investment income and net realized capital gains are distributed to
shareholders at least annually.
Davis Real Estate Portfolio intends to distribute substantially all of its net
investment income, if any, in dividends to its shareholders. For dividend
purposes, net investment income consists of all dividends or interest earned by
the Fund's investments, minus the
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Fund's expenses (including the advisory fee).
All of the Fund's net realized capital gains, if any, are distributed
periodically, no less frequently than annually. All dividends and distributions
of the Fund are reinvested in additional shares of the Fund at net asset value.
VOTING RIGHTS
Since the shares of the Fund are owned by your insurance company and not by you
directly, you will not vote shares of the Fund. Your insurance company will vote
the shares that it holds as required by state and federal law. Your contract
prospectus contains more information on your rights regarding instructions to
your insurance company on how to vote Fund shares held in connection with your
contract.
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OTHER FUND DOCUMENTS
For more information about Davis Real Estate Portfolio, request a free copy of
the Statement of Additional Information or, when they become available, the
Annual and Semi-Annual Reports. The STATEMENT OF ADDITIONAL INFORMATION provides
more detailed information about the Fund and its management and operations. When
they become available, an ANNUAL REPORT will discuss the market conditions and
investment strategies that will have significantly affected Fund performance
during the last year, and a SEMI-ANNUAL REPORT will update information provided
in the Annual Report for the following six months.
Davis Real Estate Portfolio's Statement of Additional Information has been filed
with the Securities and Exchange Commission, is incorporated by reference, and
is legally a part of this prospectus. The Annual Report, which will be filed
when it is available, will legally become a part of this prospectus.
WHERE YOU CAN GET THESE DOCUMENTS:
o FROM YOUR INSURANCE COMPANY OR YOUR ACCOUNT REPRESENTATIVE. Your Insurance
Company or Account Representative can provide you with copies of these
documents.
o VIA THE INTERNET. Visit the SEC web site (www.sec.gov).
o FROM THE SEC. The SEC's Public Reference Room in Washington DC. For more
information on the operations of the Public Reference Room call
1-800-SEC-0330. Additional copies of this information can be obtained, for
a duplicating fee, by writing the Public Reference Section of the SEC,
Washington DC 20549-6009.
Investment Company Act File No. 811-xxxx
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STATEMENT OF ADDITIONAL INFORMATION
JULY 1, 1999
DAVIS VALUE PORTFOLIO,
DAVIS FINANCIAL PORTFOLIO,
AND
DAVIS REAL ESTATE PORTFOLIO
PART OF
DAVIS VARIABLE ACCOUNT FUND, INC.
THE FUNDS ARE SOLD EXCLUSIVELY TO INSURANCE COMPANY SEPARATE ACCOUNTS FOR
VARIABLE ANNUITY AND VARIABLE LIFE INSURANCE CONTRACTS.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND SHOULD BE READ
IN CONJUNCTION WITH THE PROSPECTUSES FOR EACH FUND DATED JULY 1, 1999. THIS
STATEMENT OF ADDITIONAL INFORMATION INCORPORATES THE PROSPECTUS BY REFERENCE.
THE PROSPECTUSES MAY BE OBTAINED FROM INSURANCE COMPANIES INVESTING IN THE FUND.
THE FUNDS HAVE NOT YET PUBLISHED AN ANNUAL REPORT. WHEN THEY ARE AVAILABLE, THE
ANNUAL REPORT AND SEMI-ANNUAL REPORT TO SHAREHOLDERS WILL BE SEPARATE DOCUMENTS
SUPPLIED WITH THIS STATEMENT OF ADDITIONAL INFORMATION. THE ANNUAL REPORT,
ACCOMPANYING NOTES AND REPORT OF INDEPENDENT AUDITORS APPEARING IN THE ANNUAL
REPORT WILL BE INCORPORATED BY REFERENCE INTO THE THEN-CURRENT STATEMENT OF
ADDITIONAL INFORMATION.
<PAGE>
TABLE OF CONTENTS
PAGE
Section I: Investment Strategies and Restrictions ...................3
Investment Objectives and Policies.......................3
Portfolio Securities.....................................3
Equity Securities
Financial Services Industry
Real Estate Securities and REITs
Foreign Investments
Bonds & Other Debt Securities
Other Investment Policies................................7
Portfolio Transactions .................................12
Investment Restrictions.................................13
Section II: Key Persons.............................................15
Organization of the Company.............................15
Directors and Officers..................................16
Directors' Compensation Schedule........................19
Certain Shareholders of the Funds.......................19
Investment Advisory Services............................19
Administrative and Service Fees.........................21
Distribution of Company Shares..........................21
Other Important Service Providers.......................22
Section III: General Information....................................22
Determining the Price of Shares.........................22
Year 2000 Transition Issues.............................23
Federal Income Taxes....................................24
Performance Data........................................25
Appendix A: Financial Information About the Fund.....................28
Independent Auditors' Report
Statement of Assets & Liabilities
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Section I: Investment Strategies and Restrictions
INVESTMENT OBJECTIVES AND POLICIES
DAVIS VALUE PORTFOLIO. The investment objective of Davis Value Portfolio
is growth of capital. It invests primarily in common stocks and other equity
securities. The Fund's principal risks are the risk of price fluctuations
reflecting both market evaluations of the businesses involved, and general
changes in the equity markets. The Fund may invest in foreign securities and
attempt to reduce currency fluctuation risks by engaging in related hedging
transactions. These investments involve special risk factors.
DAVIS FINANCIAL PORTFOLIO. The investment objective of Davis Financial
Portfolio is growth of capital. It invests primarily in common stocks and other
equity securities and will concentrate investments in companies principally
engaged in the financial services industry, including banking, insurance, and
other financial services described below. Davis Financial Portfolio generally
will invest a minimum of 65% of its total assets in investments in the
financial services industry. The Fund's principal risks are market risk and
company risk. Because Davis Financial Portfolio concentrates its investments in
the financial services industry, it may be affected by economic or regulatory
developments in, or related to, that market sector. The Fund may also invest in
foreign securities.
DAVIS REAL ESTATE PORTFOLIO. The investment objective of Davis Real Estate
Portfolio is total return through a combination of growth and income. It seeks
to achieve this objective by investing primarily in equity securities of
companies principally engaged in, or related to, the real estate industry or
which own significant real estate assets, or which primarily invest in real
estate financial instruments. Normally, at least 65% of its total assets will
be so invested. It does not invest directly in real estate. Davis Real Estate
Portfolio's principal risks are market risk, company risk, and the risk of
having a concentrated real estate portfolio. The Fund may invest in foreign
securities or in high yield, high-risk debt securities, which may involve
additional risk.
An investment in the Funds may not be appropriate for all investors, and
short-term investing is discouraged.
PORTFOLIO SECURITIES
The principal securities in which the Funds invest are described below.
EQUITY SECURITIES. Each of the Funds invests primarily in equity
securities. Equity securities represent an ownership position in a company.
These securities may include, without limitation, common stocks, preferred
stocks, and securities with equity conversion or purchase rights. The Funds
usually purchase common stock. The prices of equity securities fluctuate based
on changes in the financial condition of their issuers and on market and
economic conditions. The Funds' results will be related to the overall market
for these securities. There is no limit on the percentage of its assets which
the Funds may invest in equity securities.
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Davis Value Portfolio predominantly invests in the common stock of
companies with market capitalizations of at least $5 billion. The Fund may also
invest in issues with smaller capitalizations. The equity of smaller companies
is subject to additional risks. Smaller companies are usually less established
and less diversified than larger companies, and have fewer resources available
to take advantage of opportunities or overcome challenges.
Davis Financial Fund and Davis Real Estate Fund concentrate their
investments in specific industries. This concentration is expected to cause the
performance of these Funds to be closely tied to the performance of the
industries in which they concentrate.
Primary Risks. Events which have a negative impact on a business will
probably be reflected in a decline in their equity securities. Furthermore,
when the stock market declines, most equity securities, even those issued by
strong companies, are likely to decline in value.
FINANCIAL SERVICES INDUSTRY. During normal market conditions Davis
Financial Portfolio concentrates 65% or more of its total assets in obligations
of domestic and foreign companies in the financial services industry. Davis
Value Portfolio may also invest a significant portion of its assets in the
financial services industry if the Adviser believes that such investments will
contribute to the Fund's investment objectives. For purposes of defining
concentration, Davis Financial Portfolio will consider an issuer to be deemed
"principally engaged" in the area of concentration if operations in the
identified areas comprise more than 50% of the issuer's assets or revenues on a
consolidated basis. Companies in the financial services industry include
commercial and industrial banks, savings and loan associations and their
holding companies, consumer and industrial finance companies, diversified
financial services companies, investment banks, securities brokerage and
investment advisory companies, leasing companies, and insurance companies. As a
result of such concentration, the Fund's portfolio may be subject to greater
risks than a portfolio without such a concentration, especially with respect to
those risks associated with regulatory developments in, or related to, such
industries.
Primary Risks. By concentrating its investments in the financial services
industry, Davis Financial Fund is particularly vulnerable to events affecting
that industry.
Banking. Commercial banks (including "money center" regional and community
banks), savings and loan associations, and holding companies of the foregoing
are especially subject to adverse effects of volatile interest rates,
concentrations of loans in particular industries (such as real estate or
energy), and significant competition. The profitability of these businesses is
to a significant degree dependent upon the availability and cost of capital
funds. Economic conditions in the real estate market may have a particularly
strong effect on certain banks and savings associations. Commercial banks and
savings associations are subject to extensive federal and, in many instances,
state regulation. Neither such extensive regulation nor the federal insurance
of deposits ensures the solvency or profitability of companies in this
industry, and there is no assurance against losses in securities issued by such
companies.
Broadening bank powers, including the ability to engage in multi-state
operations while permitting diversification of operations, also could expose
banks to well-established competitors in new areas of operations. The
broadening of regional and national interstate powers and the
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aggressive expansion of larger publicly-held foreign banks may result in
increased competition and a decline in the number of publicly-traded regional
banks.
Insurance. Insurance companies are particularly subject to government
regulation and rate setting, potential anti-trust and tax law changes, and
industry-wide pricing and competition cycles. Property and casualty insurance
companies may also be affected by weather and other catastrophes. Life and
health insurance companies may be affected by mortality and morbidity rates,
including the effects of epidemics. Individual insurance companies may be
exposed to reserve inadequacies, problems in investment portfolios (for
example, due to real estate or "junk" bond holdings), and failures of
reinsurance carriers.
Other Financial Services Companies. Many of the investment considerations
discussed in connection with banks and insurance also apply to financial
services companies. These companies are all subject to extensive regulation,
rapid business changes, volatile performance dependent upon the availability
and cost of capital and prevailing interest rates, and significant competition.
General economic conditions significantly affect these companies. Credit and
other losses resulting from the financial difficulty of borrowers or other
third parties have a potentially adverse effect on companies in this industry.
Investment banking, securities brokerage companies and investment advisory
companies are particularly subject to government regulation and the risks
inherent in securities trading and underwriting activities.
Other Considerations. Regulations of the Securities and Exchange
Commission limit investments in the securities of companies that derive more
than 15% of their gross revenues from the securities or investment management
business. The Competitive Equality Banking Act of 1987 requires that with
respect to at least 75% of the total assets of any fund investing in bank
securities, no more than 5% of total assets may be invested in a single issuer.
The Fund intends to comply with these restrictions.
REAL ESTATE SECURITIES AND REITS. During normal market conditions Davis
Real Estate Portfolio invests at least 65% of its total assets in real estate
securities and REITs. Davis Value Portfolio and Davis Financial Portfolio may
also invest a portion of their assets in real estate securities and REITs if
the Adviser believes that such investments will contribute to the Funds'
investment objectives.
Real estate securities are issued by companies which have at least 50% of
the value of their assets, gross income, or net profits attributable to
ownership, financing, construction, management or sale of real estate, or to
products or services that are related to real estate or the real estate
industry. None of the Funds invests directly in real estate. Real estate
companies include real estate investment trusts ("REITs"), or other securitized
real estate investments, brokers, developers, lenders and companies with
substantial real estate holdings such as paper, lumber, hotel and entertainment
companies. REITs pool investors' funds for investment primarily in
income-producing real estate or real estate-related loans or interests. A REIT
is not taxed on income distributed to shareholders if it complies with various
requirements relating to its organization, ownership, assets and income, and
with the requirement that it distribute to its shareholders at least 95% of its
taxable income (other than net capital gains) for each taxable year. REITs can
generally be classified as Equity REITs, Mortgage REITs and Hybrid REITs.
Equity REITs invest the
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majority of their assets directly in real property and derive their income
primarily from rents. Equity REITs can also realize capital gains by selling
property that has appreciated in value. Mortgage REITs invest the majority of
their assets in real estate mortgages and derive their income primarily from
interest payments. Hybrid REITs combine the characteristics of both Equity
REITs and Mortgage REITs.
Primary Risks. Real estate securities and REITs are subject to risks
associated with the direct ownership of real estate. The Funds could also be
subject to such risks by reason of direct ownership as a result of a default on
a debt security it may own. These risks include declines in the value of real
estate, risks related to general and local economic conditions, overbuilding
and increased competition, increases in property taxes and operating expenses,
changes in zoning laws, casualty or condemnation losses, fluctuations in rental
income, changes in neighborhood values, the appeal of properties to tenants,
and increases in interest rates.
Equity REITs may be affected by changes in the value of the underlying
property owned by the trusts, while mortgage REITs may be affected by the
quality of credit extended. Equity and mortgage REITs are dependent upon
management skill, may not be diversified, and are subject to project financing
risks. Such trusts are also subject to heavy cash flow dependency, defaults by
borrowers, self-liquidation and the possibility of failing to qualify for
tax-free pass-through of income under the Internal Revenue Code, and failing to
maintain exemption from registration under the Investment Company Act of 1940
("1940 Act"). Changes in interest rates may also affect the value of the debt
securities in the Fund's portfolio. By investing in REITs indirectly through
the Funds, a shareholder will bear not only his or her proportionate share of
the expense of the Fund, but also, indirectly, similar expenses of the REITs,
including compensation of management. Some real estate securities may be rated
less than investment-grade by rating services. Such securities may be subject
to the risks of high yield, high-risk securities discussed below.
FOREIGN INVESTMENTS. Each of the Funds may invest in foreign securities.
Foreign securities are either issued by foreign companies or are principally
traded in foreign markets ("foreign securities"). Foreign securities include
equity securities, real estate securities, convertible securities, and bonds.
Investments in foreign securities may be made through the purchase of
individual securities on recognized exchanges and developed over-the-counter
markets, through American Depository Receipts ("ADRs") or Global Depository
Receipts ("GDRs") covering such securities, and through U.S.-registered
investment companies investing primarily in foreign securities. When the Funds
invest in foreign securities, their operating expenses are likely to be higher
than that of an investment company investing exclusively in U.S. securities,
since the custodial and certain other expenses are expected to be higher.
Primary Risks. Investments in foreign securities may involve a higher
degree of risk than investments in domestic issuers. Foreign securities are
often denominated in foreign currencies, which means that their value will be
affected by changes in exchange rates, as well as by other factors that affect
securities prices. There is generally less publicly available information about
foreign securities and securities markets, and there may be less government
regulation and supervision of foreign issuers and securities markets. Foreign
securities and markets may also be affected by political and economic
instabilities, and may be more volatile and less liquid than
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domestic securities and markets. Investment risks may include expropriation or
nationalization of assets, confiscatory taxation, exchange controls and
limitations on the use or transfer of assets, and significant withholding
taxes. Foreign economies may differ from the United States favorably or
unfavorably with respect to inflation rates, balance of payments, capital
reinvestment, gross national product expansion, and other relevant indicators.
The Funds may attempt to reduce exposure to market and currency fluctuations by
trading in currency futures contracts or options on futures contracts for
hedging purposes only.
BONDS AND OTHER DEBT SECURITIES. While they are not primary
investments, bonds and other debt securities may be purchased by each of the
Funds to increase current income or to diversify their investment portfolios.
The U.S. government, corporations and other issuers sell bonds and other debt
securities to borrow money. Issuers pay investors interest and generally must
repay the amount borrowed at maturity. Some debt securities, such as zero coupon
bonds, do not pay current interest, but are purchased at a discount from their
face values. The prices of debt securities fluctuate, depending on such factors
as interest rates, credit quality and maturity. While there is no limit on the
percentage of their assets which the Funds may invest in bonds and other debt
securities, the Funds invest primarily in equity securities under normal market
conditions.
Primary Risks. Bonds and other debt securities are generally considered
to be interest rate-sensitive. The market value of the Funds' investments will
change in response to changes in interest rates. During periods of falling
interest rates, the value of debt securities held by the Funds generally rises.
Conversely, during periods of rising interest rates, the value of such
securities generally declines. Changes by recognized rating services in their
ratings of debt securities and changes in the ability of an issuer to make
payments of interest and principal will also affect the value of these
investments.
OTHER INVESTMENT POLICIES
TEMPORARY DEFENSIVE INVESTMENTS. For defensive purposes or to accommodate
inflows of cash awaiting more permanent investment, the Funds may temporarily
and without limitation hold high-grade short-term money market instruments,
cash and cash equivalents, including repurchase agreements.
REPURCHASE AGREEMENTS. The Funds may enter into repurchase agreements, but
normally will not enter into repurchase agreements maturing in more than seven
days. A repurchase agreement, as referred to herein, involves a sale of
securities to a Fund, with the concurrent agreement of the seller (a bank or
securities dealer which the Adviser determines to be financially sound at the
time of the transaction) to repurchase the securities at the same price plus an
amount equal to accrued interest at an agreed-upon interest rate, within a
specified time, usually less than one week, but on occasion, at a later time.
The repurchase obligation of the seller is, in effect, secured by the
underlying securities. In the event of a bankruptcy or other default of a
seller of a repurchase agreement, the Funds could experience both delays in
liquidating the underlying securities and losses, including: (a) possible
decline in the value of the collateral during the period while the Funds seek
to enforce their rights thereto; (b) possible loss of all or a part of the
income during this period; and (c) expenses of enforcing their rights.
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The Funds will enter into repurchase agreements only when the seller
agrees that the value of the underlying securities, including accrued interest
(if any), will at all times be equal to or exceed the value of the repurchase
agreement. The Funds may enter into tri-party repurchase agreements in which a
third party custodian bank issues the cash upon purchase of the securities used
as collateral, and also holds the securities. The Funds will not enter into a
repurchase agreement maturing in more than seven days if it would cause more
than 15% of the value of their net assets to be invested in such transactions.
Repurchase agreements maturing in less than seven days are not deemed illiquid
securities for the purpose of the Funds' limitation on illiquid securities.
HEDGING FOREIGN CURRENCY RISKS. To attempt to reduce exposure to currency
fluctuations, the Funds may trade in forward foreign currency exchange
contracts (forward contracts), currency futures contracts and options thereon
and securities indexed to foreign securities. These techniques are not always
effective and their use may expose the Funds to other risks, such as liquidity
and counterparty risk. The Adviser exercises its professional judgement as to
whether the reduction in currency risk justifies the expense and exposure to
liquidity and counterparty risks. In past years, the Adviser has typically not
used these techniques to any significant extent.
These techniques may be used to lock in an exchange rate in connection
with transactions in securities denominated or traded in foreign currencies, to
hedge the currency risk in foreign securities held by the Funds, and to hedge a
currency risk involved in an anticipated purchase of foreign securities.
Cross-hedging may also be utilized, that is, entering into a hedge transaction
with respect to a foreign currency different from the one in which a trade is
to be made or in which a portfolio security is principally traded. There is no
limitation on the amount of assets that may be committed to currency hedging.
However, the Funds will not engage in a futures transaction if it would cause
the aggregate of initial margin deposits and premiums paid on outstanding
options on futures contracts to exceed 5% of the value of their total assets
(excluding in calculating such 5% any in-the-money amount of any option).
Currency hedging transactions may be utilized as a tool to reduce currency
fluctuation risks due to a current or anticipated position in foreign
securities. The successful use of currency hedging transactions usually depends
on the Adviser's ability to forecast interest rate and currency exchange rate
movements. Should interest or exchange rates move in an unexpected manner, the
anticipated benefits of futures contracts, options or forward contracts may not
be achieved, or losses may be realized, and thus the Funds could be in a worse
position than if such strategies had not been used. Unlike many exchange-traded
futures contracts, there are no daily price fluctuation limits with respect to
options on currencies and forward contracts, and adverse market movements could
therefore continue to an unlimited extent over a period of time. In addition,
the correlation between movements in the prices of such instruments and
movements in the price of the securities and currencies hedged or used for
cover will not be perfect and could produce unanticipated losses. Unanticipated
changes in currency prices may result in poorer overall performance for the
Funds than if they had not entered into such contracts. When taking a position
in an anticipatory hedge (when the Funds purchase a futures contract or other
similar instrument to gain market exposure in anticipation of purchasing the
underlying securities at a later date), the Funds are required to set aside
cash or high-grade liquid securities to fully secure the obligation.
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A forward contract is an obligation to purchase or sell a specific
currency for an agreed price at a future date which is individually negotiated
and privately traded by currency traders and their customers. Such a contract
gives the Funds a position in a negotiated, currently non-regulated market. A
Fund may enter into a forward contract, for example, when it enters into a
contract for the purchase or sale of a security denominated in a foreign
currency in order to "lock in" the U.S. dollar price of the security
("transaction hedge"). Additionally, when the Adviser believes that a foreign
currency may suffer a substantial decline against the U.S. dollar, the Funds
may enter into a forward sale contract to sell an amount of that foreign
currency approximating the value of some or all of the Funds' portfolio
securities denominated in such foreign currency. When the Adviser believes that
the U.S. dollar may suffer a substantial decline against a foreign currency,
the Funds may enter into a forward purchase contract to buy that foreign
currency for a fixed dollar amount in anticipation of purchasing foreign traded
securities ("position hedge"). In this situation the Funds may, in the
alternative, enter into a forward contract with respect to a different foreign
currency for a fixed U.S. dollar amount ("cross hedge"). This may be done, for
example, where the Adviser believes that the U.S. dollar value of the currency
to be sold pursuant to the forward contract will fall whenever there is a
decline in the U.S. dollar value of the currency in which portfolio securities
of the Fund are denominated.
The Funds may purchase and write put and call options on foreign
currencies for the purpose of protecting against declines in the U.S. dollar
value of foreign currency-denominated portfolio securities and against
increases in the U.S. dollar cost of such securities to be acquired. As in the
case of other kinds of options, however, the writing of an option on a foreign
currency constitutes only a partial hedge, up to the amount of the premium
received, and the Funds could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on a foreign currency may constitute an effective hedge
against fluctuations in exchange rates although, in the event of rate movements
adverse to a Fund's position, it may forfeit the entire amount of the premium
plus related transaction costs. Options on foreign currencies to be written or
purchased by the Funds are traded on U.S. and foreign exchanges or
over-the-counter. Currently, a significant portion or all of the value of an
over-the-counter option may be treated as an illiquid investment and subject to
the restriction on such investments as long as the SEC requires that
over-the-counter options be treated as illiquid. Generally, the Funds would
utilize options traded on exchanges where the options are standardized.
The Funds may enter into contracts for the purchase or sale for future
delivery of foreign currencies ("currency futures contracts"), and may purchase
and write put and call options to buy or sell currency futures contracts. A
"sale" of a currency futures contract means the acquisition of a contractual
obligation to deliver the foreign currencies called for by the contract at a
specified price on a specified date. A "purchase" of a currency futures
contract means the incurring of a contractual obligation to acquire the foreign
currencies called for by the contract at a specified price on a specified date.
Options on currency futures contracts to be purchased by the Funds will be
traded on U.S. or foreign exchanges or over-the-counter.
The Funds may also purchase securities (debt securities or deposits)
which have their coupon rate or value at maturity determined by reference to the
value of one or more foreign
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currencies. These strategies will be used for hedging purposes only. The Funds
will hold securities or other options or futures positions whose values are
expected to offset its obligations under the hedge strategies. No Fund will
enter into a currency hedging position that exposes the Fund to an obligation
to another party unless it owns either (i) an offsetting position in
securities, options or futures positions, or (ii) cash, receivables and
short-term debt securities with a value sufficient to cover its potential
obligations. The Funds will comply with requirements established by the SEC
with respect to coverage of options and futures strategies by mutual funds,
and, if so required, will set aside liquid securities in a segregated account
with their custodian bank in the amount prescribed. The Funds' custodian will
maintain the value of such segregated account equal to the prescribed amount by
adding or removing additional liquid securities to offset fluctuations in the
value of securities held in such account. Securities held in a segregated
account cannot be sold while the futures or option strategy is outstanding,
unless they are replaced with similar securities.
The Funds' ability to dispose of their positions in futures contracts,
options and forward contracts will depend on the availability of liquid markets
in such instruments. Markets in options and futures with respect to currencies
are still developing. It is impossible to predict the amount of trading
interest that may exist in various types of futures contracts, options and
forward contracts. If a secondary market does not exist with respect to an
option purchased or written by the Funds over-the-counter, it might not be
possible to effect a closing transaction in the option (i.e., dispose of the
option) with the result that (i) an option purchased by the Funds would have to
be exercised in order for the Funds to realize any profit, and (ii) the Funds
may not be able to sell currencies covering an option written by the Funds
until the option expires or it delivers the underlying futures currency upon
exercise. Therefore, no assurance can be given that the Funds will be able to
utilize these instruments effectively for the purposes set forth above. The
Funds' ability to engage in currency hedging transactions may be limited by tax
considerations.
The Funds' transactions in forward contracts, options on foreign
currencies and currency futures contracts will be subject to special tax rules
under the Internal Revenue Code that, among other things, may affect the
character of any gains or losses of the Funds as ordinary or capital, and the
timing and amount of any income or loss to the Funds. This, in turn, could
affect the character, timing and amount of distributions by the Funds to
shareholders. The Funds may be limited in its foreign currency transactions by
tax considerations.
RESTRICTED AND ILLIQUID SECURITIES. The Funds may invest in restricted
securities which are subject to contractual restrictions on resale. The Funds'
policy is to not purchase or hold illiquid securities (which may include
restricted securities) if more than 15% of the Funds' net assets would then be
illiquid.
The restricted securities which the Funds may purchase include securities
which have not been registered under the 1933 Act but are eligible for purchase
and sale pursuant to Rule 144A ("Rule 144A Securities"). This Rule permits
certain qualified institutional buyers, such as the Funds, to trade in
privately placed securities even though such securities are not registered
under the 1933 Act. The Adviser, under criteria established by the Funds' Board
of Directors, will consider whether Rule 144A Securities being purchased or
held by the Funds are illiquid and
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thus subject to the Funds' policy limiting investments in illiquid securities.
In making this determination, the Adviser or Sub-Adviser will consider the
frequency of trades and quotes, the number of dealers and potential purchasers,
dealer undertakings to make a market, and the nature of the security and the
market place trades (for example, the time needed to dispose of the security,
the method of soliciting offers and the mechanics of transfer). The liquidity
of Rule 144A Securities will also be monitored by the Adviser and, if as a
result of changed conditions it is determined that a Rule 144A Security is no
longer liquid, the Funds' holding of illiquid securities will be reviewed to
determine what, if any, action is required in light of the policy limiting
investments in such securities. Investing in Rule 144A Securities could have
the effect of increasing the amount of investments in illiquid securities if
qualified institutional buyers are unwilling to purchase such securities.
BORROWING. The Funds may borrow money for temporary or emergency purposes.
The Funds will not borrow money with the intent of leveraging their
investments. Borrowing activities are strictly limited as described in the
section entitled "Investment Restrictions".
LENDING PORTFOLIO SECURITIES. The Funds may lend securities to
broker-dealers or institutional investors for their use in connection with
short sales, arbitrages and other securities transactions. The Funds will not
lend portfolio securities unless the loan is secured by collateral. The Funds
will not lend securities if such a loan would cause more than 33 1/3% of the
total value of their assets (including collateral received) to then be subject
to such loans.
CALL OPTIONS. For income purposes, the Funds may write covered call
options on their portfolio securities and purchase call options in closing
transactions. The Funds may suffer an opportunity loss if the value of the
underlying security should rise above the strike price of the call option
before the option expires. The Funds do not currently intend to engage in any
such transaction if it would cause more than 10% of total assets to be subject
to options.
A covered call option gives the purchaser of the option the right to buy
the underlying security at the price specified in the option (the "exercise
price") at any time until the option expires, generally within three to nine
months, in return for the payment to the writer upon the issuance of the option
of an amount called the "premium." A commission may be charged in connection
with the writing of the option. The premium received for writing a call option
is determined by the option markets. The premium paid plus the exercise price
will always be greater than the market price of the underlying securities at
the time the option is written. By writing a covered call option, a Fund
foregoes, in exchange for the premium, the opportunity to profit from an
increase in the market value of the underlying security above the exercise
price, if the option is exercised. The call obligation is terminated upon
exercise of the call option, expiration of the call or when the Fund effects a
closing purchase transaction. A closing purchase transaction is one in which
the writer purchases another call option in the same underlying security
(identical as to exercise price, expiration date and number of shares). The
writer thereby terminates its obligation and substitutes the second writer as
the obligor to the original option purchaser. A closing purchase transaction
would normally involve payment of a brokerage commission. During the remaining
term of the option, if a Fund cannot enter into a closing purchase transaction,
that Fund would lose the opportunity for realizing any gain over
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and above the premium through sale of the underlying security, and if the
security is declining in price, that Fund would continue to experience such
decline.
PORTFOLIO TRANSACTIONS
The Adviser and Sub-Adviser are responsible for the placement of portfolio
transactions, subject to the supervision of the Board of Directors. The Funds
have adopted a policy of seeking to place portfolio transactions with brokers
or dealers who will execute transactions as efficiently as possible and at the
most favorable price. Subject to this policy, research services and placement
of orders by securities firms for Funds shares may be taken into account as a
factor in placement of portfolio transactions. In seeking their investment
objectives, the Funds may trade to some degree in securities for the short term
if the Adviser or Sub-Adviser believes that such trading is advisable.
In placing executions and paying brokerage commissions, the Adviser or
Sub-Adviser considers the financial responsibility and reputation of the broker
or dealer, the range and quality of the services made available to the Funds
and the professional services rendered, including execution, clearance
procedures, wire service quotations and ability to provide supplemental
performance, statistical and other research information for consideration,
analysis and evaluation by the Adviser's or Sub-Adviser's staff. In accordance
with this policy, brokerage transactions may not be executed solely on the
basis of the lowest commission rate available for a particular transaction.
Research services provided to the Adviser or Sub-Adviser by or through brokers
who effect portfolio transactions for the Funds may be used in servicing other
accounts managed by the Adviser, and likewise, research services provided by
brokers used for transactions of other accounts may be utilized by the Adviser
or Sub-Adviser in performing services for the Funds. Subject to the
requirements of best execution, the placement of orders by securities firms for
shares of the Funds may be taken into account as a factor in the placement of
portfolio transactions.
On occasions when the Adviser or Sub-Adviser deems the purchase or sale of
a security to be in the best interests of a Fund as well as other fiduciary
accounts, the Adviser or Sub-Adviser may aggregate the securities to be sold or
purchased for a Fund with those to be sold or purchased for other accounts in
order to obtain the best net price and most favorable execution. In such event,
the allocation will be made by the Adviser or Sub-Adviser in the manner
considered to be most equitable and consistent with its fiduciary obligations
to all such fiduciary accounts, including the Fund involved. In some instances,
this procedure could adversely affect a Fund, but the Adviser and Sub-Adviser
deem that any disadvantage in the procedure would be outweighed by the
increased selection available and the increased opportunity to engage in volume
transactions.
The Adviser and Sub-Adviser believe that research from brokers and dealers
is desirable, although not essential, in carrying out their functions, in that
such outside research supplements the efforts of the Adviser and Sub-Adviser by
corroborating data and enabling the Adviser and Sub-Adviser to consider the
views, information and analyses of other research staffs. Such views,
information and analyses include such matters as communicating with persons
having special expertise on certain companies, industries, areas of the economy
and/or securities prices, obtaining written materials on these or other areas
which might affect the economy and/or securities prices,
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obtaining quotations on securities prices and obtaining information on the
activities of other institutional investors. The Adviser and Sub-Adviser
research, at their own expense, each security included in, or being considered
for inclusion in, the Funds' portfolios. As any particular research obtained by
the Adviser or Sub-Adviser may be useful to the Funds, the Board of Directors
or its Committee on Brokerage, in considering the reasonableness of the
commissions paid by the Funds, will not attempt to allocate, or require the
Adviser or Sub-Adviser to allocate, the relative costs or benefits of research.
Because of the Funds' investment policies, portfolio turnover rate will
vary. At times it could be high, which could require the payment of larger
amounts in brokerage commissions. The Adviser and Sub-Adviser are authorized to
place portfolio transactions with Shelby Cullom Davis & Co., a member of the
New York Stock Exchange, which may be deemed to be an affiliate of the Adviser,
if the commissions are fair and reasonable and comparable to commissions
charged by non-affiliated qualified brokerage firms for similar services. The
Funds anticipate that, during normal market conditions, their annual portfolio
turnover rate will be less than 100%.
INVESTMENT RESTRICTIONS
The fundamental investment restrictions set forth below may not be changed
without the approval of the holders of the lesser of (i) 67% of the eligible
votes, if the holders of more than 50% of the eligible votes are represented,
or (ii) more than 50% of the eligible votes. All percentage limitations set
forth in these restrictions apply as of the time of an investment without
regard to later increases or decreases in the value of securities or total or
net assets.
FUNDAMENTAL INVESTMENT RESTRICTIONS ADOPTED BY EACH OF THE FUNDS
1. Senior Securities. A Fund may not issue senior securities nor sell short
more than 5% of its total assets. This limitation does not apply to
selling short against the box.
2. Borrowing and Leverage. A Fund may borrow money from any source for
temporary purposes in an amount not exceeding 5% of total assets. A Fund
may borrow money from banks as a temporary measure in amounts not
exceeding 33 1/3% of the amount of its total assets (reduced by the amount
of all liabilities and indebtedness other than such borrowing) when deemed
desirable or appropriate to effect redemptions. A Fund will not purchase
portfolio securities on margin and will not purchase additional portfolio
securities while borrowings exceed 5% of the total assets of the Fund.
3. Underwriting. A Fund will not engage in the underwriting of securities;
however, a Fund may technically be considered an "underwriter" if it sells
restricted securities.
4. Concentration Davis Value Portfolio does not concentrate its investments
in any one industry and may not buy the securities of companies in any one
industry if 25% or more of the value of the Fund's total assets would then
be invested in companies in that industry. (U.S. Government Securities are
not included in this limitation.)
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Davis Financial Portfolio concentrates its investments in the financial
services industry. Davis Real Estate Portfolio concentrates its
investments in the real estate industry.
5. Commodities, Futures Contracts, and Options. A Fund may not purchase or
sell commodities, futures contracts, forward contracts, options, and other
derivative investments except for the sole purpose of hedging the
portfolio against market, currency, interest rate, and other risks.
Hedging transactions include, but are not limited to, writing covered
calls, purchasing protective puts, selling futures to hedge existing
positions, and buying futures in anticipation of purchasing the underlying
securities. This prohibition does not limit the Fund's ability to purchase
warrants, or adjustable rate debt obligations. 6. Real Estate. A Fund may
not purchase real estate or real estate mortgages as such, but may
purchase the liquid securities of companies, including real estate
investment trusts, and holding real estate or interests (including
mortgage interests) therein.
7. Lending. A Fund may not lend money, except that it may buy debt securities
customarily acquired by institutional investors. These debt securities may
comprise all or a portion of an issue of "restricted" debt securities. A
Fund may also buy debt securities which have been sold to the public and
may enter into repurchase agreements. A Fund may lend its portfolio
securities subject to having 100% collateral in cash, U.S. Government
Securities, or other liquid securities. A Fund will not lend securities if
such a loan would cause more than 33 1/3% of the total value of its assets
(including collateral received) to then be subject to such loans.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS ADOPTED BY EACH OF THE FUNDS
In addition to the foregoing restrictions, each of the Funds is also
subject to certain other non-fundamental policies, which may be changed without
shareholder approval including the following:
1. Diversification. With respect to 75% of its total assets a Fund will not:
(a) make an investment that will cause more than 5% of the value of its
total assets to be invested in securities of any one issuer, except such
limitation shall not apply to obligations issued or guaranteed by the
United States ("U.S.") Government, its agencies or instrumentalities, or
(b) acquire more than 10% of the voting securities of any one issuer.
2. Illiquid Securities. A Fund may not purchase illiquid securities if more
than 15% of the value of the Fund's net assets would be invested in such
securities.
3. State-Imposed-Investment Limitations. In order to enable California
investors to allocate variable annuity or variable life insurance contract
values to one or more of the Funds, the Funds have committed to comply
with the following guidelines: (i) the borrowing limits for any Fund are
(a) 10% of net asset value when borrowing for any general purpose, and (b)
25% of net asset value when borrowing as a temporary measure to facilitate
redemptions (for purposes of this clause, the net asset value of a Fund is
the
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market value of all investments or assets owned less outstanding
liabilities of the Fund at the time that any new or additional borrowing
is undertaken); and (ii) if a Fund invests in foreign companies, the
foreign country diversification guidelines to be followed by the Fund are
as follows:
(a) The Fund will be invested in a minimum of five different foreign
countries at all times. However, this minimum is reduced to four when
foreign country investments comprise less than 80% of the Fund's net
asset value, to three when less than 60% of such value, to two when
less than 40% and to one when less than 20%.
(b) Except as set forth in items (c) and (d) below, the Fund will
have no more than 20% of its net asset value invested in securities
of issuers located in any one country.
(c) The Fund may have an additional 15% of its net asset value
invested in securities of issuers located in any one of the following
countries: Australia, Canada, France, Japan, the United Kingdom, or
Germany.
(d) The Fund's investments in United States issuers are not subject
to the foreign country diversification guidelines.
State insurance laws and regulations may impose additional limitations on
lending securities and the use of options, futures and other derivative
instruments.
Section II: Key Persons
ORGANIZATION OF THE COMPANY
THE COMPANY. Davis Variable Account Fund, Inc. ("Company") is an open-end,
diversified, management investment company incorporated in Maryland in 1999 and
registered under the 1940 Act. The Company is a series investment company which
may issue multiple series, each of which would represent an interest in its
separate portfolio. The Company currently offers three series, Davis Value
Portfolio, Davis Financial Portfolio and Davis Real Estate Portfolio (a "Fund"
or the "Funds").
SOLD EXCLUSIVELY TO INSURANCE COMPANIES, POTENTIAL CONFLICTS. The
Company's shares are not offered directly to the public, but are sold
exclusively to insurance companies ("Participating Insurance Companies") as a
pooled funding vehicle for variable annuity and variable life insurance
contracts issued by separate accounts of Participating Insurance Companies.
Differences in tax treatment or other considerations may cause the interests of
various Variable Contract owners participating in the Funds to conflict. The
Board will monitor the Funds for any material conflicts and determine what
action, if any, should be taken.
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FUND SHARES. While they have not done so at this time, the Funds may
issue shares in different classes. The Board of Directors may offer additional
classes in the future and may at any time discontinue the offering of any class
of shares. Each share, when issued and paid for in accordance with the terms of
the offering, is fully paid and non-assessable. Shares have no preemptive or
subscription rights and are freely transferable. Each of the Funds' shares
represents an interest in the assets of the Fund issuing the share and has
identical voting, dividend, liquidation and other rights, and the same terms and
conditions as any other shares except that (i) each dollar of net asset value
per share is entitled to one vote, (ii) the expenses related to a particular
class, such as those related to the distribution of each class and the transfer
agency expenses of each class are borne solely by each such class, and (iii)
each class of shares votes separately with respect to provisions of the Rule
12b-1 Distribution Plan, which pertains to a particular class, and other matters
for which separate class voting is appropriate under applicable law. Each
fractional share has the same rights, in proportion, as a full share. Shares do
not have cumulative voting rights; therefore, the holders of more than 50% of
the voting power of the Company can elect all of the Directors of the Company.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted under the provisions of the 1940 Act or applicable state law or
otherwise to the shareholders of the outstanding voting securities of an
investment company, such as the Company, will not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each series affected by such matter. Rule 18f-2 further
provides that a series shall be deemed to be affected by a matter unless it is
clear that the interests of each series in the matter are identical, or that
the matter does not affect any interest of such series. Rule 18f-2 exempts the
selection of independent accountants and the election of Board members from the
separate voting requirements of the Rule.
In accordance with Maryland law and the Company's By-laws, the Company
does not hold regular annual shareholder meetings. Shareholder meetings are
held when they are required under the 1940 Act, or when otherwise called for
special purposes. Special shareholder meetings may be called upon the written
request of shareholders of at least 25% of the voting power that could be cast
at the meeting.
DIRECTORS AND OFFICERS
The Company's Board of Directors is responsible for the management and
supervision of the Company and the Funds. The Board approves all significant
agreements between the Company, on behalf of the Funds, and those companies
that furnish services to the Funds. The names and addresses of the directors
and officers of the Company are set forth below, together with their principal
business affiliations and occupations for the last five years. As indicated
below, certain directors and officers of the Company hold similar positions
with the following Funds that are managed by the Adviser: Davis New York
Venture Fund, Inc., Davis Intermediate Investment Grade Bond Fund, Inc., Davis
Tax-Free High Income Fund, Inc., Davis Series, Inc. and Davis International
Series, Inc. (collectively the "Davis Funds"). As indicated below, certain
directors and officers of the Company may also hold similar positions with the
following Funds that are managed by the Adviser: Selected American Shares,
Inc., Selected Special Shares, Inc., and Selected Capital Preservation Trust
(collectively the "Selected Funds").
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WESLEY E. BASS, JR. (8/21/31), 710 Walden Road, Winnetka IL 60093. Director of
the Company and each of the Davis Funds except Davis International Series, Inc.;
President, Bass & Associates (a financial consulting firm); formerly First
Deputy City Treasurer, City of Chicago, and Executive Vice President, Chicago
Title and Trust Company.
JEREMY H. BIGGS (8/16/35),* Two World Trade Center, 94th Floor, New York NY
10048. Director and Chairman of the Company and each of the Davis Funds;
Director of the Van Eck Funds; Consultant to the Adviser; Vice Chairman, Head of
Equity Research Department; Chairman of the U.S. Investment Policy Committee,
and Member of the International Investment Committee of Fiduciary Trust Company
International.
MARC P. BLUM (9/9/42), 233 East Redwood Street, Baltimore MD 21202. Director of
the Company and each of the Davis Funds except Davis International Series, Inc.;
Chief Executive Officer, World Total Return Fund, LLLP; Of Counsel to Gordon,
Feinblatt, Rothman, Hoffberger and Hollander, LLC (attorneys); Director,
Mid-Atlantic Realty Trust.
JERRY D. GEIST (5/23/34), 931 San Pedro Drive S.E., Albuquerque NM 87108.
Director of the Company and each of the Davis Funds except Davis International
Series, Inc.; Chairman, Santa Fe Center Enterprises; President and Chief
Executive Officer, Howard Energy International Utilities; Director, CH2M-Hill,
Inc.; Member, Investment Committee for Microgeneration Technology Fund, UTECH
Funds; Retired Chairman and President, Public Service Company of New Mexico.
D. JAMES GUZY (3/7/36), 508 Tasman Drive, Sunnyvale CA 94089. Director of the
Company and each of the Davis Funds except Davis International Series, Inc.;
Chairman, PLX Technology, Inc. (a manufacturer of semi-conductor circuits);
Director, Intel Corp. (a manufacturer of semi-conductor circuits), Cirrus Logic
Corp. (a manufacturer of semi-conductor circuits) and Alliance Technology Fund
(a mutual fund).
G. BERNARD HAMILTON (3/18/37), Avanti Partners, P.O. Box 1119, Richmond VA
23218. Director of the Company and each of the Davis Funds; Managing General
Partner, Avanti Partners, L.P.
LEROY E. HOFFBERGER (6/8/25), The Exchange - Suite 215, 1112 Kenilworth Drive,
Towson MD 21204. Director of the Company and each of the Davis Funds except
Davis International Series, Inc.; Of Counsel to Gordon, Feinblatt, Rothman,
Hoffberger and Hollander, LLC (attorneys); Chairman, Mid-Atlantic Realty Trust;
Director, Chairman and President, CPC, Inc. (a real estate company); Chairman,
Merchant Terminal Corporation; formerly Director of Equitable Bancorporation,
Equitable Bank and Maryland National Bank; and formerly Chairman and President,
O-W Fund, Inc. (a private investment fund).
LAURENCE W. LEVINE (4/9/31), Walsh & Levine 40 Wall Street, 21st Floor, New York
NY 10005. Director of the Company and each of the Davis Funds except Davis
International Series, Inc.; Partner, Bigham, Englar, Jones and Houston
(attorneys); United States Counsel to Aerolineas Argentina; Director, various
private companies.
CHRISTIAN R. SONNE (5/6/30), P.O. Box 777, Tuxedo Park NY 10987. Director of the
Company and each of the Davis Funds except Davis International Series, Inc.;
General Partner of Tuxedo Park Associates (a land holding and development firm);
President and Chief Executive Officer of Mulford Securities Corporation (a
private investment fund) until 1990; formerly Vice President of Goldman Sachs &
Company (investment banker).
MARSHA WILLIAMS (3/28/51), 725 Landwehr Road, Northbrook IL 60062. Director of
the Company and each of the Davis Funds (except Davis International Series,
Inc.) and the Selected Funds; Chief Administrative Officer of Crate & Barrel;
Director, Modine Manufacturing, Inc.; Director, Chicago Bridge & Iron Company,
M.V.; former Treasurer, Amoco Corporation.
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SHELBY M.C. DAVIS (3/20/37),** 4135 North Steers Head Road, Jackson Hole WY
83001. President of the Company and each of the Davis Funds and the Selected
Funds; Director, Chairman and Chief Executive Officer, Venture Advisers, Inc.;
Director, Davis Selected Advisers-NY, Inc.; Director, Shelby Cullom Davis
Financial Consultants, Inc.
ANDREW A. DAVIS (6/25/63),* ** 124 East Marcy Street, Santa Fe NM 87501.
Director and Vice President of the Company and each of the Davis Funds (except
Davis International Series, Inc.) and the Selected Funds; Director and
President, Venture Advisers, Inc.; Director and Vice President, Davis Selected
Advisers-NY, Inc.; former Vice President of convertible security research,
PaineWebber, Inc.
CHRISTOPHER C. DAVIS (7/13/65),* ** 609 Fifth Avenue, New York NY 10017.
Director and Vice President of the Company and each of the Davis Funds and the
Selected Funds; Director, Vice Chairman, Venture Advisers, Inc.; Director,
Chairman, Chief Executive Officer, Davis Selected Advisers-NY, Inc.; Chairman
and Director, Shelby Cullom Davis Financial Consultants, Inc.; Employee of
Shelby Cullom Davis & Co., a registered broker/dealer; Director, Kings Bay Ltd.,
an offshore investment management company.
KENNETH C. EICH (8/14/53), 124 East Marcy Street, Santa Fe NM 87501. Vice
President of the Company and each of the Davis Funds and Selected Funds; Chief
Operating Officer, Venture Advisers, Inc.; Vice President, Davis Selected
Advisers-NY, Inc.; President, Davis Distributors, L.L.C.; former President and
Chief Executive Officer of First of Michigan Corporation; former Executive Vice
President and Chief Financial Officer of Oppenheimer Management Corporation.
CAROLYN H. SPOLIDORO (11/19/52), 124 East Marcy Street, Santa Fe NM 87501. Vice
President of the Company and each of the Davis Funds and Selected Funds; Vice
President, Venture Advisers, Inc.
SHARRA L. REED (9/25/66), 124 East Marcy Street, Santa Fe NM 87501. Vice
President, Treasurer and Assistant Secretary of the Company and each of the
Davis Funds and Selected Funds; Vice President of Venture Advisers, Inc.; former
Unit Manager with Investors Fiduciary Trust Company.
THOMAS D. TAYS (3/7/57), 124 East Marcy Street, Santa Fe NM 87501. Vice
President and Secretary of the Company and each of the Davis Funds and Selected
Funds; Vice President and Secretary, Venture Advisers, Inc., Davis Selected
Advisers-NY, Inc., and Davis Distributors, L.L.C.; former Vice President and
Special Counsel of U.S.
Global Investors, Inc.
SHELDON R. STEIN (11/29/28), 111 East Wacker Drive, Suite 2800, Chicago IL
60601. Assistant Secretary of the Company and each of the Davis Funds and
Selected Funds; Member, D'Ancona & Pflaum LLC, the Company's counsel.
ARTHUR DON (9/24/53), 111 East Wacker Drive, Suite 2800, Chicago IL 60601.
Assistant Secretary of the Company and each of the Davis Funds and Selected
Funds; Member, D'Ancona & Pflaum LLC, the Company's counsel.
* Jeremy H. Biggs, Andrew A. Davis and Christopher C. Davis are considered
to be "interested persons" of the Company, as defined in the Investment
Company Act.
** Shelby M.C. Davis is the father of Andrew A. Davis and Christopher C.
Davis.
The Company does not pay salaries to any of its officers. The Adviser
performs certain services on behalf of the Company and is reimbursed by the
Company for the costs of providing these services.
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DIRECTORS' COMPENSATION SCHEDULE
During the year ended December 31, 1998, the compensation paid to the
Directors who are not considered to be interested persons of the Company was as
follows:
Aggregate Company Total
Name Compensation* Complex Compensation**
---- ------------- ----------------------
Wesley E. Bass $0 $52,600
Marc P. Blum 0 49,000
Jerry D. Geist 0 49,500
D. James Guzy 0 49,000
G. Bernard Hamilton 0 50,250
LeRoy E. Hoffberger 0 49,000
Laurence W. Levine 0 49,000
Christian R. Sonne 0 49,000
Marsha Williams 0 25,500
* Davis Value Portfolio, Davis Financial Portfolio, and Davis Real Estate
Portfolio did not make their initial public offer prior to the date of
this SAI, and thus the Fund did not pay any compensation to directors.
However, each of the independent Directors also serve as Directors for
other mutual funds managed by the Adviser.
** Complex Compensation is the aggregate compensation paid, for service as a
Director, by all mutual funds with the same investment adviser. There are
nine registered investment companies in the complex.
CERTAIN SHAREHOLDERS OF THE FUNDS
As of the date of this SAI, officers of the Adviser owned 100% of the
Funds' outstanding shares.
INVESTMENT ADVISORY SERVICES
Davis Selected Advisers, L.P. (the "Adviser") whose principal office is at
124 East Marcy Street, Santa Fe, New Mexico 87501, serves as the investment
adviser of the Funds. Venture Advisers, Inc. is the Adviser's sole general
partner. Shelby M.C. Davis is Chief Investment Officer of the Adviser and the
controlling shareholder of the general partner. Subject to the direction and
supervision of the Board of Directors, the Adviser manages the investment and
business operations of the Funds. Davis Distributors, LLC ("the Distributor"),
a subsidiary of the Adviser, serves as the distributor or principal underwriter
of the Funds' shares. Davis Selected Advisers-NY, Inc., ("DSA-NY") a wholly
owned subsidiary of the Adviser, performs investment management, research and
other services for the Funds on behalf of the Adviser under a Sub-Advisory
Agreement with the Adviser. The Adviser also acts as investment adviser for
Davis New York Venture Fund, Davis Intermediate Investment Grade Bond Fund,
Inc., Davis Tax-Free High Income Fund, Inc., Davis Series, Inc., Davis
International Series, Inc., (collectively with the Funds, the "Davis Funds"),
Selected American Shares, Inc., Selected Special Shares, Inc. and Selected
Capital Preservation Trust (collectively the "Selected Funds").
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The Distributor also acts as the principal underwriter for the Davis Funds and
the Selected Funds.
ADVISORY AGREEMENT. Pursuant to the Advisory Agreement, each Fund pays
the Adviser a fee at the annual rate of 0.75% of average net assets. These fees
may be higher than those of most other mutual funds, but are not necessarily
higher than those paid by funds with similar objectives.
The Adviser has entered into a Sub-Advisory Agreement with its wholly
owned subsidiary, Davis Selected Advisers-NY, Inc. ("DSA-NY"), where DSA-NY
performs research and other services on behalf of the Adviser. Under the
Agreement, the Adviser pays all of DSA-NY' s direct and indirect costs of
operation. All of the fees paid to DSA-NY are paid by the Adviser and not the
Funds.
The Advisory Agreement also makes provisions for portfolio transactions
and brokerage policies of the Funds which are discussed above under "Portfolio
Transactions."
In accordance with the provisions of the 1940 Act, the Advisory Agreement
and Sub-Advisory Agreement will terminate automatically upon assignment, and
are subject to cancellation upon 60 days' written notice by the Company's Board
of Directors, the vote of the holders of a majority of the Funds' outstanding
shares, or the Adviser. The continuance of the Advisory Agreement and
Sub-Advisory Agreement must be approved at least annually by the Funds' Board
of Directors or by the vote of holders of a majority of the outstanding shares
of the Funds. In addition, any new agreement, or the continuation of the
existing agreement, must be approved by a majority of Directors who are not
parties to the agreements or interested persons of any such party.
Pursuant to the Advisory Agreement, the Adviser, subject to the general
supervision of the Funds' Board of Directors, provides management and
investment advice, and furnishes statistical, executive and clerical personnel,
bookkeeping, office space, and equipment necessary to carry out its investment
advisory functions and such corporate managerial duties as requested by the
Board of Directors of the Funds. The Funds bear all expenses other than those
specifically assumed by the Adviser under the Advisory Agreement, including
preparation of its tax returns, financial reports to regulatory authorities,
dividend determinations, transaction and accounting matters related to its
custodian bank, transfer agency, custodial and shareholder services, and
qualification of its shares under federal and state securities laws. Each Fund
reimburses the Adviser for providing certain services including accounting and
administrative services, qualifying shares for sale with state agencies, and
shareholder services.
CODE OF ETHICS. The Adviser has adopted a Code of Ethics which regulates
the personal securities transactions of the Adviser's investment personnel,
other employees, and affiliates with access to information regarding securities
transactions of the Funds. The Code of Ethics requires investment personnel to
disclose personal securities holdings upon commencement of employment and all
subsequent trading activity to the Adviser's Compliance Officer. Investment
personnel are prohibited from engaging in any securities transactions,
including the purchase of securities in a private offering, without the prior
consent of the Compliance Officer.
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Additionally, such personnel are prohibited from purchasing securities in an
initial public offering and are prohibited from trading in any securities (i)
for which the Funds have a pending buy or sell order, (ii) which the Funds are
considering buying or selling, or (iii) which the Funds purchased or sold
within seven calendar days.
ADMINISTRATIVE AND SERVICE FEES
Davis Selected Advisers or its affiliates will pay a fee to the insurance
companies offering the Funds as an investment vehicle for variable annuity or
variable life insurance contracts issued by the life insurance companies. The
fee is equal, on an annualized basis, to 20 basis points (0.20%) per annum of
the average aggregate amount invested by the insurance company in a Fund. Such
payments will be made monthly, and only when the average aggregate amount
invested exceeds $1,000,000. Such payments are for administrative services and
investor support services, and do not constitute payment for investment
advisory, distribution or other services. Payment of such amounts by Davis
Selected Advisers or its affiliates does not increase the fees paid by the Fund
or its shareholders.
DISTRIBUTION OF COMPANY SHARES
The Company has adopted a plan under Rule 12b-1 ("Distribution Plan")
which, in the future, would allow each Fund to pay distribution and other fees
for the distribution of its shares and for services provided to shareholders or
shareholders of the insurance separate accounts investing in the Fund. At the
current time the Funds are not paying any distribution fees. In the future the
Funds may pay up to 0.25% of average annual net assets. Because these fees
would be paid out of the Funds' assets on an ongoing basis, over time these
fees may increase the cost of your investment and may cost you more than paying
other types of sales charges.
Under the Distribution Plans each Fund may in the future reimburse the
Distributor for some of its distribution expenses. The Distribution Plan was
approved by the Funds' Board of Directors in accordance with Rule 12b-1 under
the 1940 Act. Rule 12b-1 regulates the manner in which a mutual fund may assume
costs of distributing and promoting the sale of its shares. Payments pursuant
to a Distribution Plan would be included in the operating expenses of the Fund.
The Distribution Plans continue annually so long as they are approved in the
manner provided by Rule 12b-1, or unless earlier terminated by vote of the
majority of the Independent Directors or a majority of a Fund's outstanding
shares. The Distributor is required to furnish quarterly written reports to the
Board of Directors detailing the amounts expended under the Distribution Plan.
The Distribution Plan may be amended, provided that all such amendments comply
with the applicable requirements then in effect under Rule 12b-1. Currently,
Rule 12b-1 provides that as long as the Distribution Plans are in effect, the
Company must commit the selection and nomination of candidates for new
Independent Directors to the sole discretion of the existing Independent
Directors.
Payments under the Distribution Plan are limited to an annual rate of
0.25% of a Fund's average daily net asset value. Such payments are made to
reimburse the Distributor for the fees it pays to its salespersons and other
firms for selling the Funds' shares, servicing its shareholders and maintaining
its shareholder accounts, producing sales literature, printing prospectuses for
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prospective investors, and other marketing purposes. In addition, to the extent
that any investment advisory fees paid by the Company may be deemed to be
indirectly financing any activity which is primarily intended to result in the
sale of Company shares within the meaning of Rule 12b-1, the Distribution Plan
authorizes the payment of such fees.
THE DISTRIBUTOR. Davis Distributors, LLC, ("the Distributor"), 124 East
Marcy Street, Santa Fe, New Mexico, 87501 is a wholly owned subsidiary of the
Adviser, and pursuant to a Distributing Agreement acts as principal underwriter
of the Funds' shares on a continuing basis. By the terms of the Distributing
Agreement, the Distributor pays for all expenses in connection with the
preparation, printing, and distribution of advertising and sales literature for
use in offering the Funds' shares to the public, including reports to
shareholders to the extent they are used as sales literature. The Distributor
also pays for the preparation and printing of prospectuses other than those
forwarded to existing shareholders. The continuance and assignment provisions
of the Distributing Agreement are the same as those of the Advisory Agreement.
OTHER IMPORTANT SERVICE PROVIDERS
CUSTODIAN. State Street Bank and Trust Company ("State Street" or
"Custodian"), One Heritage Drive, North Quincy, Massachusetts 02171, serves as
custodian of the Company's assets. The Custodian maintains all of the
instruments representing the Company's investments and all cash. The Custodian
delivers securities against payment upon sale and pays for securities against
delivery upon purchase. The Custodian also remits the Company assets in payment
of the Funds' expenses, pursuant to instructions of officers or resolutions of
the Board of Directors. The Custodian also provides certain Fund accounting and
transfer agent services.
AUDITORS. KPMG LLP ("KPMG"), 707 17th Street, Suite 2300, Denver,
Colorado 80202, serves as independent auditors for each of the Funds. The
auditors consult on financial accounting and reporting matters, and meet with
the Audit Committee of the Board of Directors. In addition, KPMG reviews federal
and state income tax returns and related forms.
COUNSEL. D'Ancona & Pflaum LLC, 111 East Wacker Drive, Suite 2800,
Chicago, Illinois 60601, serves as counsel to the Company and also serves as
counsel for those members of the Board of Directors who are not affiliated with
the Adviser.
Section III: General Information
DETERMINING THE PRICE OF SHARES
NET ASSET VALUE. The net asset value per share of each Fund's shares is
determined daily by dividing the total value of investments and other assets,
less any liabilities, by the total outstanding shares. The net asset value of
each Fund is determined daily as of the earlier of the close of the New York
Stock Exchange (the "Exchange") or 4:00 p.m., Eastern time, on each day that
the Exchange is open for trading.
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The price per share for purchases or redemptions made directly through
State Street is generally the value next computed after State Street receives
the purchase order or redemption request.
The Company does not price its shares or accept orders for purchases or
redemptions on days when the New York Stock Exchange is closed. Such days
currently include New Year's Day, Martin Luther King, Jr. Day, President's Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
Certain brokers and certain designated intermediaries on their behalf may
accept purchase and redemption orders. The Distributor will be deemed to have
received such an order when the broker or the designee has accepted the order.
Orders are priced at the net asset value next computed after such acceptance.
Such order may be transmitted to the Fund or its agents several hours after the
time of the acceptance and pricing.
VALUATION OF PORTFOLIO SECURITIES. Portfolio securities are normally
valued using current market valuations. Securities traded on a national
securities exchange are valued at the last published sales price on the
exchange, or in the absence of recorded sales, at the average of closing bid and
asked prices on such exchange. Over-the-counter securities are valued at the
average of closing bid and asked prices. Fixed-income securities may be valued
on the basis of prices provided by a pricing service. Investments in short-term
securities (debt securities purchased with a maturity of one year or less) are
valued at amortized cost unless the Board of Directors determines that such cost
is not a fair value. Assets for which there are no quotations available will be
valued at a fair value as determined by or at the direction of the Board of
Directors.
To the extent that the Funds' securities are traded in markets that close
at different times, events affecting portfolio values that occur between the
time that their prices are determined and the time the Funds' shares are priced
will generally not be reflected in the Funds' share price. The value of
securities denominated in foreign currencies and traded in foreign markets will
have their value converted into the U.S. dollar equivalents at the prevailing
market rate as computed by State Street Bank & Trust Company. Fluctuation in
the value of foreign currencies in relation to the U.S. dollar may affect the
net asset value of the Funds' shares even if there has not been any change in
the foreign currency price of the Funds' investments.
YEAR 2000 TRANSITION ISSUES
Like all financial service providers, the Adviser, Sub-Adviser,
Distributor, and third parties providing investment advisory, administrative,
transfer agent, custodial and other services (jointly the "Service Providers")
utilize systems that may be affected by Year 2000 transition issues.
The services provided to the Funds and the shareholders by the Service
Providers depend on the smooth functioning of their computer systems and those
of other parties they deal with. Many computer software systems in use today
cannot distinguish the year 2000 from the year 1900 because of the way dates
are encoded and calculated.
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Difficulties with Year 2000 transition issues could have a negative impact
on handling securities trades, payments of interest and dividends, pricing and
account services. Although at this time there can be no assurance that there
will be no adverse impact on the Funds, the Service Providers have advised the
Funds that they have been actively working on necessary changes to their
computer systems to prepare for the Year 2000, and expect that their systems,
and those of other parties they deal with, will be adapted in time for this
event. In addition, there can be no assurance that the companies in which the
Funds invest will not experience difficulties with Year 2000 transition issues,
which may negatively affect the market value of those companies.
FEDERAL INCOME TAXES
Each Fund intends to continue to conduct its business and satisfy the
applicable diversification of assets, distribution and source of income
requirements to qualify as a regulated investment company under Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code"). Each Fund expects
to qualify as a regulated investment company in the fiscal year ended December
31, 1999. It is the policy of each Fund to distribute all investment company
taxable income and net capital gains. As a result of this policy and the Funds'
qualification as regulated investment companies, it is anticipated that none of
the Funds will pay federal income or excise taxes and that all of the Funds
will be accorded conduit or "pass through" treatment for federal income tax
purposes. Therefore, any taxes that a Fund would ordinarily owe are paid by its
shareholders on a pro-rata basis. If a Fund does not qualify as a regulated
investment company, it will be subject to corporate tax on its net investment
income and net capital gains at the corporate tax rates. If a Fund does not
distribute all of its net investment income or net capital gains, it will be
subject to tax on the amount that is not distributed.
If it invests in foreign securities, a Fund may be subject to the
withholding of foreign taxes on dividends or interest it receives on foreign
securities. Foreign taxes withheld will be treated as an expense of the Fund
unless the Fund meets the qualifications and makes the election to enable it to
pass these taxes through to shareholders for use by them as a foreign tax
credit or deduction. Tax conventions between certain countries and the United
States may reduce or eliminate such taxes.
Each Fund will be subject to a nondeductible 4% excise tax to the extent
it fails to distribute by the end of any calendar year substantially all of its
ordinary income for that year and its net capital gains for the one-year period
ending on October 31 of that year, plus certain other amounts.
Section 817(h) of the Code imposes certain diversification standards on
the underlying assets of segregated asset accounts that fund contracts such as
the variable annuity contracts and variable life insurance policies (that is,
the assets of the Funds), which are in addition to the diversification
requirements imposed on the Funds by the 1940 Act and Subchapter M. Failure to
satisfy those standards would result in imposition of Federal income tax on a
variable annuity contract or variable life insurance policy owner with respect
to the increase in the value of the variable annuity contract or variable life
insurance policy. Section 817(h)(2) provides that a segregated asset account
that funds contracts such as the variable annuity contracts and variable
24
<PAGE>
life insurance policies is treated as meeting the diversification standards if,
as of the close of each calendar quarter, the assets in the account meet the
diversification requirements for a regulated investment company and no more
than 55% of those assets consist of cash, cash items, U.S. Government
securities and securities of other regulated investment companies.
The Treasury Regulations amplify the diversification standards set forth
in Section 817(h) and provide an alternative to the provision described above.
Under the regulations, an investment portfolio will be deemed adequately
diversified if (i) no more than 55% of the value of the total assets of the
portfolio is represented by any one investment; (ii) no more than 70% of such
value is represented by any two investments; (iii) no more than 80% of such
value is represented by any three investments; and (iv) no more than 90% of
such value is represented by any four investments. For purposes of these
Regulations all securities of the same issuer are treated as a single
investment, but each United States government agency or instrumentality shall
be treated as a separate issuer.
Each Fund will be managed with the intention of complying with these
diversification requirements. It is possible that, in order to comply with
these requirements, less desirable investment decisions may be made which would
affect the investment performance of a Portfolio.
You should consult your contract prospectus and your own tax adviser
regarding specific questions about federal, state and local tax issues relating
to your contract.
PERFORMANCE DATA
THE FUNDS' TOTAL RETURNS DO NOT REFLECT FEES AND EXPENSES APPLICABLE TO
YOUR VARIABLE ANNUITY OR VARIABLE LIFE INSURANCE CONTRACT. IF THOSE FEES AND
EXPENSES WERE REFLECTED, THE RETURNS WOULD BE LOWER. Consult your contract
prospectus for the amounts of those contract fees and charges. To keep
shareholders and potential investors informed, the Funds may, from time to
time, advertise information regarding their performance. These performance
figures are based upon historical results and are not intended to indicate
future performance.
CUMULATIVE TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN
1 "Cumulative Total Return" is a measure of a fund's performance
encompassing all elements of return. Total return reflects the change in
share price over a given period and assumes all distributions are taken in
additional fund shares. Total return is determined by assuming a
hypothetical investment at the beginning of the period, deducting a
maximum front-end or applicable contingent deferred sales charge, adding
in the reinvestment of all income dividends and capital gains, calculating
the ending value of the investment at the net asset value as of the end of
the specified time period and subtracting the amount of the original
investment, and by dividing the original investment. This calculated
amount is then expressed as a percentage by multiplying by 100. Periods of
less than one year are not annualized.
2 "Average Annual Total Return" represents the average annual compounded
rate of return for the periods presented. Periods of less than one year
are not annualized. Average annual total return measures both the net
investment income generated by, and the effect of any realized or
unrealized appreciation or depreciation of, the underlying investments in
the Fund's portfolio. Average annual total return is calculated separately
for each Fund in accordance with the standardized method prescribed by the
Securities and Exchange Commission by determining the average annual
compounded rates of return over
25
<PAGE>
the periods indicated, that would equate the initial amount invested to
the ending redeemable value, according to the following formula:
P(1+T)n = ERV
Where: P = hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value at the end
of the period of a hypothetical
$1,000 payment made at the beginning
of such period.
This calculation (i) assumes all dividends and distributions are reinvested at
net asset value on the appropriate reinvestment dates, and (ii) deducts (a) the
maximum front-end or applicable contingent deferred sales charge from the
hypothetical initial $1,000 investment, and (b) all recurring fees, such as
advisory fees, charged as expenses to all shareholder accounts.
30-DAY SEC YIELD
Davis Real Estate Portfolio may, from time to time, publish its 30-Day SEC
Yield.
"30-Day SEC Yield" is computed in accordance with a standardized method
prescribed by the rules of the Securities and Exchange Commission and is
calculated separately for each Fund. 30-Day SEC Yield is a measure of the net
investment income per share (as defined) earned over a specified 30-day period
expressed as a percentage of the maximum offering price of the Funds' shares at
the end of the period. Such yield figure was determined by dividing the net
investment income per share on the last day of the period, according to the
following formula:
30-Day SEC Yield = 2 [(a - b + 1) 6 - 1]
------
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period.
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends.
d = the maximum offering price per share on the last day of
the period.
Davis Real Estate Portfolio's 30-Day SEC Yield will fluctuate depending
upon prevailing interest rates, quality, maturities, types of instruments held,
and operating expenses. Thus, any yield quotation should not be considered
representative of future results. If a broker-dealer charges investors for
services related to the purchase or redemption of Fund shares, the yield will
effectively be reduced.
26
<PAGE>
OTHER FUND STATISTICS
In reports or other communications to shareholders and in advertising
material, the performance of the Funds may be compared to recognized unmanaged
indices or averages of the performance of similar securities. Also, the
performance of the Funds may be compared to that of other funds of comparable
size and objectives as listed in the rankings prepared by Lipper Analytical
Services, Inc., Morningstar, Inc. or similar independent mutual fund rating
services, and the Funds may use evaluations published by nationally recognized
independent ranking services and publications. Any given performance comparison
should not be considered representative of the Funds' performance for any
future period.
In advertising and sales literature the Funds may publish various
statistics describing its investment portfolio, such as the Funds' average
Price to Book and Price to Earnings ratios, beta, alpha, R-squared, standard
deviation, etc.
27
<PAGE>
APPENDIX A
FINANCIAL INFORMATION
DAVIS VARIABLE ACCOUNT FUND, INC.
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDER AND BOARD OF DIRECTORS
DAVIS VARIABLE ACCOUNT FUND, INC. :
We have audited the accompanying statements of assets and liabilities of
the Davis Value Portfolio, Davis Financial Portfolio and Davis Real Estate
Portfolio, each a series of Davis Variable Account Fund, Inc., as of June 22,
1999. This financial statement is the responsibility of the Funds' management.
Our responsibility is to express an opinion on this financial statement based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the statements of assets and liabilities referred to above
presents fairly, in all material respects, the financial positions of Davis
Value Portfolio, Davis Financial Portfolio and Davis Real Estate Portfolio as
of June 22, 1999, in conformity with generally accepted accounting principles.
KPMG LLP
DENVER, COLORADO
JUNE 23, 1999
<PAGE>
DAVIS VARIABLE ACCOUNT FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
June 22, 1999
Davis Real
Davis Value Davis Financial Estate
Portfolio Portfolio Portfolio
--------- --------- ---------
ASSETS
Cash......................... $33,334 $ 33,333 $ 33,333
LIABILITIES....................... - - -
NET ASSETS
(500 million shares with par
value of $.001 authorized)....... 33,334 $ 33,333 $ 33,333
NET ASSET VALUE
Shares outstanding........... 3,334 3,333 3,333
Net asset value and redemption
price per share (net............ $10.00 $10.00 $10.00
See notes to financial statement
29
<PAGE>
DAVIS VARIABLE ACCOUNT FUND, INC.
NOTES TO STATEMENT OF ASSETS AND LIABILITIES
JUNE 22, 1999
NOTE 1
Davis Variable Account Fund, Inc. (the "Fund"), a diversified, open-end
management investment company, was formed on March 30, 1999, and has had no
operations through June 23, 1999 other than those relating to organizational
matters and the sale and issuance of 10,000 shares of common stock to Davis
Selected Advisers, L.P. (DSA). The Fund operates three series, Davis Value
Portfolio, Davis Financial Portfolio and Davis Real Estate Portfolio.
NOTE 2
On June 15, 1999 the Fund's Board approved an Investment Advisory
Agreement with DSA, a sub-advisory agreement with Davis Selected Advisers-NY,
Inc., and a Distributing Agreement with Davis Distributors, LLC as explained in
the Fund's Prospectus and Statement of Additional Information.
NOTE 3
DSA assumed all organizational costs which were estimated at $6,000.
NOTE 4
The Fund intends to comply in its initial fiscal year and thereafter with
provisions of the Internal Revenue Code applicable to regulated investment
companies and as such, will not be subject to federal income taxes on otherwise
taxable income (including net realized capital gains) distributed to
shareholders.
Davis Variable Account Fund, Inc.
Estimates for start-up costs for Davis Variable Account Fund, Inc. are as
follows:
Audit Costs $ 5,000 (1)
Legal Fees 1,000 (2)
-----
Total $ 6,000
(1) Estimate is based on start-up audit costs for similar funds.
(2) Estimate is based on start-up legal costs for similar funds.
30
<PAGE>
FORM N-1A
DAVIS VARIABLE ACCOUNT FUND, INC.
PRE-EFFECTIVE AMENDMENT NO. 1 UNDER THE SECURITIES ACT OF 1933
REGISTRATION STATEMENT No. 333-76407
AND
PRE-EFFECTIVE AMENDMENT NO. 1 UNDER THE INVESTMENT COMPANY ACT OF 1940
REGISTRATION NO. 811-9293
PART C
OTHER INFORMATION
Item 23. Exhibits:
(a) Articles of Incorporation. Articles of Incorporation.
Incorporated by reference to Exhibit (a) of Registrant's initial
registration statement, File No. 333-75407.
(b) By-laws. Incorporated by reference to Exhibit (b) of
Registrant's initial registration statement, File No. 333-75407.
(c) Instruments Defining Rights of Security Holders. Not applicable.
(d)(1) Investment Advisory Contracts. Incorporated by reference to
Exhibit (d)(1) of Registrant's initial registration statement,
File No. 333-75407.
(d)(2) Sub-Advisory Agreement with Davis Selected Advisers-NY, Inc.
Incorporated by reference to Exhibit (d)(2) of Registrant's
initial registration statement, File No. 333-75407.
(e) Underwriting Contracts. Distributor's Agreement. Incorporated by
reference to Exhibit (a) of Registrant's initial registration
statement, File No. 333-75407.
(f) Bonus or Profit Sharing Contracts. Not applicable.
(g)* Custodian Agreement. Included herein as Exhibit (g).
(h)(1)* Other Material Contracts. Transfer Agency and Service
Agreement. Included herein as Exhibit (h)(1).
1
<PAGE>
(h)(2) Form of Participation Agreement. Incorporated by reference to
Exhibit (h)(2) of Registrant's initial registration statement,
File No. 333-75407.
(i)* Legal Opinion. Opinion and Consent of Counsel, (D'Ancona &
Pflaum). Included herein as Exhibit (i)
(j)* Other Opinions. Consent of Independent Accountants, KPMG, LLP.
Included herein as Exhibit (j)
(k) Omitted Financial Statements. Not Applicable.
(l) Initial Capital Agreements. Not Applicable
(m)* Rule 12b-1 Plan. Included herein as Exhibit (m).
(n) Financial Data Schedule. Not applicable
(o) Rule 18f-3 Plan. Not applicable
(p)* Other Exhibits. Powers of Attorney of the Registrant, Officers
and Board of Directors appointing Sheldon Stein and Arthur Don
as attorneys-in-fact. Included herein as Exhibit (p).
* Filed Herein.
Item 24. Persons Controlled by or Under Common Control With Registrant
As of the date this registration statement was filed the Registrant's
adviser, Davis Selected Advisers, L.P. owned 100% of the Registrant's
outstanding shares.
Davis Distributors, LLC (the Fund's principal underwriter) and Davis
Selected Advisers-NY, Inc. (the Fund's sub-adviser) are also wholly owned
subsidiaries of Davis Selected Advisers, L.P.
Item 25. Indemnification
Registrant's Articles of Incorporation indemnifies its directors, officers
and employees to the full extent permitted by Section 2-418 of the Maryland
General Corporation Law, subject only to the provisions of the Investment
Company Act of 1940. The indemnification provisions of the Maryland General
Corporation Law (the "Law") permit, among other things, corporations to
indemnify directors and officers unless it is proved that the individual (1)
acted in bad faith or with active and deliberate dishonesty, (2) actually
received an improper personal benefit in money, property or services, or (3) in
the case of a criminal proceeding, had reasonable cause to believe that his act
or omission was unlawful. The Law was also amended to permit
3
<PAGE>
corporations to indemnify directors and officers for amounts paid in settlement
of stockholders' derivative suits.
In addition, the Registrant's directors and officers are covered under a
policy to indemnify them for loss (subject to certain deductibles) including
costs of defense incurred by reason of alleged errors or omissions, neglect or
breach of duty. The policy has a number of exclusions including alleged acts,
errors, or omissions which are finally adjudicated or established to be
deliberate, dishonest, malicious or fraudulent or to constitute willful
misfeasance, bad faith, gross negligence or reckless disregard of their duties
in respect to any registered investment company. This coverage is incidental to
a general policy carried by the Registrant's adviser.
In addition to the foregoing indemnification, Registrant's Articles of
Incorporation exculpate directors and officers with respect to monetary damages
except to the extent that an individual actually received an improper benefit in
money property or services or to the extent that a final adjudication finds that
the individual acted with active and deliberate dishonesty.
Item 26. Business and Other Connections of Investment Adviser
Davis Selected Advisers, L.P. ("DSA ") and subsidiary companies comprise a
financial services organization whose business consists primarily of providing
investment management services as the investment adviser and manager for
investment companies registered under the Investment Company Act of 1940,
unregistered off-shore investment companies, and as an investment adviser to
institutional and individual accounts. DSA also serves as sub-investment
adviser to other investment companies. Davis Distributors, L.L.C., a wholly
owned subsidiary of DSA, is a registered broker-dealer. Davis Selected Advisers
- - NY, Inc., another wholly owned subsidiary, provides investment management
services to various registered and unregistered investment companies, pension
plans, institutions and individuals.
Other business of a substantial nature that directors or officers of DSA
are or have been engaged in the last two years:
SHELBY M.C. DAVIS, 4135 North Steers Head Road, Jackson Hole, WY 83001.
Director, Chairman and Chief Executive Officer, Venture Advisers, Inc.;
Director, Davis Selected Advisers-NY, Inc.; Director, Shelby Cullom Davis
Financial Consultants, Inc.
CHRISTOPHER C. DAVIS, 609 Fifth Ave, New York, NY 10017. Vice Chairman, Venture
Advisers, Inc.; Director, Chairman, Chief Executive Officer, Davis Selected
Advisers-NY, Inc.; Chairman and Director, Shelby Cullom Davis Financial
Consultants, Inc.; employee of Shelby Cullom Davis & Co., a registered
broker/dealer; Director of Kings Bay, Ltd, an offshore investment management
company.
KENNETH C. EICH, 124 East Marcy Street, Santa Fe, NM 87501. Chief Operating
Officer, Venture Advisers, Inc.; Vice President, Davis Selected Advisers-NY,
Inc.; President, Davis Distributors, L.L.C. Former President and Chief
Executive Officer of First of Michigan Corporation. Former Executive Vice
President and Chief Financial Officer of Oppenheimer Management Corporation.
3
<PAGE>
GARY TYC, 124 East Marcy Street, Santa Fe NM 87501. Vice President, Chief
Financial Officer Treasurer, and Assistant Secretary of Venture Advisers, Inc.;
Vice President, Treasurer, & Assistant Secretary of Davis Selected Advisers -
NY, Inc.; Vice President, Treasurer, & Assistant Secretary of Davis
Distributors, L.L.C. Former Vice President of Oppenheimer Management
Corporation.
THOMAS D. TAYS, 124 East Marcy Street, Santa Fe NM 87501. Vice President and
Secretary, Venture Advisers, Inc., Davis Selected Advisers-NY, Inc., and Davis
Distributors, L.L.C. Former Vice President and Special Counsel of U.S. Global
Investors, Inc.
Item 27. Principal Underwriter
(a) Davis Distributors, LLC, a wholly owned subsidiary of the Adviser,
located at 124 East Marcy Street, Santa Fe, NM 87501, is the principal
underwriter for the Registrant and also acts as principal underwriter for
Davis New York Venture Fund, Inc., Davis Tax-Free High Income Fund, Inc.,
Davis Intermediate Investment Grade Bond Fund, Inc., Davis Series, Inc.,
Davis International Series, Inc., Selected American Shares, Inc., Selected
Special Shares, Inc. and Selected Capital Preservation Trust.
(b) Management of the Principal Underwriters:
NAME AND PRINCIPAL POSITIONS AND OFFICES WITH POSITIONS AND OFFICES
BUSINESS ADDRESS UNDERWRITER WITH REGISTRANT
- ---------------- ----------- ---------------
Kenneth C. Eich President Vice President
124 East Marcy Street
Santa Fe, NM 87501
Gary P. Tyc Vice President, Treasurer and None
124 East Marcy Street Assistant Secretary
Santa Fe, NM 87501
Thomas D. Tays Vice President and Secretary Vice President and
124 East Marcy Street Secretary
Santa Fe, NM 87501
(c) Not applicable.
Item 28. Location of Accounts and Records
Accounts and records are maintained at the offices of Davis Selected
Advisers, L.P., 124 East Marcy Street, Santa Fe, New Mexico 87501, and at the
offices of the Registrant's custodian, State Street Bank and Trust Company, One
Heritage Drive, North Quincy, Massachusetts 02107, and the Registrant's transfer
agent State Street Bank and Trust, c/o Service Agent, BFDS, Two Heritage Drive,
7th Floor, North Quincy, Massachusetts 02107.
4
<PAGE>
Item 29. Management Services
Not applicable
Item 30. Undertakings
Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of Registrant's latest annual report to shareholders upon
request and without charge.
5
<PAGE>
DAVIS VARIABLE ACCOUNT FUND, INC.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and/or the
Investment Company Act of 1940, the Registrant has caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Chicago and State of Illinois on the 25th day of
June, 1999.
DAVIS VARIABLE ACCOUNT FUND, INC.
*By: /s/ Sheldon Stein
----------------------
Sheldon Stein
Attorney-in-Fact
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated.
Signature Title Date
--------- ----- ----
Shelby M.C. Davis* President, Chief Executive Officer June 25, 1999
Shelby M.C. Davis
Sharra L. Reed* Principal Financial Officer
Sharra L. Reed and Treasurer June 25, 1999
*By: /s/ Sheldon Stein
----------------------
Sheldon Stein
Attorney-in-Fact
*Sheldon Stein signs this document on behalf of the Registrant and each of the
foregoing officers pursuant to the powers of attorney filed as Exhibit (p) to
Registrant's Pre-Effective Amendment number 1 to Registrant's Registration
Statement.
/s/ Sheldon Stein
-----------------
Sheldon Stein
Attorney-in-Fact
6
<PAGE>
DAVIS VARIABLE ACCOUNT FUND, INC.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed on June 25, 1999 by the following
persons in the capacities indicated.
Signature Title
--------- -----
Wesley E. Bass. Jr.* Director
- -------------------------
Wesley E. Bass, Jr.
Jeremy H. Biggs* Director
- -------------------------
Jeremy H. Biggs
Marc P. Blum* Director
- -------------------------
Marc P. Blum
Andrew A. Davis* Director
- -------------------------
Andrew A. Davis
Christopher C. Davis* Director
- -------------------------
Christopher C. Davis
Jerry D. Geist* Director
- -------------------------
Jerry D. Geist
D. James Guzy* Director
- -------------------------
D. James Guzy
G. Bernard Hamilton* Director
- -------------------------
G. Bernard Hamilton
LeRoy E. Hoffberger* Director
- -------------------------
LeRoy E. Hoffberger
Laurence W. Levine* Director
- -------------------------
Laurence W. Levine
Christian R. Sonne* Director
- -------------------------
Christian R. Sonne
Marsha Williams* Director
- -------------------------
Marsha Williams
7
<PAGE>
* Sheldon Stein signs this document on behalf of each of the foregoing
persons pursuant to the powers of attorney filed as Exhibit (p) to
Registrant's Pre-Effective Amendment No 1 to Registrant's Registration
Statement.
/s/ Sheldon Stein
-----------------
Sheldon Stein
Attorney-in-Fact
8
<PAGE>
EXHIBIT LIST
Exhibit (g) Custodian Agreement
Exhibit (h)(1) Transfer Agency and Service Agreement.
Exhibit (i) Opinion and Consent of Counsel, (D'Ancona & Pflaum).
Exhibit (j) Consent of Independent Accountants, KPMG, LLP.
Exhibit (m) Rule 12b-1 Plan.
Exhibit (p) Powers of Attorney.
9
<PAGE>
EXHIBIT 23(G)
CUSTODIAN AGREEMENT
This Agreement between Davis Variable Account Fund, Inc. a corporation
organized and existing under the laws of the State of Maryland (the "FUND"),
and State Street Bank and Trust Company, a Massachusetts trust company (the
"CUSTODIAN"),
WITNESSETH:
WHEREAS, the Fund is authorized to issue shares in separate series,
with each such series representing interests in a separate portfolio of
securities and other assets; and
WHEREAS, the Fund intends that this Agreement be applicable to three
(3) series, Davis Value Portfolio, Davis Real Estate Portfolio and Davis
Financial Portfolio (such series together with all other series subsequently
established by the Fund and made subject to this Agreement in accordance with
Section 18, be referred to herein as the "PORTFOLIO(S)");
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
SECTION 1. EMPLOYMENT OF CUSTODIAN AND PROPERTY TO BE HELD BY IT
The Fund hereby employs the Custodian as the custodian of the assets of
the Portfolios of the Fund, including securities which the Fund, on behalf of
the applicable Portfolio desires to be held in places within the United States
("DOMESTIC SECURITIES") and securities it desires to be held outside the United
States ("FOREIGN SECURITIES"). The Fund on behalf of the Portfolio(s) agrees to
deliver to the Custodian all securities and cash of the Portfolios, and all
payments of income, payments of principal or capital distributions received by
it with respect to all securities owned by the Portfolio(s) from time to time,
and the cash consideration received by it for such new or treasury shares of
beneficial interest of the Fund representing interests in the Portfolios
("Shares") as may be issued or sold from time to time. The Custodian shall not
be responsible for any property of a Portfolio held or received by the
Portfolio and not delivered to the Custodian.
Upon receipt of "PROPER INSTRUCTIONS" (as such term is defined in Section
6 hereof), the Custodian shall on behalf of the applicable Portfolio(s) from
time to time employ one or more sub-custodians located in the United States,
but only in accordance with an applicable vote by the Board of Directors of the
Fund (the "BOARD") on behalf of the applicable Portfolio(s), and provided that
the Custodian shall have no more or less responsibility or liability to the
Fund on account of any actions or omissions of any sub-custodian so employed
than any such
<PAGE>
sub-custodian has to the Custodian. The Custodian may employ as sub-custodian
for the Fund's foreign securities on behalf of the applicable Portfolio(s) the
foreign banking institutions and foreign securities depositories designated in
Schedules A and B hereto but only in accordance with the applicable provisions
of Sections 3 and 4.
SECTION 2. DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF THE FUND HELD BY
THE CUSTODIAN IN THE UNITED STATES
Section 2.1 Holding Securities. The Custodian shall hold and physically
segregate for the account of each Portfolio all non-cash property, to be held
by it in the United States including all domestic securities owned by such
Portfolio, other than (a) securities which are maintained pursuant to Section
2.8 in a clearing agency which acts as a securities depository or in a
book-entry system authorized by the U.S. Department of the Treasury (each, a
"U.S. SECURITIES SYSTEM") and (b) commercial paper of an issuer for which State
Street Bank and Trust Company acts as issuing and paying agent ("DIRECT PAPER")
which is deposited and/or maintained in the Direct Paper System of the
Custodian (the "DIRECT PAPER SYSTEM") pursuant to Section 2.9.
Section 2.2 Delivery of Securities. The Custodian shall release and
deliver domestic securities owned by a Portfolio held by the Custodian or in an
account of the Custodian in a U.S. Securities System ("U.S. SECURITIES SYSTEM
ACCOUNT") of the Custodian or in the Custodian's Direct Paper book entry system
account ("Direct Paper System Account") only upon receipt of Proper
Instructions on behalf of the applicable Portfolio, which may be continuing
instructions when deemed appropriate by the parties, and only in the following
cases:
1) Upon sale of such securities for the account of the Portfolio and
receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Portfolio;
3) In the case of a sale effected through a U.S. Securities System, in
accordance with the provisions of Section 2.8 hereof;
4) To the depository agent in connection with tender or other similar
offers for securities of the Portfolio;
5) To the issuer thereof or its agent when such securities are called,
redeemed, retired or otherwise become payable; provided that, in any
such case, the cash or other consideration is to be delivered to the
Custodian;
6) To the issuer thereof, or its agent, for transfer into the name of
the Portfolio or into the name of any nominee or nominees of the
Custodian or into the name or nominee name of any agent appointed
pursuant to Section 2.7 or into the name or
2
<PAGE>
nominee name of any sub-custodian appointed pursuant to Section 1; or
for exchange for a different number of bonds, certificates or other
evidence representing the same aggregate face amount or number of
units; provided that, in any such case, the new securities are to be
delivered to the Custodian;
7) Upon the sale of such securities for the account of the Portfolio, to
the broker or its clearing agent, against a receipt, for examination
in accordance with "street delivery" custom; provided that in any
such case, the Custodian shall have no responsibility or liability
for any loss arising from the delivery of such securities prior to
receiving payment for such securities except as may arise from the
Custodian's own negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of
the securities of the issuer of such securities, or pursuant to
provisions for conversion contained in such securities, or pursuant
to any deposit agreement; provided that, in any such case, the new
securities and cash, if any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the surrender
thereof in the exercise of such warrants, rights or similar
securities or the surrender of interim receipts or temporary
securities for definitive securities; provided that, in any such
case, the new securities and cash, if any, are to be delivered to the
Custodian;
10) For delivery in connection with any loans of securities made by the
Portfolio, but only against receipt of adequate collateral as agreed
upon from time to time by the Custodian and the Fund on behalf of the
Portfolio, which may be in the form of cash or obligations issued by
the United States government, its agencies or instrumentalities,
except that in connection with any loans for which collateral is to
be credited to the Custodian's account in the book-entry system
authorized by the U.S. Department of the Treasury, the Custodian will
not be held liable or responsible for the delivery of securities
owned by the Portfolio prior to the receipt of such collateral;
11) For delivery as security in connection with any borrowing by the Fund
on behalf of the Portfolio requiring a pledge of assets by the Fund
on behalf of the Portfolio, but only against receipt of amounts
borrowed;
12) For delivery in accordance with the provisions of any agreement among
the Fund on behalf of the Portfolio, the Custodian and a
broker-dealer registered under the Securities Exchange Act of 1934
(the "EXCHANGE ACT") and a member of The National Association of
Securities Dealers, Inc. ("NASD"), relating to compliance with the
rules of The Options Clearing Corporation and of any registered
national s
3
<PAGE>
securities exchange, or of any similar organization or organizations,
regarding escrow or other arrangements in connection with
transactions by the Portfolio of the Fund;
13) For delivery in accordance with the provisions of any agreement among
the Fund on behalf of the Portfolio, the Custodian, and a futures
commission merchant registered under the Commodity Exchange Act,
relating to compliance with the rules of the Commodity Futures
Trading Commission ("CFTC") and/or any contract market, or any
similar organization or organizations, regarding account deposits in
connection with transactions by the Portfolio of the Fund;
14) Upon receipt of instructions from the transfer agent for the Fund
(the "TRANSFER AGENT") for delivery to such Transfer Agent or to the
holders of Shares in connection with distributions in kind, as may be
described from time to time in the currently effective prospectus and
statement of additional information of the Fund related to the
Portfolio (the "PROSPECTUS"), in satisfaction of requests by holders
of Shares for repurchase or redemption; and
15) For any other proper purpose, but only upon receipt of Proper
Instructions from the Fund on behalf of the applicable Portfolio
specifying the securities of the Portfolio to be delivered, setting
forth the purpose for which such delivery is to be made, declaring
such purpose to be a proper corporate purpose, and naming the person
or persons to whom delivery of such securities shall be made.
SECTION 2.3 REGISTRATION OF SECURITIES. Domestic securities held by the
Custodian (other than bearer securities) shall be registered in the name of the
Portfolio or in the name of any nominee of the Fund on behalf of the Portfolio
or of any nominee of the Custodian which nominee shall be assigned exclusively
to the Portfolio, unless the Fund has authorized in writing the appointment of
a nominee to be used in common with other registered investment companies
having the same investment adviser as the Portfolio, or in the name or nominee
name of any agent appointed pursuant to Section 2.7 or in the name or nominee
name of any sub-custodian appointed pursuant to Section 1. All securities
accepted by the Custodian on behalf of the Portfolio under the terms of this
Agreement shall be in "street name" or other good delivery form. If, however,
the Fund directs the Custodian to maintain securities in "street name", the
Custodian shall utilize its best efforts only to timely collect income due the
Fund on such securities and to notify the Fund on a best efforts basis only of
relevant corporate actions including, without limitation, pendency of calls,
maturities, tender or exchange offers.
SECTION 2.4 BANK ACCOUNTS. The Custodian shall open and maintain a
separate bank account or accounts in the United States in the name of each
Portfolio of the Fund, subject only to draft or order by the Custodian acting
pursuant to the terms of this Agreement, and shall hold in such account or
accounts, subject to the provisions hereof, all cash received by it from or for
the account of the Portfolio, other than cash maintained by the Portfolio in a
bank account
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established and used in accordance with Rule 17f-3 under the Investment Company
Act of 1940, as amended (the "1940 ACT"). Funds held by the Custodian for a
Portfolio may be deposited by it to its credit as Custodian in the Banking
Department of the Custodian or in such other banks or trust companies as it may
in its discretion deem necessary or desirable; provided, however, that every
such bank or trust company shall be qualified to act as a custodian under the
1940 Act and that each such bank or trust company and the funds to be deposited
with each such bank or trust company shall on behalf of each applicable
Portfolio be approved by vote of a majority of the Board. Such funds shall be
deposited by the Custodian in its capacity as Custodian and shall be
withdrawable by the Custodian only in that capacity.
SECTION 2.5 COLLECTION OF INCOME. Subject to the provisions of Section
2.3, the Custodian shall collect on a timely basis all income and other
payments with respect to registered domestic securities held hereunder to which
each Portfolio shall be entitled either by law or pursuant to custom in the
securities business, and shall collect on a timely basis all income and other
payments with respect to bearer domestic securities if, on the date of payment
by the issuer, such securities are held by the Custodian or its agent thereof
and shall credit such income, as collected, to such Portfolio's custodian
account. Without limiting the generality of the foregoing, the Custodian shall
detach and present for payment all coupons and other income items requiring
presentation as and when they become due and shall collect interest when due on
securities held hereunder. Income due each Portfolio on securities loaned
pursuant to the provisions of Section 2.2 (10) shall be the responsibility of
the Fund. The Custodian will have no duty or responsibility in connection
therewith, other than to provide the Fund with such information or data as may
be necessary to assist the Fund in arranging for the timely delivery to the
Custodian of the income to which the Portfolio is properly entitled.
SECTION 2.6 PAYMENT OF FUND MONIES. Upon receipt of Proper Instructions on
behalf of the applicable Portfolio, which may be continuing instructions when
deemed appropriate by the parties, the Custodian shall pay out monies of a
Portfolio in the following cases only:
1) Upon the purchase of domestic securities, options, futures contracts
or options on futures contracts for the account of the Portfolio but
only (a) against the delivery of such securities or evidence of title
to such options, futures contracts or options on futures contracts to
the Custodian (or any bank, banking firm or trust company doing
business in the United States or abroad which is qualified under the
1940 Act to act as a custodian and has been designated by the
Custodian as its agent for this purpose) registered in the name of
the Portfolio or in the name of a nominee of the Custodian referred
to in Section 2.3 hereof or in proper form for transfer; (b) in the
case of a purchase effected through a U.S. Securities System, in
accordance with the conditions set forth in Section 2.8 hereof; (c)
in the case of a purchase involving the Direct Paper System, in
accordance with the conditions set forth in Section 2.9; (d) in the
case of repurchase agreements entered into between the Fund on behalf
of the Portfolio and the Custodian, or another bank, or a
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broker-dealer which is a member of NASD, (i) against delivery of the
securities either in certificate form or through an entry crediting
the Custodian's account at the Federal Reserve Bank with such
securities or (ii) against delivery of the receipt evidencing
purchase by the Portfolio of securities owned by the Custodian along
with written evidence of the agreement by the Custodian to repurchase
such securities from the Portfolio or (e) for transfer to a time
deposit account of the Fund in any bank, whether domestic or foreign;
such transfer may be effected prior to receipt of a confirmation from
a broker and/or the applicable bank pursuant to Proper Instructions
from the Fund as defined herein;
2) In connection with conversion, exchange or surrender of securities
owned by the Portfolio as set forth in Section 2.2 hereof;
3) For the redemption or repurchase of Shares issued as set forth in
Section 5 hereof;
4) For the payment of any expense or liability incurred by the
Portfolio, including but not limited to the following payments for
the account of the Portfolio: interest, taxes, management,
accounting, transfer agent and legal fees, and operating expenses of
the Fund whether or not such expenses are to be in whole or part
capitalized or treated as deferred expenses;
5) For the payment of any dividends on Shares declared pursuant to the
governing documents of the Fund;
6) For payment of the amount of dividends received in respect of
securities sold short;
7) For any other proper purpose, but only upon receipt of Proper
Instructions from the Fund on behalf of the Portfolio specifying the
amount of such payment, setting forth the purpose for which such
payment is to be made, declaring such purpose to be a proper
corporate purpose, and naming the person or persons to whom such
payment is to be made.
SECTION 2.7 APPOINTMENT OF AGENTS. The Custodian may at any time or
times in its discretion appoint (and may at any time remove) any other bank or
trust company which is itself qualified under the 1940 Act to act as a
custodian, as its agent to carry out such of the provisions of this Section 2 as
the Custodian may from time to time direct; provided, however, that the
appointment of any agent shall not relieve the Custodian of its responsibilities
or liabilities hereunder.
SECTION 2.8 DEPOSIT OF FUND ASSETS IN U.S. SECURITIES SYSTEMS. The
Custodian may deposit and/or maintain securities owned by a Portfolio in a U.S.
Securities System subject to the following provisions:
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1) The Custodian may keep securities of the Portfolio in a U.S.
Securities System Account, which account shall not include any assets
of the Custodian other than assets held as a fiduciary, custodian or
otherwise for customers;
2) The records of the Custodian with respect to securities of the
Portfolio which are maintained in a U.S. Securities System shall
identify by book-entry those securities belonging to the Portfolio;
3) The Custodian shall pay for securities purchased for the account of
the Portfolio upon (i) receipt of advice from the U.S. Securities
System that such securities have been transferred to the U.S.
Securities System Account, and (ii) the making of an entry on the
records of the Custodian to reflect such payment and transfer for the
account of the Portfolio. The Custodian shall transfer securities
sold for the account of the Portfolio upon (i) receipt of advice from
the U.S. Securities System that payment for such securities has been
transferred to the U.S. Securities System Account, and (ii) the
making of an entry on the records of the Custodian to reflect such
transfer and payment for the account of the Portfolio. Copies of all
advices from the U.S. Securities System of transfers of securities
for the account of the Portfolio shall identify the Portfolio, be
maintained for the Portfolio by the Custodian and be provided to the
Fund at its request. Upon request, the Custodian shall furnish the
Fund on behalf of the Portfolio confirmation of each transfer to or
from the account of the Portfolio in the form of a written advice or
notice and shall furnish to the Fund on behalf of the Portfolio
copies of daily transaction sheets reflecting each day's transactions
in the U.S. Securities System for the account of the Portfolio;
4) The Custodian shall provide the Fund with any report obtained by the
Custodian on the U.S. Securities System's accounting system, internal
accounting control and procedures for safeguarding securities
deposited in the U.S. Securities System;
5) Anything to the contrary in this Agreement notwithstanding, the
Custodian shall be liable to the Fund for the benefit of the
Portfolio for any loss or damage to the Portfolio resulting from use
of the U.S. Securities System by reason of any negligence,
misfeasance or misconduct of the Custodian or any of its agents or of
any of its or their employees or from failure of the Custodian or any
such agent to enforce effectively such rights as it may have against
the U.S. Securities System; at the election of the Fund, it shall be
entitled to be subrogated to the rights of the Custodian with respect
to any claim against the U.S. Securities System or any other person
which the Custodian may have as a consequence of any such loss or
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damage if and to the extent that the Portfolio has not been made
whole for any such loss or damage.
SECTION 2.9 FUND ASSETS HELD IN THE CUSTODIAN'S DIRECT PAPER SYSTEM. The
Custodian may deposit and/or maintain securities owned by a Portfolio in the
Direct Paper System of the Custodian subject to the following provisions:
1) No transaction relating to securities in the Direct Paper System will
be effected in the absence of Proper Instructions from the Fund on
behalf of the Portfolio;
2) The Custodian may keep securities of the Portfolio in the Direct
Paper System only if such securities are represented in the Direct
Paper System Account, which account shall not include any assets of
the Custodian other than assets held as a fiduciary, custodian or
otherwise for customers;
3) The records of the Custodian with respect to securities of the
Portfolio which are maintained in the Direct Paper System shall
identify by book-entry those securities belonging to the Portfolio;
4) The Custodian shall pay for securities purchased for the account of
the Portfolio upon the making of an entry on the records of the
Custodian to reflect such payment and transfer of securities to the
account of the Portfolio. The Custodian shall transfer securities
sold for the account of the Portfolio upon the making of an entry on
the records of the Custodian to reflect such transfer and receipt of
payment for the account of the Portfolio;
5) The Custodian shall furnish the Fund on behalf of the Portfolio
confirmation of each transfer to or from the account of the
Portfolio, in the form of a written advice or notice, of Direct Paper
on the next business day following such transfer and shall furnish to
the Fund on behalf of the Portfolio copies of daily transaction
sheets reflecting each day's transaction in the Direct Paper System
for the account of the Portfolio;
6) The Custodian shall provide the Fund on behalf of the Portfolio with
any report on its system of internal accounting control as the Fund
may reasonably request from time to time.
SECTION 2.10 SEGREGATED ACCOUNT. The Custodian shall upon receipt of
Proper Instructions on behalf of each applicable Portfolio establish and
maintain a segregated account or accounts for and on behalf of each such
Portfolio, into which account or accounts may be transferred cash and/or
securities, including securities maintained in an account by the Custodian
pursuant to Section 2.8 hereof, (i) in accordance with the provisions of any
agreement among the Fund on behalf of the Portfolio, the Custodian and a
broker-dealer registered under the Exchange
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Act and a member of the NASD (or any futures commission merchant registered
under the Commodity Exchange Act), relating to compliance with the rules of The
Options Clearing Corporation and of any registered national securities exchange
(or the CFTC or any registered contract market), or of any similar organization
or organizations, regarding escrow or other arrangements in connection with
transactions by the Portfolio, (ii) for purposes of segregating cash or
government securities in connection with options purchased, sold or written by
the Portfolio or commodity futures contracts or options thereon purchased or
sold by the Portfolio, (iii) for the purposes of compliance by the Portfolio
with the procedures required by Investment Company Act Release No. 10666, or
any subsequent release of the Securities and Exchange Commission ("SEC"), or
interpretative opinion of the staff of the SEC, relating to the maintenance of
segregated accounts by registered investment companies and (iv) for other
proper corporate purposes, but only, in the case of clause (iv), upon receipt
of Proper Instructions from the Fund on behalf of the applicable Portfolio,
setting forth the purpose or purposes of such segregated account and declaring
such purpose(s) to be a proper corporate purpose.
SECTION 2.11 OWNERSHIP CERTIFICATES FOR TAX PURPOSES. The Custodian shall
execute ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income or other payments with
respect to domestic securities of each Portfolio held by it and in connection
with transfers of securities.
SECTION 2.12 PROXIES. The Custodian shall, with respect to the domestic
securities held hereunder, cause to be promptly executed by the registered
holder of such securities, if the securities are registered otherwise than in
the name of the Portfolio or a nominee of the Portfolio, all proxies, without
indication of the manner in which such proxies are to be voted, and shall
promptly deliver to the Portfolio such proxies, all proxy soliciting materials
and all notices relating to such securities.
SECTION 2.13 COMMUNICATIONS RELATING TO PORTFOLIO SECURITIES. Subject to
the provisions of Section 2.3, the Custodian shall transmit promptly to the
Fund for each Portfolio all written information (including, without limitation,
pendency of calls and maturities of domestic securities and expirations of
rights in connection therewith and notices of exercise of call and put options
written by the Fund on behalf of the Portfolio and the maturity of futures
contracts purchased or sold by the Portfolio) received by the Custodian from
issuers of the securities being held for the Portfolio. With respect to tender
or exchange offers, the Custodian shall transmit promptly to the Portfolio all
written information received by the Custodian from issuers of the securities
whose tender or exchange is sought and from the party (or his agents) making
the tender or exchange offer. If the Portfolio desires to take action with
respect to any tender offer, exchange offer or any other similar transaction,
the Portfolio shall notify the Custodian at least three business days prior to
the date on which the Custodian is to take such action.
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SECTION 3. THE CUSTODIAN AS FOREIGN CUSTODY MANAGER
SECTION 3.1 DEFINITIONS. Capitalized terms in this Section 3 shall have
the following meanings:
1) "COUNTRY RISK" means all factors reasonably related to the systemic
risk of holding Foreign Assets in a particular country including, but not
limited to, such country's political environment; economic and financial
infrastructure (including financial institutions such as any Mandatory
Securities Depositories operating in the country); prevailing or
developing custody and settlement practices; and laws and regulations
applicable to the safekeeping and recovery of Foreign Assets held in
custody in that country.
2) "ELIGIBLE FOREIGN CUSTODIAN" has the meaning set forth in section
(a)(1) of Rule 17f-5, except that the term does not include Mandatory
Securities Depositories.
3) "FOREIGN ASSETS" means any of the Fund's investments (including foreign
currencies) for which the primary market is outside the United States and
such cash and cash equivalents as are reasonably necessary to effect the
Fund's transactions in such investments.
4) "FOREIGN CUSTODY MANAGER" has the meaning set forth in section (a)(2)
of Rule 17f-5.
5) "MANDATORY SECURITIES DEPOSITORY" means a foreign securities depository
or clearing agency that, either as a legal or practical matter, must be
used if the Fund determines to place Foreign Assets in a country outside
the United States (i) because required by law or regulation; (ii) because
securities cannot be withdrawn from such foreign securities depository or
clearing agency; or (iii) because maintaining or effecting trades in
securities outside the foreign securities depository or clearing agency is
not consistent with prevailing or developing custodial or market
practices.
SECTION 3.2 DELEGATION TO THE CUSTODIAN AS FOREIGN CUSTODY MANAGER. The
Fund, by resolution adopted by its Board, hereby delegates to the Custodian,
subject to Section (b) of Rule 17f-5, the responsibilities set forth in this
Section 3 with respect to Foreign Assets held outside the United States, and
the Custodian hereby accepts such delegation, as Foreign Custody Manager of the
Fund.
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SECTION 3.3 COUNTRIES COVERED. The Foreign Custody Manager shall be
responsible for performing the delegated responsibilities defined below only
with respect to the countries and custody arrangements for each such country
listed on Schedule A to this Contract, which may be amended from time to time
by the Foreign Custody Manager. The Foreign Custody Manager shall list on
Schedule A the Eligible Foreign Custodians selected by the Foreign Custody
Manager to maintain the Fund's assets. Mandatory Securities Depositories are
listed on Schedule B to this Contract, which Schedule B may be amended from
time to time by the Foreign Custody Manager. The Foreign Custody Manager will
provide amended versions of Schedules A and B in accordance with Section 3.7 of
this Section 3.
Upon the receipt by the Foreign Custody Manager of Proper Instructions to
open an account, or to place or maintain Foreign Assets, in a country listed on
Schedule A, and the fulfillment by the Fund of the applicable account opening
requirements for such country, the Foreign Custody Manager shall be deemed to
have been delegated by the Board responsibility as Foreign Custody Manager with
respect to that country and to have accepted such delegation. Following the
receipt of Proper Instructions directing the Foreign Custody Manager to close
the account of the Fund with the Eligible Foreign Custodian selected by the
Foreign Custody Manager in a designated country, the delegation by the Board to
the Custodian as Foreign Custody Manager for that country shall be deemed to
have been withdrawn and the Custodian shall immediately cease to be the Foreign
Custody Manager of the Fund with respect to that country.
The Foreign Custody Manager may withdraw its acceptance of delegated
responsibilities with respect to a designated country upon written notice to
the Fund. Thirty days (or such longer period as to which the parties agree in
writing) after receipt of any such notice by the Fund, the Custodian shall have
no further responsibility as Foreign Custody Manager to the Fund with respect
to the country as to which the Custodian's acceptance of delegation is
withdrawn.
SECTION 3.4 SCOPE OF DELEGATED RESPONSIBILITIES.
SECTION 3.4.1 SELECTION OF ELIGIBLE FOREIGN CUSTODIANS. Subject to the
provisions of this Section 3, the Foreign Custody Manager may place and
maintain the Foreign Assets in the care of the Eligible Foreign Custodian
selected by the Foreign Custody Manager in each country listed on Schedule A,
as amended from time to time.
In performing its delegated responsibilities as Foreign Custody Manager to
place or maintain Foreign Assets with an Eligible Foreign Custodian, the
Foreign Custody Manager shall determine that the Foreign Assets will be subject
to reasonable care, based on the standards applicable to custodians in the
country in which the Foreign Assets will be held by that Eligible Foreign
Custodian, after considering all factors relevant to the safekeeping of such
assets, including, without limitation:
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1) the Eligible Foreign Custodian's practices, procedures, and internal
controls, including, but not limited to, the physical protections
available for certificated securities (if applicable), its methods of
keeping custodial records, and its security and data protection
practices;
2) whether the Eligible Foreign Custodian has the financial strength to
provide reasonable care for Foreign Assets;
3) the Eligible Foreign Custodian's general reputation and standing and,
in the case of a foreign securities depository or clearing agency
which is not a Mandatory Securities Depository, the foreign
securities depository's or clearing agency's operating history and
the number of participants in the foreign securities depository or
clearing agency; and
4) whether the Fund will have jurisdiction over and be able to enforce
judgments against the Eligible Foreign Custodian, such as by virtue
of the existence of any offices of the Eligible Foreign Custodian in
the United States or the Eligible Foreign Custodian's consent to
service of process in the United States.
Section 3.4.2. Contracts With Eligible Foreign Custodians. The Foreign
Custody Manager shall determine that the contract (or the rules or established
practices or procedures in the case of an Eligible Foreign Custodian that is a
foreign securities depository or clearing agency) governing the foreign custody
arrangements with each Eligible Foreign Custodian selected by the Foreign
Custody Manager will provide reasonable care for the Foreign Assets held by
that Eligible Foreign Custodian based on the standards applicable to custodians
in the particular country. Each such contract shall include provisions that
provide:
1) for indemnification or insurance arrangements (or any combination of
the foregoing) such that the Fund will be adequately protected
against the risk of loss of the Foreign Assets held in accordance
with such contract;
2) that the Foreign Assets will not be subject to any right, security
interest, or lien or claim of any kind in favor of the Eligible
Foreign Custodian or its creditors except a claim of payment for
their safe custody or administration or, in the case of cash
deposits, liens or rights in favor of creditors of the Eligible
Foreign Custodian arising under bankruptcy, insolvency, or similar
laws;
3) that beneficial ownership of the Foreign Assets will be freely
transferable without the payment of money or value other than for
safe custody or administration;
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4) that adequate records will be maintained identifying the Foreign
Assets as belonging to the Fund or as being held by a third party for
the benefit of the Fund;
5) that the Fund's independent public accountants will be given access
to those records or confirmation of the contents of those records;
and
6) that the Fund will receive periodic reports with respect to the
safekeeping of the Foreign Assets, including, but not limited to,
notification of any transfer of the Foreign Assets to or from the
Fund's account or a third party account containing the Foreign Assets
held for the benefit of the Fund,
or, in lieu of any or all of the provisions set forth in (1) through (6) above,
such other provisions that the Foreign Custody Manager determines will provide,
in their entirety, the same or greater level of care and protection for the
Foreign Assets as the provisions set forth in (1) through (6) above in their
entirety.
SECTION 3.4.3 MONITORING. In each case in which the Foreign Custody
Manager maintains Foreign Assets with an Eligible Foreign Custodian selected by
the Foreign Custody Manager, the Foreign Custody Manager shall establish a
system to monitor (i) the appropriateness of maintaining the Foreign Assets with
such Eligible Foreign Custodian and (ii) the contract governing the custody
arrangements established by the Foreign Custody Manager with the Eligible
Foreign Custodian. In the event the Foreign Custody Manager determines that the
custody arrangements with an Eligible Foreign Custodian it has selected are no
longer appropriate, the Foreign Custody Manager shall notify the Board in
accordance with Section 3.7 hereunder.
SECTION 3.5 GUIDELINES FOR THE EXERCISE OF DELEGATED AUTHORITY. For
purposes of this Section 3, the Board shall be deemed to have considered and
determined to accept such Country Risk as is incurred by placing and maintaining
the Foreign Assets in each country for which the Custodian is serving as Foreign
Custody Manager of the Fund, and the Board shall be deemed to be monitoring on a
continuing basis such Country Risk to the extent that the Board considers
necessary or appropriate. The Fund and the Custodian each expressly acknowledge
that the Foreign Custody Manager shall not be delegated any responsibilities
under this Section 3 with respect to Mandatory Securities Depositories.
SECTION 3.6 STANDARD OF CARE AS FOREIGN CUSTODY MANAGER OF THE FUND. In
performing the responsibilities delegated to it, the Foreign Custody Manager
agrees to exercise reasonable care, prudence and diligence such as a person
having responsibility for the safekeeping of assets of management investment
companies registered under the 1940 Act, as amended, would exercise.
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SECTION 3.7 REPORTING REQUIREMENTS. The Foreign Custody Manager shall
report the withdrawal of the Foreign Assets from an Eligible Foreign Custodian
and the placement of such Foreign Assets with another Eligible Foreign
Custodian by providing to the Board amended Schedules A or B at the end of the
calendar quarter in which an amendment to either Schedule has occurred. The
Foreign Custody Manager shall make written reports notifying the Board of any
other material change in the foreign custody arrangements of the Fund described
in this Section 3 after the occurrence of the material change.
SECTION 3.8 REPRESENTATIONS WITH RESPECT TO RULE 17F-5. The Foreign
Custody Manager represents to the Fund that it is a U.S. Bank as defined in
section (a)(7) of Rule 17f-5.
The Fund represents to the Custodian that the Board has determined that it
is reasonable for the Board to rely on the Custodian to perform the
responsibilities delegated pursuant to this Contract to the Custodian as the
Foreign Custody Manager of the Fund.
SECTION 3.9 EFFECTIVE DATE AND TERMINATION OF THE CUSTODIAN AS FOREIGN
CUSTODY MANAGER. The Board's delegation to the Custodian as Foreign Custody
Manager of the Fund shall remain in effect until terminated at any time,
without penalty, by written notice from the terminating party to the
non-terminating party. Termination will become effective thirty days after
receipt by the non-terminating party of such notice. The provisions of Section
3.3 shall govern the delegation to and termination of the Custodian as Foreign
Custody Manager of the Fund with respect to designated countries.
SECTION 4. DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF THE FUND
HELD OUTSIDE THE UNITED STATES.
SECTION 4.1 DEFINITIONS. Capitalized terms in this Section 4 shall
have the following meanings:
1) "FOREIGN SECURITIES SYSTEM" means either a clearing agency or a
securities depository listed on Schedule A hereto or a Mandatory
Securities Depository listed on Schedule B hereto.
2) "FOREIGN SUB-CUSTODIAN" means a foreign banking institution
serving as an Eligible Foreign Custodian or a Permissible
Foreign Custodian.
3) "PERMISSIBLE FOREIGN CUSTODIAN" means any person with whom
property of the Fund may be placed and maintained outside of the
United States under (i) section 17(f) or 26(a) of the 1940 Act,
without regard to Rule 17f-5 or (ii) an order of the SEC.
4) "SECURITIES SYSTEM" means either a Foreign Securities System of
a U.S. Securities System.
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SECTION 4.2 HOLDING SECURITIES. The Custodian shall identify on its books
as belonging to the Fund the foreign securities held by each Foreign
Sub-Custodian or Foreign Securities System. The Custodian may hold foreign
securities for all of its customers, including the Fund, with any Foreign
Sub-Custodian in an account that is identified as belonging to the Custodian
for the benefit of its customers, provided however, that (i) the records of the
Custodian with respect to foreign securities of the Fund which are maintained
in such account shall identify those securities as belonging to the Fund and
(ii) the Custodian shall require that securities so held by the Foreign
Sub-Custodian be held separately from any assets of such Foreign Sub-Custodian
or of other customers of such Foreign Sub-Custodian.
SECTION 4.3 FOREIGN SECURITIES SYSTEMS. Foreign securities shall be
maintained in a Foreign Securities System in a designated country only through
arrangements implemented by the Foreign Sub-Custodian in such country pursuant
to the terms of this Agreement.
SECTION 4.4 HOLDING OF FOREIGN ASSETS WITH PERMISSIBLE FOREIGN CUSTODIANS.
Subject to the requirements of Sections 17(f) and 26(a) of the 1940 Act (and
any other applicable law or order), the Custodian may place and maintain
Foreign Assets in the care of any Permissible Foreign Custodian. Section 3
(other than the definitions in Section 3.1) of this Contract shall not apply to
placement of Foreign Assets by the Custodian with a Permissible Custodian.
SECTION 4.5 TRANSACTIONS IN FOREIGN CUSTODY ACCOUNT.
SECTION 4.5.1 DELIVERY OF FOREIGN SECURITIES. The Custodian or a Foreign
Sub-Custodian shall release and deliver foreign securities of the Fund held by
such Foreign Sub-Custodian, or in a Foreign Securities System account, only
upon receipt of Proper Instructions, which may be continuing instructions when
deemed appropriate by the parties, and only in the following cases:
1) upon the sale of such foreign securities for the Fund in accordance
with reasonable market practice in the country where such foreign
securities are held or traded, including, without limitation: (A)
delivery against expectation of receiving later payment; or (B) in
the case of a sale effected through a Foreign Securities System, in
accordance with the rules governing the operation of the Foreign
Securities System;
2) in connection with any repurchase agreement related to foreign
securities;
3) to the depository agent in connection with tender or other similar
offers for foreign securities of the Fund;
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4) to the issuer thereof or its agent when such foreign securities are
called, redeemed, retired or otherwise become payable;
5) to the issuer thereof, or its agent, for transfer into the name of
the Custodian (or the name of the respective Foreign Sub-Custodian or
of any nominee of the Custodian or such Foreign Sub-Custodian) or for
exchange for a different number of bonds, certificates or other
evidence representing the same aggregate face amount or number of
units;
6) to brokers, clearing banks or other clearing agents for examination
or trade execution in accordance with market custom; provided that in
any such case the Foreign Sub-Custodian shall have no responsibility
or liability for any loss arising from the delivery of such
securities prior to receiving payment for such securities except as
may arise from the Foreign Sub-Custodian's own negligence or willful
misconduct;
7) for exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of
the securities of the issuer of such securities, or pursuant to
provisions for conversion contained in such securities, or pursuant
to any deposit agreement;
8) in the case of warrants, rights or similar foreign securities, the
surrender thereof in the exercise of such warrants, rights or similar
securities or the surrender of interim receipts or temporary
securities for definitive securities;
9) for delivery as security in connection with any borrowings by the
Fund requiring a pledge of assets by the Fund;
10) in connection with trading in options and futures contracts,
including delivery as original margin and variation margin;
11) in connection with the lending of foreign securities; and
12) for any other proper corporate purpose, but only upon receipt of
Proper Instructions specifying the foreign securities to be
delivered, setting forth the purpose for which such delivery is to be
made, declaring such purpose to be a proper corporate purpose, and
naming the person or persons to whom delivery of such securities
shall be made.
SECTION 4.5.2 PAYMENT OF FUND MONIES. Upon receipt of Proper Instructions,
which may be continuing instructions when deemed appropriate by the parties,
the Custodian shall pay out, or direct the respective Foreign Sub-Custodian or
the respective Foreign Securities System to pay out, monies of the Fund in the
following cases only:
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1) upon the purchase of foreign securities for the Fund, unless
otherwise directed by Proper Instructions, by (A) delivering money to
the seller thereof or to a dealer therefor (or an agent for such
seller or dealer) against expectation of receiving later delivery of
such foreign securities; or (B) in the case of a purchase effected
through a Foreign Securities System, in accordance with the rules
governing the operation of such Foreign Securities System;
2) in connection with the conversion, exchange or surrender of foreign
securities of the Fund;
3) for the payment of any expense or liability of the Fund including but
not limited to the following payments: interest, taxes, investment
advisory fees, transfer agency fees, fees under this Agreement, legal
fees, accounting fees, and other operating expenses;
4) for the purchase or sale of foreign exchange or foreign exchange
contracts for the Fund, including transactions executed with or
through the Custodian or its Foreign Sub-Custodians;
5) in connection with trading in options and futures contracts,
including delivery as original margin and variation margin;
6) in connection with the borrowing/lending of foreign securities; and
7) for any other proper corporate purpose, but only upon receipt of
Proper Instructions specifying the amount of such payment, setting
forth the purpose for which such payment is to be made, declaring
such purpose to be a proper corporate purpose, and naming the person
or persons to whom such payment is to be made.
Section 4.5.3 Market Conditions. Notwithstanding any provision of this
Agreement to the contrary, settlement and payment for Foreign Assets received
for the account of the Fund and delivery of Foreign Assets maintained for the
account of the Fund may be effected in accordance with the customary
established securities trading or processing practices and procedures in the
country or market in which the transaction occurs, including, without
limitation, delivering Foreign Assets to the purchaser thereof or to a dealer
therefor (or an agent for such purchaser or dealer) with the expectation of
receiving later payment for such Foreign Assets from such purchaser or dealer.
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Section 4.6 Registration of Foreign Securities. The foreign securities
maintained in the custody of a Foreign Custodian (other than bearer securities)
shall be registered in the name of the Fund or in the name of the Custodian or
in the name of any Foreign Sub-Custodian or in the name of any nominee of the
foregoing, and the Fund agrees to hold any such nominee harmless from any
liability as a holder of record of such foreign securities. The Custodian or a
Foreign Sub-Custodian shall not be obligated to accept securities on behalf of
the Fund under the terms of this Contract unless the form of such securities
and the manner in which they are delivered are in accordance with reasonable
market practice.
Section 4.7 Bank Accounts. A bank account or bank accounts opened and
maintained outside the United States on behalf of the Fund with a Foreign
Sub-Custodian shall be subject only to draft or order by the Custodian or such
Foreign Sub-Custodian, acting pursuant to the terms of this Agreement to hold
cash received by or from or for the account of the Fund.
Section 4.8 Collection of Income. The Custodian shall use reasonable
endeavors to collect all income and other payments in due course with respect
to the Foreign Assets held hereunder to which the Fund shall be entitled and
shall credit such income, as collected, to the Fund. In the event that
extraordinary measures are required to collect such income, the Fund and the
Custodian shall consult as to such measures and as to the compensation and
expenses of the Custodian relating to such measures.
Section 4.9 Proxies. The Custodian will generally with respect to the
foreign securities held under this Section 4 use its reasonable endeavors to
facilitate the exercise of voting and other shareholder proxy rights, subject
always to the laws, regulations and practical constraints that may exist in the
country where such securities are issued. The Fund acknowledges that local
conditions, including lack of regulation, onerous procedural obligations, lack
of notice and other factors may have the effect of severely limiting the
ability of the Fund to exercise shareholder rights.
Section 4.10 Communications Relating to Foreign Securities. The Custodian
shall transmit promptly to the Fund written information (including, without
limitation, pendency of calls and maturities of foreign securities and
expirations of rights in connection therewith) received by the Custodian via
the Foreign Sub-Custodians from issuers of the foreign securities being held
for the account of the Fund. With respect to tender or exchange offers, the
Custodian shall transmit promptly to the Fund written information so received
by the Custodian from issuers of the foreign securities whose tender or
exchange is sought or from the party (or its agents) making the tender or
exchange offer. The Custodian shall not be liable for any untimely exercise of
any tender, exchange or other right or power in connection with foreign
securities or other property of the Fund at any time held by it unless (i) the
Custodian or the respective Foreign Sub-Custodian is in actual possession of
such foreign securities or property and (ii) the Custodian receives Proper
Instructions with regard to the exercise of any such right or power, and both
(i) and (ii) occur at least three business days prior to the date on which such
right or power is to be exercised.
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SECTION 4.11 LIABILITY OF FOREIGN SUB-CUSTODIANS AND FOREIGN SECURITIES
SYSTEMS. Each agreement pursuant to which the Custodian employs a Foreign
Sub-Custodian shall, to the extent possible, require the Foreign Sub-Custodian
to exercise reasonable care in the performance of its duties and, to the extent
possible, to indemnify, and hold harmless, the Custodian from and against any
loss, damage, cost, expense, liability or claim arising out of or in connection
with such Foreign Sub-Custodian's performance of such obligations. At the
election of the Fund, the Fund shall be entitled to be subrogated to the rights
of the Custodian with respect to any claims against a Foreign Sub-Custodian as
a consequence of any such loss, damage, cost, expense, liability or claim if
and to the extent that the Fund has not been made whole for any such loss,
damage, cost, expense, liability or claim.
SECTION 4.12 TAX LAW. The Custodian shall have no responsibility or
liability for any obligations now or hereafter imposed on the Fund or the
Custodian as custodian of the Fund by the tax law of the United States or of
any state or political subdivision thereof. It shall be the responsibility of
the Fund to notify the Custodian of the obligations imposed on the Fund or the
Custodian as custodian of the Fund by the tax law of countries other than those
mentioned in the above sentence, including responsibility for withholding and
other taxes, assessments or other governmental charges, certifications and
governmental reporting. The sole responsibility of the Custodian with regard to
such tax law shall be to use reasonable efforts to assist the Fund with respect
to any claim for exemption or refund under the tax law of countries for which
the Fund has provided such information.
SECTION 4.13 CONFLICT. If the Custodian is delegated the
responsibilities of Foreign Custody Manager pursuant to the terms of Section 3
hereof, in the event of any conflict between the provisions of Sections 3 and 4
hereof, the provisions of Section 3 shall prevail.
SECTION 5. PAYMENTS FOR SALES OR REPURCHASES OR REDEMPTIONS OF SHARES
The Custodian shall receive from the distributor for the Shares or from the
Transfer Agent and deposit into the account of the appropriate Portfolio such
payments as are received for Shares thereof issued or sold from time to time by
the Fund. The Custodian will provide timely notification to the Fund on behalf
of each such Portfolio and the Transfer Agent of any receipt by it of payments
for Shares of such Portfolio.
From such funds as may be available for the purpose, the Custodian shall,
upon receipt of instructions from the Transfer Agent, make funds available for
payment to holders of Shares who have delivered to the Transfer Agent a request
for redemption or repurchase of their Shares. In connection with the redemption
or repurchase of Shares, the Custodian is authorized upon receipt of
instructions from the Transfer Agent to wire funds to or through a commercial
bank designated by the redeeming shareholders. In connection with the
redemption or repurchase of
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Shares, the Custodian shall honor checks drawn on the Custodian by a holder of
Shares, which checks have been furnished by the Fund to the holder of Shares,
when presented to the Custodian in accordance with such procedures and controls
as are mutually agreed upon from time to time between the Fund and the
Custodian.
SECTION 6. PROPER INSTRUCTIONS
Proper Instructions as used throughout this Agreement means a writing
signed or initialed by one or more person or persons as the Board shall have
from time to time authorized. Each such writing shall set forth the specific
transaction or type of transaction involved, including a specific statement of
the purpose for which such action is requested. Oral instructions will be
considered Proper Instructions if the Custodian reasonably believes them to have
been given by a person authorized to give such instructions with respect to the
transaction involved. The Fund shall cause all oral instructions to be confirmed
in writing. Proper Instructions may include communications effected directly
between electro-mechanical or electronic devices provided that the Fund and the
Custodian agree to security procedures, including but not limited to, the
security procedures selected by the Fund in the Funds Transfer Addendum attached
hereto. For purposes of this Section, Proper Instructions shall include
instructions received by the Custodian pursuant to any three-party agreement
which requires a segregated asset account in accordance with Section 2.10.
SECTION 7. ACTIONS PERMITTED WITHOUT EXPRESS AUTHORITY
The Custodian may in its discretion, without express authority from the
Fund on behalf of each applicable Portfolio:
1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under this
Agreement, provided that all such payments shall be accounted for to
the Fund on behalf of the Portfolio;
2) surrender securities in temporary form for securities in definitive
form;
3) endorse for collection, in the name of the Portfolio, checks, drafts
and other negotiable instruments; and
4) in general, attend to all non-discretionary details in connection
with the sale, exchange, substitution, purchase, transfer and other
dealings with the securities and property of the Portfolio except as
otherwise directed by the Board.
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SECTION 8. EVIDENCE OF AUTHORITY
The Custodian shall be protected in acting upon any instructions, notice,
request, consent, certificate or other instrument or paper believed by it to be
genuine and to have been properly executed by or on behalf of the Fund. The
Custodian may receive and accept a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Fund ("CERTIFIED RESOLUTION") as
conclusive evidence (a) of the authority of any person to act in accordance
with such resolution or (b) of any determination or of any action by the Board
as described in such resolution, and such resolution may be considered as in
full force and effect until receipt by the Custodian of written notice to the
contrary.
SECTION 9. DUTIES OF CUSTODIAN WITH RESPECT TO THE BOOKS OF ACCOUNT AND
CALCULATION OF NET ASSET VALUE AND NET INCOME
The Custodian shall cooperate with and supply necessary information to the
entity or entities appointed by the Board to keep the books of account of each
Portfolio and/or compute the net asset value per Share of the outstanding
Shares or, if directed in writing to do so by the Fund on behalf of the
Portfolio, shall itself keep such books of account and/or compute such net
asset value per Share. If so directed, the Custodian shall also calculate daily
the net income of the Portfolio as described in the Prospectus and shall advise
the Fund and the Transfer Agent daily of the total amounts of such net income
and, if instructed in writing by an officer of the Fund to do so, shall advise
the Transfer Agent periodically of the division of such net income among its
various components. The calculations of the net asset value per Share and the
daily income of each Portfolio shall be made at the time or times described
from time to time in the Prospectus.
SECTION 10. RECORDS
The Custodian shall with respect to each Portfolio create and maintain all
records relating to its activities and obligations under this Agreement in such
manner as will meet the obligations of the Fund under the 1940 Act, with
particular attention to Section 31 thereof and Rules 31a-1 and 31a-2
thereunder. All such records shall be the property of the Fund and shall at all
times during the regular business hours of the Custodian be open for inspection
by duly authorized officers, employees or agents of the Fund and employees and
agents of the SEC. The Custodian shall, at the Fund's request, supply the Fund
with a tabulation of securities owned by each Portfolio and held by the
Custodian and shall, when requested to do so by the Fund and for such
compensation as shall be agreed upon between the Fund and the Custodian,
include certificate numbers in such tabulations.
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SECTION 11. OPINION OF FUND'S INDEPENDENT ACCOUNTANT
The Custodian shall take all reasonable action, as the Fund on behalf of
each applicable Portfolio may from time to time request, to obtain from year to
year favorable opinions from the Fund's independent accountants with respect to
its activities hereunder in connection with the preparation of the Fund's Form
N-1A, and Form N-SAR or other annual reports to the SEC and with respect to any
other requirements thereof.
SECTION 12. REPORTS TO FUND BY INDEPENDENT PUBLIC ACCOUNTANTS
The Custodian shall provide the Fund, on behalf of each of the Portfolios
at such times as the Fund may reasonably require, with reports by independent
public accountants on the accounting system, internal accounting control and
procedures for safeguarding securities, futures contracts and options on
futures contracts, including securities deposited and/or maintained in a U.S.
Securities System or a Foreign Securities System, relating to the services
provided by the Custodian under this Agreement; such reports, shall be of
sufficient scope and in sufficient detail, as may reasonably be required by the
Fund to provide reasonable assurance that any material inadequacies would be
disclosed by such examination, and, if there are no such inadequacies, the
reports shall so state.
SECTION 13. COMPENSATION OF CUSTODIAN
The Custodian shall be entitled to reasonable compensation for its services
and expenses as Custodian, as agreed upon from time to time between the Fund on
behalf of each applicable Portfolio and the Custodian.
SECTION 14. RESPONSIBILITY OF CUSTODIAN
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Agreement and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties,
including any futures commission merchant acting pursuant to the terms of a
three-party futures or options agreement. The Custodian shall be held to the
exercise of reasonable care in carrying out the provisions of this Agreement,
but shall be kept indemnified by and shall be without liability to the Fund for
any action taken or omitted by it in good faith without negligence. It shall be
entitled to rely on and may act upon advice of counsel (who may be counsel for
the Fund) on all matters, and shall be
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without liability for any action reasonably taken or omitted pursuant to such
advice. Except as may arise from the Custodian's own negligence or willful
misconduct or the negligence or willful misconduct of a Foreign Sub-Custodian,
the Custodian shall be without liability to the Fund and the Portfolios for any
loss, liability, claim or expense resulting from or caused by anything which is
(A) part of Country Risk (as defined in Section 3 hereof), including without
limitation nationalization, expropriation, currency restrictions, or acts of
war, revolution, riots or terrorism, or (B) part of the "prevailing country
risk" of the Portfolios, as such term is used in SEC Release Nos. IC-22658;
IS-1080 (May 12, 1997) or as such term or other similar terms are now or in the
future interpreted by the SEC or by the staff of the Division of Investment
Management thereof.
Except as may arise from the Custodian's own negligence or willful
misconduct or the negligence or willful misconduct of a sub-custodian or agent,
the Custodian shall be without liability to the Fund for any loss, liability,
claim or expense resulting from or caused by; (i) events or circumstances
beyond the reasonable control of the Custodian or any sub-custodian or
Securities System or any agent or nominee of any of the foregoing, including,
without limitation, the interruption, suspension or restriction of trading on
or the closure of any securities market, power or other mechanical or
technological failures or interruptions, computer viruses or communications
disruptions, work stoppages, natural disasters, or other similar events or
acts; (ii) errors by the Fund or the Investment Advisor in their instructions
to the Custodian provided such instructions have been in accordance with this
Agreement; (iii) the insolvency of or acts or omissions by a Securities System;
(iv) any delay or failure of any broker, agent or intermediary, central bank or
other commercially prevalent payment or clearing system to deliver to the
Custodian's sub-custodian or agent securities purchased or in the remittance or
payment made in connection with securities sold; (v) any delay or failure of
any company, corporation, or other body in charge of registering or
transferring securities in the name of the Custodian, the Fund, the Custodian's
sub-custodians, nominees or agents or any consequential losses arising out of
such delay or failure to transfer such securities including non-receipt of
bonus, dividends and rights and other accretions or benefits; (vi) delays or
inability to perform its duties due to any disorder in market infrastructure
with respect to any particular security or Securities System; and (vii) any
provision of any present or future law or regulation or order of the United
States of America, or any state thereof, or any other country, or political
subdivision thereof or of any court of competent jurisdiction.
The Custodian shall be liable for the acts or omissions of a Foreign
Sub-Custodian (as defined in Section 4 hereof) to the same extent as set forth
with respect to sub-custodians generally in this Agreement.
If the Fund on behalf of a Portfolio requires the Custodian to take any
action with respect to securities, which action involves the payment of money
or which action may, in the opinion of the Custodian, result in the Custodian
or its nominee assigned to the Fund or the Portfolio being liable for the
payment of money or incurring liability of some other form, the Fund on behalf
of
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the Portfolio, as a prerequisite to requiring the Custodian to take such
action, shall provide indemnity to the Custodian in an amount and form
satisfactory to it.
If the Fund requires the Custodian, its affiliates, subsidiaries or
agents, to advance cash or securities for any purpose (including but not
limited to securities settlements, foreign exchange contracts and assumed
settlement) or in the event that the Custodian or its nominee shall incur or be
assessed any taxes, charges, expenses, assessments, claims or liabilities in
connection with the performance of this Agreement, except such as may arise
from its or its nominee's own negligent action, negligent failure to act or
willful misconduct, any property at any time held for the account of the
applicable Portfolio shall be security therefor and should the Fund fail to
repay the Custodian promptly, the Custodian shall be entitled to utilize
available cash and to dispose of such Portfolio's assets to the extent
necessary to obtain reimbursement.
In no event shall the Custodian be liable for indirect, special or
consequential damages.
SECTION 15. EFFECTIVE PERIOD, TERMINATION AND AMENDMENT
This Agreement shall become effective as of its execution, shall continue
in full force and effect until terminated as hereinafter provided, may be
amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than sixty (60) days after the date of such delivery or mailing; provided,
however, that the Fund shall not amend or terminate this Agreement in
contravention of any applicable federal or state regulations, or any provision
of the Fund's Articles of Incorporation, and further provided, that the Fund on
behalf of one or more of the Portfolios may at any time by action of its Board
(i) substitute another bank or trust company for the Custodian by giving notice
as described above to the Custodian, or (ii) immediately terminate this
Agreement in the event of the appointment of a conservator or receiver for the
Custodian by the Comptroller of the Currency or upon the happening of a like
event at the direction of an appropriate regulatory agency or court of
competent jurisdiction.
Upon termination of the Agreement, the Fund on behalf of each applicable
Portfolio shall pay to the Custodian such compensation as may be due as of the
date of such termination and shall likewise reimburse the Custodian for its
costs, expenses and disbursements.
SECTION 16. SUCCESSOR CUSTODIAN
If a successor custodian for one or more Portfolios shall be appointed by
the Board, the Custodian shall, upon termination, deliver to such successor
custodian at the office of the Custodian, duly endorsed and in the form for
transfer, all securities of each applicable Portfolio
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then held by it hereunder and shall transfer to an account of the successor
custodian all of the securities of each such Portfolio held in a Securities
System.
If no such successor custodian shall be appointed, the Custodian shall, in
like manner, upon receipt of a Certified Resolution, deliver at the office of
the Custodian and transfer such securities, funds and other properties in
accordance with such resolution.
In the event that no written order designating a successor custodian or
Certified Resolution shall have been delivered to the Custodian on or before the
date when such termination shall become effective, then the Custodian shall have
the right to deliver to a bank or trust company, which is a "bank" as defined in
the 1940 Act, doing business in Boston, Massachusetts, or New York, New York, of
its own selection, having an aggregate capital, surplus, and undivided profits,
as shown by its last published report, of not less than $25,000,000, all
securities, funds and other properties held by the Custodian on behalf of each
applicable Portfolio and all instruments held by the Custodian relative thereto
and all other property held by it under this Agreement on behalf of each
applicable Portfolio, and to transfer to an account of such successor custodian
all of the securities of each such Portfolio held in any Securities System.
Thereafter, such bank or trust company shall be the successor of the Custodian
under this Agreement.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the Certified Resolution to appoint a successor
custodian, the Custodian shall be entitled to fair compensation for its
services during such period as the Custodian retains possession of such
securities, funds and other properties and the provisions of this Agreement
relating to the duties and obligations of the Custodian shall remain in full
force and effect.
SECTION 17. INTERPRETIVE AND ADDITIONAL PROVISIONS
In connection with the operation of this Agreement, the Custodian and the
Fund on behalf of each of the Portfolios, may from time to time agree on such
provisions interpretive of or in addition to the provisions of this Agreement
as may in their joint opinion be consistent with the general tenor of this
Agreement. Any such interpretive or additional provisions shall be in a writing
signed by both parties and shall be annexed hereto, provided that no such
interpretive or additional provisions shall contravene any applicable federal
or state regulations or any provision of the Fund's Articles of Incorporation.
No interpretive or additional provisions made as provided in the preceding
sentence shall be deemed to be an amendment of this Agreement.
SECTION 18. ADDITIONAL FUNDS
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In the event that the Fund establishes one or more series of Shares in
addition to Davis Value Portfolio, Davis Real Estate Portfolio and Davis
Financial Portfolio with respect to which it desires to have the Custodian
render services as custodian under the terms hereof, it shall so notify the
Custodian in writing, and if the Custodian agrees in writing to provide such
services, such series of Shares shall become a Portfolio hereunder.
SECTION 19. MASSACHUSETTS LAW TO APPLY
This Agreement shall be construed and the provisions thereof interpreted
under and in accordance with laws of The Commonwealth of Massachusetts.
SECTION 20. PRIOR AGREEMENTS
This Agreement supersedes and terminates, as of the date hereof, all prior
Agreements between the Fund on behalf of each of the Portfolios and the
Custodian relating to the custody of the Fund's assets.
SECTION 21. NOTICES
Any notice, instruction or other instrument required to be given hereunder
may be delivered in person to the offices of the parties as set forth herein
during normal business hours or delivered prepaid registered mail or by telex,
cable or telecopy to the parties at the following addresses or such other
addresses as may be notified by any party from time to time.
To the Fund: Davis Variable Account Fund, Inc.
124 East Marcy Street
Santa Fe, New Mexico 87501
Attention: Sharra Reed
Telephone: 505-820-3102
Telecopy: 505-820-3002
To the Custodian: State Street Bank and Trust Company
One Heritage Drive JPB 2S
North Quincy, Massachusetts 02171
Attention: Stephanie Ryer
Telephone: 617-985-4591
Telecopy: 617-985-5271
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Such notice, instruction or other instrument shall be deemed to have been
served in the case of a registered letter at the expiration of five business
days after posting, in the case of cable twenty-four hours after dispatch and,
in the case of telex, immediately on dispatch and if delivered outside normal
business hours it shall be deemed to have been received at the next time after
delivery when normal business hours commence and in the case of cable, telex or
telecopy on the business day after the receipt thereof. Evidence that the
notice was properly addressed, stamped and put into the post shall be
Conclusive evidence of posting.
SECTION 22. REPRODUCTION OF DOCUMENTS
This Agreement and all schedules, addenda, exhibits, attachments and
amendments hereto may be reproduced by any photographic, photostatic,
microfilm, micro-card, miniature photographic or other similar process. The
parties hereto all/each agree that any such reproduction shall be admissible in
evidence as the original itself in any judicial or administrative proceeding,
whether or not the original is in existence and whether or not such
reproduction was made by a party in the regular course of business, and that
any enlargement, facsimile or further reproduction of such reproduction shall
likewise be admissible in evidence.
SECTION 23. DATA ACCESS SERVICES ADDENDUM
The Custodian and the Fund agree to be bound by the terms of the Data
Access Services Addendum attached hereto.
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SECTION 24. SHAREHOLDER COMMUNICATIONS ELECTION
SEC Rule 14b-2 requires banks which hold securities for the account of
customers to respond to requests by issuers of securities for the names,
addresses and holdings of beneficial owners of securities of that issuer held
by the bank unless the beneficial owner has expressly objected to disclosure of
this information. In order to comply with the rule, the Custodian needs the
Fund to indicate whether it authorizes the Custodian to provide the Fund's
name, address, and share position to requesting companies whose securities the
Fund owns. If the Fund tells the Custodian "no", the Custodian will not provide
this information to requesting companies. If the Fund tells the Custodian "yes"
or does not check either "yes" or "no" below, the Custodian is required by the
rule to treat the Fund as consenting to disclosure of this information for all
securities owned by the Fund or any funds or accounts established by the Fund.
For the Fund's protection, the Rule prohibits the requesting company from using
the Fund's name and address for any purpose other than corporate
communications. Please indicate below whether the Fund consents or objects by
checking one of the alternatives below.
YES [ ] The Custodian is authorized to release the Fund's name, address,
and share positions.
NO [X] The Custodian is not authorized to release the Fund's name,
address, and share positions.
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IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of June 21, 1999.
Davis Variable Account Fund, Inc. Fund signature attested to By:
By:_________________________ By: ____________________
Name: Sharra Reed Name: Thomas Tays
Title: Chief Financial Officer Title: General Counsel
State Street Bank and Trust Company Signature attested to By:
By:_________________________ By: ____________________
Name:Ronald E. Logue Name: Marc L. Parsons
Title:Vice Chairman Title: Associate Counsel
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AMENDMENT TO CUSTODIAN CONTRACT
This Amendment to Custodian Contract is made as of June 21, 1999 by and
between Davis Variable Account Fund, Inc. (the "Fund") and State Street Bank
and Trust Company (the "Custodian"). Capitalized terms used in this Amendment
without definition shall have the respective meanings given to such terms in
the Custodian Contract referred to below.
WHEREAS, the Fund and the Custodian entered into a Custodian Contract
dated June 21, 1999 (as amended from time to time, the "Custodian Contract");
and
WHEREAS, the Fund and the Custodian wish to amend the Custodian Contract
to enable the Fund to instruct the Custodian to deliver Fund property, in the
context of repurchase and reverse repurchase transactions, without the
Custodian receiving cash, securities or other negotiable instruments in return
therefor,
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements set forth hereinafter and in the Custodian Contract, the parties
hereby agree to amend the Custodian Contract as follows:
1. The following clause is added to the end of the last sentence of the first
paragraph of Section 1 of the Custodian Contract:
...including without limitation any property released, delivered or
otherwise removed from the Fund's account with the Custodian pursuant
to Proper Instructions.
2. Section 2.1 is amended and restated in its entirety as follows:
The Custodian shall hold and physically segregate for the account of
the Fund all non-cash Fund property to be held by it in the United
States, including all domestic securities owned by the Fund, other
than (a) property of the Fund released and delivered pursuant to
Section 2.2(15) or purchased pursuant to Section 2.8(7), (b)
securities which are maintained pursuant to Section 2.12 in a
clearing agency which acts as a securities depository or in a
book-entry system authorized by the U.S. Department of the Treasury
(each, a "U.S. Securities System"), and (c) commercial paper of an
issuer for which State Street Bank and Trust Company acts as issuing
and paying agent ("Direct Paper") which is deposited and/or
maintained in
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the Direct Paper System of the Custodian (the "Direct Paper System")
pursuant to Section 2.12A.
3. Section 2.2(15) is renumbered as Section 2.2(16), and new Section 2.2(15)
is added to the Custodian Contract as follows:
(15) Upon the sale of Fund property, and prior to or without receipt
of payment therefor, but only as set forth in Proper
Instructions (such delivery in advance of payment shall be
referred to herein as a "Free Trade"); and
4. The following clause is added to the beginning of the first sentence of
Section 2.7 of the Custodian Contract:
Except with respect to Fund property released and delivered
pursuant to Section 2.2(15) or purchased pursuant to Section
2.8(7), the Custodian shall...
5. Section 2.8(7) is renumbered as Section 2.8(8), and new Section 2.8(7) is
added to the Custodian Contract as follows:
(7) Upon the purchase of investments, and prior to or without
receipt thereof, but only as set forth in Proper Instructions
(such payment in advance of delivery, along with delivery in
advance of payment made in accordance with Section 2.2(15), as
applicable, shall also be referred to herein as a "Free Trade");
and
6. The following clause is added to the beginning of the first sentence of
Section 2.9 of the Custodian Contract:
Except with respect to Fund monies released and delivered
pursuant to Section 2.8(7),...
7. The following clause is added to the beginning of the first sentence of
Section 2.15 of the Custodian Contract:
Except with respect to Fund property released and delivered
pursuant to Section 2.2(15), or purchased pursuant to Section
2.8(7), of this Custodian Contract, the Custodian shall...
31
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8. The following clause is added to the beginning of the first sentence of
Section 2.16 of the Custodian Contract:
Except with respect to Fund property released and delivered
pursuant to Section 2.2(15), or purchased pursuant to Section
2.8(7), of this Custodian Contract, the Custodian shall...
9. The following sentence is added to the end of Section 3 of the Custodian
Contract:
The Fund acknowledges that, in keeping the books of account of
the Fund and/or making the calculations described herein, with
respect to Fund property released, delivered or purchased
pursuant to Sections 2.2(15) and 2.8(7) of this Custodian
Contract, the Custodian is authorized and instructed to rely
upon information provided to it by the Fund, the Fund's
counterparty(ies), or the agents of either of them.
10. The following sentence is added to the end of Section 4 of the Custodian
Contract:
The Fund acknowledges that, in creating and maintaining the
records as set forth herein, with respect to Fund property
released, delivered or purchased pursuant to Sections 2.2(15)
and 2.8(7) of this Custodian Contract, the Custodian is
authorized and instructed to rely upon information provided to
it by the Fund, the Fund's counterparty(ies), or the agents of
either of them.
11. The following paragraph is added to Section 8 of the Custodian Contract:
The Fund agrees to indemnify and hold the Custodian harmless
from and against any and all costs, expenses, losses, damages,
charges, attorney's fees, payments and liabilities which may
be asserted against the Custodian acting in accordance with
any Proper Instruction with respect to Free Trades including,
but not limited to, loss, damage, cost, expense, liability,
tax, charge, assessment or claim resulting from (a) the
failure of the Fund to receive income with respect to
purchased investments, (b) the failure of the Fund to recover
amounts invested on maturity of purchased investments, (c) the
failure of the Custodian to respond to or be aware of notices
or other corporate communications with respect to purchased
investments, or (d) the Custodian's reliance on information
provided by the Fund, the Fund's counterparty(ies) or the
agents of either of them with respect to Fund property
released, delivered or purchased pursuant to
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Sections 2.2(15) and 2.8(7) of this Custodian Contract.
12. Except as specifically set forth herein, the terms and provisions of the
Custodian Contract continue to apply with full force and effect.
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In Witness Whereof, each of the parties has caused this Amendment to be
executed in its name and behalf by its duly authorized representative as of the
date first above written.
DAVIS VARIALBLE ACCOUNT FUND, INC. Witnessed By:
By: _________________________ By: _______________
Name: Sharra Reed Name: Thomas Tays
Title: Chief Financial Officer Title: General Counsel
STATE STREET BANK AND TRUST COMPANY Witnessed By:
By: _________________________ By: _________________
Name: Ronald E. Logue Name: Glenn Ciotti
Title: Executive Vice President Title: VP & Assoc. Counsel
<PAGE>
Exhibit 23(h)(1)
STATE STREET BANK AND TRUST COMPANY
FEE INFORMATION FOR SERVICES AS
PLAN, TRANSFER AND DIVIDEND DISBURSING AGENT
DAVIS VARIABLE ACCOUNT FUND, INC.
EFFECTIVE JULY 1, 1999 THROUGH JUNE 30, 2001
<PAGE>
STATE STREET BANK AND TRUST COMPANY
FEE INFORMATION FOR SERVICES AS
PLAN, TRANSFER AND DIVIDEND DISBURSING AGENT
DAVIS FUNDS
General - Fees are based on an annual base fee charge per cusip plus
out-of-pocket expenses.
Base Fee - Billable on a monthly basis at the rate of 1/12 the annual fee.
o Effective 07/01/99
o 3 cusips @ $6,500 per cusip $19,500
Out-of-Pocket Expenses - Out-of-pocket expenses include, but are not limited
to: confirmation production, postage, forms, telephone, microfilm, microfiche,
and expenses incurred at the specific direction of the fund. Postage for mass
mailings is due seven days in advance of the mailing date.
Payment - The above fees will be charged against the fund's custodian checking
account five (5) days after the invoice is mailed.
Davis Selected Advisers, L. P. State Street Bank and Trust Company
Name: /s/ Ken Eich Name: /s/ Ronald E. Lynn
Title: COO Title: Executive Vice President
Date: 5/3/99 Date: 5/5/99
<PAGE>
Exhibit
ITEM 23 (I)
[LETTERHEAD OF D'ANCONA & PFLAUM LLC]
June 25, 1999
Davis Variable Account Fund, Inc.
124 East Marcy Street
Santa Fe, New Mexico 87501
Dear Ladies and Gentlemen:
We have acted as counsel for Davis Variable Account Fund, Inc. (the
"Company") in connection with the registration under the Securities Act of 1933
(the "Act") of an indefinite number of shares of common stock in the series of
the Company designated as Davis Value Portfolio, Davis Financial Portfolio, and
Davis Real Estate Portfolio (collectively, the "Shares") in registration
statement No. 333-76407 on Form N-1A (the "Registration Statement").
In this connection we have examined originals, or copies certified or
otherwise identified to our satisfaction, of such documents, corporate and other
records, certificates and other papers as we deemed it necessary to examine for
the purpose of this opinion, including the Articles of Incorporation and bylaws
of the Company, actions of the Board of Directors authorizing the issuance of
Shares and the Registration Statement.
Based on the foregoing examination, we are of the opinion that upon the
issuance and delivery of the Shares in accordance with the Articles of
Incorporation and the actions of the Board of Directors authorizing the issuance
of the Shares, and the receipt by the Company of the authorized consideration
therefor, the Shares so issued will be validly issued, fully paid and
nonassessable.
We consent to the filing of this opinion as an exhibit to the
Registration Statement. In giving this consent, we do not admit that we are in
the category of persons whose consent is required under section 7 of the Act.
Very truly yours,
D'Ancona & Pflaum LLC
By: /s/ Sheldon R. Stein
-------------------------
Sheldon R. Stein, Member
<PAGE>
EXHIBIT
ITEM 23 (J)
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Davis Variable Account Fund, Inc.
We consent to the use of our report dated June 23, 1999 incorporated by
reference in this Registration Statement of Davis Variable Account Fund, Inc.
and to the reference to our firm under the heading "Auditors" in the Statement
of Additional Information.
/s/ KPMG, LLP
-------------
/s/ KPMG, LLP
Denver, Colorado
June 28, 1999
<PAGE>
EXHIBIT 23(M)
DAVIS VARIABLE ACCOUNTFUND, INC
RULE 12B-1 DISTRIBUTION PLAN
THE PLAN:
1. PURPOSE. The Company shall finance the distribution of its shares
pursuant to Rule 12b-1 under the Investment Company Act of 1940 ("Act")
according to the terms of this Distribution Plan (the "Plan").
2. FEES. Amounts, not exceeding in the aggregate a maximum annual amount
equal to 0.25% of the averages of the daily net asset values of the shares of
the Company during each fiscal year of the Company, may be paid quarterly by
the Company to the Distributor out of the assets attributable to such shares at
any time after the effective date of the Plan to: (i) reimburse the Distributor
for fees paid to its salespersons and to other firms which offer and sell the
Company's shares and/or provide servicing and maintenance of shareholder
accounts, and (ii) reimburse the Distributor for its other distribution
expenses, after application of the Distributor's portion of sales charges
incurred in connection with the distribution of Company shares, excluding
overhead expense and including expenses of promotion, sales seminars,
wholesaling, advertising, and sales literature. For this purpose sales
literature shall not include reports sent to shareholders' regulatory bodies
which are paid for by the Company.
To the extent that any investment advisory fees paid by the Company may be
deemed to be indirectly financing any activity which is primarily intended to
result in the sale of shares of the Company within the meaning of Rule 12b-1,
the payments of such fees are authorized under this Plan.
3. REQUIRED APPROVALS AND TERM. Subject to paragraph 8, the Plan shall not
take effect until it has been approved by the vote of at least a majority (as
defined in the Act) of the outstanding shares of the Company. In addition, the
Plan shall not take effect until it has been approved, together with any
related agreements, by vote of the majority of both (i) the Board of Directors
of the Company, and (ii) those directors of the Company who are not "interested
persons" of the Company as defined in the Act and who have no direct or
indirect financial interest in the operation of the Plan or any agreements
related to it ("Independent Directors"), cast in person at a meeting called for
the purpose of voting on the Plan or such Agreements. Unless sooner terminated
pursuant to the terms hereof, the Plan shall continue in effect for a period of
one year from its effective date, and thereafter shall continue in effect so
long as such continuance is specifically approved at least annually in the
manner provided for by Rule 12b-1 under the Act.
4. PERIODIC REPORTS. Any person authorized to direct the disposition of
monies paid or payable by the Company pursuant to the Plan or any related
agreement shall provide to the Company's Board of Directors, and the Board of
Directors shall review at
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least quarterly, a written report of the amounts so expended and the purposes
for which such expenditures were made.
5. TERMINATION. Subject to paragraph 8, the Plan may be terminated at any
time by a vote of the majority of the Independent Directors, or by vote of a
majority vote of the outstanding shares.
6. RELATED AGREEMENTS. Any agreement related to the Plan shall be in
writing, and shall provide:
(i) That such agreement may be terminated at any time, without payment of
penalty, by vote of a majority of the Independent Directors, or by vote of a
majority vote of the outstanding shares on not more than 60 days' written
notice to any other party to the agreement; and
(ii) That such agreement shall terminate automatically in the event of its
assignment.
7. AMENDMENTS. The Plan may not be amended to increase materially the
amount of distribution expenses provided for in paragraph 2 unless such
amendment is approved in the manner provided in paragraph 3, and no material
amendment to the Plan shall be made unless approved by the Board of Directors
and the Independent Directors.
8. SPECIAL PROCEDURES FOR SERIES COMPANY. If the Company is or becomes a
series company (as defined in Rule 18f-2 under the Act), then the Plan shall
not take effect as to the shares of any series and no amendment may be effected
to increase materially the amount of distribution expenses as to the shares of
any series until it has been approved as to the shares of such series by the
Board of Directors, the Independent Directors and the shareholders of such
series in the manner provided in paragraph 3; and no material amendment to the
Plan in respect to such shares shall be made unless approved as to such shares
by the Board of Directors and Independent Directors. The Plan may be terminated
as to any series at any time by vote of a majority of the Independent Directors
by majority vote of the shareholders of the series.
2
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EXHIBIT 23(P)
DAVIS VARIABLE ACCOUNT FUND, INC.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned constitutes
and appoints Sheldon R. Stein and Arthur Don, and each of them, as the
undersigned's attorneys-in-fact, each with the power of substitution, for him
or her in any and all capacities, to sign any post-effective amendments to the
registration statement under the Securities Act of 1933 (Registration No.
333-76407) and/or the Investment Company Act of 1940 (Registration No.
811-9293), whether on Form N-1A or any successor forms thereof, and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission and all other applicable state or
federal regulatory authorities. Each of the undersigned hereby ratifies and
confirms all that each of the aforenamed attorneys-in-fact, or his substitute
or substitutes, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned have executed this Power of Attorney
as of the date listed below.
REGISTRANT:
Davis Variable Account Fund, Inc. (Registrant)
By: /s/ Jeremy H. Biggs Date: June 15, 1999_
- ---------------------------- ----- --------------
Jeremy H. Biggs
Chairman of the Board of Directors
OFFICERS:
/s/ Shelby M.C. Davis Date: June 15, 1999
----------------------- ----- -------------
Shelby M.C. Davis
President
/s/ Sharra L. Reed Date: June 15, 1999
----------------------- ----- -------------
Sharra L. Reed
Treasurer, Chief Financial Officer and Chief Accounting Officer
<PAGE>
DIRECTORS:
/s/ Wesley E. Bass, Jr. Date: June 15, 1999_
- ----------------------- ----- --------------
Wesley E. Bass, Jr.
/s/ Jeremy H. Biggs Date: June 15, 1999
------------------- ----- -------------
Jeremy H. Biggs
/s/ Marc P. Blum Date: June 15, 1999
----------------- ----- -------------
Marc P. Blum
/s/ Andrew A. Davis Date: June 15, 1999
------------------- ----- -------------
Andrew A. Davis
/s/ Christopher C. Davis Date: June 15, 1999
------------------------ ----- -------------
Christopher C. Davis
/s/ Jerry D. Geist Date: June 15, 1999
------------------ ----- -------------
Jerry D. Geist
/s/ D. James Guzy Date: June 15, 1999
----------------- ----- -------------
D. James Guzy
/s/ G. Bernard Hamilton Date: June 15, 1999
----------------------- ----- -------------
G. Bernard Hamilton
/s/ LeRoy E. Hoffberger Date: June 15, 1999
----------------------- ----- -------------
LeRoy E. Hoffberger
/s/ Laurence W. Levine Date: June 15, 1999
---------------------- ----- -------------
Laurence W. Levine
/s/ Christian R. Sonne Date: June 15, 1999
---------------------- ----- -------------
Christian R. Sonne
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/s/ Marsha Williams Date: June 15, 1999
------------------- ----- -------------
Marsha Williams
