<PAGE>
DAVIS VARIABLE ACCOUNT FUND, INC.
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
===============================================================================
Dear Shareholder:
As we enter the new millennium, we must recognize that the market has come a
long way and is starting from a high base. We are unlikely to continue enjoying
the twin benefits of steeply falling interest rates and rising corporate profits
as a percentage of gross domestic product that propelled stock prices and
price/earnings ratios sharply higher in the last two decades or so of the 20th
century. Corporate profits have been inflated by various accounting practices.
In addition, while the Internet holds great possibilities for many businesses,
it is disrupting profitability for others.
Throughout modern times, we have seen the development of different networks that
linked people and businesses together and changed history. Examples include the
railroad, automobile/highway, electricity, air travel and telephone networks.
Today, the Internet is transforming the world through an electronic network that
transmits video, voice and data at ever-increasing speeds and ever-reducing
costs.
For many companies, the "net net" conclusion is that they must convert their
businesses to e-businesses or they will have no business. As a result, the
Internet revolution, like other revolutions before it, has spawned enormous
investment spending--creating a high degree of optimism and speculation, perhaps
even a financial bubble. Yet this speculation has also facilitated the raising
of low-cost capital and given the United States a first-mover advantage in
developing the Internet and driving it forward.
A recession or high interest rates would reduce the availability of capital and
spending on the Internet. We think policymakers have been willing to live with
some froth in the market because they believe the good of the Internet outweighs
the bad. The Internet should have a huge positive impact on productivity and
cost structures, therefore maintaining our leadership position is worth the risk
of not taking actions that could lead to recession. Continued investment in the
Internet is necessary for the good of the country and our competitive health.
At the same time, many business models will have to change and there definitely
will be losers as well as winners, as there have always been with any
technological advance. For example, as more business is done directly via the
Internet, middleman industries like distributors are particularly vulnerable.
Many established companies are going to have to provide greater value-added with
their services or their customers will turn to the Internet. The impact of these
businesses modernizing and taking restructuring charges will not necessarily be
bullish for corporate profits in the early stages.
Moreover, it is impossible to predict which of the new dot.com companies will
thrive or even survive over time. When we look at other industries that
transformed the country like autos and airplanes, we see that most of the
pioneering companies in those industries are no longer in business today.
We think we may be closing another chapter in the market's history and facing a
future that does not hold as many favorable macro factors. The Internet is both
a driver and a destroyer. Companies old and new are caught up in a Darwinian
struggle, trying to anticipate which business models will work and which will
not work. Hopefully, this will be a process of creative destruction and the
economy overall will emerge the better for it. But struggles are not necessarily
good for corporate profits, and we don't think it will be as easy--if, indeed,
it ever has been easy--to make money in stocks. As a result, stock selection
will be more crucial than ever.
<PAGE>
DAVIS VARIABLE ACCOUNT FUND, INC.
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
===============================================================================
Because we are in a time of ferment and change, we think a premium will be paid
for company managements that "get it" and invest their shareholders' money
correctly to position the company for the future. In addition, with the U.S.
market unlikely to enjoy the big tailwind of expanding P/E ratios that it did
over the past 15 or 20 years, we think having a global perspective may be
increasingly important. Multinational companies have an advantage in that they
can allocate their capital around the world to areas where GDP growth is
expected to be the fastest.
Some foreign economies such as Germany and Japan appear to be behind us in their
evolution, and they may offer greater opportunities as more and more of their
businesses streamline and restructure. On the other hand, the United States is a
moving target, and it will not be easy for other countries to catch us because
we are driving our Internet development so rapidly.
If the Dow were to increase at the same pace over the next two decades as it did
over the past two, it would stand at roughly 100,000 in 2020. We are certain
that will not happen. However, if the Dow were to compound at a rate of 7% or 8%
a year, it could reach 40,000 or 50,000 over that time frame--meaning the market
still offers considerable opportunities for long-term wealth building.(1) As
always, we will focus on buying growing companies at reasonable prices that are
led by management teams who respond dynamically to change. We are on a long
voyage with our shareholders and our money is invested shoulder-to-shoulder with
theirs. We are not overly optimistic. We are not pessimistic. We are trying to
be realistic.
Sincerely,
/s/ Shelby M.C. Davis
- --------------------------
Shelby M.C. Davis
Senior Research Adviser
February 4, 2000
2
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DAVIS VARIABLE ACCOUNT FUND, INC.
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
===============================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
DAVIS VALUE PORTFOLIO
PERFORMANCE OVERVIEW
o Davis Value Portfolio generated a total return of 2.64% for the period from
July 1, 1999 (commencement of operations) through December 31, 1999,(2)
under performing the 7.71% return earned by the Standard & Poor's 500 Index
but outpacing the average return of (0.40%) for the Lipper Large-Cap Value
Fund Index.(3)
AN INTERVIEW WITH CHRISTOPHER C. DAVIS AND KENNETH CHARLES FEINBERG, PORTFOLIO
MANAGERS
Q. How would you describe the performance of the Fund in its first six months of
operation?
A. Investors often speak of stock market performance in terms of breadth or
narrowness. By this they are describing whether a move in the market was enjoyed
by a broad range of companies or by a select few. The year 1999 was another year
of extraordinary narrowness in the market. The 7.71% gain earned by the S&P 500
Index the last six months of the year was produced by the strong performance of
a very few stocks while the vast majority of stocks posted weak performance.
As even the most casual market observer knows, 1999 was a year of extraordinary
performance in the technology sector. While many of the gains in this sector
were reaped by companies with virtually no earnings and no clear path to
developing significant earnings, the performance of more old-fashioned
technology companies--if that is not an oxymoron--was also exceptional.
Importantly, the shares of technology companies that the Fund owns--such as IBM
and Hewlett-Packard(4)--did not just reflect changes in psychology or a new-era
mania, but instead reflected substantial gains in their core businesses.
Corporate customers continue to flock to IBM to seek advice and solutions for
addressing the Internet. Hewlett-Packard's wonderful printing business continues
to benefit from the rise of e-mail and digital photography.
Q. What about the performance of financial stocks in 1999?
A. Most market observers would describe 1999 as a terrible year for financial
stocks. The PHLX/KBW Bank Index(3), for example fell 12.97% in the last six
months of 1999 while the threat of increasing interest rates spooked investors
throughout the sector. Although the Fund owns a number of financial stocks whose
value declined and whose earnings outlook deteriorated somewhat, it is notable
that our two largest holdings in the financial area achieved exceptional gains.
American Express, the Fund's largest holding, rose substantially, perhaps
discounting the fact that the Internet does not accept cash. The Fund's sixth
largest holding, Citigroup, is a great beneficiary of worldwide privatization,
the globalization of trade and finance, unprecedented mergers and acquisitions
activity, and strong capital markets. We continue to think that Citigroup is one
of only a handful of American powerhouses that make up a global oligopoly in the
investment banking business.
3
<PAGE>
DAVIS VARIABLE ACCOUNT FUND, INC.
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
===============================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
AN INTERVIEW WITH CHISTOPHER C. DAVIS AND KENNETH CHARLES FEINBERG, PORTFOLIO
MANAGERS - CONTINUED
Q. What holdings performed unsatisfactorily last year?
A. Of course, if the Fund's success in the financial companies just mentioned
and in the technology sector were the end of the story for Davis Value
Portfolio, we would have achieved far stronger results in the last half of 1999
than the 2.64% gain we reported. But the Fund also owned companies whose stocks
performed poorly. Among the holdings that experienced a disappointing year were
Wells Fargo, Berkshire Hathaway, McDonald's, and Household International.
Significantly, in Ken's and my view, the poor performance of these stocks was
not a reflection of poor performance in their underlying businesses. It is
important to distinguish these types of stocks from stocks where poor returns
reflected a substantial decline in the operating performance of those
businesses. It is this latter group that Ken and I categorize as mistakes, and
we certainly had our share of these in 1999.
Chief among these mistakes must be our mis-assessment of Waste Management. While
the Fund's holdings in this company were never among our largest, it was
certainly our largest mistake given the fact that the company's financial
statements were inaccurate and the impression that senior management knowingly
covered up deteriorating operating results. To this list, we must also add
Philip Morris where we failed to anticipate material setbacks for the company in
the legal arena. A final example of a mistake is UnumProvident where we were
overly optimistic in assessing the profitability of the company's core business.
While we know we are in a batting average business, it is still important to
remember that the only value of mistakes lies in the lessons that we learn from
them. As my grandfather Shelby Cullom Davis once said, "If you do not admit you
make mistakes, you do not learn from them."
Q. What is your outlook as we move into the next century?
A. In his commentary at the beginning of this annual report, my father Shelby
M.C. Davis has clearly described the challenges that in all likelihood lie ahead
and the issues on which Ken and I must always remain focused. A wag once
famously said that the four most expensive words on Wall Street are, "This time
is different." But clearly as we look out at this new economy, some things are
different. Venerable companies with stable businesses are under attack from this
new juggernaut called the Internet. Business plans that once could have been
carved in stone must be completely reassessed.
In addition to these changes in technology, other powerful forces are at work
creating an environment of uncertainty. For example, investors have been lulled
into a sense of complacency by the seemingly routine predictability of quarterly
earnings gains that may have been more the result of elastic accounting than a
true reflection of the underlying businesses. In many industries there is also
the specter of increased government regulation, from price controls in the
pharmaceutical industry to regulatory intervention in the development of the
broadband Internet.
Finally, while Ken and I are not economists, the level of interest rates must
play a vital role in our evaluation of companies for one simple reason: no
company is worth more or less than the present value of its future cash flows.
In determining that present value, one must do two things: first, make
predictions about the future cash flows generated by the business in question
and, second, discount those cash flows to the present using an interest rate
determined by the available risk-free alternatives. The higher this interest
rate, the lower the present value of those future earnings streams and,
therefore, the lower the valuation for the stock in question. Warren Buffett
once said that interest rates act like gravity in the financial markets. Higher
rates would certainly weigh down stock valuations.
4
<PAGE>
DAVIS VARIABLE ACCOUNT FUND, INC.
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
===============================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
AN INTERVIEW WITH CHISTOPHER C. DAVIS AND KENNETH CHARLES FEINBERG, PORTFOLIO
MANAGERS - CONTINUED
I would like to end with an interesting quotation from an interview given by my
father that appeared in Business Week magazine. In it he says, we guarantee that
we "will never be number one in a roaring speculative bull market. [We] eschew
the go-go philosophy that made instant winners [last year] of funds that favored
letter stock, new issues and hotshot over-the-counter securities." What makes
this observation so interesting is that it appeared in the February 7th issue of
Business Week in the year 1970, not long before the onset of the worst bear
market since the depression.
But lest we become too pessimistic, it is notable that in the same interview my
father states, "In a bull market, all you need is a great stock. In a bear
market, you need a great company." Ken and I feel that in Davis Value Portfolio
we own many great companies run by great executives. While we think that the
next five years may be difficult ones for the overall market, we believe that,
at today's prices, the valuations for the companies we own are not excessive and
that patient, long-term investors will be rewarded for riding through the
inevitable financial storms that are likely to follow the smooth sailing of the
last decade.(5)
DAVIS FINANCIAL PORTFOLIO
PERFORMANCE OVERVIEW
o The Davis Financial Portfolio declined 7.17% for the period July 1, 1999
(commencement of operations) through December 31, 1999.(2) Over the same
time frame, the Standard & Poor's Index registered a gain of 7.71% and the
Lipper Financial Services Fund Index declined 9.69%.3
AN INTERVIEW WITH CHRISTOPHER C. DAVIS AND KENNETH CHARLES FEINBERG, PORTFOLIO
MANAGERS
Q. Could you recap the performance of the Fund and financial stocks in general
during 1999?
A. The year 1999 was a difficult year for financial stocks. Our Fund was down
7.17% over the last six months of the year, clearly disappointing when compared
to the 7.71% increase in the S&P 500 over the same six months. As a sector fund
with over 80% of assets invested in financial stocks, Chris and I realize, and
hope our shareholders do too, that there will be years when the Fund's
performance diverges significantly from that of the overall market.
The primary reason for the underperformance of financial stocks in 1999 was a
restrictive Federal Reserve that raised short-term interest rates three times by
a total of 75 basis points. Historically, financial stocks perform poorly during
periods of rising interest rates, particularly when investors sense that the
Federal Reserve is serious about slowing down the economy to keep inflation
under control. The fact that most institutional investors are judged on
short-term performance encourages many investment firms to sell some of their
holdings of financial stocks and wait for clearer signs that the central bank
has adopted a more favorable bias toward interest rates. Given the growing trend
toward momentum investing in the current go-go market, it is not particularly
surprising that fewer investors have the fortitude to be early in increasing
their positions in financial stocks.
5
<PAGE>
DAVIS VARIABLE ACCOUNT FUND, INC.
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
===============================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
AN INTERVIEW WITH CHISTOPHER C. DAVIS AND KENNETH CHARLES FEINBERG, PORTFOLIO
MANAGERS - CONTINUED
Another trend hurting the performance of the group was the gradual realization
among investors that the best of times may already be over for several financial
sectors that have benefited from favorable macroeconomic tailwinds that have
either peaked or begun to reverse. For instance, the earnings of many banks have
benefited from very benign credit loss experience, particularly in commercial
loans, given the nine-year economic expansion that we have all enjoyed.
Moreover, until recently, a number of banks actually had considerable recoveries
on previously charged-off loans from the traumatic early 1990's that boosted
reported earnings for years, but that have now been largely exploited. Rising
interest rates have also erased most of the embedded unrealized gains in banks'
large bond portfolios, which has eroded management's flexibility to meet
analysts' earnings expectations.
Perhaps most devastating to the performance of banks in 1999 was the realization
that the majority of the exciting mega-mergers that made headlines during the
past few years were not living up to expectations and not producing the expense
savings or revenue synergies promised by overly optimistic managements. These
merged banks have consistently missed their earnings targets, which has
undermined investor confidence and reduced price/earnings multiples for the
entire sector with few exceptions. Many of these stocks have fallen almost 50%
from their 1999 highs.
Similarly, investors in property-casualty stocks experienced continued
disappointments throughout the year as the decade-long soft-pricing environment
in commercial-lines insurance took its inevitable toll on reported earnings.
Insurance companies, which had for several years been able to offset part of
their commercial-lines losses with favorable loss reserve development on their
personal-lines business, suddenly saw this well run dry as brutal competition
forced personal-lines rates down just at the time that claims-cost inflation
trends reversed direction and began to accelerate. Pure-play personal-lines
companies that had been good stocks for the past few years were particularly
punished, with quality companies such as Progressive4 falling significantly
during the period. Progressive's management is now in the process of
re-underwriting its underpriced risks but investor confidence in this sector may
take time to rebuild.
Q. What holdings were important contributors to performance?
A. One of the positive attributes of being a diversified financial services fund
is that the financial services sector includes many different subsectors in
which to find great companies. Our largest holding continues to be American
Express, which performed extremely well during the period. American Express has
done a terrific job of reinvigorating its core card business with important new
product offerings that should drive profitable account growth both in the United
States and abroad. Chris and I wake up happy every day knowing that American
Express, with its strong global brand and 45 million customer accounts, should
be a prime beneficiary of the broad shift in spending that is moving to the
Internet. Neither cash nor checks but rather plastic is the preferred payment
vehicle on the Net.
Citigroup turned in a stellar performance as the outstanding management team led
by Sandy Weill and John Reed, after an admittedly rocky start, proved to be one
of the mega-mergers that delivered favorable returns to shareholders. Citicorp
is an extremely well capitalized company with a respected brand name that can be
leveraged to expand its financial services businesses, such as asset management,
consumer finance, insurance and investment banking and create an increasingly
strong global powerhouse. Sandy Weill continues to demonstrate that he is one
the best stewards of shareholder capital in corporate America. As part of
Citigroup, which is a partner of choice among the elite global companies in
financial services, he now has the whole world as his canvas. We are happy to be
on board with him.
6
<PAGE>
DAVIS VARIABLE ACCOUNT FUND, INC.
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
===============================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
AN INTERVIEW WITH CHISTOPHER C. DAVIS AND KENNETH CHARLES FEINBERG, PORTFOLIO
MANAGERS - CONTINUED
The Fund also benefited from sizable positions in consumer finance companies
such as Providian and Capital One that have honed sophisticated data-mining
capabilities to profitably grow their credit card businesses in a fiercely
competitive environment. The success of these first-rate, highly focused
management teams shows how specialists in particular niches of financial
services, despite their smaller size, can gain tremendous market share at the
expense of larger, less agile players that fail to make the necessary
investments in technology required to remain competitive.
Q. What is your outlook for financial stocks going forward?
A. Historically, financial stocks lead the market down during the early stages
of Federal Reserve tightening, but then rally and lead the market up once
investors believe that the central bank has nearly completed its job of slowing
down the economy. So financial stocks could remain volatile until investors get
more clarity regarding the direction of inflation and interest rates. The good
news is that the current economic climate continues to be excellent with strong
growth and low inflation. Credit loss trends are generally stable reflecting the
strength of corporate balance sheets and strong discretionary income among
consumers.
Until sentiment changes, and this can happen very quickly, it could be a market
that especially rewards careful individual stock selection since the rising tide
of falling interest rates that lifted most financial companies' performance over
the past decade may not be repeated. We continue to find well managed companies
with strong balance sheets and valuable customer franchises whose business
fundamentals are actually accelerating in the current environment. Golden West
Financial and Household International are examples of outstanding companies that
fit this description and whose savvy management teams are using the businesses'
considerable free cash flow to aggressively repurchase shares at bargain prices,
thereby creating considerable value for shareholders.
Longer term, Chris and I remain extremely excited about the outlook for
carefully selected financial services companies for a variety of reasons, which
include:
o Favorable demographic trends in the United States, Europe and Asia that
should drive demand for savings and investment products worldwide;
o Accelerating deregulation of huge overseas markets that offer rich
opportunities to invest in companies with proven ability to execute in
international markets;
o Ongoing consolidation particularly now that the Glass-Steagall Act has been
replaced with less restrictive legislation that opens up greater
opportunity for cross-industry mergers;
o The emergence of powerful brand-name companies that should increasingly
take market share from both stodgy large competitors and weaker, smaller
players in these highly fragmented markets; and
o The strong excess cash flow currently generated by many companies that can
be used to enhance shareholder value through higher dividends, share
repurchases and successful acquisitions.
We believe that carefully researched, well managed financial services companies
with strong customer franchises will continue to represent outstanding
investment opportunities for shareholders.(5)
7
<PAGE>
DAVIS VARIABLE ACCOUNT FUND, INC.
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
===============================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
DAVIS REAL ESTATE PORTFOLIO
PERFORMANCE OVERVIEW
o The Davis Real Estate Portfolio declined 10.79% for the period from July 1,
1999 (commencement of operations) through December 31, 1999.(2) By way of
comparison, the Morgan Stanley REIT (Real Estate Investment Trust) Index
dropped 8.77% during the same time period.(3)
AN INTERVIEW WITH ANDREW A. DAVIS, PORTFOLIO MANAGER
Q. How would you characterize the performance of real estate stocks and the
Davis Real Estate Portfolio in the last six months of 1999?
A. Real estate stocks remained in the doldrums as they have for some time. The
irony is that even after another year of positive earnings growth where the
earnings of real estate companies we own exceeded our expectations, their stock
prices continued to sag. I find these results disappointing. At the same time, I
believe that real estate stocks represent outstanding long-term opportunities
today, and we believe the Fund is strategically poised to take advantage of
these opportunities once the investment climate improves.
The Davis investment discipline is predicated on the belief that, over the long
term, growth in earnings is ultimately what drives price appreciation of all
stocks, including real estate stocks. Our approach is to pay a reasonable price
for companies that have attractive growth prospects over the long term.
At midyear, when the Fund commenced operations, the outlook for real estate
stocks brightened as high-profile investors like Warren Buffett moved into the
market, and the Fund's performance improved dramatically at that time. However,
when a sustained recovery failed to materialize, Fund results suffered. By
December the Morgan Stanley REIT (Real Estate Investment Trust) Index was
trading at a three-year low.
Moreover, unlike many other sectors of the stock market today where investors
have been willing to pay remarkably lofty prices for growth, the exact opposite
has been true in real estate. Since the Fund is focused on growth-oriented real
estate stocks rather than yield-oriented stocks, we lagged behind our peer group
in 1999.
Q. What factors have been holding real estate stocks back?
A. We think there are two main reasons for the unsatisfactory performance of
real estate. First, many investors are concerned that we are coming toward the
end of an economic cycle and that when the next recession comes, real estate
will be besieged by the same difficulties it suffered in the late 1980s and
early 1990s.
In our minds, nothing could be further from the truth. We are not suggesting
that real estate earnings will continue to show strong growth forever, but the
cycle should be substantially less dramatic. The factors that created problems
last time around were caused primarily by tax code incentives that encouraged
overbuilding without regard to demand. Those tax incentives no longer exist. Now
there is a much more transparent view of what is happening in terms of new
building and development, and that eliminates surprises. As a result, there is
not nearly the excess supply of real estate we had in the prior cycle. In short,
the rules in real estate have changed, but many investors are acting as if the
old rules are still in effect.
8
<PAGE>
DAVIS VARIABLE ACCOUNT FUND, INC.
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
===============================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
AN INTERVIEW WITH ANDREW A. DAVIS, PORTFOLIO MANAGER - CONTINUED
The second reason for the continuing slump in real estate stocks is perhaps more
intuitive. Simply put, in these heady times of high-flying Internet shares and
other glamour stocks, it appears that some investors may find the returns
offered by real estate a little too sedate.
Generally, long-term returns in real estate stocks, like other stocks, should
approximate the rate of companies' earnings growth. The only way for the Fund to
achieve a return that is better than earnings growth over time is to buy the
stocks right--that is, not to overpay for a company's earnings.
For the real estate companies we follow we generally foresee consistent earnings
growth of between 8% to 12%. To do better than that, we have to buy these 12%
growers at eight or nine times earnings, which we have been able to do in the
current market environment. We expect other investors will eventually recognize
the companies' long-term growth potential, which means they should be willing to
pay a higher multiple of earnings for the shares. In that case, the companies'
valuations might rise so that they trade not at eight times earnings but at 10
or 11 times earnings, and the Fund would be positioned to ride the tide of those
long-term compounding earnings.
We think the ultimate upside from owning these real estate companies is a return
of between 10% to 15%, year in and year out--but few investors these days seem
to care about those kinds of returns. What they seem to want are returns of 10%
to 15% a day or a month. However, we do not believe results like that are
possible over long periods of time, and such an approach is not the way to build
long-term wealth.
If you look at the overall market, most income-oriented companies, such as
utilities, fared poorly in 1999, and real estate is not dissimilar in that
regard. Real estate stocks have fallen from favor due to a dramatic shift in
investor psychology--and to us that spells opportunity.
Q. What are some of your favorite holdings now?
A. One of our favorite companies is Centerpoint Properties(4), an industrial
REIT. The company is growing its earnings 15% annually, year after year, but it
is still trading at around 11 times earnings.
Another favorite Fund holding is Home Properties of New York, an apartment REIT.
Home Properties is a great company with a terrific management team. Not only has
the company never missed an earnings estimate, it has actually beaten estimates
several times. Other investors do not seem to care. We do.
Two other large Fund positions with terrific growth rates and low dividend
yields are Public Storage, a storage REIT, and Vornado, a diversified REIT.
However, because they are growth-oriented, not yield-oriented, these stocks
underperformed our expectations over the last six months of 1999.
One area that suffered particularly in 1999 is the retail arena, and a company
we like here is General Growth Properties, a shopping mall REIT. Some observers
are predicting that the boom in shopping over the Internet will mean the death
of the shopping mall. Similar predictions were made when catalog sales and home
shopping via television first caught consumers' fancy, and those forecasts
proved to be incorrect. We expect the shopping mall concept to evolve, not die,
over the next decade. Already, we are starting to see alliances among retailers,
mall owners and Internet players in order to better serve consumers--and we
expect that trend to accelerate. However, because investor psychology is so
negative now, retail REITs are incredibly cheap and we see opportunities in
these shares.
9
<PAGE>
DAVIS VARIABLE ACCOUNT FUND, INC.
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
===============================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
AN INTERVIEW WITH ANDREW A. DAVIS, PORTFOLIO MANAGER - CONTINUED
One of the biggest positives today for the Fund as a whole is that the earnings
growth of our portfolio companies is solid. If we had owned 100% of every single
company in the Davis Real Estate Portfolio in for the entire year (the Fund
commenced operations on July 1, 1999), we would have had returns of around 14%.
In other words, that would have been the cash we could have put in our pocket at
the end of the year. Unfortunately, that earnings performance was not reflected
in the companies' stock prices and, therefore, not in the Fund's results. While
we are not satisfied with these short-term results, we remain dedicated to the
long-term Davis investment discipline and are taking advantage of this downturn
to solidify our core positions in well-managed REITs that we believe are capable
of generating steadily increasing rental income and solid returns on capital.(5)
- -------------------------
This Annual Report is authorized for distribution only when accompanied or
preceded by a current prospectus of Davis Variable Account Funds which contains
more information about risks, fees and expenses. Please read the prospectus
carefully before investing or sending money.
(1) This hypothetical example illustrates the power of compounding over a
20-year period, and is not intended to be indicative of future investment
results which may be higher or lower than the assumed rate.
(2) Total return assumes reinvestment of dividends and capital gain
distributions. Past performance is not a guarantee of future results. Investment
return and principal value will vary so that, when redeemed, an investor's
shares may be worth more or less than when purchased. The following table lists
the average annual total returns for the period from July 1, 1999 (commencement
of operations) through December 31, 1999.
- -------------------------------------------------------------
FUND NAME INCEPTION
- --------- ---------
- -------------------------------------------------------------
Davis Value Portfolio 2.64% -07/01/99
- -------------------------------------------------------------
Davis Financial Portfolio (7.17%) -07/01/99
- -------------------------------------------------------------
Davis Real Estate Portfolio (10.79%) -07/01/99
- -------------------------------------------------------------
10
<PAGE>
DAVIS VARIABLE ACCOUNT FUND, INC.
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
===============================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
(3) The definitions of indices quoted in this annual report appear below.
Investments cannot be made directly in any of these indices.
I. The S&P 500 Index is an unmanaged index of 500 selected common stocks,
most of which are listed on the New York Stock Exchange. The index is
adjusted for dividends, weighted towards stocks with large market
capitalizations, and represents approximately two-thirds of the total
market value of all domestic common stocks.
II. The Lipper Large Cap Value Fund Index is composed of funds that by
portfolio practice invest primarily in companies with market
capitalizations greater than 300% of the dollar-weighted median market
capitalization of the S&P Mid-cap 400 Index. Large-cap Value funds
seek long-term growth of capital by investing in companies that are
considered to be undervalued relative to a major unmanaged stock index
based on price-to-current earning, book value asset value or other
factors.
III. The Lipper Financial Services Fund Index is composed of funds that by
portfolio practice invest at least 65% of its portfolio in equity
securities of companies engaged in providing financial services,
including but not limited to banks, finance companies, insurance
companies, and securities/brokerage firms.
IV. The PHLX/KBW Bank Index is a capitalization-weighted index consisting
of 24 exchange-listed and National Market System stocks, representing
national money center banks and leading regional institutions. The
index is intended to reflect the evolving financial sector and was
developed with a base value of 195 as of 10-21-91.
V. The Morgan Stanley REIT (Real Estate Investment Trust) Index is a
capitalization-weighted index with dividends reinvested, of the most
actively traded real estate investment trusts and is designed to be a
measure of real estate equity performance.
(4) Portfolio holdings and portfolio manager opinions cited in this material are
current as of the date of this report, but are subject to change. See each
Fund's Schedule of Investments for a detailed list of portfolio holdings.
(5) This report reflects the professional opinions of the Funds' portfolio
managers. All investments involve some degree of risk; there can be no assurance
that the Funds' investment strategies will be successful. Prices of shares will
vary, so that when redeemed, an investor's shares could be worth more or less
than their original cost.
An investment in the Funds is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
11
<PAGE>
DAVIS VARIABLE ACCOUNT FUND, INC.
SCHEDULE OF INVESTMENTS
DAVIS VALUE PORTFOLIO
DECEMBER 31, 1999
===============================================================================
<TABLE>
<CAPTION>
VALUE
SHARES SECURITY (NOTE 1)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK - (94.82%)
ADVERTISING AGENCIES - (0.13%)
200 WPP Group PLC .............................................................. $ 16,575
-------------
AGRICULTURAL - (0.22%)
800 Monsanto Co. .............................................................. 28,500
-------------
BANKS AND SAVINGS & LOAN ASSOCIATIONS - (6.34%)
5,300 Golden West Financial Corp................................................... 177,550
4,200 U.S. Bancorp................................................................. 100,013
13,000 Wells Fargo Co............................................................... 525,688
-------------
803,251
-------------
BUILDING MATERIALS - (2.72%)
8,700 Masco Corp................................................................... 220,763
3,100 Vulcan Materials Company..................................................... 123,806
-------------
344,569
-------------
CONSUMER PRODUCTS - (1.64%)
900 Colgate-Palmolive Co......................................................... 58,500
1,200 Gillette Co.................................................................. 49,425
4,300 Philip Morris Cos., Inc. .................................................... 99,706
-------------
207,631
-------------
DIVERSIFIED - (1.94%)
3 Berkshire Hathaway Inc., Class A*............................................ 168,300
42 Berkshire Hathaway Inc., Class B*............................................ 76,860
-------------
245,160
-------------
DIVERSIFIED MANUFACTURING - (1.78%)
5,800 Tyco International Ltd....................................................... 225,475
-------------
ELECTRONICS - (8.57%)
2,400 Applied Materials, Inc.*..................................................... 303,975
400 Koninklijke Philips Electronics N.V.......................................... 54,000
1,900 Molex Inc.................................................................... 107,647
6,400 Texas Instruments Inc........................................................ 620,000
-------------
1,085,622
-------------
ENERGY - (1.97%)
2,200 Devon Energy Corporation..................................................... 72,325
3,900 Dover Corp................................................................... 176,962
-------------
249,287
-------------
FINANCIAL - (17.65%)
4,800 American Express Company..................................................... 798,000
10,500 Citigroup, Inc............................................................... 583,406
5,000 Freddie Mac.................................................................. 235,312
10,500 Household International, Inc................................................. 391,125
2,500 Providian Financial Corp. ................................................... 227,656
-------------
2,235,499
-------------
12
<PAGE>
DAVIS VARIABLE ACCOUNT FUND, INC.
SCHEDULE OF INVESTMENTS
DAVIS VALUE PORTFOLIO - Continued
DECEMBER 31, 1999
===============================================================================
<CAPTION>
VALUE
SHARES SECURITY (NOTE 1)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK - CONTINUED
FOOD/BEVERAGE & RESTAURANT - (3.66%)
11,500 McDonald's Corp.............................................................. $ 463,594
-------------
HOTELS & MOTELS - (0.82%)
3,300 Marriott International, Inc.................................................. 104,156
-------------
INDUSTRIAL - (1.10%)
2,700 Sealed Air Corp.*............................................................ 139,894
-------------
INSURANCE - (0.43%)
1,700 UnumProvident Corp. ......................................................... 54,506
-------------
INVESTMENT FIRMS - (5.15%)
800 Donaldson, Lufkin & Jenrette, Inc............................................ 38,700
4,300 Morgan Stanley Dean Witter & Co.............................................. 613,825
-------------
652,525
-------------
PHARMACEUTICAL AND HEALTH CARE - (4.72%)
5,800 American Home Products Corp.................................................. 228,737
500 Bristol-Myers Squibb Co...................................................... 32,094
700 Merck & Co., Inc............................................................. 46,944
3,000 Pfizer Inc................................................................... 97,313
3,000 SmithKline Beecham PLC - ADR................................................. 193,313
-------------
598,401
-------------
PROPERTY/CASUALTY INSURANCE - (7.65%)
5,425 American International Group, Inc. .......................................... 586,578
1,000 Chubb Corp................................................................... 56,312
1,900 Progressive Corp. (Ohio)..................................................... 138,938
2,400 Transatlantic Holdings, Inc.................................................. 187,350
-------------
969,178
-------------
PUBLISHING - (2.44%)
600 Dow Jones & Co., Inc. ....................................................... 40,800
1,600 Gannett Co., Inc............................................................. 130,500
2,500 Tribune Co................................................................... 137,656
-------------
308,956
-------------
REAL ESTATE - (1.24%)
200 Avalonbay Communities, Inc................................................... 6,862
2,600 CenterPoint Properties Corp. ................................................ 93,275
1,300 Crescent Real Estate Equities Co............................................. 23,887
1,000 Vornado Realty Trust......................................................... 32,500
-------------
156,524
-------------
RETAIL - (0.04%)
210 The Neiman Marcus Group, Inc., Class B* ..................................... 5,657
-------------
13
<PAGE>
DAVIS VARIABLE ACCOUNT FUND, INC.
SCHEDULE OF INVESTMENTS
DAVIS VALUE PORTFOLIO - Continued
DECEMBER 31, 1999
===============================================================================
<CAPTION>
VALUE
SHARES SECURITY (NOTE 1)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK - CONTINUED
TECHNOLOGY - (19.28%)
6,300 Hewlett-Packard Co........................................................... $ 717,806
3,300 Intel Corp................................................................... 271,528
4,800 International Business Machines Corp......................................... 518,400
2,000 Lexmark International Group, Inc., Class A*.................................. 181,000
4,000 Novell, Inc.*................................................................ 159,625
2,800 Oracle Corp.*................................................................ 313,688
4,900 SAP AG....................................................................... 255,106
800 Unisys Corp.*................................................................ 25,550
-------------
2,442,703
-------------
TELECOMMUNICATIONS - (5.19%)
300 Agilent Technologies, Inc.*.................................................. 23,194
300 AT&T Corp.................................................................... 15,225
1,500 Globalstar Telecommunications Limited* ...................................... 66,047
4,000 Loral Space & Communications, Ltd.*.......................................... 97,250
1,900 MediaOne Group, Inc.*........................................................ 145,944
2,100 Motorola, Inc................................................................ 309,225
-------------
656,885
-------------
WASTE MANAGEMENT SERVICES - (0.14%)
1,000 Waste Management, Inc........................................................ 17,188
-------------
Total Common Stock - (identified cost $11,071,755)........................... 12,011,736
-------------
SHORT TERM INVESTMENTS - (4.68%)
$ 593,000 State Street Corporation Repurchase Agreement, 2.75%, 01/03/00, dated
12/31/99, repurchase value $593,136 (collateralized by $635,000 par
value Fannie Mae DN, Zero Cpn., 08/17/00, market value $611,188)
- (identified cost $593,000).............................................. 593,000
-------------
Total Investments - (99.50%) - (identified cost $ 11,664,755) - (a).......... 12,604,736
Other Assets Less Liabilities - (0.50%)...................................... 63,148
-------------
Net Assets - (100%).......................................................... $ 12,667,884
=============
*Non-Income Producing Security
(a) Aggregate cost for Federal Income Tax purposes is $11,692,120. At December
31, 1999 unrealized appreciation (depreciation) of securities for Federal Income
Tax purposes is as follows:
Unrealized appreciation...................................................... $ 1,425,648
Unrealized depreciation...................................................... (513,032)
-------------
Net unrealized appreciation ................................................. $ 912,616
=============
SEE NOTES TO FINANCIAL STATEMENTS
</TABLE>
14
<PAGE>
DAVIS VARIABLE ACCOUNT FUND, INC.
SCHEDULE OF INVESTMENTS
DAVIS FINANCIAL PORTFOLIO
DECEMBER 31, 1999
===============================================================================
<TABLE>
<CAPTION>
VALUE
SHARES SECURITY (NOTE 1)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK - (88.71%)
BANKS AND SAVINGS & LOAN ASSOCIATIONS - (12.73%)
3,100 Bank of New York Company, Inc................................................ $ 124,000
200 Fifth Third Bancorp.......................................................... 14,669
1,600 Golden West Financial Corp................................................... 53,600
1,002 Lloyds TSB Group PLC......................................................... 12,446
400 State Street Corporation..................................................... 29,225
1,600 U.S. Bancorp ................................................................ 38,100
4,200 Wells Fargo Co............................................................... 169,838
-------------
441,878
-------------
BUILDING MATERIALS - (3.66%)
2,800 Masco Corp................................................................... 71,050
1,400 Vulcan Materials Company..................................................... 55,913
-------------
126,963
-------------
CONSUMER Products - (1.20%)
1,800 Philip Morris Cos., Inc...................................................... 41,737
-------------
DIVERSIFIED - (2.57%)
1 Berkshire Hathaway Inc., Class A*............................................ 56,100
18 Berkshire Hathaway Inc., Class B*............................................ 32,940
-------------
89,040
-------------
DIVERSIFIED MANUFACTURING - (3.81%)
3,400 Tyco International Ltd....................................................... 132,175
-------------
FINANCIAL SERVICES - (56.75%)
INSURANCE - (17.96%)
925 American International Group, Inc............................................ 100,016
300 Chubb Corp. ................................................................. 16,894
1,900 Cincinnati Financial Corp.................................................... 59,078
1,500 Everest Reinsurance Holding, Inc............................................. 33,469
1,100 FPIC Insurance Group, Inc.*.................................................. 18,322
3,200 Horace Mann Educators Corp................................................... 62,800
100 Markel Corp.*................................................................ 15,500
800 Progressive Corp. (Ohio)..................................................... 58,500
1,900 ReliaStar Financial Corp..................................................... 74,456
2,100 Transatlantic Holdings Inc................................................... 163,931
600 Travelers Property Casualty Corp. Class A.................................... 20,550
-------------
623,516
-------------
OTHER FINANCIAL SERVICES - (38.79%)
2,000 American Express Company..................................................... 332,500
2,600 Capital One Financial Corp................................................... 125,287
900 Charles Schwab Corp.......................................................... 34,538
4,300 Citigroup, Inc............................................................... 238,919
1,400 Donaldson, Lufkin & Jenrette Inc............................................. 67,725
15
<PAGE>
DAVIS VARIABLE ACCOUNT FUND, INC.
SCHEDULE OF INVESTMENTS
DAVIS FINANCIAL PORTFOLIO - CONTINUED
DECEMBER 31, 1999
===============================================================================
<CAPTION>
VALUE
SHARES SECURITY (NOTE 1)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK - CONTINUED
OTHER FINANCIAL SERVICES - CONTINUED
1,400 Freddie Mac.................................................................. $ 65,887
4,100 Household International, Inc................................................. 152,725
900 Legg Mason, Inc.............................................................. 32,625
1,900 MBNA Corp. .................................................................. 51,775
500 Morgan Stanley Dean Witter & Co.............................................. 71,375
1,900 Providian Financial Corp..................................................... 173,019
-------------
1,346,375
-------------
RESTAURANT & FOOD - (4.30%)
3,700 McDonald's Corp. ............................................................ 149,156
-------------
Technology - (2.83%)
200 Hewlett-Packard Co. ......................................................... 22,787
700 International Business Machines Corp......................................... 75,600
-------------
98,387
-------------
TRANSPORTATION - (0.86%)
400 Kansas City Southern Industries, Inc......................................... 29,850
-------------
Total Common Stock - (identified cost $3,135,059)............................ 3,079,077
-------------
SHORT TERM - (11.38%)
$ 395,000 State Street Bank and Trust Co. Repurchase Agreement, 2.75%, 01/03/00,
dated 12/31/99, repurchase value $395,091 (collateralized by $425,000
par value Fannie Mae DN Zero Cpn., 08/17/00, market value $409,063)
- (identified cost $395,000................................................. 395,000
-------------
Total Investments - (100.09%) - (identified cost $3,530,059) - (a) 3,474,077
Liabilities Less Other Assets - (0.09%)...................................... (3,074)
--------------
Net Assets - (100%) ........................................................ $ 3,471,003
==============
*Non-Income Producing Security.
(a) Aggregate cost for Federal Income Tax purposes is $3,545,742. At December 31, 1999
unrealized appreciation (depreciation) of securities for Federal Income Tax purposes is
as follows:
Unrealized appreciation...................................................... $ 139,555
Unrealized depreciation...................................................... (211,220)
--------------
Net unrealized depreciation.................................................. $ (71,665)
==============
SEE NOTES TO FINANCIAL STATEMENTS
</TABLE>
16
<PAGE>
DAVIS VARIABLE ACCOUNT FUND, INC.
SCHEDULE OF INVESTMENTS
DAVIS REAL ESTATE PORTFOLIO
DECEMBER 31, 1999
===============================================================================
<TABLE>
<CAPTION>
VALUE
SHARES SECURITY (NOTE 1)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK - (83.90%)
APARTMENTS - (3.38%)
2,400 Boardwalk Equities, Inc.*.................................................... $ 20,617
-------------
APARTMENTS (REITS) - (22.26%)
700 Apartment Investment & Management Co......................................... 27,869
1,000 Archstone Communities Trust.................................................. 20,500
600 Avalon Bay Communities, Inc.................................................. 20,587
400 Equity Residential Property Trust............................................ 17,075
700 Gables Residential Trust..................................................... 16,800
1,200 Home Properties of New York, Inc. ........................................... 32,925
-------------
135,756
-------------
DIVERSIFIED - (2.48%)
600 Crescent Operating, Inc.* ................................................... 1,613
800 Trizec Hahn Corporation...................................................... 13,500
-------------
15,113
-------------
DIVERSIFIED (REITS) - (13.37%)
1,000 Duke-Weeks Realty Corporation................................................ 19,500
300 Liberty Property Trust....................................................... 7,275
700 Spieker Properties, Inc...................................................... 25,506
900 Vornado Realty Trust......................................................... 29,250
-------------
81,531
-------------
GOLF (REITS) - (2.50%)
900 Golf Trust of America, Inc. ................................................. 15,244
-------------
HOTELS & LODGING - (2.59%)
500 Marriott International, Inc.................................................. 15,781
-------------
INDUSTRIAL (REITS) - (6.47%)
1,100 CenterPoint Properties Corporation........................................... 39,462
-------------
MALLS (REITS) - (0.92%)
200 General Growth Properties, Inc............................................... 5,600
-------------
OFFICE SPACE (REITS) - (18.63%)
900 Alexandria Real Estate Equities, Inc......................................... 28,631
800 Boston Properties, Inc....................................................... 24,900
600 Cornerstone Properties, Inc.................................................. 8,775
200 Crescent Real Estate Equities Co............................................. 3,675
200 Equity Office Properties Trust............................................... 4,925
300 Kilroy Realty Corportion..................................................... 6,600
800 Parkway Properties Inc....................................................... 23,050
600 SL Green Realty Corp......................................................... 13,050
-------------
113,606
-------------
REAL ESTATE DEVELOPMENT - (3.15%)
1,500 Catellus Development Corp.*.................................................. 19,219
-------------
17
<PAGE>
DAVIS VARIABLE ACCOUNT FUND, INC.
SCHEDULE OF INVESTMENTS
DAVIS REAL ESTATE PORTFOLIO - CONTINUED
DECEMBER 31, 1999
===============================================================================
<CAPTION>
VALUE
SHARES SECURITY (NOTE 1)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK - CONTINUED
RESORTS/THEME PARKS - (0.88%)
300 Vail Resorts, Inc.* ......................................................... $ 5,381
--------------
SHOPPING CENTERS (REITS)- (2.43%)
500 JDN Realty Corp.............................................................. 8,063
200 Kimco Realty Corp............................................................ 6,775
-------------
14,838
-------------
STORAGE (REITS) - (4.84%)
1,300 Public Storage, Inc.......................................................... 29,494
-------------
Total Common Stock - (identified cost $540,457)................................ 511,642
--------------
CONVERTIBLE PREFERRED STOCK - (6.23%)
APARTMENTS (REITS)- (0.39%)
100 Equity Residential Properties Trust, 7.00%, Series E, Conv. Pfd.............. 2,362
-------------
MALLS (REITS) - (2.30%)
700 General Growth Properties, 7.25%, Conv. Pfd.................................. 14,000
--------------
RESORTS/THEME PARKS - (3.54%)
400 Premier Parks Inc. 7.50%, Conv. Pfd.......................................... 21,600
--------------
Total Convertible Preferred Stock - (identified cost $44,491)................ 37,962
--------------
Total Investment - (90.13%) - (identified cost $584,948) - (a)............... 549,604
Other Assets Less Liabilities - (9.87%)...................................... 60,179
--------------
Net Assets - (100%).......................................................... $ 609,783
==============
*Non-Income Producing Security.
(a) Aggregate cost for Federal Income Tax purposes is $585,703. At December 31,
1999 unrealized appreciation (depreciation) of securities for Federal Income Tax
purposes is as follows:
Unrealized appreciation...................................................... $ 6,755
Unrealized depreciation..................................................... (42,854)
--------------
Net unrealized depreciation ................................................. $ (36,099)
==============
SEE NOTES TO FINANCIAL STATEMENTS
</TABLE>
18
<PAGE>
DAVIS VARIABLE ACCOUNT FUND, INC.
STATEMENTS OF ASSETS AND LIABILITIES
At December 31, 1999
===============================================================================
<TABLE>
<CAPTION>
DAVIS
DAVIS DAVIS REAL
VALUE FINANCIAL ESTATE
PORTFOLIO PORTFOLIO PORTFOLIO
--------------- -------------- --------------
<S> <C> <C> <C>
ASSETS:
Investments in securities, at value
* (see accompanying Schedules
of Investments).............................. $ 12,604,736 $ 3,474,077 $ 549,604
Cash........................................... 1,523 1,104 66,584
Receivables:
Dividends and interest....................... 7,087 2,347 3,486
Capital stock sold........................... 78,348 4,985 125
Due from adviser............................. - 2,678 1,457
--------------- -------------- --------------
Total assets................................... 12,691,694 3,485,191 621,256
--------------- -------------- --------------
LIABILITIES:
Accrued expenses............................... 23,810 14,188 11,473
--------------- -------------- --------------
Total liabilities.............................. 23,810 14,188 11,473
--------------- -------------- --------------
NET ASSETS ....................................... $ 12,667,884 $ 3,471,003 $ 609,783
=============== ============== ==============
SHARES OUTSTANDING (NOTE 4)....................... 1,236,199 374,811 69,994
=============== ============== ==============
NET ASSET VALUE, offering and
redemption price per share (Net
Assets / shares outstanding)................. $ 10.25 $ 9.26 $ 8.71
=========== ========== ==========
NET ASSETS CONSIST OF:
Overdistributed net investment income.......... $ - $ (45) $ -
Par value of shares of capital stock........... 1,236 375 70
Additional paid-in capital..................... 11,785,268 3,564,849 673,253
Accumulated net realized loss.................. (58,601) (38,194) (28,196)
Net unrealized appreciation (depreciation) on
investments.................................. 939,981 (55,982) (35,344)
--------------- -------------- --------------
$ 12,667,884 $ 3,471,003 $ 609,783
=============== ============== ==============
</TABLE>
* Including repurchase agreements of $593,000 and $395,000 for Davis Value
Portfolio and Davis Financial Portfolio, respectively, and cost of $11,664,755,
$3,530,059 and $584,948 for Davis Value Portfolio, Davis Financial Portfolio,
Davis Real Estate Portfolio, respectively.
SEE NOTES TO FINANCIAL STATEMENTS
19
<PAGE>
DAVIS VARIABLE ACCOUNT FUND, INC.
STATEMENTS OF OPERATIONS
For the period from July 1, 1999 (commencement of operations) to
December 31, 1999
===============================================================================
<TABLE>
<CAPTION>
DAVIS
DAVIS DAVIS REAL
VALUE FINANCIAL ESTATE
PORTFOLIO PORTFOLIO PORTFOLIO
--------------- --------------- ---------------
<S> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Income:
Dividends...................................... $ 28,473 $ 9,673 $ 13,405
Interest....................................... 17,858 7.278 341
--------------- --------------- ---------------
Total income............................... 46,331 16,951 13,746
--------------- --------------- ---------------
Expenses:
Management fees (Note 2)....................... 24,434 7,252 1,902
Custodian fees................................. 16,899 9,374 5,205
Transfer agent fees............................ 4,467 4,478 4,282
Audit fees..................................... 7,000 7,000 7,000
Accounting fees (Note 2)....................... 4,000 4,000 4,000
Legal fees..................................... 6,177 3,006 3,276
Reports to shareholders........................ 10,139 4,973 3,501
Directors fees and expenses.................... 897 893 892
Registration and filing fees................... 424 208 147
Miscellaneous.................................. 57 26 16
--------------- --------------- ---------------
Total expenses............................. 74,494 41,210 30,221
Expenses paid indirectly (Note 5).......... (212) (216) (510)
Reimbursement of expenses by
adviser (Note 2)......................... (41,974) (31,364) (27,147)
--------------- --------------- ---------------
Net expenses............................... 32,308 9,630 2,564
--------------- --------------- ---------------
Net investment income...................... 14,023 7,321 11,182
--------------- --------------- ---------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized loss from
investment transactions...................... (58,601) (38,194) (28,196)
Net increase (decrease) in unrealized
appreciation of investments
during the period............................ 939,981 (55,982) (35,344)
--------------- -------------- ---------------
Net realized and unrealized
gain (loss) on investments............... 881,380 (94,176) (63,540)
--------------- -------------- ---------------
Net increase (decrease) in net
assets resulting from
operations................................. $ 895,403 $ (86,855) $ (52,358)
=============== ============== ===============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
20
<PAGE>
DAVIS VARIABLE ACCOUNT FUND, INC. STATEMENTS
OF CHANGES IN NET ASSETS
For the period ended December 31, 1999
===============================================================================
<TABLE>
<CAPTION>
DAVIS
DAVIS DAVIS REAL
VALUE FINANCIAL ESTATE
PORTFOLIO PORTFOLIO PORTFOLIO
--------------- --------------- --------------
<S> <C> <C> <C>
OPERATIONS:
Net investment income....................... $ 14,023 $ 7,321 $ 11,182
Net realized losses from
investment transactions................... (58,601) (38,194) (28,196)
Net increase (decrease) in unrealized
appreciation of investments............... 939,981 (55,982) (35,344)
--------------- --------------- --------------
Net increase (decrease) in net
assets resulting from operations.......... 895,403 (86,855) (52,358)
DIVIDENDS TO
SHAREHOLDERS FROM:
Net investment income....................... (14,023) (7,366) (11,182)
Return of capital........................... (2,540) (1,035) (1,876)
CAPITAL SHARE TRANSACTIONS
(NOTE 4).................................... 11,789,044 3,566,259 675,199
---------------- --------------- --------------
Total increase in net assets.................... 12,667,884 3,471,003 609,783
NET ASSETS:
Beginning of period......................... - - -
---------------- --------------- --------------
End of Period (Including overdistributed
net investment income of $45 for Davis
Financial Portfolio)..................... $ 12,667,884 $ 3,471,003 $ 609,783
=============== =============== ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
21
<PAGE>
DAVIS VARIABLE ACCOUNT FUND, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
===============================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Davis Variable Account Fund, Inc. consists of three series of Funds,
Davis Value Portfolio, Davis Financial Portfolio, and Davis Real Estate
Portfolio (collectively "the Funds"). The Funds are registered under the
Investment Company Act of 1940, as amended, as diversified, open-end management
investment companies. The Funds accounts separately for the assets, liabilities
and operations of each series. The following is a summary of significant
accounting policies followed by the Funds in the preparation of financial
statements.
Davis Value Portfolio, Davis Financial Portfolio and Davis Real Estate
Portfolio are diversified, professionally managed stock-oriented funds.
A. VALUATION OF SECURITIES - Securities listed on national securities exchanges
are valued at the last reported sales price on the day of valuation. Securities
traded in the over the counter market and listed securities for which no sale
was reported on that date are stated at the last quoted bid price. Securities
for which market quotations are not readily available are valued at fair value
as determined by the Board of Directors. Short-term obligations are valued at
amortized cost which approximates fair value as determined by the Board of
Directors. These valuation procedures are reviewed and subject to approval by
the Board of Directors.
B. CURRENCY TRANSLATION - The market values of all assets and liabilities
denomination in foreign currencies are recorded in the financial statements
after translation to the U.S. dollar based upon the mean between the bid and
offered quotations of the currencies against U.S. dollars on the date of
valuation. The cost basis of such assets and liabilities is determined based
upon historical exchange rates. Income and expenses are translated at average
exchange rates in effect as accrued or incurred.
C. FORWARD CURRENCY CONTRACTS - The Funds may enter into forward purchases or
sales of foreign currencies to hedge certain foreign currency denominated assets
and liabilities against declines in market value relative to the U.S. dollar.
Forward currency contracts are marked-to-market daily and the change in market
value is recorded by the Funds as an unrealized gain or loss. When the forward
currency contract is closed, the Funds record a realized gain or loss equal to
the difference between the value of the forward currency contract at the time it
was opened and value at the time it was closed. Investments in forward currency
contracts may expose the Funds to risks resulting from unanticipated movements
in foreign currency exchange rates or failure of the counter-party to the
agreement to perform in accordance with the terms of the contract.
Reported net realized foreign exchange gains or losses arise from the sales and
maturities of short-term sales of foreign currencies, currency gains or losses
realized between the trade and settlement dates on securities transactions, the
difference between the amounts of dividends, interest and foreign withholding
taxes recorded on the Funds' books, and the U.S. dollar equivalent of the
amounts actually received or paid. Net unrealized foreign exchange gains and
losses arise from changes in the value of assets and liabilities other than
investments in securities at fiscal year end, resulting from changes in the
exchange rate.
D. FEDERAL INCOME TAXES - It is each Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to
shareholders. Therefore, no provision for federal income or excise tax is
required. At December 31, 1999, Davis Value Portfolio had approximately $31,000
of capital loss carryovers available to offset future capital gains, if any,
which expire in 2007. At December 31, 1999, Davis Financial Portfolio had
approximately $22,000 of capital loss carryovers and post October losses
available to offset future capital gains, if any, which expire in 2007 and 2008.
At December 31, 1999, Davis Real Estate Portfolio had approximately $27,000 of
capital loss carryovers and post October losses available to offset future
capital gains, if any, which expire in 2007 and 2008.
22
<PAGE>
DAVIS VARIABLE ACCOUNT FUND, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1999
===============================================================================
E. USE OF ESTIMATES IN FINANCIAL STATEMENTS - In preparing financial statements
in conformity with generally accepted accounting principles, management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, as well as the reported amounts of income and expenses
during the reporting period. Actual results may differ from these estimates.
F. SECURITIES TRANSACTIONS AND RELATED INVESTMENT INCOME - Securities
transactions are accounted for on the trade date (date the order to buy or sell
is executed) with realized gain or loss on the sale of securities being
determined based upon identified cost. Interest income is recorded on the
accrual basis and dividend income is recorded on the ex-dividend date. Discounts
and premiums on debt securities (excluding convertible bonds) purchased are
amortized over the lives of the respective securities in accordance with the
requirements of the Internal Revenue Code.
G. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS - Dividends and distributions to
shareholders are recorded on the ex-dividend date. The character of the
distributions made during the year from net investment income may differ from
its ultimate characterization for federal income tax purposes. Also, due to the
timing of distributions, the fiscal year in which amounts are distributed may
differ from the fiscal year in which income or gain was recorded by the Funds.
The Funds adjust the classification of distributions to shareholders to reflect
the differences between financial statement amounts and distributions determined
in accordance with income tax regulations.
NOTE 2 - INVESTMENT ADVISORY FEES
The fee for each of the Davis Value Portfolio, Davis Financial Portfolio and
Davis Real Estate Portfolio is 0.75% of the respective Funds' average annual net
assets.
State Street Bank is the Funds' primary transfer agent. Davis Selected
Advisers, L.P. (the "Adviser") is also paid for certain transfer agent services.
The fee paid to the Adviser for the period ended December 31, 1999 was $8 for
each of the Davis Value Portfolio, Davis Financial Portfolio and Davis Real
Estate Portfolio. State Street Bank & Trust Company ("State Street Bank") is the
Funds' primary accounting provider. Fees for such services are included in the
custodian fee as State Street also serves as the Funds' custodian. The Adviser
is also paid for certain accounting services. The fee for the period ended
December 31, 1999 for Davis Value Portfolio, Davis Financial Portfolio and Davis
Real Estate Portfolio amounted to $4,000 for each portfolio. The Adviser has
agreed to reimburse the Funds for certain expenses incurred in the current
fiscal period which amounted to $41,974, $31,364 and $27,147 for Davis Value
Portfolio, Davis Financial Portfolio and Davis Real Estate Portfolio,
respectively. Certain directors and officers of the Funds are also directors and
officers of the general partner of the Adviser.
Davis Selected Advisers - NY, Inc. ("DSA-NY"), a wholly-owned subsidiary of
the Adviser, acts as sub-adviser to the Funds. The Funds pay no fees directly to
DSA-NY.
Each Fund has adopted procedures to treat Shelby Cullom Davis & Co. ("SCD")
as an affiliate of the Adviser. For Davis Value Portfolio, SCD received $37 in
commissions on the purchases/sales of portfolio securities.
23
<PAGE>
DAVIS VARIABLE ACCOUNT FUND, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1999
===============================================================================
NOTE 3 - PURCHASES AND SALES OF SECURITIES
Purchases and sales of investment securities (excluding short-term
securities) during the period ended December 31, 1999 were as follows:
<TABLE>
<CAPTION>
DAVIS DAVIS DAVIS
VALUE FINANCIAL REAL ESTATE
PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- ---------
<S> <C> <C> <C>
Cost of purchases........................ $ 11,479,273 $ 3,343,657 $ 713,295
Proceeds of sales........................ $ 348,828 $ 170,443 $ 98,615
</TABLE>
NOTE 4 - CAPITAL STOCK
At December 31, 1999, there were 5 billion shares of capital stock ($0.001
par value per share) authorized. Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
JULY 1, 1999
(COMMENCEMENT OF
OPERATIONS) THROUGH
DECEMBER 31, 1999
---------------------------------------------
DAVIS DAVIS DAVIS
VALUE FINANCIAL REAL ESTATE
PORTFOLIO PORTFOLIO PORTFOLIO
----------- ---------- ----------
<S> <C> <C> <C>
Shares sold............................................... 1,328,411 426,594 68,984
Shares issued in reinvestment of distributions............ 1,624 912 1,495
----------- ---------- ----------
1,330,035 427,506 70,479
Shares redeemed........................................... (93,836) (52,695) (485)
----------- ---------- ----------
Net increase........................................ 1,236,199 374,811 69,994
=========== ========== ==========
Proceeds from shares sold................................. $12,681,981 $4,045,353 $ 666,302
Proceeds from shares issued in
reinvestment of distributions......................... 16,563 8,401 13,058
----------- ---------- ----------
12,698,544 4,053,754 679,360
Cost of shares redeemed................................... (909,500) (487,495) (4,161)
----------- ---------- ----------
Net increase........................................ $11,789,044 $3,566,259 $ 675,199
=========== ========== ==========
</TABLE>
NOTE 5 - CUSTODIAN FEES
Under an agreement with the custodian bank, each Fund's custodian fees
are reduced for earnings on cash balances maintained at the custodian by the
Funds. Such reductions amounted to $212, $216 and $510 for Davis Value
Portfolio, Davis Financial Portfolio and Davis Real Estate Portfolio,
respectively.
24
<PAGE>
DAVIS VARIABLE ACCOUNT FUND, INC.
FINANCIAL HIGHLIGHTS
===============================================================================
The following financial information represents data for each share of capital
stock outstanding throughout each period:
<TABLE>
<CAPTION>
DAVIS DAVIS DAVIS
VALUE FINANCIAL REAL ESTATE
PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- ---------
JULY 1, 1999 JULY 1, 1999 JULY 1, 1999
(COMMENCEMENT (COMMENCEMENT (COMMENCEMENT
OF OPERATIONS) OF OPERATIONS) OF OPERATIONS)
THROUGH THROUGH THROUGH
DECEMBER 31, 1999 DECEMBER 31, 1999 DECEMBER 31, 1999
------------------ ----------------- -----------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period.... $ 10.00 $ 10.00 $ 10.00
---------- --------- ---------
Income From Investment Operations
- ---------------------------------
Net Investment Income.................. 0.01 0.02 0.18
Net Realized and Unrealized
Gains (Losses)...................... 0.25 (0.74) (1.26)
---------- --------- ---------
Total From Investment Operations.... 0.26 (0.72) (1.08)
Dividends and Distributions
- ----------------------------
Dividends from Net Investment Income... (0.01) (0.02) (0.18)
Return of Capital...................... _(3) _(3) (0.03)
---------- --------- ---------
Total Dividends and Distributions... (0.01) (0.02) (0.21)
---------- --------- ---------
Net Asset Value, End of Period.......... $ 10.25 $ 9.26 $ 8.71
========== ========= =========
Total Return(1)......................... 2.64% (7.17)% (10.79)%
- -------------
Ratios/Supplemental Data
- ------------------------
Net Assets, End of Period
(000 omitted)....................... $12,668 $3,471 $610
Ratio of Expenses to Average Net Assets 1.00%*(4) 1.00%*(4) 1.00%*(4)
Ratio of Net Investment Income to
Average Net Assets.................. 0.43%* 0.76%* 4.41%*
Portfolio Turnover Rate(2)............. 5% 9% 21%
</TABLE>
(1) Assumes hypothetical initial investment on the business day before the first
day of the fiscal period, with all dividends and distributions reinvested in
additional shares on the reinvestment date, and redemption at the net asset
value calculated on the last business day of the fiscal period. Total
returns are not annualized for periods of less than one year.
(2) The lesser of purchases or sales of portfolio securities for a period,
divided by the monthly average of the market value of portfolio securities
owned during the period. Securities with a maturity or expiration date at
the time of acquisition of one year or less are excluded from the
calculation.
(3) Less than $0.005 per share.
(4) Had the Adviser not absorbed certain expenses the ratio of expenses to
average net assets would have been 2.29%, 4.24% and 11.70%, for Davis Value
Portfolio, Davis Financial Portfolio and Davis Real Estate Portfolio,
respectively.
* Annualized
SEE NOTES TO FINANCIAL STATEMENTS
25
<PAGE>
DAVIS VARIABLE ACCOUNT FUND, INC.
INDEPENDENT AUDITORS' REPORT
================================================================================
To the Shareholders and Board of Directors
of Davis Variable Account Fund, Inc.:
We have audited the accompanying statements of assets and liabilities of
Davis Value Portfolio, Davis Financial Portfolio and Davis Real Estate
Portfolio, including the schedules of investments as of December 31, 1999 and
the related statements of operations, the statements of changes in net assets,
and the financial highlights for the period from July 1, 1999 (commencement of
operations) to December 31, 1999. These financial statements and financial
highlights are the responsibility of the Funds' management. Our responsibility
is to express an opinion on these financial statements and financial highlights
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 statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1999, by correspondence with the custodian. 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 financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
positions of Davis Value Portfolio, Davis Financial Portfolio and Davis Real
Estate Portfolio as of December 31, 1999, and the results of operations, the
changes in net assets, and the financial highlights for the period from July 1,
1999 (commencement of operations) to December 31, 1999, in conformity with
generally accepted accounting principles.
KPMG LLP
Denver, Colorado
February 4, 2000
26
<PAGE>
DAVIS VARIABLE ACCOUNT FUND, INC
2949 East Elvira Road, Suite 101, Tucson, Arizona 85706
================================================================================
DIRECTORS OFFICERS
Wesley E. Bass, Jr. Jeremy H. Biggs
Jeremy H. Biggs Chairman
Marc P. Blum Shelby M. C. Davis
Andrew A. Davis President
Christopher C. Davis Kenneth C. Eich
Jerry D. Geist Vice President
D. James Guzy Sharra L. Reed
G. Bernard Hamilton Vice President,
Laurence W. Levine Treasurer & Assistant Secretary
Christian R. Sonne Thomas D. Tays
Marsha Williams Vice President Secretary
Christopher C. Davis
Vice President
Andrew A. Davis
Vice President
INVESTMENT ADVISER
Davis Selected Advisers, L.P.
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
(800) 279-0279
DISTRIBUTOR
Davis Distributors, LLC
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
TRANSFER AGENT & CUSTODIAN
State Street Bank and Trust Company
c/o The Davis Funds
P.O. Box 8406
Boston, Massachusetts 02266-8406
COUNSEL
D'Ancona & Pflaum
111 E. Wacker Drive, Suite 2800
Chicago, Illinois 60601-4205
AUDITORS
KPMG LLP
707 Seventeenth Street
Suite 2300
Denver, Colorado 80202
================================================================================
For more information about the Davis Variable Account Fund, Inc., including
management fee, charges and expenses, see the current prospectus which must
precede or accompany this report.
================================================================================
27
