<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
REGISTRATION NO. 2-57209
POST-EFFECTIVE AMENDMENT NO. 38
AND
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
REGISTRATION NO. 811-2679
AMENDMENT NO. 34
DAVIS SERIES, INC.
124 East Marcy Street
Santa Fe, New Mexico 87501
1-505-983-4335
Agents for Service: Sheldon R. Stein
D'Ancona & Pflaum
30 North LaSalle Street
Suite 2900
Chicago, Illinois 60602
1-312-580-2014
-or-
Samuel P. Ynzunza, Esq.
Davis Selected Advisers, L.P.
124 East Marcy Street
Santa Fe, New Mexico 87501
1-505-983-4335
It is proposed that this filing will become effective:
Immediately upon filing pursuant to paragraph (b)
-----
X On August 12, 1997 pursuant to paragraph (b) (ix)
-----
60 days after filing pursuant to paragraph (a)
-----
on , pursuant to paragraph (a) of Rule 485
----- ---------
Registrant has registered an indefinite number of its shares, under the
Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company
Act of 1940. The Registrant's Rule 24f-2 Notice for its fiscal year ended
December 31,1996 was filed on or about February 28, 1997.
1
<PAGE> 2
FORM N-1A
DAVIS SERIES, INC. CLASS A, B AND C SHARES
------------------------------------------
POST-EFFECTIVE AMENDMENT NO. 38 TO REGISTRATION STATEMENT NO. 2057209 UNDER
THE SECURITIES ACT OF 1933 AND AMENDMENT NO. 34 UNDER THE INVESTMENT COMPANY
ACT OF 1940 TO REGISTRATION STATEMENT NO. 811-2679.
<TABLE>
CROSS REFERENCE SHEET
---------------------
<CAPTION>
N-1A
ITEM NO. PROSPECTUS CAPTION OR PLACEMENT
- -------- -------------------------------
<S> <C>
1 Front Cover
2 Summary
3 Financial Highlights
4 Summary; Investment Objectives and Policies; High Yield High Risk Debt Securities
5 Adviser, Sub-Adviser and Distributor; Distribution Plans; Purchase of Shares;
Summary; Investment Objectives and Policies
6 Summary; Shareholder Inquiries; Dividends and Distributions; Federal Income
Taxes; Company Shares
7 Purchase of Shares; Exchange of Shares; Determining the Price of Shares;
Dividends and Distributions
8 Redemptions of Shares; Exchange of Shares
9 (Not Applicable)
PART B CAPTION OR PLACEMENT
---------------------------
10 Cover Page
11 Table of Contents
12 (Not Applicable)
13 Investment Restrictions; High Yield, High Risk Debt Securities; Hedging on
Foreign Currency Risks; Repurchase Agreements; Writing Covered Call Options;
Additional Information Concerning the Davis Government Bond Fund;
Portfolio Transactions
14 Directors and Officers
15 Certain Shareholders of the Funds
16 Investment Advisory Services; Custodian; Auditors;
Determining the Price of Shares; Distribution of Fund Shares; Additional
Information Regarding Plans of Distribution
17 Portfolio Transactions
18 <F*>
19 Determining the Price of Shares; Reduction of Class A Sales Charge
20 Federal Tax Aspects of Certain Mortgage REITS
21 <F*>
22 Performance Data
23 Financial Statements for the Company for the year ended December 31, 1996, are
incorporated by reference from the 1996 Annual Report to Shareholders.
<FN>
- -----------
<F*> INCLUDED IN PROSPECTUS
</TABLE>
2
<PAGE> 3
FORM N-1A
DAVIS SERIES, INC. CLASS Y SHARES
---------------------------------
POST-EFFECTIVE AMENDMENT NO. 38 TO REGISTRATION STATEMENT NO. 2-57209 UNDER
THE SECURITIES ACT OF 1933 AND AMENDMENT NO. 34 UNDER THE INVESTMENT COMPANY
ACT OF 1940 TO REGISTRATION STATEMENT NO. 811-2679.
<TABLE>
CROSS REFERENCE SHEET
---------------------
<CAPTION>
N-1A
ITEM NO. PROSPECTUS CAPTION OR PLACEMENT
- --------
<S> <C>
1 Front Cover
2 Summary
3 Financial Highlights
4 Summary; Investment objectives and Policies; High Yield High Risk Debt Securities
Adviser, Sub-Adviser and Distributor; Purchase of Shares;
5 Summary; Investment Objectives and Policies
6 Summary; Shareholder Inquiries; Dividends and Distributions; Federal Income
Taxes; Company Shares
7 Purchase of Shares; Exchange of Shares; Determining the Price of Shares;
Dividends and Distributions
8 Redemption of Shares; Exchange of Shares
9 (Not Applicable)
PART B CAPTION OR PLACEMENT
---------------------------
10 Cover Page
11 Table of Contents
3
<PAGE> 4
<S> <C>
12 (Not Applicable)
13 Investment Restrictions; High Yield, High Risk Debt Securities; Hedging on
14 Foreign Currency Risks; Repurchase Agreements; Writing Covered Call Options;
Additional Information Concerning the
Davis Government Bond Fund; Portfolio Transactions
14 Directors and Officers
15 Certain Shareholders of the Funds
16 Investment Advisory Services; Custodian; Auditors; Determining the Price of
Shares; Distribution of Fund Shares; Additional Information Regarding the Plans of Distribution
17 Portfolio Transactions
18 <F*>
19 Determining the Price of Shares; Reduction of Class A Sales Charge
20 Federal Tax Aspects of Certain Mortgage REITS
21 <F*>
22 Performance Data
23 Financial Statements for the Company for the year ended December 31, 1996, are
incorporated by reference from the 1996 Annual Report to Shareholders.
<FN>
- ------------------
<F*> INCLUDED IN PROSPECTUS
</TABLE>
4
<PAGE> 5
PROSPECTUS MAY 1, 1997 AS REVISED AUGUST 6, 1997
CLASS A, CLASS B AND CLASS C
DAVIS SERIES, INC.
124 EAST MARCY STREET
SANTA FE, NEW MEXICO 87501
1-800-279-0279
DAVIS SERIES, INC. (the "Company") offers a variety of investment
portfolios. See "Investment Objectives" for more information on each
portfolio.
DAVIS GROWTH OPPORTUNITY FUND seeks to achieve growth of capital. It
invests primarily in common stocks and other equity securities, and may invest
in both domestic and foreign issuers.
DAVIS GOVERNMENT BOND FUND seeks to achieve current income. It invests in
debt securities which are obligations of, or which are guaranteed by, the U.S.
Government, its agencies or instrumentalities.
DAVIS GOVERNMENT MONEY MARKET FUND ("DGMMF") seeks to achieve as high a
level of current income as is consistent with the principle of preservation of
capital and maintenance of liquidity. It invests in debt securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities and
repurchase agreements involving such securities. There is no assurance that the
Fund will be able to maintain a stable net asset value of $1.00 per share.
DAVIS FINANCIAL FUND seeks to achieve growth of capital. It invests
primarily in common stocks and other equity securities, and will concentrate
investments in companies principally engaged in the banking and financial
services industries.
DAVIS CONVERTIBLE SECURITIES FUND seeks to achieve total return. The Fund
invests primarily in convertible securities, which combine fixed income with
potential for capital appreciation. It may invest in lower rated bonds commonly
known as "junk bonds" so long as no such investment would cause 35% or more
of the Funds net assets to be so invested.
DAVIS REAL ESTATE FUND seeks to achieve total return through a combination
of growth and income. It invests primarily in 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.
This Prospectus concisely sets forth information about the Class A, Class B
and Class C shares of the Funds that prospective investors should know before
investing. It should be read carefully and retained for future reference. A
Statement of Additional Information dated May 1, 1997 as Revised August 6, 1997
has been filed with the Securities and Exchange Commission and is incorporated
herein by reference. A copy of this Statement and other information about the
Funds may be obtained without charge by writing or calling the Company at the
above address or telephone number.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<PAGE> 6
<TABLE>
===============================================================================================================================
TABLE OF CONTENTS
<CAPTION>
PAGE
<S> <C>
Summary................................................................................................................ 2
Financial Highlights................................................................................................... 7
Investment Objectives and Policies..................................................................................... 18
Adviser, Sub-Advisers and Distributor.................................................................................. 30
Distribution Plans..................................................................................................... 32
Purchase of Shares..................................................................................................... 34
Telephone Privilege.................................................................................................... 39
Exchange of Shares..................................................................................................... 40
Redemption of Shares................................................................................................... 41
Determining the Price of Shares........................................................................................ 44
Dividends and Distributions............................................................................................ 45
Federal Income Taxes................................................................................................... 46
Company Shares......................................................................................................... 47
Performance Data....................................................................................................... 47
Shareholder Inquiries.................................................................................................. 48
Appendix -- Quality Ratings of Debt Securities......................................................................... 49
===============================================================================================================================
</TABLE>
<PAGE> 7
SUMMARY
FUND EXPENSES. The following table is intended to assist you in
understanding the various costs and expenses that an investor in the Class A, B
or C shares of the Funds will bear directly or indirectly. Except as noted
below, the information for all of the Funds is based on the fiscal year ended
December 31, 1996. The expenses for Davis Convertible have been restated to
reflect the effect of exchanges to Class Y shares. The fee information for
Davis Government Bond reflects the fee reduction effective May 1, 1996. You can
refer to "Adviser, Sub-Advisers and Distributor" and "Purchase of Shares"
for more information on transaction and operating expenses of the Funds.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES DGMMF<F*> ALL FUNDS OTHER THAN DGMMF
- -------------------------------- --------- -----------------------------------
CLASS A, B AND C CLASS A CLASS B CLASS C
---------------- ------- ------- -------
<S> <C> <C> <C> <C>
Maximum sales load imposed on
purchases............................. None 4.75% None None
Maximum sales load imposed on reinvested
dividends............................. None None None None
Deferred sales load (a declining
percentage of the lesser of the net
asset value of the shares redeemed or
the total cost of such shares)
Redeemed during first year.......... None<F**> None<F**> 4.00% 1.00%
Redeemed during second or third
year.............................. None None 3.00% None
Redeemed during fourth or fifth
year.............................. None None 2.00% None
Redeemed during sixth year.......... None None 1.00% None
Redeemed after sixth year........... None None None None
Exchange Fee.......................... None None None None
<FN>
- -------------
<F*> Shares received in exchange for DGMMF shares and DGMMF shares received in
exchange for shares of other Funds are generally subject to an initial or
deferred sales load. See "Exchange of Shares." DGMMF accounts of less
than $1000 are charged a small account maintenance fee of $10. See
"Redemption of Shares -- Maintenance Fees."
<F**> On certain Class A shares purchased after May 1, 1997 and redeemed
during the first year after purchase, there is a 0.75% deferred sales
charge.
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (AS
A PERCENTAGE OF AVERAGE NET ASSETS) CLASS A CLASS B CLASS C
- ----------------------------------- ------- ------- -------
<S> <C> <C> <C>
DAVIS GROWTH OPPORTUNITY FUND:
Management fees................. 0.75% 0.75% 0.75%
12b-1 fees<F*>.................. 0.18% 0.97% 1.00%
Transfer Agent fees............. 0.21% 0.18% 0.18%
Other expenses.................. 0.35% 0.35% 0.35%
------- ------- -------
Total Fund operating expenses... 1.49% 2.25% 2.28%
DAVIS GOVERNMENT BOND FUND:
Management fees................. 0.50% 0.50% 0.50%
12b-1 fees<F*>.................. 0.22% 0.98% 1.00%
Transfer Agent fees............. 0.29% 0.29% 0.29%
Other expenses.................. 0.67% 0.67% 0.67%
------- ------- -------
Total Fund operating expenses... 1.68% 2.44% 2.46%
2
<PAGE> 8
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (AS
A PERCENTAGE OF AVERAGE NET ASSETS) CLASS A CLASS B CLASS C
- ------------------------------------ ------- ------- -------
<S> <C> <C> <C>
DAVIS GOVERNMENT MONEY MARKET FUND:
Management fees....................... 0.48% 0.48% 0.48%
12b-1 fees<F*>........................ 0.00% 0.00% 0.00%
Transfer Agent fees................... 0.05% 0.05% 0.05%
Other expenses........................ 0.13% 0.13% 0.13%
------- ------- -------
Total Fund operating expenses......... 0.66% 0.66% 0.66%
DAVIS FINANCIAL FUND:
Management fees....................... 0.75% 0.75% 0.75%
12b-1 fees<F*>........................ 0.08% 1.00% 1.00%
Transfer Agent fees................... 0.07% 0.04% 0.04%
Other expenses........................ 0.25% 0.25% 0.25%
------- ------- -------
Total Fund operating expenses......... 1.15% 2.04% 2.04%
DAVIS CONVERTIBLE SECURITIES FUND:
Management fees....................... 0.75% 0.75% 0.75%
12b-1 fees<F*>........................ 0.07% 1.00% 1.00%
Transfer Agent fees................... 0.03% 0.03% 0.03%
Other expenses........................ 0.23% 0.23% 0.23%
------- ------- -------
Total Fund operating expenses......... 1.08% 2.01% 2.01%
DAVIS REAL ESTATE FUND:
Management fees....................... 0.75% 0.75% 0.75%
12b-1 fees<F*>........................ 0.07% 0.98% 1.00%
Transfer Agent fees................... 0.07% 0.06% 0.06%
Other expenses........................ 0.43% 0.43% 0.43%
------- ------- -------
Total Fund operating expenses......... 1.32% 2.22% 2.24%
<FN>
- -------------
<F*> The effect of a Rule 12b-1 plan is that long-term shareholders may pay
more than the maximum front-end sales charge permitted under the
applicable rules of the National Association of Securities Dealers, Inc.
</TABLE>
Example:
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return and (except as provided below) redemption at the end of each time
period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
DAVIS GROWTH OPPORTUNITY FUND:
Class A................................. $62 $92 $125 $217
Class B................................. $53 $90 $130 N/A
Class B (assuming no redemption at end
of period)............................ $23 $70 $120 N/A
Class C................................. $23 $71 $122 $262
Class C (assuming no redemption at end
of period)............................ $23 $71 $122 $262
3
<PAGE> 9
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
DAVIS GOVERNMENT BOND FUND:
Class A................................. $64 $98 $134 $237
Class B................................. $55 $96 $140 N/A
Class B (assuming no redemption at end
of period)............................ $25 $76 $130 N/A
Class C................................. $25 $77 $131 $280
Class C (assuming no redemption at end
of period)............................ $25 $77 $131 $280
DAVIS GOVERNMENT MONEY MARKET FUND:
Class A................................. $7 $21 $ 37 $ 82
Class B................................. $7 $21 $ 37 N/A
Class B (assuming no redemption at end
of period)............................ $7 $21 $ 37 N/A
Class C................................. $7 $21 $ 37 $ 82
Class C (assuming no redemption at end
of period)............................ $7 $21 $ 37 $ 82
DAVIS FINANCIAL FUND:
Class A................................. $59 $82 $108 $181
Class B................................. $51 $84 $120 N/A
Class B (assuming no redemption at end
of period)............................ $21 $64 $110 N/A
Class C................................. $21 $64 $110 $237
Class C (assuming no redemption at end
of period)............................ $21 $64 $110 $237
DAVIS CONVERTIBLE SECURITIES FUND:
Class A................................. $58 $80 $104 $173
Class B................................. $50 $83 $118 N/A
Class B (assuming no redemption at end
of period)............................ $20 $63 $108 N/A
Class C................................. $20 $63 $108 $234
Class C (assuming no redemption at end
of period)............................ $20 $63 $108 $234
DAVIS REAL ESTATE FUND:
Class A................................. $60 $87 $116 $199
Class B................................. $53 $89 $129 N/A
Class B (assuming no redemption at end
of period)............................ $23 $69 $119 N/A
Class C................................. $23 $70 $120 $257
Class C (assuming no redemption at end
of period)............................ $23 $70 $120 $257
</TABLE>
THE 5% RATE USED IN THE EXAMPLE IS ONLY FOR ILLUSTRATION AND IS NOT INTENDED TO
BE INDICATIVE OF THE FUTURE PERFORMANCE OF THE FUNDS, WHICH MAY BE MORE OR LESS
THAN THE ASSUMED RATE. ACTUAL EXPENSES AND FUTURE EXPENSES MAY BE MORE OR LESS
THAN THOSE SHOWN.
4
<PAGE> 10
THE COMPANY. Davis Series, Inc. (the "Company"), was incorporated in
Maryland in 1976 and is registered under the Investment Company Act of 1940.
The Company is an open-end diversified management investment company and was
formed primarily to provide a multi-portfolio vehicle of Funds with different
investment objectives for long-term investment, including the investment of
retirement plan assets. There is no assurance that the investment objective of
any Fund will be achieved.
Each fund offers four classes of shares. Class A shares may be purchased at
a price equal to their net asset value per share plus a front-end sales charge
("FESC") imposed at the time of purchase. Purchases of $1 million or more of
Class A shares may be purchased at net asset value but shares purchased after
May 1, 1997 are subject to a 0.75% contingent deferred sales charge
("CDSC") on redemptions made within one year of purchase. Class B shares may
be purchased at net asset value, with no FESC but are subject to a CDSC on most
redemptions made within six years after purchase. Class C shares may also be
purchased at net asset value but are subject to a CDSC of 1% on redemptions
made within one year after purchase. These alternatives permit an investor to
choose the method of purchasing shares that is most beneficial given the amount
of the purchase, the length of time the investor expects to hold the shares,
and other circumstances. The Class Y shares, available only to certain
qualified institutional investors, are offered through a separate prospectus.
For more information about the Class Y shares, see "Purchase of Shares --
Alternative Purchase Arrangements". Shares of the Davis Government Money
Market Fund are offered at net asset value. However, in the case of certain
exchanges, the Money Market Fund shares received may be subject to an escrow,
pursuant to a Statement of Intention, or a CDSC. See "Exchange of Shares."
Each Fund's Class A shares (other than Davis Government Money Market Fund)
pay a Rule 12b-1 distribution fee at an annual rate not to exceed 0.25% of a
Fund's aggregate average daily net assets attributable to the Class A shares.
Each Fund's Class B and C shares (other than Davis Government Money Market
Fund) pay a Rule 12b-1 distribution fee at an annual rate not to exceed 1.00%
of a Fund's aggregate average daily net assets attributable to the Class B and
C shares. The purpose and function of the deferred sales charge and
distribution fee with respect to the Class B and C shares is the same as those
of the initial sales charge and distribution services fee with respect to the
Class A shares.
Each share of a particular Fund represents an identical interest in the
investment portfolio of that Fund. However, shares differ by class in important
respects. For example, Class B shares (except for the Davis Government Money
Market Fund) incur higher distribution services fees and bear certain other
expenses and will thus have a higher expense ratio and pay correspondingly
lower dividends than Class A shares. Class B shares will automatically convert
to Class A shares at the end of eight years after purchase, in the
circumstances and subject to the qualifications described in this Prospectus.
Class C shares (except for the Davis Government Money Market Fund), like Class
B shares, will also have a higher expense ratio and pay correspondingly lower
dividends than Class A shares, as a result of higher distribution services fees
and certain other expenses. Unlike Class B shares, Class C shares do not have a
conversion feature and therefore will always be subject to higher distribution
fees and other expenses than Class A shares. The per share net asset value of
the Class B and Class C shares generally will be lower than the per share net
asset value of the Class A shares, reflecting the daily expense accruals of
additional distribution fees and certain other expenses applicable to Class B
and Class C shares. All shares offered by Davis Government Money Market Fund
are expected to maintain a net asset value of $1 per share. The Board of
Directors may offer additional funds or classes of shares of a fund in the
future and may at any time discontinue the offering of any funds or class of
shares of a fund. See "Purchase of Shares -- Alternative Purchase
Arrangements."
5
<PAGE> 11
INVESTMENT OBJECTIVES.
DAVIS GROWTH OPPORTUNITY FUND. The investment objective of Davis Growth
Opportunity Fund is growth of capital. It invests primarily in common stocks
and other equity securities. These securities are subject to the risk of price
fluctuations reflecting both market evaluations of the businesses involved and
general changes in the equity markets. It may invest in foreign securities and
attempt to reduce currency fluctuation risks by engaging in related hedging
transactions. These investments involve special risk factors. See "Investment
Objectives and Policies -- Davis Growth Opportunity Fund."
DAVIS GOVERNMENT BOND FUND. The investment objective of Davis Government
Bond Fund is current income. It invests in debt securities which are
obligations of or guaranteed by the U.S. Government, its agencies and
instrumentalities ("U.S. Government Securities"). It also may invest in
repurchase agreements involving such securities. Investments held by Davis
Government Bond Fund generally reflect market fluctuations. In particular, the
value of the Fund's investments usually changes inversely to interest rate
changes. Mortgage related securities (including collateralized mortgage
obligations), which at times may constitute a large or the largest portion of
the Fund's investments, have special characteristics and risks. See
"Investment Objectives and Policies -- Davis Government Bond Fund."
DAVIS GOVERNMENT MONEY MARKET FUND. The investment objective of Davis
Government Money Market Fund is to achieve as high a level of current income as
is consistent with the principle of preservation of capital and maintenance of
liquidity. It invests in U.S. Government Securities and repurchase agreements
involving such securities. It normally has a stable net asset value with yield
fluctuating with short-term interest rates. See "Investment Objectives and
Policies -- Davis Government Money Market Fund."
DAVIS FINANCIAL FUND. The investment objective of Davis Financial Fund is
growth of capital. It invests primarily in common stocks and other equity
securities and will concentrate investments in companies principally engaged in
the banking and financial services industries. The banking industry includes
commercial and industrial banks, savings and loan associations and their
holding companies. The financial services industry includes consumer and
industrial finance companies, diversified financial services companies,
investment banking, securities brokerage and investment advisory companies,
leasing companies, and insurance companies. Davis Financial Fund generally will
invest a minimum of 25% of its total assets in investments in each of these two
industries. As a result, its portfolio may be affected by economic or
regulatory developments in or related to the identified industries. Davis
Financial Fund invests in securities subject to the risk of price fluctuations
reflecting both market evaluations of the businesses involved and general
changes in the equity markets. See "Investment Objectives and Policies --
Davis Financial Fund."
DAVIS CONVERTIBLE SECURITIES FUND. The investment objective of Davis
Convertible Securities Fund is total return. It seeks this objective through a
combination of current income and capital appreciation. It invests in a
portfolio consisting primarily of convertible debt and equity securities.
Normally it will invest at least 65% of its total assets in convertible
securities. It may also invest in other securities, including common and
preferred stock, non-convertible corporate debt securities, U.S. government
securities and short term money market instruments (including repurchase
agreements). The securities in which it invests, including high yielding
securities (commonly known as "junk bonds"), involve risks. See "Investment
Objectives and Policies -- Davis Convertible Securities Fund."
DAVIS REAL ESTATE FUND. The investment objective of Davis Real Estate Fund
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
6
<PAGE> 12
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. The securities in which it invests, including
high yielding securities, involve risks. See "Investment Objectives and
Policies -- Davis Real Estate Fund."
INVESTMENT ADVISER, SUB-ADVISERS AND DISTRIBUTOR. Davis Selected Advisers,
L.P. (the "Adviser") is the investment adviser for the Funds. Davis
Distributors, LLC (the "Distributor") serves as the principal underwriter for
the Funds. Tanaka Capital Management, Inc. (the "Sub-Adviser") is employed by
the Adviser to provide day to day management of the portfolio of the Davis
Growth Opportunity Fund and is paid by the Adviser from its advisory fees. The
Adviser has entered into a Sub-Advisory Agreement with its wholly-owned
subsidiary, Davis Selected Advisers-NY, Inc. ("DSA-NY"). DSA-NY performs
research and other services for the Funds on behalf of the Adviser. For more
information see "Adviser, Sub-Advisers and Distributor".
PURCHASES, EXCHANGES AND REDEMPTIONS. Initial and subsequent minimum
investments in the Class A, B and C shares may be made in amounts equal to
$1,000 and $25, respectively, except that the minimum initial investment for
retirement plans is $250. Shares may be exchanged under certain circumstances
at net asset value for the same class of shares of the other funds managed by
the Adviser. Accounts with a market value of less than $250 caused by
shareholder redemptions are redeemable by the Company. To help relieve the high
cost of maintaining small accounts in DGMMF, there is a $10 charge imposed
yearly on all accounts where the net asset value has been reduced to less than
$1,000 due to shareholder redemptions. See "Purchase of Shares," "Exchange
of Shares" and "Redemption of Shares". Class A shareholders who are eligible
to purchase Class Y shares may exchange their shares for Class Y shares of any
of the Funds. See "Purchase of Shares -- Alternative Purchase Arrangements"
for Class Y eligibility requirements.
SHAREHOLDER SERVICES. Questions regarding the Funds or your account may be
directed to Davis Distributors, LLC at 1-800-279-0279 or to your sales
representative. Written inquiries may be directed to State Street Bank and
Trust Co., c/o The Davis Funds, P.O. Box 8406, Boston, MA, 02266-8406. During
severe market conditions, the Distributor may experience difficulty in
accepting telephone redemptions or exchanges. If you are unable to contact the
Distributor at the above telephone number, you should call 1-505-820-3000
Monday through Friday from 8:00 a.m. to 4:00 p.m. Mountain Time.
FINANCIAL HIGHLIGHTS
The following tables provide you with information about the financial
history of the Class A and Class B shares of Davis Growth Opportunity Fund,
Davis Government Bond Fund, Davis Government Money Market Fund, Davis Financial
Fund, Davis Convertible Securities Fund and Davis Real Estate Fund and Class C
shares of Davis Government Money Market Fund. The tables express the
information in terms of a single share for the respective periods presented and
are supplementary to the Company's financial statements which are included in
the December 31, 1996 Annual Report to Shareholders. Such Report may be
obtained by writing or calling the Company. The Company's 1996 financial
statements including the financial highlights for the five years ended December
31, 1996 have been audited by the Company's independent certified public
accountants, whose opinion thereon is contained in the Annual Report.
7
<PAGE> 13
<TABLE>
DAVIS GROWTH OPPORTUNITY FUND -- CLASS A
<CAPTION>
YEAR
ENDED MONTH
DECEMBER 31, ENDED
--------------------- DECEMBER 31,
1996 1995 1994
------- ------- ------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period........................ $ 17.25 $ 12.83 $ 13.70
------- ------- --------
Income From Investment Operations
Net Investment Income (Loss).............................. (0.13) (0.11) (0.01)
Net Gains or Losses on Securities (both realized and
unrealized)............................................. 3.37 6.08 (0.29)
------- ------- --------
Total From Investment Operations...................... 3.24 5.97 (0.30)
------- ------- --------
Less Distributions
Dividends (from net investment income).................... -- -- --
Distributions (from capital gains)........................ (1.55) (1.55) (0.57)
Distributions (from paid-in capital)...................... (0.01) -- --
------- ------- --------
Total Distributions................................... (1.56) (1.55) (0.57)
------- ------- --------
Net Asset Value, End of Period.............................. $ 18.93 $ 17.25 $ 12.83
======= ======= ========
Total Return<F1>............................................ 18.73% 46.65% (2.21)%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted)................... $27,158 $22,890 $ 12,455
Ratio of Expenses to Average Net Assets................... 1.49%<F2> 1.51% 1.42%<F*>
Ratio of Net Income to Average Net Assets................. (0.76)% (0.71)% (0.08)%<F*>
Portfolio Turnover Rate................................... 30.55% 30.07% 37.31%
Average Commission Rate Per Share......................... $0.0454 -- --
<FN>
- -------------
<F1> Sales charges are not reflected in calculation.
<F2> Ratio of expenses to average net assets after the reduction of custodian
fees under a custodian agreement was 1.48% for 1996. Prior to 1996, such
reductions were reflected in the expense ratios.
<F*> Annualized
</TABLE>
8
<PAGE> 14
<TABLE>
DAVIS GROWTH OPPORTUNITY FUND -- CLASS B
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------
1996 1995 1994 1993<F1> 1992<F1> 1991<F1> 1990<F1> 1989<F1> 1988<F1> 1987<F1>
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset
Value,
Beginning of
Period....... $ 17.08 $ 12.82 $ 14.67 $ 13.25 $ 13.73 $ 9.83 $ 10.94 $ 8.74 $ 8.57 $ 9.62
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income From
Investment
Operations
Net
Investment
Income
(Loss)..... (0.27) (0.26) (0.12) (0.07) (0.07) (0.06) -- 0.27 (0.01) (0.04)
Net Gains or
Losses on
Securities
(both
realized
and
unrealized) 3.33 6.07 (1.11) 1.54 (0.32) 4.07 (0.52) 3.19 0.90 0.48
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total From
Investment
Operations. 3.06 5.81 (1.23) 1.47 (0.39) 4.01 (0.52) 3.46 0.89 0.44
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Less
Distributions
Dividends
(from net
investment
income).... -- -- -- (0.05) -- -- -- (0.27) -- --
Distributions
(from
capital
gains)..... (1.55) (1.55) (0.62) -- -- -- (0.45) (0.88) (0.59) (1.49)
Distributions
(from
paid-in
capital)... (0.01) -- -- -- (0.09) (0.11) (0.14) (0.11) (0.13) --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total
Distributions (1.56) (1.55) (0.62) (0.05) (0.09) (0.11) (0.59) (1.26) (0.72) (1.49)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net Asset
Value, End of
Period....... $ 18.58 $ 17.08 $ 12.82 $ 14.67 $ 13.25 $ 13.73 $ 9.83 $ 10.94 $ 8.74 $ 8.57
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Total
Return<F2>... 17.86% 45.44% (8.45)% 11.16% (2.86)% 40.93% (4.72)% 40.06% 10.49% 4.61%
Ratios/
Supplemental
Data
Net Assets,
End of
Period (000
omitted)... $39,343 $35,326 $36,087 $51,762 $46,958 $43,419 $24,107 $25,689 $19,866 $18,436
Ratio of
Expenses to
Average Net
Assets..... 2.25%<F3> 2.30% 2.15% 2.39% 2.55% 2.49% 2.62% 2.58% 2.57% 2.45%
Ratio of Net
Income to
Average Net
Assets..... (1.52)% (1.50)% (0.81)% (0.55)% (0.54)% (0.45)% (0.04)% 2.29% (0.19)% (0.50)%
Portfolio
Turnover
Rate....... 30.55% 30.07% 37.31% 38.93% 39.01% 12.16% 40.50% 45.17% 82.90% 56.78%
Average
Commission
Rate Per
Share...... $0.0454 -- -- -- -- -- -- -- -- --
<FN>
- ---------------
<F1> Per share data has been restated to give effect to a 2 for 1 stock split
to shareholders of record as of the close of January 7, 1994.
<F2> Sales charges are not reflected in calculation.
<F3> Ratios of expenses to average net assets after the reduction of
custodian fees under a custodian agreement was 2.24% for 1996. Prior to
1996, such reductions were reflected on the expenses ratios.
</TABLE>
9
<PAGE> 15
<TABLE>
DAVIS GOVERNMENT BOND FUND -- CLASS A
<CAPTION>
YEAR
ENDED ONE MONTH
DECEMBER 31, ENDED
--------------------- DECEMBER 31,
1996 1995 1994
------- ------- ------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period........................ $ 6.00 $ 5.79 $ 5.78
------- ------- -------
Income From Investment Operations
Net Investment Income..................................... 0.33 0.39 0.02
Net Gains or Losses on Securities (both realized and
unrealized)............................................. (0.14) 0.27 (0.01)
------- ------- -------
Total From Investment Operations...................... 0.19 0.66 0.01
------- ------- -------
Less Distributions
Dividends (from net investment income).................... (0.33) (0.36) --
Distributions (from paid-in capital)...................... (0.10) (0.09) --
------- ------- -------
Total Distributions................................... (0.43) (0.45) --
------- ------- -------
Net Asset Value, End of Period.............................. $ 5.76 $ 6.00 $ 5.79
======= ======= =======
Total Return<F1>............................................ 3.40% 11.82% (0.97)%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted)................... $18,129 $21,485 $20,035
Ratio of Expenses to Average Net Assets................... 1.77% 1.74% 1.64%<F*>
Ratio of Net Income to Average Net Assets................. 5.88% 6.54% 6.22%<F*>
Portfolio Turnover Rate................................... 45.50% 41.04% 62.17%
<FN>
- -------------
<F1> Sales charges are not reflected in calculation.
<F*> Annualized
</TABLE>
10
<PAGE> 16
<TABLE>
DAVIS GOVERNMENT BOND FUND -- CLASS B
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------------
1996 1995 1994 1993<F1> 1992<F1> 1991<F1> 1990 1989 1988 1987
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset
Value,
Beginning of
Period....... $ 5.98 $ 5.79 $ 6.33 $ 6.61 $ 6.88 $ 6.64 $ 6.86 $ 6.90 $ 7.19 $ 7.96
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income From
Investment
Operations
Net
Investment
Income..... 0.29 0.34 0.31 0.36 0.37 0.43 0.41 0.49 0.50 0.54
Net Gains or
Losses on
Securities
(both
realized
and
unrealized) (0.13) 0.26 (0.37) (0.12) (0.10) 0.35 (0.02) 0.13 (0.10) (0.53)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total From
Investment
Operations. 0.16 0.60 (0.06) 0.24 0.27 0.78 0.39 0.62 0.40 0.01
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Less
Distributions
Dividends
(from net
investment
income).... (0.29) (0.33) (0.37) (0.42) (0.27) (0.43) (0.41) (0.49) (0.50) (0.53)
Distributions
from
capital
gains...... -- -- -- -- -- -- -- -- -- (0.03)
Distributions
(from
paid-in
capital)... (0.10) (0.08) (0.11) (0.10) (0.27) (0.11) (0.20) (0.17) (0.19) (0.22)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total
Distributions (0.39) (0.41) (0.48) (0.52) (0.54) (0.54) (0.61) (0.66) (0.69) (0.78)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net Asset
Value, End of
Period....... $ 5.75 $ 5.98 $ 5.79 $ 6.33 $ 6.61 $ 6.88 $ 6.64 $ 6.86 $ 6.90 $ 7.19
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Total
Return<F2>... 2.78% 10.62% (0.97)% 3.69% 4.14% 12.36% 6.11% 9.45% 5.70% 0.26%
Ratios/
Supplemental
Data
Net Assets,
End of
Period (000
omitted)... $12,959 $15,976 $19,241 $50,080 $54,422 $62,766 $55,489 $64,776 $69,885 $70,373
Ratio of
Expenses to
Average Net
Assets..... 2.53%<F3> 2.51% 2.38% 2.37% 2.51% 2.51% 2.50% 2.48% 2.48% 2.31%
Ratio of Net
Income to
Average Net
Assets..... 5.13% 5.77% 5.48% 5.52% 5.83% 6.36% 6.58% 7.27% 7.04% 7.01%
Portfolio
Turnover
Rate....... 45.50% 41.04% 62.17% 42.82% 81.28% 28.14% 72.02% 81.86% -- 20.41%
<FN>
- ---------------
<F1> Per share calculations other than distributions were based on average
shares outstanding during the period.
<F2> Sales charges are not reflected in calculation.
<F3> Ratio of expenses to average net assets after the reduction of custodian
fees under a custodian agreement was 2.52% for 1996. Prior to 1996, such
reductions were reflected in the expense ratio.
</TABLE>
11
<PAGE> 17
<TABLE>
DAVIS GOVERNMENT MONEY MARKET FUND -- CLASS A
<CAPTION>
THREE
YEAR ENDED MONTHS YEAR ENDED
DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------------------------------------ DECEMBER -----------------------------------
31,
1996 1995 1994 1993 1992 1991 1990 1989 1989 1988<F1> 1987<F1>
------ ------ ------ ------ ------ ------ ------ -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset
Value,
Beginning of
Period....... $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $ 1.000 $ 1.000 $ 1.000
------ ------ ------ ------ ------ ------ ------ ------ -------- ------- -------
Income From
Investment
Operations
Net
Investment
Income..... .047 .051 .034 .020 .027 .047 .064 .018 .073 .055 .051
Less
Distributions
Dividends
(from net
investment
income).... (.047) (.051) (.034) (.020) (.027) (.047) (.064) (.018) (.073) (.055) (.051)
------ ------ ------ ------ ------ ------ ------ ------ -------- ------- -------
Net Asset
Value, End of
Period....... $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $ 1.000 $ 1.000 $ 1.000
====== ====== ====== ====== ====== ====== ====== ====== ======== ======= =======
Total Return... 4.80% 5.25% 3.48% 2.01% 2.70% 4.78% 6.58% 7.09%<F*> 7.51% 5.74% 5.22%
Ratios/
Supplemental
Data
Net Assets,
End of
Period
(000,000
omitted)... $ 407 $ 357 $ 240 $ 40 $ 42 $ 51 $ 65 $ 16 $ 17 $ 21 $ 30
0
Ratio of
Expenses to
Average Net
Assets..... 0.66% 0.73% 0.64% 1.15% 1.14% 1.25% 1.50%<F2> 1.50%<F2><F*> 1.50%<F2> 1.50% 1.10%
Ratio of Net
Income to
Average Net
Assets..... 4.72% 5.13% 3.43% 1.98% 2.68% 4.72% 6.28%<F2> 7.01%<F2><F*> 7.25%<F2> 5.58% 5.09%
%
<FN>
- ---------------
<F1> From the Fund's inception through September 30, 1987, Clayton Brown
Advisors, Inc. served as investment manager of the Fund. On October 1,
1987. Venture Advisers, Inc. became the investment adviser of the Fund
and on January 1, 1988, Davis Selected Advisers, L.P. succeeded to the
business of Venture Advisers, Inc. and became investment adviser of the
Fund. Venture Advisers, Inc. is the sole general partner of Davis
Selected Advisers, L.P. Effective December 1, 1989 the Fund became a
series of the Davis Series, Inc
<F2> Reflects the reimbursement of certain expenses by the Fund's investment
manager.
<F*> Annualized
</TABLE>
12
<PAGE> 18
<TABLE>
DAVIS GOVERNMENT MONEY MARKET FUND -- CLASS B AND C
<CAPTION>
CLASS B CLASS C
----------------------------------- -------------------------------
DECEMBER 8, 1994 MARCH 30, 1995
YEAR (COMMENCEMENT (COMMENCEMENT
ENDED OF OPERATIONS) YEAR OF OPERATIONS)
DECEMBER 31, THROUGH ENDED THROUGH
----------------- DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994 1996 1995
------ ------ ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period................................. $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------
Income From Investment
Operations
Net Investment Income............................... .047 .051 .003 .047 .041
Less Distributions
Dividends (from net investment
income)........................................... (.047) (.051) (.003) (.047) (.041)
------ ------ ------ ------ ------
Net Asset Value, End of Period........................ $1.000 $1.000 $1.000 $1.000 $1.000
====== ====== ====== ====== ======
Total Return.......................................... 4.80% 5.25% 0.34% 4.80% 4.21%
Ratios/Supplemental Data
Net Assets, End of Period
(000 omitted)..................................... $4,155 $2,697 $ 747 $ 714 $ 475
Ratio of Expenses to Average Net Assets............. 0.66% 0.73% 0.64%<F*> 0.66% 0.73%<F*>
Ratio of Net Income to Average Net Assets........... 4.72% 5.13% 3.43%<F*> 4.72% 5.13%<F*>
<FN>
- -------------
<F*> Annualized
</TABLE>
13
<PAGE> 19
<TABLE>
DAVIS FINANCIAL FUND -- CLASS A
<CAPTION>
MAY 1, 1991
(COMMENCEMENT
OF OPERATIONS)
YEAR ENDED DECEMBER 31, THROUGH
---------------------------------------------------- DECEMBER 31,
1996 1995 1994 1993<F3> 1992<F3> 1991<F3>
-------- ------- ------- ------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.... $ 14.50 $ 10.68 $ 11.70 $ 11.20 $ 8.76 $ 7.15
-------- ------- ------- ------- ------- ------
Income From Investment Operations
Net Investment Income................. 0.14 0.07 0.08 0.07 0.05 0.01
Net Gains or Losses on Securities
(both realized and unrealized)...... 4.44 5.32 (0.61) 1.59 2.79 1.65
-------- ------- ------- ------- ------- ------
Total From Investment Operations.. 4.58 5.39 (0.53) 1.66 2.84 1.66
-------- ------- ------- ------- ------- ------
Less Distributions
Dividends (from net investment
income)............................. (0.15) (0.07) (0.08) (0.08) (0.05) (0.02)
Distributions (from capital gains).... (0.87) (1.50) (0.39) (1.08) (0.35) (0.03)
Distributions (from paid-in
capital)............................ -- -- (0.02) -- -- --
-------- ------- ------- ------- ------- ------
Total Distributions............... (1.02) (1.57) (0.49) (1.16) (0.40) (0.05)
-------- ------- ------- ------- ------- ------
Net Asset Value, End of Period.......... $ 18.06 $ 14.50 $ 10.68 $ 11.70 $ 11.20 $ 8.76
======== ======= ======= ======= ======= ======
Total Return<F1>........................ 31.50% 50.51% (4.55)% 14.87% 32.67% 34.74%<F*><F2>
Ratios/Supplemental Data
Net Assets, End of Period (000
omitted)............................ $107,579 $79,874 $57,670 $50,778 $31,660 $ 9,221
Ratio of Expenses to Average Net
Assets.............................. 1.15% 1.18% 1.24% 1.32% 1.68% 2.49%<F*><F2>
Ratio of Net Income to Average Net
Assets.............................. 0.92% 0.53% 0.67% 0.57% 0.43% 0.51%<F*><F2>
Portfolio Turnover Rate............... 25.78% 41.89% 43.95% 70.33% 49.64% 39.75%
Average Commission Rate Per Share..... $ 0.0518 -- -- -- -- --
<FN>
- -------------
<F1> Sales charges are not reflected in calculation.
<F2> Reflects the reimbursement of certain expenses by the Fund's investment
manager.
<F3> Per share data has been restated to give effect to a 2 for 1 stock split
to shareholders of record as of the close of January 7, 1994.
<F*> Annualized
</TABLE>
14
<PAGE> 20
<TABLE>
DAVIS FINANCIAL FUND -- CLASS B
<CAPTION>
DECEMBER 27, 1994
YEAR (COMMENCEMENT
ENDED OF OPERATIONS)
DECEMBER 31, THROUGH
--------------------- DECEMBER 31,
1996 1995 1994
------- ------ -----------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period........................ $ 14.41 $10.68 $ 11.22
------- ------ ------
Income From Investment Operations
Net Investment Income..................................... 0.01 0.01 0.03
Net Gains or Losses on Securities (both realized and
unrealized)............................................. 4.37 5.22 (0.13)
------- ------ ------
Total From Investment Operations...................... 4.38 5.23 (0.10)
------- ------ ------
Less Distributions
Dividends (from net investment income).................... (0.01) -- (0.03)
Distributions (from capital gains)........................ (0.87) (1.50) (0.39)
Distributions (from paid-in capital)...................... -- -- (0.02)
------- ------ ------
Total Distributions................................... (0.88) (1.50) (0.44)
------- ------ ------
Net Asset Value, End of Period.............................. $ 17.91 $14.41 $ 10.68
======= ====== ======
Total Return<F1>............................................ 30.29% 49.00% (0.90)%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted)................... $ 8,213 $1,762 $ 28
Ratio of Expenses to Average Net Assets................... 2.04% 2.09% 2.04%<F*>
Ratio of Net Income to Average Net Assets................. 0.19% (0.38)% (0.13)%<F*>
Portfolio Turnover Rate................................... 25.78% 41.89% 43.95%
Average Commission Rate Per Share......................... $0.0518 -- --
<FN>
- -------------
<F1> Sales charges are not reflected in calculation.
<F*> Annualized
</TABLE>
15
<PAGE> 21
<TABLE>
DAVIS CONVERTIBLE SECURITIES FUND -- CLASS A AND B
<CAPTION>
CLASS A CLASS B
-------------------------------------------------- ------------------------------
MAY 1, 1992 FEBRUARY 3, 1995
(COMMENCEMENT (COMMENCEMENT
OF OPERATIONS) YEAR OF OPERATIONS)
YEAR ENDED DECEMBER 31, THROUGH ENDED THROUGH
---------------------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994 1993 1992 1996 1995
------- ------- ------- ------- -------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period........................... $ 18.22 $ 15.57 $ 17.45 $ 15.73 $ 14.29 $ 18.14 $15.95
------- ------- ------- ------- ------- -------- ------
Income From Investment Operations
Net Investment Income............ 0.71 0.67 0.67 0.67 0.40 0.59 0.54
Net Gains or Losses on Securities
(both realized and
unrealized).................... 4.56 3.42 (1.83) 2.02 1.44 4.45 2.97
------- ------- ------- ------- ------- -------- ------
Total From Investment
Operations................. 5.27 4.09 (1.16) 2.69 1.84 5.04 3.51
------- ------- ------- ------- ------- -------- ------
Less Distributions
Dividends (from net investment
income)........................ (0.69) (0.66) (0.67) (0.67) (0.40) (0.56) (0.54)
Distributions (from capital
gains)......................... (1.54) (0.78) (0.05) (0.30) -- (1.54) (0.78)
Distributions (from
paid-in-capital)............... (0.04) -- -- -- -- (0.03) --
------- ------- ------- ------- ------- -------- ------
Total Distributions.......... (2.27) (1.44) (0.72) (0.97) (0.40) (2.13) (1.32)
------- ------- ------- ------- ------- -------- ------
Net Asset Value, End of Period..... $ 21.22 $ 18.22 $ 15.57 $ 17.45 $ 15.73 $ 21.05 $18.14
======= ======= ======= ======= ======= ======== ======
Total Return<F1>................... 29.46% 26.68% (6.72)% 17.26% 19.95%<F*> 28.21% 25.31%
Ratios/Supplemental Data
Net Assets, End of Period (000
omitted)....................... $42,841 $59,757 $47,844 $44,730 $24,323 $ 2,075 $ 378
Ratio of Expenses to Average Net
Assets......................... 1.05% 1.14% 1.20% 1.21% 1.35%<F*> 2.01%<F2> 2.01%<F*>
Ratio of Net Income to Average
Net Assets..................... 3.34% 3.87% 4.06% 3.89% 4.94%<F*> 2.40% 3.00%<F*>
Portfolio Turnover Rate.......... 43.16% 53.58% 45.15% 62.17% 11.51% 43.16% 53.58%
Average Commission Rate Per
Share.......................... $0.0552 -- -- -- -- $ 0.0552 --
<FN>
- ---------------
<F1> Sales charges are not reflected in calculation.
<F2> Ratio of expenses to average net assets after the reduction of custodian
fees under a custodian agreement was 2.00% for Class B Shares for 1996.
Prior to 1996, such reductions were reflected in expenses ratios.
<F*> Annualized
</TABLE>
16
<PAGE> 22
<TABLE>
DAVIS REAL ESTATE FUND -- CLASS A AND B
<CAPTION>
CLASS A CLASS B
------------------------------------- --------------------------------------
JANUARY 3, 1994 DECEMBER 27, 1994
YEAR (COMMENCEMENT YEAR (COMMENCEMENT
ENDED OF OPERATIONS) ENDED OF OPERATIONS)
DECEMBER 31, THROUGH DECEMBER 31, THROUGH
------------------- DECEMBER 31, ----------------- DECEMBER 31,
1996<F1> 1995 1994 1996<F1> 1995 1994
------- ------- --------------- ------- ------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period........................... $ 16.44 $ 14.72 $ 14.29 $ 16.41 $14.72 $14.73
------- ------- ------- ------- ------ ------
Income From Investment Operations
Net Investment Income............ 0.71 0.82 0.62 0.56 0.68 0.02
Net Gains on Securities (both
realized and unrealized)....... 5.22 1.71 0.55 5.21 1.70 0.11
------- ------- ------- ------- ------ ------
Total From Investment
Operations................. 5.93 2.53 1.17 5.77 2.38 0.13
------- ------- ------- ------- ------ ------
Less Distributions
Dividends (from net investment
income)........................ (0.70) (0.81) (0.62) (0.63) (0.69) (0.02)
Distributions (from capital
gains)......................... (0.25) -- (0.12) (0.25) -- (0.12)
Distributions (from
paid-in-capital)............... (0.18) -- -- (0.11) -- --
------- ------- ------- ------- ------ ------
Total Distributions.......... (1.13) (0.81) (0.74) (0.99) (0.69) (0.14)
------- ------- ------- ------- ------ ------
Net Asset Value, End of Period..... $ 21.24 $ 16.44 $ 14.72 $ 21.19 $16.41 $14.72
======= ======= ======= ======= ====== ======
Total Return<F2>................... 37.05% 17.70% 8.25%<F*> 35.99% 16.59% 0.89%
Ratios/Supplemental Data
Net Assets, End of Period (000
omitted)....................... $32,507 $29,320 $25,450 $10,919 $ 414 $ 34
Ratio of Expenses to Average Net
Assets......................... 1.32%<F3> 1.43% 1.86%<F*> 2.22% 2.39% 2.64%<F*>
Ratio of Net Income to Average
Net Assets..................... 3.95% 5.44% 3.98%<F*> 3.46% 4.48% 3.20%<F*>
Portfolio Turnover Rate.......... 18.60% 38.82% 35.80% 18.60% 38.82% 35.80%
Average Commission Rate Per
Share.......................... $0.0600 -- -- $0.0600 -- --
<FN>
- ---------------
<F1> Per share calculations other than distributions were based on average
shares outstanding during the period.
<F2> Sales charges are not reflected in calculation.
<F3> Ratio of expenses to average net assets after the reduction of custodian
fees under a custodian agreement was 1.31% for Class A Shares 1996.
Prior to 1996, such reductions were reflected in the expenses ratios.
<F*> Annualized
</TABLE>
17
<PAGE> 23
INVESTMENT OBJECTIVES AND POLICIES
DAVIS GROWTH OPPORTUNITY FUND
GENERAL. The investment objective of Davis Growth Opportunity Fund is
growth of capital. It invests primarily in common stocks and other equity
securities such as securities convertible into common stock. Generally, it
invests in equity securities of companies that are diversified across a variety
of industries and may be expected to have small and medium, as well as large
market capitalizations. Such investments will usually consist of issues which
the Sub-Advisers believe have capital growth potential due to factors such as
rapid growth in demand in existing markets, expansion into new markets, new
product introductions, reduced competitive pressures, cost reduction programs
and other fundamental changes which may result in improved earnings growth or
increased asset values.
OTHER POLICIES. For information concerning other investment policies,
risks and considerations see "General Fund Policies and Risks" below.
DAVIS GOVERNMENT BOND FUND
GENERAL. The investment objective of Davis Government Bond Fund is current
income. It invests in debt securities which are obligations of or guaranteed by
the U.S. Government, its agencies or instrumentalities ("U.S. Government
Securities").
It is not limited as to the maturities of its portfolio investments and may
take full advantage of the entire range of maturities available in U.S.
Government Securities. The Adviser may adjust the average maturity of its
portfolio from time to time, depending on its assessment of the relative yields
available on securities of different maturities and its assessment of future
interest rate patterns and market risk. Thus, at various times the average
maturity of the portfolio may be relatively short (from one year to five years,
for example) and at other times may be relatively long (over 10 years, for
example). Fluctuations in portfolio values and therefore fluctuations in the
net asset value of its shares are more likely to be greater when the portfolio
average maturity is longer. The portfolio is likely to be primarily invested in
securities with short-term maturities in periods when the Adviser deems a more
defensive position is advisable. For temporary periods, for defensive purposes
or to accommodate inflows of cash awaiting more permanent investment, it may
also invest in short-term money market instruments, including repurchase
agreements.
There are two basic types of U.S. Government Securities: (1) direct
obligations of the U.S. Treasury, and (2) obligations issued or guaranteed by
an agency or instrumentality of the U.S. Government. Agencies and
instrumentalities include Federal Farm Credit System ("FFCS"), Student Loan
Marketing Association ("SLMA"), Federal Home Loan Mortgage Corporation
("FHLMC"), Federal Home Loan Banks ("FHLB"), Federal National Mortgage
Association ("FNMA") and Government National Mortgage Association ("GNMA").
Some obligations issued or guaranteed by agencies or instrumentalities, such as
those issued by GNMA, are fully guaranteed by the U.S. Government. Others, such
as FNMA bonds, rely on the assets and credit of the instrumentality with
limited rights to borrow from the U.S. Treasury. Still other securities, such
as obligations of the FHLB, are supported by more extensive rights to borrow
from the U.S. Treasury.
When the Adviser deems that higher yields are obtainable through
investments in mortgage related securities and that the yield advantage offsets
the uncertainties of the timing of principal payments, the Fund may be
significantly invested in mortgage related securities. GNMA Certificates are
mortgage-backed securities
18
<PAGE> 24
representing part ownership of a pool of mortgage loans. These loans issued by
lenders such as mortgage bankers, commercial banks and savings and loan
associations are either insured by the Federal Housing Administration or
guaranteed by the Veterans Administration. A "pool" or group of such
mortgages is assembled and, after being approved by GNMA, is offered to
investors through securities dealers. Once approved by GNMA, the timely payment
of interest and principal on each mortgage is guaranteed by GNMA and backed by
the full faith and credit of the U.S. Government. GNMA Certificates differ from
bonds in that principal is paid back monthly by the borrower over the term of
the loan rather than returned in a lump sum at maturity. GNMA Certificates are
called "pass-through" securities because both interest and principal payments
(including prepayments) are passed through to the holder of the Certificate.
Upon receipt, principal payments will be used by the Fund to purchase
additional GNMA Certificates or other U.S. Government Securities.
The Fund may also invest in pools of mortgages which are issued or
guaranteed by other agencies of the U.S. Government. The average life of
pass-through pools varies with the maturities of the underlying mortgage
instruments. In addition, a pool's term may be shortened or lengthened by
unscheduled or early payment, or by slower than expected prepayment, of
principal and interest on the underlying mortgages. The occurrence of mortgage
prepayments is affected by the level of interest rates, general economic
conditions, the location and age of the mortgage and other social and
demographic conditions. As prepayment rates of individual pools vary widely, it
is not possible to accurately predict the average life of a particular pool.
It may also invest in a collateralized mortgage obligation ("CMO"). A CMO
is a debt security issued by a corporation, trust or custodian or by a U.S.
Government agency or instrumentality, that is collateralized by a portfolio or
pool of mortgages, mortgage-backed securities, U.S. Government securities or
corporate debt obligations. The issuer's obligation to make interest and
principal payments is secured by the underlying pool or portfolio of
securities. The Fund invests only in CMOs which are obligations of or
guaranteed by the U.S. Government, its agencies or instrumentalities such as
the FNMA or the FHLMC.
CMOs are most often issued in two or more classes (each of which is a
separate security) with varying maturities and stated rates of interest.
Interest and principal payments from the underlying collateral (generally a
pool of mortgages) are not necessarily passed directly through to the holders
of the CMOs; these payments are typically used to pay interest on all CMO
classes and to retire successive class maturities in a sequence. Thus, the
issuance of CMO classes with varying maturities and interest rates may result
in greater predictability of maturity with one class and less predictability of
maturity with another class than a direct investment in a mortgage-backed
pass-through security (such as a GNMA Certificate). Classes with shorter
maturities typically have lower volatility and lower yield while those with
longer maturities typically have higher volatility and higher yield. Thus,
investments in CMOs provide greater or lesser control over the investment
characteristics than mortgage pass-through securities and offer more defensive
or aggressive investment alternatives.
Investment by Davis Government Bond Fund in mortgage-related U.S.
Government Securities, such as GNMA Certificates, and CMOs also involves other
risks. The yield on a pass-through security is typically quoted based on the
maturity of the underlying instruments and the associated average life
assumption. Actual prepayment experience may cause the yield to differ from the
assumed average life yield. Accelerated prepayments adversely impact yields for
pass-throughs purchased at a premium; the opposite is true for pass-throughs
purchased at a discount. During periods of declining interest rates, prepayment
of mortgages underlying pass-through certificates can be expected to
accelerate. When the mortgage obligations are prepaid, the Fund reinvests the
prepaid amounts in securities, the yields of which reflect interest rates
prevailing at that time. Therefore, the Fund's ability to maintain a portfolio
of high-yielding, mortgage-backed securities will be adversely affected to the
extent that prepayments of mortgages must be reinvested in securities which
have
19
<PAGE> 25
lower yields than the prepaid mortgages. Moreover, prepayments of mortgages
which underlie securities purchased at a premium could result in capital
losses. Investment in such securities could also subject the Fund to "maturity
extension risk" which is the possibility that rising interest rates may cause
prepayments to occur at a slower than expected rate. This particular risk may
effectively change a security which was considered a short or intermediate-term
security at the time of purchase into a long-term security. Long-term
securities generally fluctuate more widely in response to changes in interest
rates than short or intermediate-term securities.
In selecting CMOs, the Adviser seeks a favorable yield relative to risk and
considers purchase price, interest rates, total rates of return, prepayment
rates, average life, duration and volatility and compares these with other
mortgage-backed investments and U.S. Government Securities.
The guarantees of the U.S. Government, its agencies and instrumentalities
are guarantees of the timely payment of principal and interest on the
obligations purchased. The value of the shares issued by the Davis Government
Bond Fund is not guaranteed and will fluctuate with the value of the Fund's
portfolio. Generally when the level of interest rates rise, the value of the
Fund's portfolio is likely to decline and when the level of interest rates
decline, the value of the Fund's portfolio is likely to rise.
The Fund may engage in portfolio trading primarily to take advantage of
yield disparities. Such trading strategies may result in minor temporary
increases or decreases in the Fund's current income and in its holding of debt
securities which sell at substantial premiums or discounts from face value. If
expectations of changes in interest rates or the price of two securities prove
to be incorrect, the Fund's potential income and capital gain will be reduced
or its potential loss will be increased.
OTHER POLICIES. For information concerning other investment policies,
risks and considerations see "General Fund Policies and Risks" below.
DAVIS GOVERNMENT MONEY MARKET FUND
GENERAL. The investment objective of Davis Government Money Market Fund is
to achieve as high a level of current income as is consistent with the
principle of preservation of capital and maintenance of liquidity. It seeks to
achieve its investment objective by investing exclusively in U.S. Government
Securities and repurchase agreements involving U.S. Government Securities. For
a description of these securities see "Investment Objectives and Policies --
Davis Government Bond Fund."
MATURITY. The Fund limits its investments to securities and repurchase
agreements which will mature 397 days or less from the date of purchase. Such
period is calculated pursuant to the provisions of Rule 2a-7 under the
Investment Company Act of 1940 which governs the use of amortized cost
valuation. Maturities of securities collateralizing repurchase agreements are
not so limited.
NET ASSET VALUE. It is the policy of the Fund to seek to maintain a net
asset value of $1.00 per share. However, the maintenance of a $1.00 share price
is not assured. The U.S. Government and its agencies and instrumentalities do
not guarantee the value of the shares issued by the Fund. The Fund values its
assets on the basis of amortized cost which permits it to maintain a dollar
weighted average portfolio maturity not exceeding 90 days. See "Determining
the Price of Shares."
PORTFOLIO ACTIVITY. Generally, the Fund holds its securities until
maturity. However, the Fund may attempt, from time to time, to increase its
yield by trading to take advantage of variations in the markets or yields for
short-term money market instruments. Portfolio securities in the Fund may also
be disposed of prior
20
<PAGE> 26
to maturity if, on the basis of a revised credit evaluation of the issuer or
other financial or investment considerations, such disposition is deemed
advisable by the Adviser. The policy of investing in securities with short
maturities will result in high portfolio turnover. However, this would not
usually affect the Fund since normally brokerage commissions are not paid in
connection with the purchase or sale of short-term instruments.
INVESTMENT RISKS. While the Fund intends to invest in high quality money
market instruments, these investments are not entirely without risk. It may
invest in obligations issued or guaranteed by the U.S. Treasury which include
bills, notes and bonds which differ from each other only in interest rates,
maturities and time of issuance: Treasury bills have maturities of one year or
less, Treasury notes have initial maturities of up to ten years and Treasury
bonds have initial maturities of greater than ten years. The Fund may also
invest in obligations issued or guaranteed by the U.S. Government, its agencies
or instrumentalities, which are supported by any of the following: (a) the full
faith and credit of the U.S. Government (such as GNMA Certificates); (b) the
right of the issuer to borrow an amount limited to a specific line of credit
from the U.S. Government (such as Federal Farm Credit Bank-FFCB); (c)
discretionary borrowing authority of the U.S. Government agency or
instrumentality (such as Student Loan Marketing Association -- SLMA); or (d)
the credit of the instrumentality (such as Financing Corporation -- FICO).
OTHER POLICIES. For information concerning other investment policies, risk
and considerations, see "General Fund Policies and Risks" below.
DAVIS FINANCIAL FUND
GENERAL. The investment objective of Davis Financial Fund is growth of
capital. It invests primarily in common stocks and other securities such as
securities convertible into common stock. Such investments will consist of
issuers which the Adviser believes have capital growth potential due to factors
such as undervalued assets or earnings potential, the development and demand of
new products and services, favorable operating ratios, resources for expansion,
management abilities, improved competitive positions and favorable overall
business prospects.
CONCENTRATED AREA OF INVESTMENT. Generally, the Fund will concentrate 25%
or more of its total assets in obligations of domestic and foreign companies in
each of the banking and financial services industries. For purposes of a
concentrated area, an issuer will 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
banking industry include U.S. and foreign commercial and industrial banking and
savings institutions (including their parent holding companies). Companies in
the financial services industry include commercial and industrial finance
companies, diversified financial services companies, investment banking,
securities brokerage and investment advisory companies, leasing companies and
insurance companies (including multi-line, property, casualty and life
insurance companies) and insurance holding 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.
The banking and financial services industries are currently experiencing
change as existing distinctions between such industries become less clear, as
new regulations may create new opportunities for companies in the area, and as
some companies may become attractive acquisition candidates. There are
congressional and executive department proposals that would make significant
changes in the federal laws governing the range of business in which federally
regulated banks can engage. These proposals would allow certain banks and their
21
<PAGE> 27
holding companies to offer a wide range of financial products and services,
including insurance, mutual fund underwriting, and securities underwriting and
sales. These changes would eliminate many distinctions between commercial and
investment banking.
INVESTMENT CONSIDERATIONS AND RISKS CONCERNING THE BANKING
INDUSTRY. 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.
Recent legislation, has significantly altered the regulatory environment
for savings institutions. The number of such institutions with financial
problems, the unsettled economic environment and poor commercial lending
performance has prompted Congress to raise capital requirements as well as
other industry standards. Recent regulatory action has also increased capital
requirements and raised other standards applicable to banks.
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 aggressive
expansion of larger, publicly held foreign banks may result in increased
competition and a decline in the number of publicly traded regional banks.
INVESTMENT CONSIDERATIONS AND RISKS CONCERNING THE FINANCIAL SERVICES
INDUSTRY. Many of the investment considerations discussed in connection with
banks and savings associations 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 and investment advisory companies are
particularly subject to government regulation and the risks inherent in
securities trading and underwriting activities. 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 POLICIES. Regulations of the Securities and Exchange Commission
limit investments in the securities of companies that derive more than 25% 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. For information concerning other investment
policies, risks and considerations, see "General Fund Policies and Risks."
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<PAGE> 28
DAVIS CONVERTIBLE SECURITIES FUND
GENERAL. The investment objective of Davis Convertible Securities Fund is
total return. It seeks this objective through a combination of current income
and capital appreciation. The Fund will, under normal circumstances, invest 65%
or more of its total assets in convertible securities. Securities received upon
conversion of a convertible security may be retained by the Fund to permit
orderly disposition or to establish long-term holdings for federal income tax
purposes. In the event that less than 65% of total assets are invested in
convertible securities due to the exercise of conversion rights, the Fund will
invest available funds in additional convertible securities as soon as
practicable. The remaining assets may be invested in other securities,
including common and preferred stock, corporate debt securities, real estate
investment trusts ("REITs"), U.S. Government Securities, and money market
instruments (including repurchase agreements). For a discussion of the risks
associated with investing in REITs see "Davis Real Estate Fund".
Generally, convertible securities are bonds, debentures, notes, preferred
stocks or other securities that convert or are exchanged into shares of the
underlying common stock at a stated exchange ratio. Usually, the conversion or
exchange is solely at the option of the holder. However, some convertible
securities may be convertible or exchangeable at the option of the issuer or
are automatically converted or exchanged at a time certain, or upon the
occurrence of certain events, or have a combination of these characteristics.
Usually a convertible security provides a long term call on the issuer's common
stock and therefore tends to appreciate in value as the underlying common stock
appreciates in value. A convertible security may also be subject to redemption
by the issuer after a date certain and under certain circumstances (including a
specified price) established on issue. If a convertible security held by the
Fund is called for redemption, the Fund could be required to tender it for
redemption, convert it into the underlying common stock or sell it.
In selecting convertible securities for the Fund, the Adviser will seek to
achieve a high level of total return and will consider the following factors,
among others: (1) the Adviser's own evaluations of the basic underlying value
of assets and business of the issuers; (2) the interest or dividend income
generated by the securities; (3) the potential for capital appreciation of the
securities and the underlying common stocks; (4) the prices of the securities
relative to the underlying common stocks; (5) the prices of the securities
relative to other comparable securities; (6) whether the securities are
entitled to the benefits of sinking funds or other protective conditions; (7)
the existence of any anti-dilution protections of the security; and (8) the
diversification of the Fund's portfolio as to issuers. The Fund may convert a
convertible security which it holds (A) when necessary to permit orderly
disposition of the investment when a convertible security approaches maturity
or has been called for redemption; (B) to facilitate a sale of the position;
(C) if the dividend rate on the underlying common stock increases above the
yield on the convertible security; or (D) whenever the Adviser believes it is
otherwise in the best interests of the Fund.
INVESTMENT CONSIDERATIONS AND RISKS GENERALLY. Fixed-income securities are
generally considered to be interest rate sensitive. The market value of the
Fund's investments will change in response to changes in interest rates. During
periods of falling interest rates, the value of debt securities held by the
Fund 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. Due to its conversion feature, the price of a convertible
security will normally vary in some proportion to changes in the price of the
underlying common stock. A convertible security will normally also provide a
higher yield than the underlying common stock (but generally lower than
comparable non-convertible securities). Due to their higher yield, convertible
securities generally sell above their "conversion value," which is the
current market value of the
23
<PAGE> 29
stock to be received upon conversion. The difference between this conversion
value and the price of convertible securities will vary over time depending on
the value of the underlying common stocks and interest rates. When the
underlying common stocks decline in value, convertible securities will tend not
to decline to the same extent because the yield acts as a price support. When
the underlying common stocks rise in value, the value of convertible securities
may also be expected to increase but will generally not increase to the same
extent as common stocks.
HIGH YIELD, HIGH RISK DEBT SECURITIES. Convertible securities are often
viewed by the issuer as future common stock subordinated to other debt and
carry a lower rating than the issuer's non-convertible debt obligations. The
debt securities in which the Fund may invest (including convertible securities)
include high yield, high risk debt securities (including convertible
securities) rated BBB or lower by Standard & Poor's Corporation ("S&P") or
Baa or lower by Moody's Investor Services ("Moody's") or unrated securities
deemed by the Adviser to be of an equivalent rating. A brief description of the
quality ratings of these two services is contained herein under "Portfolio
Composition" and a more complete description is contained in the Appendix.
Securities rated BBB by S&P or Baa by Moody's have speculative characteristics;
changes in economic conditions or other circumstances are more likely to lead
to a weakened capacity to make principal and interest payments. Securities
rated BB or lower by S&P and Ba or lower by Moody's are referred to in the
financial community as "junk bonds" and may include D rated securities of
issuers in default. The Fund intends not to purchase securities rated BB or Ba
or lower if such purchase would then cause 35% or more of the Fund's net assets
to be invested in such securities. While likely to have some quality and
protective characteristics, such securities, whether or not convertible into
common stock, usually involve increased risk as to payment of principal and
interest.
The Adviser considers the ratings assigned by S&P or Moody's as one of
several factors in its independent credit analysis of issuers. Ratings assigned
by credit agencies do not evaluate market risks.
Issuers of high yield, high risk securities may be highly leveraged and may
not have available to them traditional methods of financing. Therefore, the
risks associated with acquiring the securities of such issuers generally are
greater than is the case with higher rated securities. For example, during an
economic downturn or a sustained period of rising interest rates, issuers of
high yield securities may be more likely to experience financial stress,
especially if such issuers are highly leveraged. During such periods, such
issuers may not have sufficient revenues to meet their principal and interest
payment obligations. The issuer's ability to service its debt obligations also
may be adversely affected by specific issuer developments, or the issuer's
inability to meet specific projected business forecasts, or the unavailability
of additional financing. The risk of loss due to default by the issuer is
significantly greater for the holders of high yield securities because such
securities may be unsecured and may be subordinated to other creditors of the
issuer.
Such securities are subject to greater price volatility than higher rated
securities, tend to decline in price more steeply than higher rated securities
in periods of economic difficulty or accelerating interest rates and are
subject to greater risk of payment in adverse economic times. There may be a
thin trading market for such securities. This may have an adverse impact on
market price and the ability of the Fund to dispose of particular issues and
may cause the Fund to incur special securities registration responsibilities,
liabilities and costs and liquidity and valuation difficulties. Unexpected net
redemptions may force the Fund to sell high yield, high risk debt securities
without regard to investment merit, thereby possibly reducing return rates.
Such securities may be subject to redemptions or call provisions which, if
exercised when investment rates are declining, could result in the replacement
of such securities with lower yielding securities, resulting in a decreased
return. To the extent that the Fund invests in bonds that are original issue
discount, zero coupon, pay-in-kind or deferred interest
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<PAGE> 30
bonds, the Fund may have taxable interest income in excess of the cash actually
received on these issues. In order to avoid taxation to the Fund, the Fund may
have to sell portfolio securities to meet taxable distribution requirements.
See the Statement of Additional Information for more detailed information
on high yield, high risk debt securities.
PORTFOLIO COMPOSITION. The table below reflects Davis Convertible
Securities Fund's portfolio quality rating for December 31, 1996. The table
reflects the percentage of total assets represented by fixed income securities
rated by Moody's or S&P, by unrated fixed income securities and by other
assets. The percentages shown reflect the higher of the Moody's or S&P rating.
U.S. Government Securities, whether or not rated, are reflected as Aaa and AAA
(highest quality). Other assets may include money market instruments,
repurchase agreements, equity securities, net payables and receivables and
cash. The allocations in the table are not necessarily representative of the
composition of the Fund's portfolio at other times. Portfolio quality rating
will change over time.
<TABLE>
PORTFOLIO COMPOSITION OF THE DAVIS CONVERTIBLE SECURITIES FUND PORTFOLIO BY
QUALITY RATING AS A PERCENTAGE OF TOTAL NET ASSETS AT DECEMBER 31, 1996
<CAPTION>
FUND'S ASSESSMENT GENERAL DEFINITION
MOODY'S S&P RATING CATEGORY PERCENTAGE OF UNRATED SECURITIES OF BOND QUALITY
- --------------------------- ---------- --------------------- ------------------
<S> <C> <C> <C>
Aaa/AAA................................. -- -- Highest quality
Aa/AA................................... -- -- High quality
A/A..................................... 7.76% -- Upper medium grade
Baa/BBB................................. 5.93% -- Medium grade
Ba/BB................................... 5.49% 1.85% Some speculative elements
B/B..................................... 5.19% -- Speculative
Caa/CCC................................. -- -- More speculative
Ca,C/CC,C,D............................. -- -- Very speculative, may be
in default
Not Rated............................... 1.85% -- Not rated by Moody's or
S&P
Common and Convertible Preferred --
Stock................................. 71.78%
Short-term Investments.................. 2.00% --
----- ----
100% 1.85%
</TABLE>
The description of each bond quality category set forth in the table above
is intended to be a general guide and not a definitive statement as to how
Moody's and S&P define such rating category. A more complete description of the
rating categories is set forth in the Appendix. The ratings of Moody's and S&P
represent their opinions as to the quality of the securities that they
undertake to rate. It should be emphasized, however, that ratings are relative
and subjective and are not absolute standards of quality. There is no assurance
that a rating assigned initially will not change. The Fund may retain a
security whose rating has changed or has become unrated.
OTHER POLICIES. For information concerning other investment policies,
risks and considerations see "General Fund Policies and Risks" below.
25
<PAGE> 31
DAVIS REAL ESTATE FUND
GENERAL. The investment objective of Davis Real Estate Fund is total
return through a combination of growth and income. It invests primarily in
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 invested in securities of 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. It does
not invest directly in real estate. Real estate companies include real estate
investment trusts, or other securitized real estate investments, brokers,
developers, lenders and companies with substantial real estate holdings such as
paper, lumber, hotel and entertainment companies. It invests in common stocks
and other equity securities and debt securities. In keeping with its primary
growth objective, it will normally invest primarily in equity securities
(including securities convertible into equity securities). It may also invest
in fixed income securities for income or as a defensive strategy when the
Adviser believes that adverse economic or market conditions require such
strategy.
The remaining 35% of the Fund's assets may be invested in securities of
companies in any other industries. These may include companies which are not
primarily involved in real estate operations or ownership but which have
products or services relating to the real estate industry, such as
manufacturers and distributors of building supplies, financial institutions
which make or service real estate loans or companies which have substantial
real estate assets such as some companies in the energy, retailing or railroad
industries. There is no limitation on such investments except that the Fund
intends to invest less than 25% of its total assets in the securities of any
industry other than the real estate industry.
The Fund will invest in shares of real estate investment trusts
("REITs"). 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 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.
INVESTMENT CONSIDERATIONS AND RISKS GENERALLY. Because the Fund invests
primarily in the real estate industry, it is subject to risks associated with
the direct ownership of real estate. The Fund 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, over building 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. If the Fund has rental income or income from the
disposition of real property, the receipt of such income may adversely affect
its ability to retain its tax status as a regulated investment company.
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
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<PAGE> 32
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. 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 Fund, a shareholder will bear not only his proportionate
share of the expense of the Fund, but also, indirectly, similar expenses of the
REITs, including compensation of management.
HIGH YIELD, HIGH RISK DEBT SECURITIES. The Fund may also invest in the
same types of high yield, high risk securities as Davis Convertible Securities
Fund. However, the Fund generally will not purchase securities rated BB or Ba
or lower if such purchase would then cause more than 30% of the Fund's net
assets to be invested in such securities. The Fund currently has none of its
assets invested in high yield, high risk securities and does not presently
intend to have over 5% of its assets invested in such securities in the near
future.
OTHER POLICIES. For information concerning other investment policies,
risks and considerations see "General Fund Policies and Risks" below.
GENERAL FUND POLICIES AND RISKS
With respect to this section, the Funds are referred to as follows:
Davis Growth Opportunity Fund as the "Growth Fund"
Davis Government Bond Fund as the "Bond Fund"
Davis Government Money Market Fund as the "Money Market Fund"
Davis Financial Fund as the "Financial Fund"
Davis Convertible Securities Fund as the "Convertible Fund"
Davis Real Estate Fund as the "Real Estate Fund"
DIVERSIFICATION. The Growth, Bond and Money Market Funds limit investments
in one issuer to 5% of total assets. The Financial, Convertible and Real Estate
Funds have the same limitation, but only as to 75% of their respective total
assets. The remaining 25% of each Fund's total assets may be invested without
regard to this 5% limitation. This may involve greater risk than if the 5%
limitation is applied to all assets. Note that no Fund has any limitations on
investments in U.S. Government Securities or repurchase agreements with respect
to such securities.
CONCENTRATION. No Fund, other than the Financial Fund and Real Estate
Fund, will make any investment which would cause 25% or more of its total
assets to be invested in any one industry. This limitation does not apply to
investments in U.S. Government Securities.
TEMPORARY INVESTMENTS OF FUNDS OTHER THAN THE MONEY MARKET FUND. The Funds
may temporarily invest in high grade money market instruments, repurchase
agreements, or may hold cash or cash equivalents for defensive purposes or to
accommodate inflows of cash awaiting more permanent investment.
FOREIGN INVESTMENTS. Funds other than the Bond and Money Market Funds may
invest in securities of foreign issuers or securities which are principally
traded in foreign markets ("foreign securities"). When foreign investments
are made, the Adviser or Sub-Advisers will attempt to take advantage of
differences between economic trends and the performance of securities markets
in various countries to maximize investment
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performance. In most instances, foreign investments will be made in companies
principally based in developed countries.
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") covering such
securities and through U.S. registered investment companies investing primarily
in foreign securities. The Funds, however, may not invest in the securities of
other registered investment companies if more than 10% of a Fund's total assets
would then be so invested. Other registered investment companies usually have
their own management costs or fees and the Adviser will also earn its regular
fee on Fund assets invested in such other companies. Operating expenses of a
Fund investing in foreign securities are likely to be higher than that of one
investing exclusively in U.S. securities, since management, custodial and
certain other expenses are expected to be higher.
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 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 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.
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 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 in respect to a different foreign currency than 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, a Fund 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 its total
assets (excluding in such 5% asset calculation 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 a Fund 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 a Fund
than if it
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had not entered into such contracts. When taking a position in an anticipatory
hedge, a Fund is required to set aside cash or high grade liquid securities to
fully secure the obligation.
PORTFOLIO TRANSACTIONS. The Adviser (and Sub-Advisers with respect to
Growth Fund) is responsible for the placement of portfolio transactions,
subject to the supervision of the Board of Directors. It is the Company's
policy to seek 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 shares of the Company may be taken into account as a
factor in placement of portfolio transactions. In seeking its investment
objective, a Fund predominantly investing in equity securities may trade to
some degree in securities for the short term if the Adviser (or Sub-Advisers)
believes that the growth potential of a security no longer exists, considers
that other securities have more growth potential, or otherwise believes that
such trading is advisable. As discussed above, the Bond Fund may engage in
portfolio trading to take advantage of yield disparities. Because of
differences among investment policies, portfolio turnover rate will be
different for each Fund. At times it could be high, which could require the
payment of larger amounts in brokerage commissions. However, Bond and Money
Market Funds' trades are usually principal transactions involving no
commissions. The Adviser and Sub-Advisers 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.
WRITING COVERED OPTIONS. For income purposes, the Funds other than the
Money Market Fund may write covered call options on its portfolio securities.
However, the Funds have not done so to any significant extent and do not
currently intend to engage in any such transaction if it would cause more than
10% of net assets to be subject to options.
REPURCHASE AGREEMENTS. The Funds may enter into repurchase agreements, but
normally do not enter into repurchase agreements maturing in more than seven
days, and may make repurchase agreement transactions through a joint account
with other funds which have the same investment adviser. A repurchase
agreement, as referred to herein, involves a sale of securities to the Funds,
with the concurrent agreement of the seller (a member bank of the Federal
Reserve System 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.
RESTRICTED AND ILLIQUID SECURITIES. Funds, other than the Money Market
Fund, may invest in restricted securities, i.e., securities which, if sold,
would cause the Funds to be deemed "underwriters" under the Securities Act of
1933 or 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 any Fund's net assets would then be
illiquid. If at any time more than 15% of a Fund's net assets are illiquid,
steps will be taken as soon as practicable to reduce the percentage of illiquid
assets to 15% or less.
The restricted securities which a Fund 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
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Rule permits certain qualified institutional buyers, such as the Fund, to trade
in privately placed securities even though such securities are not registered
under the 1933 Act. The Adviser, or the Sub-Advisers in the case of Growth
Fund, under criteria established by the Company's Board of Directors, will
consider whether Rule 144A Securities being purchased or held by the Fund are
illiquid and thus subject to the Fund's policy limiting investments in illiquid
securities. In making this determination, the Adviser or the Sub-Advisers 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 marketplace 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 or the Sub-Advisers and, if as a result of changed conditions, it is
determined that a Rule 144A Security is no longer liquid, the Fund's holding of
illiquid securities will be reviewed to determine what, if any, action is
appropriate in light of the policy limiting investments in such securities.
There is no limitation on the percentage of the Fund's assets that can be
invested in liquid Rule 144A 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. No Fund will borrow money except from banks for temporary or
emergency purposes (usually to facilitate orderly redemption of its shares
while avoiding untimely disposition of portfolio holdings.) Except for the
Money Market Fund, a Fund may not (i) borrow money in excess of 10% of the
value of its total assets (excluding the amount borrowed) at the time of the
borrowing or (ii) mortgage, pledge or hypothecate any assets except to secure
permitted borrowings and then only in an amount not in excess of 15% of the
value of its total assets (excluding the amount borrowed) at the time of such
borrowings. The Money Market Fund may not (a) borrow in excess of 25% of the
value of its total assets (including the amounts borrowed) at the time of
borrowing or (b) pledge or hypothecate any of its assets except to secure
permitted borrowing and then in an amount not in excess of 10% of the value of
its net assets (including the amount borrowed) at the time of such borrowing.
No Fund will purchase securities while any borrowing exceeds 5% of net assets.
FUNDAMENTAL AND NON-FUNDAMENTAL POLICIES. The investment restrictions set
forth in the Statement of Additional Information including those in respect to
borrowing, concentration and diversification as discussed above are fundamental
policies. The investment objectives and policies with respect to eligible
investments are fundamental policies of Money Market Fund and cannot be changed
without a shareholder vote. All other investment objectives and policies of the
Company's Funds are not fundamental and may be changed without shareholder
approval. In the event that a Fund's objective should ever be changed, such
change may result in an objective different from the objective the shareholder
considered appropriate at the time of investment in such Fund. Except for the
restrictions on illiquid securities, any percentage restrictions set forth in
the prospectus or in the Statement of Additional Information apply as of the
time of investment without regard to later increases or decreases in the values
of securities or total net assets.
ADVISER, SUB-ADVISERS AND DISTRIBUTOR
Davis Selected Advisers, L.P., (the "Adviser") whose principal office is
at 124 East Marcy Street, Santa Fe, New Mexico 87501, serves as the adviser of
the Funds. Venture Advisers, Inc. is the Adviser's sole general partner. Shelby
M.C. Davis is 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 Davis Government Bond Fund, Davis
Government Money Market Fund, Davis Financial Fund, Davis Convertible
Securities Fund and Davis Real Estate Fund, and manages the business operations
of the Davis Growth Opportunity Fund. Davis Distributors, LLC (the
"Distributor"), a subsidiary of the Adviser serves as the
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distributor or principal underwriter of the Funds' shares. As discussed below,
the Adviser has hired Tanaka Capital Management, Inc. as Sub-Adviser for the
Growth Opportunity Fund. Davis Selected Advisers-NY, Inc. ("DSA-NY"), a
wholly-owned subsidiary of the Adviser, performs research and other services
for the Funds on behalf of the Adviser under a Sub-Advisory Agreement with the
Adviser. This Agreement does not affect the services provided by Tanaka Capital
Management. The Adviser also acts as investment adviser for Davis High Income
Fund, Inc., Davis Tax-Free High Income Fund, Inc., Davis New York Venture Fund,
Inc. and Davis International Series, Inc., (collectively with the Funds, the
"Davis Funds") and Selected American Shares, Inc., Selected Special Shares,
Inc. and Selected Capital Preservation Trust (collectively the "Selected
Funds"). The Distributor also acts as the principal underwriter for the Davis
and Selected Funds.
The Davis Government Bond Fund pays the Adviser a fee at the annual rate of
0.50% of total net assets. Davis Government Money Market Fund pays the Adviser
a fee at the annual rate of 0.50% on the first $250 million of average net
assets, 0.45% on the next $250 million of net assets and 0.40% on assets over
$500 million. The other Funds each pay the Adviser a fee at the annual rate of
0.75% on the first $250 million of average net assets, 0.65% on the next $250
million of net assets and 0.55% on assets over $500 million. The fees for these
other Funds are higher than those charged by many mutual funds with similar
objectives. The Company also reimburses the Adviser for its costs of providing
certain accounting and financial reporting, shareholder services and compliance
with state securities laws. Under the Sub-Advisory Agreement with DSA-NY, the
Adviser pays all of DSA-NY's direct and indirect costs of operations. All the
fees paid to DSA-NY are paid by the Adviser and not the Funds.
Tanaka Capital Management, Inc. (the "Sub-Adviser"), is the sub-adviser
for the Davis Growth Opportunity Fund. The Sub-Adviser manages the day to day
investment operations for the Davis Growth Opportunity Fund. The Company pays
no fees directly to the Sub-Adviser. The Sub-Adviser receives from the Adviser
a reallowed portion of its advisory fee equal to 0.30% of the first $100
million of the Davis Growth Opportunity Fund's annual average net assets and
0.25% of such Fund assets over $100 million with a minimum annual fee of
$100,000. However, the Sub-Adviser's fees on Fund assets over $100 million may
not exceed one-third of the fees paid to the Adviser from the Davis Growth
Opportunity Fund. The Sub-Adviser also provides investment advisory services to
employee benefit plans, institutions, trusts and individuals. The Sub-Adviser's
offices are located at 230 Park Avenue, Suite 1432, New York, New York 10169.
Graham Y. Tanaka is the owner of the Sub-Adviser. Since February, 1987, Mr.
Tanaka has been the controlling shareholder, Chief Executive Officer and sole
director of the Sub-Adviser. Prior to December, 1990, he was employed by the
Adviser.
PORTFOLIO MANAGEMENT. Carolyn H. Spolidoro is the primary portfolio
manager of the Davis Government Bond Fund. She has been employed by the Adviser
since August 1985. She is Vice President of the Adviser's General Partner and
Vice President of all the Davis Funds. She is also the portfolio manager of the
Davis Government Money Market Fund, the Selected U. S. Government Income Fund
and the Selected Daily Government Fund.
Graham Y. Tanaka has been the primary portfolio manager of Davis Growth
Opportunity Fund since January, 1987.
Christopher C. Davis and Kenneth Charles Feinberg are the co-portfolio
managers of the Davis Financial Fund. Christopher C. Davis was the co-portfolio
manager of this Fund with Shelby M.C. Davis from its inception until December
1, 1994. He has been employed by the Adviser since September, 1989 as an
assistant portfolio manager and research analyst.
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Kenneth Charles Feinberg has been employed by the Adviser since December of
1994 as a research analyst. He previously served as Assistant Vice President of
Investor Relations for the Continental Corporation from 1988 to 1994.
Andrew A. Davis is the primary portfolio manager of the Davis Convertible
Securities Fund and the Davis Real Estate Fund. He was the co-portfolio manager
of these funds with Shelby M.C. Davis from their inception until December 1,
1994. Andrew A. Davis is a Vice President of the Company and the President of
the Adviser's General Partner. Until February 1993, he was the Vice President
and head of convertible research at Paine Webber, Incorporated.
Shelby M.C. Davis is Chief Investment Officer of the Adviser. As Chief
Investment Officer, he is active in providing investment themes, strategies and
individual stock selection to one or more of the Funds. He is the controlling
shareholder of the Adviser, was the primary portfolio manager of the Davis
Financial Fund and the co-portfolio manager of the Davis Convertible Securities
Fund and the Davis Real Estate Fund until December 1, 1994.
The Distributor is reimbursed by each Fund for some of its distribution
expenses through Distribution Plans which have been adopted with respect to
Class A, Class B and Class C shares of each Fund and approved by the Company's
Board of Directors in accordance with Rule 12b-1 under the Investment Company
Act of 1940. See "Distribution Plans" below for more details.
DISTRIBUTION PLANS
Each Fund, except Davis Government Money Market Fund, bears some of the
costs of selling its shares under Distribution Plans adopted with respect to
its Class A, Class B and Class C shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. This rule regulates the manner in which a
mutual fund may assume costs of distributing and promoting the sale of its
shares.
Payments under the Class A Distribution Plan are limited to an annual rate
of 0.25% of the average daily net asset value of the Class A shares. Such
payments are made to reimburse the Distributor for the fees it pays to its
salespersons and other firms for selling Fund shares and/or servicing
shareholders and maintaining shareholder accounts. Where a commission is paid
for purchases of $1 million or more of Class A shares and as long as the limits
of the distribution plan have not been reached, such payment is also made from
12b-1 distribution fees received from the Fund. Normally, such fees are at the
annual rate of 0.25% of the average net asset value of the accounts serviced
and maintained on the books of the Fund. Payments under the Class A
Distribution Plan may also be used to reimburse the Distributor for other
distribution costs (excluding overhead) not covered in any year by any portion
of the sales charges the Distributor retains. See "Purchase of Shares."
Payments under the Class B Distribution Plan are limited to an annual rate
of 1% of the average daily net asset value of the Class B shares. In accordance
with current applicable rules, such payments are also limited to 6.25% of gross
sales of Class B shares plus interest at 1% over the prime rate on any unpaid
amounts. Up to 0.75% of the average daily net assets is used to pay the
Distributor a 4% commission on new sales of Class B Shares. Most or all of such
commissions are reallowed to salespersons and to firms responsible for such
sales. No commissions are paid by the Company with respect to sales by the
Distributor to officers, directors and full-time employees of the Company, the
Distributor or the Distributor's General Partner. Up to 0.25% of average net
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assets is used to reimburse the Distributor for the payment of service and
maintenance fees to its salespersons and other firms for shareholder servicing
and maintenance of shareholder accounts.
If, due to the foregoing payment limitations, the Company is unable to pay
the Distributor the 4% commission on new sales of Class B shares, the
Distributor intends, but is not obligated, to accept new orders for shares and
pay commissions in excess of the payments it receives from the Company. The
Distributor intends to seek full payment from the Company of any excess amounts
with interest at 1% over the prime rate at such future date when and to the
extent such payments on new sales would not be in excess of the limitations.
The Company is not obligated to make such payments; the amount (if any), timing
and condition of any such payments are solely within the discretion of the
directors of the Company who are not interested persons of the Distributor or
the Company and have no direct or indirect financial interest in the Class B
Distribution Plan (the "Independent Directors"). If the Class B Distribution
Plan is terminated, the Distributor will ask the Independent Directors to take
whatever action they deem appropriate with regard to the payment of any excess
amounts. As of December 31, 1996, the Distributor paid $180,986, $408,923,
$242,356, $46,038 and $339,925, respectively, in commissions with respect to
Davis Growth Opportunity Fund, Davis Government Bond Fund, Davis Financial
Fund, Davis Convertible Securities Fund and Davis Real Estate Fund,
respectively, for which the Distributor had not yet received reimbursement.
In addition, the Plans provide that the Adviser, in its sole discretion,
may utilize its own resources for distributing and promoting sales of Fund
shares, including any profits from its advisory fees.
With respect to Davis Government Money Market Fund, the Distribution Plan
for each class of shares does not provide for any amounts to be paid by the
Fund directly to the Distributor as either compensation or reimbursement for
distributing shares of the Fund, but does authorize the use of the advisory fee
for distribution to the extent such fee may be considered to be indirectly
financing any activity or expense which is primarily intended to result in the
sale of Fund shares.
Each of the Distribution Plans may be terminated at any time by vote of the
Independent Directors or by vote of a majority of the outstanding voting shares
of the respective class. Payments pursuant to a Distribution Plan are included
in the operating expenses of the class.
As described herein, dealers or others will receive different levels of
compensation depending on which class of shares they sell. The Distributor may
make expense reimbursements for special training of a dealer's registered
representatives, advertising or equipment, or to defray the expenses of dealer
meetings. Any such amounts may be paid by the Distributor from the fees it
receives under the Class A, Class B and Class C Distribution Plans. In
addition, the Distributor may, from time to time, pay additional cash
compensation or other promotional incentives to authorized dealers or agents
that sell shares of the Funds. In some instances such cash compensation or
other incentives may be offered only to certain dealers or agents who employ
registered representatives who have sold or may sell significant amounts or
shares of the Funds and/or the other Davis Funds managed by the Adviser during
a specified period of time.
Shares of the Funds may also be sold through banks or bank-affiliated
dealers. Any determination that such banks or bank-affiliated dealers are
prohibited from selling shares of the Funds under the Glass-Steagall Act would
have no material adverse effects on the Company. State securities laws may
require such firms to be licensed as securities dealers in order to sell shares
of the Funds.
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PURCHASE OF SHARES
GENERAL. You can purchase any class of shares of a Davis Fund from any
dealer or other person having a sales agreement with the Distributor.
There are three ways to make an initial investment in the Funds. One way is
to fill out the Application Form included in this Prospectus and mail it to
State Street Bank and Trust Company ("State Street") at the address on the
Form. The dealer must also sign the Form. Your dealer or sales representative
will help you fill out the Form. All purchases made by check should be in U.S.
dollars (minimum $1,000, except $250 for retirement plans) and made payable to
THE DAVIS FUNDS, or in the case of a retirement account, the custodian or
trustee. THIRD PARTY CHECKS WILL NOT BE ACCEPTED. When purchases are made by
check, redemptions will not be allowed until the investment being redeemed has
been in the account for 15 days. Shareholders whose Davis Government Money
Market Fund accounts are established for distributions of earnings or principal
from a unit investment trust sponsored by Clayton Brown & Associates, Inc. may
make initial and subsequent investments of amounts below the stated minimum.
Another way to make an initial investment is to have your dealer order and
pay for the shares. In this case, you must pay your dealer. The dealer can
order the shares from the Distributor by telephone or wire. You can also use
this method for additional investments of at least $1,000.
The third way to purchase shares is by wire. Shares may be purchased at any
time by wiring federal funds directly to State Street. Prior to an initial
investment by wire, the shareholder should telephone Davis Distributors, LLC at
1-800-279-0279 to advise them of the investment and class of shares and to
obtain an account number and instructions. (We will then mail you an
application form, or Plan Adoption Agreement, which you will need to complete,
sign and return to State Street Bank). To assure proper credit, the wire
instructions should be made as follows:
State Street Bank and Trust Company,
Boston MA 02210
Attn.: Mutual Fund Services
DAVIS SERIES, INC.
(Please specify Fund)
Shareholder Name,
Shareholder Account Number,
Federal Routing Number 011000028,
DDA Number 9904-606-2
After your initial investment, you can make additional investments of at
least $25. Simply mail a check payable to "The Davis Funds" to State Street
Bank and Trust Company, c/o The Davis Funds, P.O. Box 8406, Boston, MA
02266-8406. The check should be accompanied by a form which State Street will
provide after each purchase. If you do not have a form, you should tell State
Street that you want to invest the check in shares of a Fund. If you know your
account number, you should also give it to State Street.
The Funds do not issue certificates for Class A shares unless you request a
certificate each time you make a purchase. Certificates will not be issued on
Class B or C shares or for accounts using the Automatic Withdrawal Plan. In no
event, however, will the Davis Government Money Market Fund issue a certificate
since all shares must be uncertificated to use the check writing or
pre-designated account payment privileges. See "Redemption of Shares."
Instead, shares purchased are automatically credited to an account maintained
for you on the books
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of the Funds by State Street. Each time you add to or withdraw from your
account, you will receive a statement showing the details of the transaction
and any other transactions you had during the current year.
ALTERNATIVE PURCHASE ARRANGEMENTS. All Davis Funds each offer four classes
of shares, Class A, B, C and Y shares. With certain exceptions described below,
Class A shares of the Davis Funds are sold with a front-end sales charge at the
time of purchase and are not subject to a sales charge when redeemed (other
than certain Class A shares purchased after May 1, 1997 and redeemed within one
year after purchase, on which there is a 0.75% deferred sales charge). Class B
shares are sold without a sales charge at the time of purchase, but are subject
to a deferred sales charge if they are redeemed within six years after
purchase. Class B shares will automatically convert to Class A shares eight
years after the end of the calendar month in which the shareholder's order to
purchase was accepted. Class C shares are sold at their net asset value per
share without the imposition of a front-end sales charge but are subject to a
1% deferred sales charge if redeemed within one year after purchase and do not
have a conversion feature. The Davis Government Money Market Fund offers four
classes of shares, A, B, C and Y. The four classes of the Davis Government
Money Market Fund shares are available so as to enable investors to facilitate
exchanges since, with the exception of exchanges from Class A shares to Class Y
shares, shares may be exchanged only for shares of the same class. Davis
Government Money Market shares are sold directly without sales charges;
however, front-end or deferred sales charges may be imposed, in certain cases,
upon their exchange into shares of other Davis Funds (see "Exchange of
Shares"). Class Y shares are offered through a separate prospectus to (i)
trust companies, bank trusts, endowments, pension plans or foundations acting
on behalf of their own account or one or more clients for which such
institution acts in a fiduciary capacity and investing at least $5,000,000 at
any one time ("Institutions"); (ii) any state, county, city, department,
authority or similar agency which invests at least $5,000,000 at any one time
("Governmental Entities"); and (iii) any investor with an account established
under a "wrap account" or other similar fee-based program sponsored and
maintained by a registered broker-dealer approved by the Adviser ("Wrap
Program Investors"). Class Y shares are sold at net asset value without the
imposition of Rule 12b-1 charges. For more information about the Class Y
shares, call the Fund at 1-800-279-0279.
Depending on the amount of the purchase and the anticipated length of time
of investment, investors may choose to purchase one class of shares rather than
another. Investors who would prefer to pay the entire cost of distribution at
the time of investment, rather than spreading such cost over time, might
consider Class A shares. Other investors might consider Class B or Class C
shares, in which case 100% of the purchase price is invested immediately. The
Funds will not accept any purchase of Class B shares in the amount of $250,000
or more per investor. Such purchase must be made in Class A shares. Class C
shares may be more appropriate for the short-term investor. The Fund will not
accept any purchase of Class C shares when Class A shares may be purchased at
net asset value. See also "Distribution Plans" for more information.
Wrap Program Investors should be aware that both Class A and Class Y shares
are made available by the Fund at net asset value to sponsors of wrap programs.
However, Class A shares are subject to additional expenses under the Fund's
Rule 12b-1 Plan and sponsors of wrap programs utilizing Class A shares are
generally entitled to payments under the Plan. If the sponsor has selected
Class A shares, investors should discuss these charges with their program's
sponsor and weigh the benefits of any services to be provided by the sponsor
against the higher expenses paid by Class A shareholders.
35
<PAGE> 41
CLASS A SHARES. Class A share Davis Government Money Market Fund are sold
at net asset value. Class A shares of the other Funds are sold at their net
asset value plus a sales charge. The amounts of the sales charges are shown in
the table below.
<TABLE>
<CAPTION>
CUSTOMARY
SALES CHARGE CHARGE AS CONCESSION TO
AS APPROXIMATE YOUR DEALER AS
PERCENTAGE PERCENTAGE PERCENTAGE
OF OFFERING OF AMOUNT OF OFFERING
PRICE INVESTED PRICE
------------ ------------ --------------
<S> <C> <C> <C>
$ 99,999 or less....................... 4 3/4% 5.0% 4%
$ 100,000 to $249,999................... 3 1/2% 3.6% 3%
$ 250,000 to $499,999................... 2 1/2% 2.6% 2%
$ 500,000 to $749,999................... 2% 2.0% 1 3/4%
$ 750,000 to $999,999................... 1% 1.0% 3/4 of 1%
$1,000,000 or more...................... 0% 0.0% 0%<F*>
<FN>
- -------------
<F*> On purchases of $1 million or more, the investor pays no front-end sales
charge but a contingent deferred sales charge of 0.75% may be imposed if
shares purchased after May 1, 1997 are redeemed within the first year
after purchase. The Distributor may pay the financial service firm a
commission during the first year after purchase as follows:
<CAPTION>
PURCHASE AMOUNT COMMISSION
- --------------- ----------
<S> <C>
First $3,000,000........................ .75%
Next $2,000,000......................... .50%
Over $5,000,000......................... .25%
</TABLE>
When a commission is paid for purchases of $1 million or more, such payment
will be made from 12b-1 distribution fees received from the Fund and, in cases
where the limits of the Distribution Plan in any one year have been reached,
from the Distributor's own profits or resources.
There are a number of ways to reduce the sales charge on the purchase of
Class A shares as set forth below.
(i) Family Purchases: Purchases made by an individual, such individual's
spouse and children under 21 are combined and treated as a purchase of a single
person.
(ii) Group Purchases: The purchases of an organized group, whether or not
incorporated, are combined and treated as the purchase of a single person. The
organization must have been organized for a purpose other than to purchase
shares of mutual funds.
(iii) Purchases for Employee Benefit Plans: Trustee or other fiduciary
accounts and Individual Retirement Accounts ("IRA") of a single employer are
treated as purchases of a single person. Purchases of and ownership by an
individual and such individual's spouse under an IRA are combined with their
other purchases and ownership.
(iv) Purchases under a Statement of Intention: By executing the "Statement
of Intention" included in the Application Form at the back of the prospectus,
purchases of Class A shares of $100,000 or more made over a
36
<PAGE> 42
13-month period may be made at the applicable price for the aggregate shares
actually purchased during the period. Please see "Terms and Conditions" at
the back of prospectus.
(v) Rights of Accumulation: If you notify your dealer or the Adviser you
may include the Class A shares you already own (valued at maximum offering
price) in calculating the price applicable to your current purchase.
(vi) Combined Purchases with other Davis Funds: Purchases of Class A shares
of any Fund (other than Davis Government Money Market Fund) may be combined
with your purchases of Class A shares of other Davis Funds, including Davis New
York Venture Fund, Davis High Income Fund, Davis Tax-Free High Income Fund and
Davis International Series, Inc., separately or under combined Statements of
Intention or rights of accumulation to determine the price applicable to your
purchases of Class A shares of a Fund.
(vii) Sales at Net Asset Value: The sales charge will not apply to: (1)
Class A shares purchased through the automatic reinvestment of dividends and
distributions (see "Dividends and Distributions"); (2) Class A shares
purchased by directors, officers and employees of any fund for which the
Adviser acts as an investment adviser or officers and employees of the Adviser,
Sub-Advisers or Distributor including former directors and officers and any
spouse, child, parent, grandparent, brother or sister ("immediate family
members") of all the foregoing, and any employee benefit or payroll deduction
plan established by or for such persons; (3) Class A shares purchased by any
registered representatives, principals and employees (and any immediate family
member) of securities dealers having a sales agreement with the Distributor;
(4) initial purchases of Class A shares totaling at least $250,000 but less
than $5,000,000 made at any one time by banks, trust companies and other
financial institutions on behalf of one or more clients for which such
institution acts in a fiduciary capacity; (5) Class A shares purchased by any
single account covering a minimum of 250 participants (this 250 participant
minimum may be waived for certain fee based mutual fund marketplace programs)
and representing a defined benefit plan, defined contribution plan, cash or
deferred plan qualified under 401(a) or 401(k) of the Internal Revenue Code or
a plan established under section 403(b), 457 or 501(c) (9) of such Code or
"rabbi trusts"; (6) Class A shares purchased by persons participating in a
"wrap account" or similar fee-based program sponsored and maintained by a
registered broker-dealer approved by the Fund's Distributor or by investment
advisers or financial planners who place trades for their own accounts or the
accounts of their clients and who charge a management, consulting or other fee
for their services; and clients of such investment advisers or financial
planners who place trades for their own accounts if the accounts are linked to
the master account of such investment adviser or financial planner on the books
and records of the broker or agent; and (7) Class A shares amounting to less
than $5,000,000 purchased by any state, county, city, department, authority or
similar agency. Investors may be charged a fee to effect transactions in Fund
shares through a broker or agent. The Funds may also issue Class A shares at
net asset value incident to a merger with or acquisition of assets of an
investment company.
CLASS B SHARES. Class B shares are offered at net asset value, without a
front-end sales charge. With certain exceptions described below, the Company
imposes a deferred sales charge on Class B shares of all the Funds except the
Davis Money Market Fund. The charge is 4% on shares redeemed during the first
year after purchase, 3% on shares redeemed during the second or third year
after purchase, 2% on shares redeemed during the fourth or fifth year after
purchase and 1% on shares redeemed during the sixth year after purchase.
However, on Class B shares of the Company which were (i) purchased prior to
December 1, 1994 or (ii) acquired in exchange from Class B shares of other
Davis Funds which were purchased prior to December 1, 1994, the Company will
impose a deferred sales charge of 4% on shares redeemed during the first
calendar year after purchase; 3% on shares redeemed during the second calendar
year after purchase; 2% on shares redeemed
37
<PAGE> 43
during the third calendar year after purchase; and 1% on shares redeemed during
the fourth calendar year after purchase, and no deferred sales charge is
imposed on amounts redeemed after four calendar years from purchase. Class B
shares will be subject to a maximum Rule 12b-1 fee at the annual rate of 1% of
the class' average daily net asset value. The Fund will not accept any purchase
of Class B shares in the amount of $250,000 or more per investor.
Class B shares that have been outstanding for eight years will
automatically convert to Class A shares without imposition of a front-end sales
charge or exchange fee. (Conversion of pre December 1, 1994, Class B shares
represented by stock certificates will require the return of the stock
certificates to the Funds' transfer agent). The Class B shares so converted
will no longer be subject to the higher expenses borne by Class B shares.
Because the net asset value per share of the Class A shares may be higher or
lower than that of the Class B shares at the time of conversion, although the
dollar value will be the same, a shareholder may receive more or less Class A
shares than the number of Class B shares converted. Under the Funds' private
Internal Revenue Service Ruling such a conversion will not constitute a taxable
event under the federal income tax law. In the event that this ceases to be the
case, the Board of Directors will consider what action, if any, is appropriate
and in the best interests of the Class B shareholders. In addition certain
Class B shares held by certain defined contribution plans automatically convert
to Class A shares based on increases of plan assets as described in the
Statement of Additional Information.
CLASS C SHARES. Class C shares are offered at net asset value without a
sales charge at the time of purchase. Class C shares redeemed within one year
of purchase will be subject to a 1% charge upon redemption. Class C shares do
not have a conversion feature. The Fund will not accept any purchases of Class
C shares when Class A shares may be purchased at net asset value.
The Distributor will pay a commission to the firm responsible for the sale
of Class C shares. No other fees will be paid by the Distributor during the
one-year period following purchase. The Distributor will be reimbursed for the
commission paid from 12b-1 fees paid by the Fund during the one-year period. If
Class C shares are redeemed within the one-year period after purchase, the 1%
redemption charge will be paid to the Distributor. After Class C shares have
been outstanding for more than one year, the Distributor will make quarterly
payments to the firm responsible for the sale of the shares in amounts equal to
0.75% of the annual average daily net asset value of such shares for sales fees
and 0.25% of the annual average daily net asset value of such shares for
service and maintenance fees.
CONTINGENT DEFERRED SALES CHARGES. Any contingent deferred sales charge
imposed upon the redemption of Class A, Class B or Class C shares is a
percentage of the lesser of (i) the net asset value of the shares redeemed or
(ii) the original cost of such shares. No contingent deferred sales charge is
imposed when you redeem amounts derived from (a) increases in the value of
shares redeemed above the original cost of such shares or (b) certain shares
with respect to which a Fund did not pay a commission on issuance, including
shares acquired through reinvestment of dividend income and capital gains
distributions. Upon request for redemption, shares not subject to the
contingent deferred sales charge will be redeemed first. Thereafter, shares
held the longest will be the first to be redeemed.
The contingent deferred sales charge will be waived as follows:
The contingent deferred sales charge (CDSC) on Class A, B, and C Shares
that are subject to a CDSC will be waived if the redemption relates to the
following: (a) in the event of the total disability (as evidenced by a
determination by the federal Social Security Administration) of the shareholder
(including registered joint owner) occurring after the purchase of the shares
being redeemed; (b) in the event of the death of the shareholder (including a
registered joint owner); (c) for redemptions made pursuant to an automatic
withdrawal
38
<PAGE> 44
plan in an amount, on an annual basis, up to 12% of the value of the account at
the time the shareholder elects to participate in the automatic withdrawal
plan; (d) for redemptions from a qualified retirement plan or IRA that
constitute a tax-free return of contributions to avoid tax penalty; (e) on
redemptions of shares sold to directors, officers and employees of any fund for
which the Adviser acts as investment adviser or officers and employees of the
Adviser, Sub-Advisors or Distributor including former directors and officers
and immediate family members of all of the foregoing, and any employee benefit
or payroll deduction plan established by or for such persons; (f) on
redemptions pursuant to the right of the Fund to liquidate a shareholder's
account if the aggregate net asset value of the shares held in such account
falls below an established minimum amount; (g) certain other exceptions related
to defined contribution plans as described in the Statement of Additional
Information.
PROTOTYPE RETIREMENT PLANS. The Distributor and certain qualified dealers
have available prototype retirement plans (e.g. 401(k), profit sharing, money
purchase, Simplified Employee Pension ("SEP") plans, model 403(b) and 457
plans for charitable, educational and governmental entities) sponsored by the
Funds for corporations and self-employed individuals and prototype Individual
Retirement Account ("IRA") plans and SIMPLE IRA plans for both individuals
and employers. These plans utilize the shares of the Funds and other Davis
Funds as their investment vehicle. State Street acts as custodian or trustee
for the plans and charges the participant $10 to establish each account and an
annual maintenance fee of $10 per account (up to a maximum of $20 per social
security number). Such fees will be redeemed automatically at year end from
your account, unless you elect to pay the fee directly.
AUTOMATIC INVESTMENT PLAN. You may arrange for automatic monthly investing
whereby State Street will be authorized to initiate a debit to your bank
account of a specific amount (minimum $25) each month which will be used to
purchase Fund shares. For institutions that are members of the Automated
Clearing House system ("ACH"), such purchases can be processed electronically
on any day of the month between the 3rd and 28th day of each month. After each
automatic investment, you will receive a transaction confirmation and the debit
should be reflected on your next bank statement. You may terminate this plan at
any time via a telephone call by the account's registered representative or
shareholder or by written instructions from the shareholder(s). If you desire
to utilize this plan, you may use the appropriate designation on the
Application Form.
DIVIDEND DIVERSIFICATION PROGRAM. You may also establish a dividend
diversification program which allows you to have all dividends and any other
distributions automatically invested in shares of one or more of the Davis
Funds, subject to state securities law requirements and the minimum investment
requirements set forth below. You must receive a current prospectus for the
other fund or funds prior to investment. Shares will be purchased at the chosen
fund's net asset value on the dividend payment date. A dividend diversification
account must be in the same registration as the distributing fund account and
must be of the same class of shares. All accounts established or utilized under
this program must have a minimum initial value of at least $250 and all
subsequent investments must be at least $25. This program can be amended or
terminated at any time, upon at least 60 days' notice. If you would like to
participate in this program, you may use the appropriate designation on the
Application Form.
TELEPHONE PRIVILEGE
Unless you have provided in your application that the telephone privilege
is not to be available, the telephone privilege is automatically available
under certain circumstances for exchanging shares and for redeeming shares. BY
EXERCISING THE TELEPHONE PRIVILEGE TO SELL OR EXCHANGE SHARES, YOU AGREE THAT
THE COMPANY
39
<PAGE> 45
SHALL NOT BE LIABLE FOR FOLLOWING TELEPHONE INSTRUCTIONS REASONABLY BELIEVED TO
BE GENUINE. Reasonable procedures will be employed to confirm that such
instructions are genuine and if not employed, the Company may be liable for
unauthorized instructions. Such procedures will include a request for personal
identification (account or social security number) and tape recording of the
instructions. You should be aware that during unusual market conditions we may
have difficulty accepting telephone requests, in which case you should contact
us by mail. See "Exchange of Shares -- By Telephone," "Redemption of Shares
- -- By Telephone" and "Redemption of Shares -- Expedited Redemption
Privilege."
EXCHANGE OF SHARES
GENERAL. You may exchange shares of any Fund for shares of the same class
of the other Davis Funds. This exchange privilege is a convenient way to buy
shares in other Davis Funds in order to respond to changes in your goals or in
market conditions. If such goals or market conditions change, the Davis Funds
offer a variety of investment objectives that includes common stock funds,
tax-exempt and corporate bond funds, and a money market fund. However, each
Fund, except the Davis Government Money Market Fund is intended as a long-term
investment and not for the short-term. Shares of a particular class of the Fund
may be exchanged only for shares of the same class of another Davis Fund except
that Class A shareholders who are eligible to purchase Class Y shares may
exchange their shares for Class Y shares of the Fund. All of the Davis Funds
offer Class A, Class B and Class C shares. The shares to be received upon
exchange must be legally available for sale in your state. The net asset value
of the initial shares being acquired must be at least $1,000 unless such an
exchange is under the Automatic Exchange Program described below. See
"Purchase of Shares -- Alternative Purchase Arrangements" for Class Y
eligibility requirements.
Generally, shares may be exchanged for the same class of shares of another
Davis Fund at relative net asset value. However, if any Davis Fund shares being
exchanged are subject to an escrow or segregated account pursuant to the terms
of a Statement of Intention or a CDSC, such shares will be exchanged at
relative net asset value, but the escrow or segregated account will continue
with respect to the Davis Fund shares acquired in the exchange. In addition,
the terms of any CDSC to which any Class B or Class C shares are subject at the
time of exchange will continue to apply to any shares acquired upon exchange.
Class A shares of the Davis Government Money Market Fund which are purchased
for cash may be exchanged for any class of any Davis Fund. However, exchanges
of Class A shares of the Davis Government Money Market Fund into Class A shares
of another Davis Fund will be made at the public offering price of the acquired
shares (which includes the applicable front-end sales load) unless such shares
were acquired by exchange of shares on which you have already paid a sales
charge.
An exchange involves both a redemption and a purchase, and normally both
are done on the same day. However, in certain instances such as where a large
redemption is involved, the investment of redemption proceeds into shares of
other Davis Funds may take up to seven days. For federal income tax purposes,
exchanges between funds are treated as a sale and purchase. Therefore, there
will usually be a recognizable capital gain or loss due to an exchange. An
exchange between different classes of the same fund is not a taxable event.
SEGREGATION OF DAVIS GOVERNMENT MONEY MARKET FUND SHARES. In order to
secure the payment of any FESC or CDSC that may be due on shares exchanged into
shares of the Davis Government Money Market Fund, the number of shares equal in
value to the sales charge are segregated and separately maintained in the Davis
Government Money Market Fund. The purpose of the segregation is to assure that
redemptions utilizing
40
<PAGE> 46
the Davis Government Money Market Fund check writing privilege do not deplete
the account without payment of any applicable sales charge and therefore no
draft will be honored for liquidation of shares in excess of the shares in the
Davis Government Money Market Fund account which are free of segregation. See
"Check Writing Privilege" under "Redemption of Shares -- Davis Government
Money Market Fund."
Before you decide to make an exchange, you must obtain the current
prospectus of the desired fund. Call your broker or the Distributor for
information and a prospectus for any of the other Davis Funds registered in
your state. Read the prospectus carefully. If you decide to exchange your
shares, send State Street a written unconditional request for the exchange and
follow the instructions regarding delivery of share certificates contained in
the section on "Redemption of Shares." A signature guarantee is not required
for such an exchange. However, if shares are also redeemed for cash in
connection with the exchange transaction, a signature guarantee may be
required. See "Redemption of Shares." Your dealer may charge an additional
fee for handling an exercise of the exchange privilege.
BY TELEPHONE. You may exchange shares by telephone into accounts with
identical registrations. Please see the discussion of procedures in respect to
telephone instructions in the section entitled "Telephone Privilege," as such
procedures are also applicable to exchanges.
AUTOMATIC EXCHANGE PROGRAM. The Funds also offer an automatic monthly
exchange program. All accounts established or utilized under this program must
have the same registration and a minimum initial value of at least $250. All
subsequent exchanges must have a value of at least $25. Each month shares will
be simultaneously redeemed and purchased at the chosen fund's applicable
offering price. If you would like to participate in this program, you may use
the appropriate designation on the Application Form.
The number of times a shareholder may exchange shares among the Davis Funds
within a specified period of time may be limited at the discretion of the
Distributor. Currently, more than four exchanges out of a Fund during a twelve
month period are not permitted without the prior written approval of the
Distributor. The Company reserves the right to terminate or amend the exchange
privilege at any time upon 60 or more days' notice.
REDEMPTION OF SHARES
ALL FUNDS EXCEPT DAVIS GOVERNMENT MONEY MARKET FUND. You can redeem, or
sell back to the Company, all or part of your shares at any time at net asset
value less any applicable sales charges or redemption fees. You can do this by
sending a written request to State Street Bank and Trust Company, c/o The Davis
Funds, P.O. Box 8406, Boston, MA 02266-8406, indicating how many of your shares
or what dollar amount you want to redeem. If more than one person owns the
shares to be redeemed, all owners must sign the request. The signatures on the
request must correspond to the account from which the shares are being
redeemed.
Sometimes State Street needs more documents to verify authority to make a
redemption. This usually happens when the owner is a corporation, partnership
or fiduciary (such as a trustee or the executor of an estate) or if the person
making the request is not the registered owner of the shares.
If shares to be redeemed are represented by a certificate, the certificate,
signed by the owner or owners, must be sent to State Street with the request.
For the protection of all shareholders, the Company also requires that
signatures appearing on a share certificate, stock power or redemption request
where the proceeds would be more than $50,000, must be
41
<PAGE> 47
guaranteed by a bank, credit union, savings association, securities exchange,
broker, dealer or other guarantor institution. A signature guarantee is also
required in the event that any modification to the Company's application is
made after the account is established, including the selection of the Expedited
Redemption Privilege. In some situations such as where corporations, trusts or
estates are involved, additional documents may be necessary to effect the
redemption. The transfer agent may reject a request from any of the foregoing
eligible guarantors, if such guarantor does not satisfy the transfer agent's
written standards or procedures or if such guarantor is not a member or
participant of a signature guarantee program. This provision also applies to
exchanges when there is also a redemption for cash. A signature guarantee on
redemption requests where the proceeds would be $50,000 or less is not
required, provided that such proceeds are being sent to the address of record
and, in order to ensure authenticity of an address change, such address of
record has not been changed within the last 30 days. All notifications of
address changes must be in writing.
Redemption proceeds are normally paid to you within seven days after State
Street receives your proper redemption request. Payment for redemptions can be
suspended under certain emergency conditions determined by the Securities and
Exchange Commission or if the New York Stock Exchange is closed for other than
customary or holiday closings. If any of the shares redeemed were just bought
by you, payment to you may be delayed until your purchase check has cleared
(which usually takes up to 15 days from the purchase date). You can avoid any
such redemption delay by paying for your shares with a certified or cashier's
check or by bank wire or federal funds.
Your shares may also be redeemed through participating brokers or dealers.
The Distributor may repurchase shares from your dealer, if your dealer is a
member of the Distributor's selling group. Your dealer may, but is not required
to, use this method in selling back your shares and may place any repurchase
request by telephone or wire. Any broker dealer may charge you a service fee or
commission. No charge is payable if you redeem your own shares through State
Street rather than having a dealer arrange for a repurchase.
DAVIS GOVERNMENT MONEY MARKET FUND. You may request redemption of part or
all of your shares in the Davis Government Money Market Fund by mail by sending
your request to State Street Bank and Trust Company, c/o Davis Funds, P.O. Box
8406, Boston, MA 02266-8406. You may also redeem shares through the Check
Writing Privilege or by Expedited Redemption Privilege to a pre-designated bank
account. Normally, except for payment to a pre-designated bank account, State
Street will send payment for the Davis Government Money Market Fund Shares
redeemed within three business days, but in no event, later than seven days,
after receipt of a redemption request in proper form. Redemption of the Davis
Government Money Market Fund shares which were acquired by exchange from shares
subject to a contingent deferred sales charge may be subject to such a charge.
Shares exchanged into Davis Government Money Market Fund are subject to
segregation to assure payment of any sales charges that may be due upon
redemption. See "Exchange of Shares -- Segregation of Davis Government Money
Market Fund Shares."
CHECK WRITING PRIVILEGE. For Davis Government Money Market Fund accounts
other than prototype retirement plans and IRAs, State Street will provide, upon
request, forms of drafts to be drawn on your regular account (but not your
"segregated" account) that will clear through State Street. See "Exchange of
Shares." These drafts may be made payable to the order of any person in any
amount not less than $100. When a draft is presented to State Street for
payment, State Street will redeem a sufficient number of full and fractional
shares in your account to cover the amount of the draft. This enables you to
continue earning daily income dividends until the draft has cleared.
42
<PAGE> 48
If you elect to use this method of redemption, please so signify on the
Check Writing Privilege Form. You will be subject to State Street's rules and
regulations governing such drafts, including the right of State Street not to
honor drafts in amounts exceeding the value of the regular account at the time
they are presented for payment. Drafts in excess of the value of the Davis
Government Money Market Fund regular account cannot be honored by redemption of
any other Fund account. The Company and State Street reserve the right to
modify or terminate this service at any time.
A shareholder may issue a "Stop Payment" on any draft by calling State
Street at (617) 847-8543. The "Stop Payment" order will become effective if
it is given on a timely basis pursuant to the "Stop Payment" rules in effect
at State Street with respect to their regular checking accounts.
EXPEDITED REDEMPTION PRIVILEGE. Investors with accounts other than
prototype retirement plans and IRAs may designate on the Expedited Redemption
Privilege Form (included in this prospectus) an account with any commercial
bank and have the cash proceeds from the redemption sent, by either wire or
electronically through the ACH, to a pre-designated bank account. For the Davis
Government Money Market Fund the proceeds may be sent by wire if the amount is
$5,000 or more. State Street will accept instructions to redeem shares and make
payment to a pre-designated commercial bank account by (a) written request
signed by the registered shareholder, (b) telephone request by any Qualified
Dealer to Davis Distributors, LLC (1-800-279-0279), and (c) by facsimile
request by the shareholder to State Street. At the time of redemption, the
shareholder must request that federal funds be wired or transferred by ACH to
the bank account designated on the application. The redemption proceeds under
this procedure may not be directed to a savings bank, savings and loan or
credit union account except by arrangement with its correspondent bank or
unless such institution is a member of the Federal Reserve System. The
Distributor, in its discretion, may limit the amount that may be redeemed by a
shareholder in any day under the Expedited Redemption Privilege to $25,000.
There is a $5 charge by State Street for wire service, and receiving banks may
also charge for this service. Payment by ACH will usually arrive at your bank
two banking days after your call. Payment by ACH is usually credited to your
bank account on the next business day after your call. The Expedited Redemption
Privilege may be terminated, modified or suspended by the Company at any time.
See "Telephone Privilege."
The name of the registered shareholder and corresponding Fund account
number must be supplied. The Expedited Redemption Privilege Form provides for
the appropriate information concerning the commercial bank and account number.
Changes in ownership, account number (including the identity of your bank) or
authorized signatories of the pre-designated account may be made by written
notice to State Street with your signature and those of new owners or signers
on the account guaranteed by a commercial bank or trust company. Additional
documentation may be required to change the designated account when shares are
held by a corporation, partnership, executor, administrator, trustee or
guardian.
If a shareholder seeks to use the check writing privilege or expedited
redemption privilege to a pre-designated bank account to redeem Davis
Government Money Market Fund shares recently purchased by check (whether by
regular or expedited method), the fund will refuse to accept telephone
redemption requests when made and to honor redemption drafts when presented
unless it is then reasonably assured of the collection of the check
representing the purchase (normally up to 15 days after receipt of such check).
This result can be avoided by investing by wire.
MAINTENANCE FEES. To help relieve the Davis Government Money Market Fund's
high cost of maintaining small accounts, there is a $10 charge imposed on all
accounts whose net asset value has been reduced to less
43
<PAGE> 49
than $1,000 due to shareholder redemptions. This charge is collected by
redemption in December of each year and is paid to the Davis Government Money
Market Fund.
BY TELEPHONE. You can redeem shares by telephone and receive a check by
mail, but please keep in mind:
The check can only be issued for up to $25,000;
The check can only be issued to the registered owner (who must be an
individual);
The check can only be sent to the address of record; and
Your current address of record must have been on file for 30 days.
AUTOMATIC WITHDRAWALS PLAN. Under the Automatic Withdrawals Plan, you can
indicate to State Street how many dollars you would like to receive each month
or each quarter. Your account must have a value of at least $10,000 to start a
plan. Shares are redeemed so that you will receive the payment you have
requested approximately at the end of the month. Withdrawals involve redemption
of shares and may produce gain or loss for income tax purposes. Shares of a
Fund initially acquired by exchange from any of the other Davis Funds will
remain subject to an escrow or segregated account to which any of the exchanged
shares were subject. If you utilize this program using Class B shares, any
applicable contingent deferred sales charges will be imposed on such Class B
shares redeemed. Purchase of additional shares concurrent with withdrawals may
be disadvantageous to you because of tax consequences. If the amount you
withdraw exceeds the dividends on your shares, your account will suffer
depletion. Your Automatic Withdrawals Plan may be terminated by you at any time
without charge or penalty. The Company reserves the right to terminate or
modify the Automatic Withdrawals Plan at any time.
INVOLUNTARY REDEMPTIONS. To relieve the Company of the cost of maintaining
uneconomical accounts, the Company may effect the redemption of shares at net
asset value in any account if the account, due to shareholder redemptions, has
a value of less than $250. At least 60 days prior to such involuntary
redemption, the Company will mail a notice to the shareholder so that an
additional purchase may be effected to avoid such redemption.
SUBSEQUENT REPURCHASES. After some or all of your shares are redeemed or
repurchased, you may decide to put back all or part of your proceeds into the
same class of the Fund's shares. Any such shares will be issued without sales
charge at the net asset value next determined after you have returned the
amount of your proceeds. In addition, any CDSC assessed on Class B or Class C
shares will be returned to the account. Class B or Class C shares will be
deemed to have been purchased on the original purchase date for purposes of
calculating the CDSC and conversion period. This can be done by sending the
Company or the Distributor a letter, together with a check for the
reinstatement amount. The letter must be received, together with the payment,
within 30 days after the redemption or repurchase. You can only use this
privilege once.
TAX IMPLICATIONS. Redemption of shares may result in a gain or loss for
tax purposes. If a loss is realized on shares held for six months or less, and
you received a capital gain dividend during that period, then any tax loss is
treated as a long-term capital loss to the extent of the capital gain dividend.
See "Federal Income Taxes."
DETERMINING THE PRICE OF SHARES
The net asset value per share of each class is determined daily by dividing
the total value of investments and other assets, less any liabilities, by the
total number of outstanding shares of each class. Valuation of a Fund's
portfolio securities (which comprise most of a Fund's assets) is based upon
their market valuation. Securities traded on a national securities exchange are
valued at the last published sales prices on the principal
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<PAGE> 50
exchange where listed, 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 (maturing in sixty days 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.
Normally, the share price of the Davis Government Money Market Fund does not
fluctuate. However, if there are unusually rapid changes in interest rates
which in the Board's view cause a material deviation between amortized cost and
market value, the Board will consider whether such conditions require taking
any temporary action to maintain the normal fixed price or to prevent material
dilution or other unfavorable results to shareholders. Such action could
include withholding dividends, paying dividends out of surplus, realizing gains
or losses or using market valuation.
The net asset value per share is normally determined as of the earlier of
the close of the New York Stock Exchange or 4:00 p.m. Eastern Time on each day
the Exchange is open. The price per share for purchases or redemptions made
directly through State Street normally is such value next computed after State
Street receives the purchase order or redemption request. If the purchase order
or redemption request is placed with your dealer, then the applicable price is
normally computed as of 4:00 p.m. Eastern Time on the day the dealer receives
the order, provided that the dealer receives the order before 4:00 p.m. Eastern
Time. Otherwise, the applicable price is the next determined net asset value.
It is the responsibility of your dealer to promptly forward purchase and
redemption orders to the Distributor. Note that in the case of redemptions and
repurchases of shares owned by corporations, trusts or estates, or of shares
represented by outstanding certificates, State Street may require additional
documents to effect the redemption and the applicable price will be determined
as of the close of the next computation following the receipt of the required
documentation or outstanding certificates. See "Redemption of Shares."
DIVIDENDS AND DISTRIBUTIONS
DAVIS GROWTH OPPORTUNITY FUND AND DAVIS FINANCIAL FUND. Income dividends
and distributions from any net realized capital gains are distributed annually.
DAVIS GOVERNMENT BOND FUND. Income dividends are paid monthly. You will
receive quarterly confirmation statements for dividends declared and shares
purchased through reinvestment of dividends. Distributions from any net
realized capital gain not offset by capital loss carryovers are distributed
annually. The Davis Government Bond Fund declares distributions based on the
Adviser's projections of estimated net investment income and net realized
short-term gains. The amount of each distribution may differ from actual net
investment income and gains determined in accordance with generally accepted
accounting principles. The Davis Government Bond Fund at times may continue to
pay distributions based on expectations of future investment results to provide
stable distributions for its shareholders even though, as a result of temporary
market conditions or other factors (including losses realized later in a fiscal
year which have the effect of affecting previously realized gains), the Davis
Government Bond Fund may have failed to achieve projected investment results
for a given period. In such cases, the Davis Government Bond Fund's
distributions may include a return of capital to shareholders. Shareholders who
reinvest their distributions are largely unaffected by such returns of capital.
In the case of shareholders who do not reinvest, a return of capital is
equivalent to a partial redemption of the shareholder's investment.
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<PAGE> 51
DAVIS GOVERNMENT MONEY MARKET FUND. Dividends from net income are declared
daily on shares outstanding as of the close of business the preceding day and
are paid monthly. You will receive monthly confirmation statements for
dividends declared and shares purchased through reinvestment of dividends.
Income for Saturdays, Sundays and holidays are accrued on Fridays. Dividends
declared during each calendar month are paid on the last business day of the
month. Shares earn dividends as of the first business day after the effective
purchase date up through the date of redemption.
DAVIS CONVERTIBLE SECURITIES FUND AND DAVIS REAL ESTATE FUND. Income
dividends are normally paid quarterly. Distributions from any net realized
capital gains are made annually.
ALL FUNDS. Because Class B and Class C shares incur higher distribution
service fees and bear certain other expenses, such shares will have a higher
ratio expense and will pay correspondingly lower dividends than Class A shares.
Information concerning distributions will be mailed to shareholders annually.
Shareholders have the option to receive all dividends and distributions in
cash, to have all dividends and distributions reinvested, or to have income
dividends and short-term capital gain distributions paid in cash and long-term
capital gain distributions reinvested. The reinvestment of dividends and
distributions is made at net asset value (without any sales charge) on the
dividend payment date. Upon receipt of the second dividend check which has been
returned to State Street as undeliverable, undelivered dividends will be
invested in additional shares at the current net asset value and the account
designated as a dividend reinvestment account.
FEDERAL INCOME TAXES
This section and the additional tax information in the Statement of
Additional Information are not intended to be a full discussion of all the
aspects of the federal income tax law and its effects on shareholders.
Shareholders may be subject to state and local taxes on distributions. You
should consult your own tax adviser regarding the effects of federal, state and
local tax laws on investment in the Funds.
Under the Internal Revenue Code (the "Code"), the Funds are treated as
separate entities. The Company intends to continue to qualify the Funds as
regulated investment companies under the Code and, if so qualified, the Funds
will not be liable for federal income tax to the extent their earnings are
distributed. If, for any calendar year, the required distribution of the Funds
exceed the amount distributed, an excise tax equal to 4% of the excess will be
imposed. The Company intends to make distributions during each calendar year
sufficient to prevent imposition of the excise tax.
Distributions of net investment income and of net realized short-term
capital gains will be taxable to shareholders as ordinary income. Distributions
of net long-term capital gains will be taxable to shareholders as long-term
capital gain regardless of how long the shares have been held. Distributions
will be treated the same for tax purposes whether received in cash or in
additional shares.
A gain or loss for tax purposes may be realized on the redemption of
shares. If the shareholder realizes a loss on the sale or exchange of any
shares held for six months or less and if the shareholder received a capital
gain distribution during such period, then such loss is treated as a long-term
capital loss to the extent of such capital gain distribution. Dividends
declared in the last three calendar months to shareholders of record in such
months and paid by the end of the following January are treated as received by
the shareholder in the year in which they are declared.
Davis Real Estate Fund may invest in real estate investment trusts
("REITs") that hold residual interests in real estate mortgage investment
conduits ("REMICs"). Under Treasury regulations that have not yet been
46
<PAGE> 52
issued, but may apply retroactively, a portion of the Fund's income from a REIT
that is attributable to the REIT's residual interest in a REMIC (referred to in
the Code as an "excess inclusion") will be subject to Federal income tax in
all events. See "Certain Federal Tax Aspects of Mortgage REITs" in the
Statement of Additional Information.
COMPANY SHARES
The Company's capital stock is currently divided into six series of common
stock. Each series represents one of the Company's Funds. Each series is
divided into classes as described previously. The Board of Directors may offer
additional Funds and classes in the future and may at any time discontinue the
offering of any Fund or class. 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 share of each Fund represents an interest in the assets of that Fund and
has identical voting, dividend, liquidation and other rights and the same terms
and conditions as any other shares of that Fund 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. Due to the differing expenses of the classes, dividends of Class B
and Class C shares are likely to be lower than for Class A shares, and are
likely to be higher for Class Y shares than for any other class of shares. For
more information about the Class Y shares, call the Fund at 1-800-279-0279 to
obtain the Class Y prospectus.
In accordance with Maryland law and its Articles of Incorporation, the
Company does not hold regular annual shareholder meetings. Shareholder meetings
are held when they are required under the Investment Company Act of 1940 or
otherwise called for special purposes. Special meetings may be called upon the
written request of holders of at least 10% of the votes that could be cast at
the meeting.
MAJOR SHAREHOLDERS. Shelby Cullom Davis & Co., which may be deemed to be
an affiliate of the Adviser, may be deemed to control the Company due to its
beneficial ownership of more than 25% of the Company's outstanding shares.
PERFORMANCE DATA
From time to time, the Fund may advertise information regarding its
performance. Such information may consist of its "yield," "distribution
rate," "average annual total return" and "total return" and will be
calculated separately for each class. These performance figures are based upon
historical results and are not intended to indicate future performance.
"Yield" is computed by dividing the net investment income per share (as
defined in applicable regulations of the Securities and Exchange Commission)
during a specified 30-day period by the maximum offering price per share on the
last day of such period. Yield is an annualized figure, in that it assumes that
the same level of net investment income is generated over a one-year period.
The yield formula annualizes net investment income by providing for semi-annual
compounding.
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<PAGE> 53
"Distribution rate" is determined by dividing the income dividends per
share for a stated period by the net asset value per share on the last day of
such period. Distribution rates published are measures of the level of income
dividends distributed during a specified period. Thus, such rates differ from
yield (which measures income actually earned by a Fund) and total return (which
measures actual income, plus realized and unrealized gains or losses of a
Fund's investments). Consequently, distribution rates alone should not be
considered complete measures of performance.
"Average annual total return" refers to the Fund's average annual
compounded rate of return over a stated period that would equate an initial
amount invested at the beginning of the period to the ending redeemable value
of the investment.
"Total return" refers to the Fund's compounded rate of return over a
stated period that would equate an initial amount invested at the beginning of
the period to the ending redeemable value of the investment. Total return is
not annualized. In the event the Fund advertises its total return or average
annual total return, the stated periods will be one, five and ten years, and
may also include longer or shorter periods, including the life of the Fund. The
computation of total and average annual total return assumes reinvestment of
all dividends and distributions, and deduction of all charges and expenses. In
addition, a table showing the performance of an assumed investment of $10,000
may be used from time to time.
The Fund may also quote average annual total return and total return on net
asset value. Such data will be calculated substantially as described above
except that sales charges will not be deducted.
In reports or other communications to shareholders and in advertising
material, the performance of the Fund may be compared to recognized unmanaged
indices or averages of the performance of similar securities. Also, the
performance of the Fund may be compared to that of other funds of similar 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 Fund may use evaluations published by nationally recognized
independent ranking services and publications.
The Fund's 1996 Annual Report contains additional performance information
and will be made available upon request and without charge.
SHAREHOLDER INQUIRIES
Shareholder inquiries should be directed to Davis Distributors, LLC, by
writing to State Street Bank and Trust company, c/o The Davis Funds, P.O. Box
8406, Boston, MA 02266-8406 or by calling a shareholder services representative
or "Davis Direct Access" at 1-800-279-0279. Davis Direct Access is the Davis
Funds' automated telephone system that enables shareholders to perform a number
of account transactions automatically by using a touch-tone phone. Shareholders
may obtain Fund and account specific information and make purchases, exchanges
and redemptions.
48
<PAGE> 54
APPENDIX
QUALITY RATINGS OF DEBT SECURITIES
MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATINGS
Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk. Interest payments are protected
by a large or by an exceptionally stable margin and principal is secure. While
the various protective elements are likely to change, such changes as can be
visualized are unlikely to impair the fundamentally strong position of such
issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than Aaa
securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations, i.e. they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any longer period of time may
be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
STANDARD & POOR'S CORPORATION CORPORATE BOND RATINGS
AAA -- Debt rated `AAA' has the highest rating assigned by Standard and
Poor's. Capacity to pay interest and repay principal is extremely strong.
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<PAGE> 55
AA -- Debt rated `AA' has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A -- Debt rated `A' has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB -- Debt rated `BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB -- Debt rated `BB' has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments. The
`BB' rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied `BBB1' rating.
B -- Debt rated `B' has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The `B' rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied `BB' or `BB1' rating.
CCC -- Debt rated `CCC' has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial, or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The `CCC'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied `B' or `B1' rating.
CC -- The rating `CC' is typically applied to debt subordinated to senior
debt that is assigned an actual or implied `CCC' rating.
C -- The rating `C' is typically applied to debt subordinated to senior
debt which is assigned an actual or implied `CCC1' debt rating. The `C' rating
may be used to cover a situation where a bankruptcy petition has been filed,
but debt service payments are continued.
CI -- The rating `CI' is reserved for income bonds on which no interest is
being paid.
D -- Debt rated `D' is in payment default. The `D' rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The `D' rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
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DAVIS GOVERNMENT MONEY MARKET FUND
<TABLE>
<S> <C>
CHECK WRITING PRIVILEGE: INFORMATION CONCERNING THE DRAFTS USED FOR THE DAVIS GOVERNMENT MONEY
/ / If you wish the MARKET FUND CHECK WRITING PRIVILEGE:
check writing privilege
please check the box to 1. Your Davis Series, Inc. Davis Government Money Market Fund drafts
the left and complete the are paid from an account of Davis Series, Inc. at State Street Bank and
signature card below. Trust Company ("State Street").
2. In connection with this account, you will have the same rights and
duties with respect to stop payment orders, "stale" drafts,
unauthorized signatures, alterations, and unauthorized endorsements
as bank checking account customers do under the Massachusetts
Uniform Commercial Code. All notices with regard to those rights and
duties must be given to State Street.
3. Stop payment instructions must be given to State Street, by calling
State Street's service telephone number for Davis Series, Inc.
shareholders: (617) 847-8543. State Street's address is State Street
Bank and Trust Company, c/o The Davis Funds, P. O. Box 8406, Boston,
MA. 02266-8406.
4. These rules may be amended from time to time.
-----------------------------------------------------------------------------------
CHECK WRITING PRIVILEGE SIGNATURE CARD (TYPE OR PRINT)
Account Number
--------------------------------------------------------------------
Shareholder Name
------------------------------------------------------------------
Co-Shareholder Name
---------------------------------------------------------------
BY SIGNING THIS SIGNATURE CARD THE UNDERSIGNED AGREE(S) TO BE SUBJECT TO
THE INSTRUCTIONS AND RULES, AS NOW IN EFFECT AND AS AMENDED FROM TIME TO
TIME, OF DAVIS SERIES, INC., THAT PERTAIN TO THE USE OF REDEMPTION
CHECKS. (SOME OF THE CURRENT RULES APPEAR ABOVE.) EACH SIGNATORY
GUARANTEES THE OTHER'S SIGNATURE.
(Signature)
-----------------------------------------------------------------------
(Signature of Co-Shareholder)
-----------------------------------------------------
/ / Check here if both signatures are required on checks.
/ / Check here if only one signature is required on checks.
IF NEITHER BOX IS CHECKED, ALL CHECKS WILL REQUIRE BOTH SIGNATURES.
</TABLE>
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[THIS PAGE INTENTIONALLY LEFT BLANK]
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TERMS AND CONDITIONS FOR A STATEMENT OF INTENTION (CLASS A SHARES ONLY)
TERMS OF ESCROW:
1. Out of my initial purchase (or subsequent purchases if necessary) 5% of the
dollar amount specified in this Statement will be held in escrow by State
Street in the form of shares (computed to the nearest full share at the public
offering price applicable to the initial purchase hereunder) registered in my
name. For example, if the minimum amount specified under this statement is
$100,000 and the public offering price applicable to transactions of $100,000
is $10 a share, 500 shares (with a value of $5,000) would be held in escrow.
2. In the event I should exchange some or all of my shares to those of another
mutual fund for which Davis Distributors, LLC acts as distributor, according to
the terms of this prospectus, I hereby authorize State Street to escrow the
applicable number of shares of the new fund, until such time as this Statement
is complete.
3. If my total purchases are at least equal to the intended purchases, the
shares in escrow will be delivered to me or to my order.
4. If my total purchases are less than the intended purchases, I will remit to
Davis Distributors, LLC the difference in the dollar amount of sales charge
actually paid by me and the sales charge which I would have paid if the total
purchase had been made at a single time. If remittance is not made within 20
days after written request by Davis Distributors, LLC or my dealer, State
Street will redeem an appropriate number of the escrowed shares in order to
realize such difference.
5. I hereby irrevocably constitute and appoint State Street my attorney to
surrender for redemption any or all escrowed shares with full power of
substitution in the premises.
6. Shares remaining after the redemption referred to in Paragraph No. 4 will
be credited to my account.
7. The duties of State Street are only such as are herein provided being
purely ministerial in nature, and it shall incur no liability whatever except
for willful misconduct or gross negligence so long as it has acted in good
faith. It shall be under no responsibility other than faithfully to follow the
instructions herein. It may consult with legal counsel and shall be fully
protected in any action taken in good faith in accordance with advice from such
counsel. It shall not be required to defend any legal proceedings which may be
instituted against it in respect of the subject matter of this Agreement unless
requested to do so and indemnified to its satisfaction against the cost and
expense of such defense.
8. If my total purchases are more than the intended purchases and such total
is sufficient to qualify for an additional quantity discount, a retroactive
price adjustment shall be made for all purchases made under such Statement to
reflect the quantity discount applicable to the aggregate amount of such
purchases during the thirteen-month period.
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<PAGE> 59
EXPEDITED REDEMPTION PRIVILEGE
/ / If you wish the Expedited Redemption Privilege please check the box to the
left and complete the following information.
I (we) hereby authorize State Street Bank and Trust Company, Davis Selected
Advisers, L.P., Davis Distributors, LLC, and/or the Davis Funds to act upon
instructions received by telephone or telegraph, believed by them to be
genuine, and to redeem shares in my (our) account in any of the Davis Funds
and to wire the proceeds of such redemption to the pre-designated bank
listed below. I (we) hereby agree that neither State Street Bank and Trust
Company, nor Davis Selected Advisers nor the Davis Funds nor any of their
officers or employees, will be liable for any loss, liability, cost or
expense for acting upon such instructions.
- ------------------------------------------ ----------------------------------
Signature of Shareholder Signature of Co-Shareholder
- ------------------------------------------ ----------------------------------
Name of Commercial Bank (Title of Account at Bank)
- ------------------------------------------ ----------------------------------
(Street) (Account Number at Bank)
- ------------------------------------------ ----------------------------------
(City) (State) (Zip) (ABA/Transit Routing Number)
54
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NOTES
55
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NOTES
56
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NOTES
57
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NOTES
58
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NOTES
59
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NOTES
60
<PAGE> 66
PROSPECTUS May 1, 1997
Class Y Shares as revised August 15, 1997
DAVIS SERIES, INC.
124 East Marcy Street
Santa Fe, New Mexico 87501
1-800-279-0279
Davis Series, Inc. (the "Company") offers a variety of investment portfolios.
See "Investment Objectives" for more information on each portfolio.
Davis Growth Opportunity Fund seeks to achieve growth of capital. It invests
primarily in common stocks and other equity securities, and may invest in
both domestic and foreign issuers.
Davis Government Bond Fund seeks to achieve current income. It invests in
debt securities which are obligations of, or which are guaranteed by, the
U.S. Government, its agencies or instrumentalities.
Davis Government Money Market Fund ("DGMMF") seeks to achieve as high a level
of current income as is consistent with the principle of preservation of
capital and maintenance of liquidity. It invests in debt securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities and
repurchase agreements involving such securities. There is no assurance that
the Fund will be able to maintain a stable net asset value of $1.00 per
share.
Davis Financial Fund seeks to achieve growth of capital. It invests
primarily in common stocks and other equity securities, and will concentrate
investments in companies principally engaged in the banking and financial
services industries.
Davis Convertible Securities Fund seeks to achieve total return. The Fund
invests primarily in convertible securities, which combine fixed income with
potential for capital appreciation. It may invest in lower rated bonds
commonly known as "junk bonds" so long as no such investment would cause 35%
or more of the Fund's net assets to be so invested.
Davis Real Estate Fund seeks to achieve total return through a combination of
growth and income. It invests primarily in 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.
This Prospectus concisely sets forth information about the Class Y shares of
the Funds that prospective investors should know before investing. It should
be read carefully and retained for future reference. A Statement of
Additional Information dated May 1, 1997 as revised August 15, 1997 has been
filed with the Securities and Exchange Commission and is incorporated herein
by reference. A copy of this Statement and other information about the
Fund's may be obtained without charge by writing or calling the Company at
the above address or telephone number.
Shares of the Funds are not deposits or obligations of, or guaranteed or
endorsed by, any bank and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE> 67
SUMMARY
Fund Expenses. The following table is intended to assist you in
understanding the various costs and expenses that an investor in the Y shares
of the Funds will bear directly or indirectly. Because the Y shares were not
offered prior to September 1, 1996, the information is based on the expenses
of the Class A shares for the Company's fiscal year ended December 31, 1996.
Expenses have been restated to give effect to the elimination of 12b-1 fees
for Class Y shares. The fee information for Davis Government Bond reflects
the fee reduction effective May 1, 1996. You can refer to "Adviser,
Sub-Advisers and Distributor" and "Purchase of Shares" for more information
on transaction and operating expenses of the Funds.
<TABLE>
<CAPTION>
Shareholder Transaction Expenses Class Y
- -------------------------------- -------
<S> <C>
Maximum sales load imposed on purchases None
Maximum sales load imposed on reinvested dividends None
Deferred sales load (a declining percentage of the
lesser of the net asset value of the shares
redeemed or the total cost of such shares)
Redeemed during first year None
Redeemed during second or third year None
Redeemed during fourth or fifth year None
Redeemed during sixth year None
Redeemed after sixth year None
Exchange Fee None
<CAPTION>
Annual Fund operating expenses (as a percentage of
average net assets) Class Y
- -------------------------------------------------- -------
<S> <C>
Davis Growth Opportunity Fund:
Management fees 0.75%
12b-1 fees 0.00%
Other expenses 0.35%
Total Fund operating expenses 1.10%
Davis Government Bond Fund:
Management fees 0.50%
12b-1 fees 0.00%
Other expenses 0.67%
Total Fund operating expenses 1.17%
Davis Government Money Market Fund:
Management fees 0.48%
12b-1 fees 0.00%
Other expenses 0.18%
Total Fund operating expenses 0.66%
Davis Financial Fund:
Management fees 0.75%
12b-1 fees 0.00%
Other expenses 0.25%
Total Fund operating expenses 1.00%
<PAGE> 68
Davis Convertible Securities Fund:
Management fees 0.75%
12b-1 fees 0.00%
Other expenses 0.23%
Total Fund operating expenses 0.98%
Davis Real Estate Fund:
Management fees 0.75%
12b-1 fees 0.00%
Other expenses 0.43%
Total Fund operating expenses 1.18%
</TABLE>
Example:
You would pay the following expenses on a $1,000 investment, assuming a
5% annual return and redemption at the end of each time period:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Davis Growth Opportunity Fund:
Class Y $11 $35 $61 $134
Davis Government Bond Fund:
Class Y $12 $37 $64 $142
Davis Government Money Market Fund:
Class Y $7 $21 $37 $82
Davis Financial Fund:
Class Y $10 $32 $55 $122
Davis Convertible Securities Fund:
Class Y $10 $31 $54 $120
Davis Real Estate Fund:
Class Y $12 $37 $65 $143
</TABLE>
The 5% rate used in the example is only for illustration and is not
intended to be indicative of the future performance of the Funds, which may
be more or less than the assumed rate. Actual expenses and future expenses
may be more or less than those shown.
The Company. Davis Series, Inc. (the "Company"), was incorporated in
Maryland in 1976 and is registered under the Investment Company Act of 1940.
The Company is an open-end diversified management investment company and was
formed primarily to provide a multi-portfolio vehicle of Funds with different
investment objectives for long-term investment, including the investment of
retirement plan assets. There is no assurance that the investment objective
of any Fund will be achieved.
Each fund offers four classes of shares Class A, B, C and Y shares.
Class A, Class B and Class C shares are sold through a separate prospectus.
Class Y shares are offered through this Prospectus to (i) trust companies,
bank trusts, endowments, pension plans or foundations ("Institutions") acting
on behalf of their own account or one or more clients for which such
Institution acts in a fiduciary capacity and investing at least $5,000,000 at
any one time; (ii) any state, county, city, department, authority or similar
agency which invests at least $5,000,000 ("Government Entities"); and (iii)
any investor with an account established under a "wrap account" or other fee
based program, sponsored and maintained by a registered broker-dealer
approved by the Adviser ("Wrap Program Investors").
<PAGE> 69
Each share of a particular Fund represents an identical interest in the
investment portfolio of that Fund. However, shares differ by class in
important respects. See "Company Shares" for more information about the
differences between the classes. The four classes offered by Davis
Government Money Market Fund are expected to maintain a net asset value of $1
per share. The Board of Directors may offer additional funds or classes of
shares of a fund in the future and may at any time discontinue the offering
of any funds or class of shares of a fund.
Investment Objectives.
Davis Growth Opportunity Fund. The investment objective of Davis
Growth Opportunity Fund is growth of capital. It invests primarily in common
stocks and other equity securities. These securities are subject to the risk
of price fluctuations reflecting both market evaluations of the businesses
involved and general changes in the equity markets. It may invest in foreign
securities and attempt to reduce currency fluctuation risks by engaging in
related hedging transactions. These investments involve special risk factors.
See "Investment Objectives and Policies - Davis Growth Opportunity Fund."
Davis Government Bond Fund. The investment objective of Davis
Government Bond Fund is current income. It invests in debt securities which
are obligations of or guaranteed by the U.S. Government, its agencies and
instrumentalities ("U.S. Government Securities"). It also may invest in
repurchase agreements involving such securities. Investments held by Davis
Government Bond Fund generally reflect market fluctuations. In particular,
the value of the Fund's investments usually changes inversely to interest
rate changes. Mortgage related securities (including collateralized mortgage
obligations), which at times may constitute a large or the largest portion of
the Fund's investments, have special characteristics and risks. See
"Investment Objectives and Policies - Davis Government Bond Fund."
Davis Government Money Market Fund. The investment objective of Davis
Government Money Market Fund is to achieve as high a level of current income
as is consistent with the principle of preservation of capital and
maintenance of liquidity. It invests in U.S. Government Securities and
repurchase agreements involving such securities. It normally has a stable
net asset value with yield fluctuating with short-term interest rates. See
"Investment Objectives and Policies - Davis Government Money Market Fund."
Davis Financial Fund. The investment objective of Davis Financial Fund
is growth of capital. It invests primarily in common stocks and other equity
securities and will concentrate investments in companies principally engaged
in the banking and financial services industries. The banking industry
includes commercial and industrial banks, savings and loan associations and
their holding companies. The financial services industry includes consumer
and industrial finance companies, diversified financial services companies,
investment banking, securities brokerage and investment advisory companies,
leasing companies, and insurance companies. Davis Financial Fund generally
will invest a minimum of 25% of its total assets in investments in each of
these two industries. As a result, its portfolio may be affected by economic
or regulatory developments in or related to the identified industries. Davis
Financial Fund invests in securities subject to the risk of price
fluctuations reflecting both market evaluations of the businesses involved
and general changes in the equity markets. See "Investment Objectives and
Policies - Davis Financial Fund."
<PAGE> 70
Davis Convertible Securities Fund. The investment objective of Davis
Convertible Securities Fund is total return. It seeks this objective through
a combination of current income and capital appreciation. It invests in a
portfolio consisting primarily of convertible debt and equity securities.
Normally it will invest at least 65% of its total assets in convertible
securities. It may also invest in other securities, including common and
preferred stock, non-convertible corporate debt securities, U.S. government
securities and short term money market instruments (including repurchase
agreements). The securities in which it invests, including high yielding
securities (commonly known as "junk bonds"), involve risks. See "Investment
Objectives and Policies - Davis Convertible Securities Fund."
Davis Real Estate Fund. The investment objective of Davis Real Estate
Fund 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. The
securities in which it invests, including high yielding securities, involve
risks. See "Investment Objectives and Policies - Davis Real Estate Fund."
Investment Adviser, Sub-Advisers and Distributor. Davis Selected
Advisers, L.P., (the "Adviser") is the investment adviser for the Funds.
Davis Distributors, LLC (the "Distributor") serves as the principal
underwriter for the Fund. Tanaka Capital Management, Inc. (the "Sub-Adviser")
is employed by the Adviser to provide day to day management of the portfolio of
the Davis Growth Opportunity Fund and is paid by the Adviser from its advisory
fees. The Adviser has entered into a Sub-Advisory Agreement with its
wholly-owned subsidiary, Davis Selected Advisers-NY, Inc. ("DSA-NY"). DSA-NY
performs research and other services for the Funds on behalf of the Adviser.
For more information see "Adviser, Sub-Advisers and Distributor."
Purchases, Exchanges and Redemptions. Class Y shares are sold at net
asset value without a sales charge. The initial minimum investment for
Institutions and Government Entities is $5,000,000. The initial minimum
investment for Wrap Program Investors is set by the sponsor of the program.
Shares may be exchanged under certain circumstances at net asset value for
the same class of shares of certain other funds managed by the Adviser. See
"Purchase of Shares," "Exchange of Shares" and "Redemption of Shares".
Class A shareholders who are eligible to purchase Class Y shares may
exchange their shares for Class Y shares of any of the Funds.
Shareholder Services. Questions regarding the Funds or your account
may be directed to Davis Distributors, LLC at 1-800-279-0279 or to your sales
representative. Written inquiries may be directed to State Street Bank &
Trust Co., c/o The Davis Funds, P.O. Bo 8406, Boston, MA 02266-8406. During
severe market conditions, the Distributor may experience difficulty in
accepting telephone redemptions or exchanges. If you are unable to contact
the Distributor at the above telephone number, you should call 1-505-820-3000
Monday through Friday from 8:00 a.m. to 4:00 p.m. Mountain Time.
<PAGE> 71
FINANCIAL HIGHLIGHTS
The following financial highlights are derived from financial
statements of the Funds. The tables express the information in terms of a
single Class A share (or Class Y share for Davis Convertible Securities Fund
and Davis Real Estate Fund) for the respective periods presented and are
supplementary to the Company's financial statements which are included in the
December 31, 1996 Annual Report to Shareholders. Such Report may be obtained
by writing or calling the Company. The Company's 1996 financial statements
including the financial highlights for the five years ended December 31, 1996
have been audited by the Company's independent certified public accountants,
whose opinion thereon is contained in the Annual Report. With respect to
each Fund except Davis Convertible Securities Fund and Davis Real Estate
Fund, no information is presented for the Class Y shares as they were not
offered until September 1, 1996 and no such shares of any Fund were
outstanding as of December 31, 1996.
<TABLE>
DAVIS GROWTH OPPORTUNITY FUND - Class A
<CAPTION>
One Month
Year ended ended
December 31, December 31,
1996 1995 1994
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $17.25 $12.83 $13.70
Income (Loss) From Investment Operations
Net Investment Income (Loss) (0.13) (0.11) (0.01)
Net Gains or Losses on Securities
(both realized and unrealized) 3.37 6.08 (0.29)
Total From Investment Operations 3.24 5.97 (0.30)
Less Distributions
Dividends (from net investment income) -- -- --
Distributions (from capital gains) (1.55) (1.55) (0.57)
Distributions (from paid-in capital) (0.01) -- --
Total Distributions (1.56) (1.55) (0.57)
Net Asset Value, End of Period $18.93 $17.25 $12.83
Total Return<F1> 18.73% 46.65% (2.21)%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) $27,158 $22,890 $12,455
Ratio of Expenses to Average Net Assets 1.49%<F2> 1.51% 1.42%<F*>
Ratio of Net Income to Average Net Assets (0.76)% (0.71)% (0.08)%<F*>
Portfolio Turnover Rate 30.55% 30.07% 37.31%
Average Commission Rate per Share $0.0454 -- --
<FN>
<F1> Sales charges are not reflected in calculation.
Ratio of expenses to average net assets after the reduction of custodian fees
under a custodian agreement was 1.48% for 1996. Prior to 1996, such
reductions were reflected in the expenses ratio.
<F*> Annualized
</TABLE>
<PAGE> 72
<TABLE>
DAVIS GOVERNMENT BOND FUND - Class A
<CAPTION>
One Month
Year ended ended
December 31, December 31,
1996 1995 1994
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $6.00 $5.79 $5.78
Income (Loss) From Investment Operations
Net Investment Income 0.33 0.39 0.02
Net Gains or Losses on Securities
(both realized and unrealized) (0.14) 0.27 (0.01)
Total From Investment Operations 0.19 0.66 0.01
Less Distributions
Dividends (from net investment income) (0.33) (0.36) --
Distributions (from paid-in capital) (0.10) (0.09) --
Total Distributions (0.43) (0.45) --
Net Asset Value, End of Period $5.76 $6.00 $5.79
Total Return<F1> 3.40% 11.82% (0.97)%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) $18,129 $21,485 $20,035
Ratio of Expenses to Average Net Assets 1.77% 1.74% 1.64%<F*>
Ratio of Net Income to Average Net Assets 5.88% 6.54% 6.22%<F*>
Portfolio Turnover Rate 45.50% 41.04% 62.17%
<FN>
<F1> Sales charges are not reflected in calculation.
<F*> Annualized
</TABLE>
<TABLE>
DAVIS Government Money Market Fund - Class A
<CAPTION>
Three
Months Year ended
Year ended December 31, December 31, September 30,
1996 1995 1994 1993 1992 1991 1990 1989 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
Income From Investment
Operations
Net Investment
Income .047 .051 .034 .020 .027 .047 .064 .018 .073 .055 .051
Less Distributions
Dividends (from net
investment
income) (.047) (.051) (.034) (.020) (.027) (.047) (.064) (.018) (.073) (.055) (.051)
Net Asset Value, End
of Period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Total Return 4.80% 5.25% 3.48% 2.01% 2.70% 4.78% 6.58% 7.09%<F*> 7.51% 5.74% 5.22%
Ratios/Supplemental
Data
Net Assets, End
of Period
(000,000 omitted) $407 $357 $240 $40 $42 $51 $65 $16 $17 $21 $30
Ratio of Expenses to
Average Net Assets 0.66% 0.73% 0.64% 1.15% 1.14% 1.25% 1.50%<F2> 11.50%<F2><F*> 1.50%<F2> 1.50% 1.10%
Ratio of Net Income
to Average Net Assets 4.72% 5.13% 3.43% 1.98% 2.68% 4.72% 6.28%<F2> 7.01%<F2><F*> 7.25%<F2> 5.58% 5.09%
<FN>
<F1> From the Fund's inception through September 30, 1987, Clayton Brown
Advisors, Inc. served as investment manager of the Fund. On October 1, 1987.
Venture Advisers, Inc. became the investment adviser of the Fund and on
January 1, 1988, Davis Selected Advisers, L.P. succeeded to the business of
Venture Advisers, Inc. and became investment adviser of the Fund. Venture
Advisers, Inc. is the sole general partner of Davis Selected Advisers, L.P.
Effective December 1, 1989 the Fund became a series of the Davis Series, Inc.
<F2> Reflects the reimbursement of certain expenses by the Fund's investment
manager.
<F*> Annualized
</TABLE>
<PAGE> 73
<TABLE>
DAVIS FINANCIAL Fund - Class A
<CAPTION>
May 1, 1991
(Commencement
of operations)
through
Year ended December 31, December 31,
1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 14.50 $ 10.68 $ 11.70 $ 11.20 $ 8.76 $ 7.15
Income (Loss) From Investment Operations
Net Investment Income 0.14 0.07 0.08 0.07 0.05 0.01
Net Gains or Losses on Securities
(both realized and unrealized) 4.44 5.32 (0.61) 1.59 2.79 1.65
Total From Investment
Operations 4.58 5.39 (0.53) 1.66 2.84 1.66
Less Distributions
Dividends (from net investment
income) (0.15) (0.07) (0.08) (0.08) (0.05) (0.02)
Distributions (from capital gains) (0.87) (1.50) (0.39) (1.08) (0.35) (0.03)
Distributions (from paid-in
capital) -- -- (0.02) -- -- --
Total Distributions (1.02) (1.57) (0.49) (1.16) (0.40) (0.05)
Net Asset Value, End of Period $ 18.06 $ 14.50 $ 10.68 $ 11.70 $ 11.20 $ 8.76
Total Return <F1> 31.50% 50.51% (4.55)% 14.87% 32.67% 34.74%<F*><F2>
Ratios/Supplemental Data
Net Assets, End of Period
(000 omitted) $107,579 $79,874 $57,670 $50,778 $31,660 $ 9,221
Ratio of Expenses to Average Net
Assets 1.15% 1.18% 1.24% 1.32% 1.68% 2.49%<F*><F2>
Ratio of Net Income to Average
Net Assets 0.92% 0.53% 0.67% 0.57% 0.43% 0.51%<F*><F2>
Portfolio Turnover Rate 25.78% 41.89% 43.95% 70.33% 49.64% 39.75%
Average Commission Rate per Share $0.0518 -- -- -- -- --
<FN>
<F1> Sales charges are not reflected in calculation.
<F2> Reflects the reimbursement of certain expenses by the Fund's investment
manager.
<F3> Per share data has been restated to give effect to a 2 for 1 stock split
to shareholders of record as of the close of January 7, 1994.
<F*> Annualized
</TABLE>
<PAGE> 74
<TABLE>
DAVIS CONVERTIBLE Securities Fund - Class Y
<CAPTION>
December 11, 1996
(Commencement
of operations) through
December 31,1996
----------------------
<S> <C>
Net Asset Value, Beginning of Period $21.39
Income From Investment Operations
Net Investment Income 0.07
Net Gains or Losses on Securities (both
realized and unrealized) 1.44
Total From Investment Operations 1.51
Less Distributions
Dividends (from net investment income) (0.06)
Distributions (from capital gains) (1.54)
Distributions (from paid-in-capital) (0.01)
Total Distributions (1.61)
Net Asset Value, End of Period $21.29
Total Return 7.01%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) $33,006
Ratio of Expenses to Average Net Assets 0.98%<F*>
Ratio of Net Income to Average Net Assets 3.11%<F*>
Portfolio Turnover Rate 43.16%
Average Commission Rate per Share $0.0552
<FN>
<F*> Annualized
</TABLE>
<TABLE>
DAVIS REAL ESTATE Fund - Class Y
<CAPTION>
December 8, 1996
(Commencement
of operations) through
December 31,1996
----------------------
<S> <C>
Net Asset Value, Beginning of Period $19.29
Income From Investment Operations
Net Investment Income 0.13
Net Gains or Losses on Securities (both
realized and unrealized) 2.35
Total From Investment Operations 2.48
Less Distributions
Dividends (from net investment income) (0.13)
Distributions (from capital gains) (0.25)
Distributions (from paid-in-capital) (0.02)
Total Distributions (0.40)
Net Asset Value, End of Period $21.37
Total Return 12.89%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) $18,165
Ratio of Expenses to Average Net Assets 1.18%<F*>
Ratio of Net Income to Average Net Assets 4.22%<F*>
Portfolio Turnover Rate 18.60%
Average Commission Rate per Share $0.0600
<FN>
<F*> Annualized
</TABLE>
<PAGE> 75
INVESTMENT OBJECTIVES AND POLICIES
Davis Growth Opportunity Fund
General. The investment objective of Davis Growth Opportunity Fund is
growth in capital. It invests primarily in common stocks and other equity
securities such as securities convertible into common stock. Generally, it
invests in equity securities of companies that are diversified across a
variety of industries and may be expected to have small and medium, as well
as large market capitalizations. Such investments will usually consist of
issues which the Sub-Adviser believes have capital growth potential due to
factors such as rapid growth in demand in existing markets, expansion into
new markets, new product introductions, reduced competitive pressures, cost
reduction programs and other fundamental changes which may result in improved
earnings growth or increased asset values.
Other Policies. For information concerning other investment policies,
risks and considerations see "General Fund Policies and Risks" below.
Davis Government Bond Fund
General. The investment objective of Davis Government Bond Fund is
current income. It invests in debt securities which are obligations of or
guaranteed by the U.S. Government, its agencies or instrumentalities ("U.S.
Government Securities").
It is not limited as to the maturities of its portfolio investments and
may take full advantage of the entire range of maturities available in U.S.
Government Securities. The Adviser may adjust the average maturity of its
portfolio from time to time, depending on its assessment of the relative
yields available on securities of different maturities and its assessment of
future interest rate patterns and market risk. Thus, at various times the
average maturity of the portfolio may be relatively short (from one year to
five years, for example) and at other times may be relatively long (over 10
years, for example). Fluctuations in portfolio values and therefore
fluctuations in the net asset value of its shares are more likely to be
greater when the portfolio average maturity is longer. The portfolio is
likely to be primarily invested in securities with short-term maturities in
periods when the Adviser deems a more defensive position is advisable. For
temporary periods, for defensive purposes or to accommodate inflows of cash
awaiting more permanent investment, it may also invest in short-term money
market instruments, including repurchase agreements.
There are two basic types of U.S. Government Securities: (1) direct
obligations of the U.S. Treasury, and (2) obligations issued or guaranteed by
an agency or instrumentality of the U.S. Government. Agencies and
instrumentalities include Federal Farm Credit System ("FFCS"), Student Loan
Marketing Association ("SLMA"), Federal Home Loan Mortgage Corporation
("FHLMC"), Federal Home Loan Banks ("FHLB"), Federal National Mortgage
Association ("FNMA") and Government National Mortgage Association ("GNMA").
Some obligations issued or guaranteed by agencies or instrumentalities, such
as those issued by GNMA, are fully guaranteed by the U.S. Government.
Others, such as FNMA bonds, rely on the assets and credit of the
instrumentality with limited rights to borrow from the U.S. Treasury. Still
other securities, such as obligations of the FHLB, are supported by more
extensive rights to borrow from the U.S. Treasury.
When the Adviser deems that higher yields are obtainable through
investments in mortgage related securities and that the yield advantage
offsets the uncertainties of the
<PAGE> 76
timing of principal payments, the Fund may be significantly invested in
mortgage related securities. GNMA Certificates are mortgage-backed securities
representing part ownership of a pool of mortgage loans. These loans issued by
lenders such as mortgage bankers, commercial banks and savings and loan
associations are either insured by the Federal Housing Administration or
guaranteed by the Veterans Administration. A "pool" or group of such mortgages
is assembled and, after being approved by GNMA, is offered to investors through
securities dealers. Once approved by GNMA, the timely payment of interest and
principal on each mortgage is guaranteed by GNMA and backed by the full faith
and credit of the U.S. Government. GNMA Certificates differ from bonds in that
principal is paid back monthly by the borrower over the term of the loan rather
than returned in a lump sum at maturity. GNMA Certificates are called
"pass-through" securities because both interest and principal payments
(including prepayments) are passed through to the holder of the Certificate.
Upon receipt, principal payments will be used by the Fund to purchase
additional GNMA Certificates or other U.S. Government Securities.
The Fund may also invest in pools of mortgages which are issued or
guaranteed by other agencies of the U.S. Government. The average life of
pass-through pools varies with the maturities of the underlying mortgage
instruments. In addition, a pool's term may be shortened or lengthened by
unscheduled or early payment, or by slower than expected prepayment, of
principal and interest on the underlying mortgages. The occurrence of
mortgage prepayments is affected by the level of interest rates, general
economic conditions, the location and age of the mortgage and other social
and demographic conditions. As prepayment rates of individual pools vary
widely, it is not possible to accurately predict the average life of a
particular pool.
It may also invest in a collateralized mortgage obligation ("CMO"). A
CMO is a debt security issued by a corporation, trust or custodian or by a
U.S. Government agency or instrumentality, that is collateralized by a
portfolio or pool of mortgages, mortgage-backed securities, U.S. Government
securities or corporate debt obligations. The issuer's obligation to make
interest and principal payments is secured by the underlying pool or
portfolio of securities. It invests only in CMOs which are obligations of or
guaranteed by the U.S. Government, its agencies or instrumentalities such as
the FNMA or the FHLMC.
CMOs are most often issued in two or more classes (each of which is a
separate security) with varying maturities and stated rates of interest.
Interest and principal payments from the underlying collateral (generally a
pool of mortgages) are not necessarily passed directly through to the holders
of the CMOs; these payments are typically used to pay interest on all CMO
classes and to retire successive class maturities in a sequence. Thus, the
issuance of CMO classes with varying maturities and interest rates may result
in greater predictability of maturity with one class and less predictability
of maturity with another class than a direct investment in a mortgage-backed
pass-through security (such as a GNMA Certificate). Classes with shorter
maturities typically have lower volatility and lower yield while those with
longer maturities typically have higher volatility and higher yield. Thus,
investments in CMOs provide greater or lesser control over the investment
characteristics than mortgage pass-through securities and offer more
defensive or aggressive investment alternatives.
Investment by Davis Government Bond Fund in mortgage-related U.S.
Government Securities, such as GNMA Certificates, and CMOs also involves
other risks. The yield on a pass-through security is typically quoted based
on the maturity of the underlying instruments and the associated average life
assumption. Actual prepayment experience may cause the yield to differ from
the assumed average life yield. Accelerated prepayments adversely impact
yields for pass-throughs purchased at a premium; the opposite is true for
pass-throughs purchased at a discount. During periods of declining
<PAGE> 77
interest rates, prepayment of mortgages underlying pass-through certificates
can be expected to accelerate. When the mortgage obligations are prepaid, the
Fund reinvests the prepaid amounts in securities, the yields of which reflect
interest rates prevailing at that time. Therefore, the Fund's ability to
maintain a portfolio of high-yielding, mortgage-backed securities will be
adversely affected to the extent that prepayments of mortgages must be
reinvested in securities which have lower yields than the prepaid mortgages.
Moreover, prepayments of mortgages which underlie securities purchased at a
premium could result in capital losses. Investment in such securities could
also subject the Fund to "maturity extension risk" which is the possibility
that rising interest rates may cause prepayments to occur at a slower than
expected rate. This particular risk may effectively change a security which
was considered a short or intermediate-term security at the time of purchase
into a long-term security. Long-term securities generally fluctuate more
widely in response to changes in interest rates than short or
intermediate-term securities.
In selecting CMOs, the Adviser seeks a favorable yield relative to risk
and considers purchase price, interest rates, total rates of return,
prepayment rates, average life, duration and volatility and compares these
with other mortgage-backed investments and U.S. Government Securities.
The guarantees of the U.S. Government, its agencies and
instrumentalities are guarantees of the timely payment of principal and
interest on the obligations purchased. The value of the shares issued by the
Davis Government Bond Fund is not guaranteed and will fluctuate with the
value of the Fund's portfolio. Generally when the level of interest rates
rise, the value of the Fund's portfolio is likely to decline and when the
level of interest rates decline, the value of the Fund's portfolio is likely
to rise.
The Fund may engage in portfolio trading primarily to take advantage of
yield disparities. Such trading strategies may result in minor temporary
increases or decreases in the Fund's current income and in its holding of
debt securities which sell at substantial premiums or discounts from face
value. If expectations of changes in interest rates or the price of two
securities prove to be incorrect, the Fund's potential income and capital
gain will be reduced or its potential loss will be increased.
Other Policies. For information concerning other investment policies,
risks and considerations see "General Fund Policies and Risks" below.
Davis Government Money Market Fund.
General. The investment objective of Davis Government Money Market
Fund is to achieve as high a level of current income as is consistent with
the principle of preservation of capital and maintenance of liquidity. It
seeks to achieve its investment objective by investing exclusively in U.S.
Government Securities and repurchase agreements involving U.S. Government
Securities. For a description of these securities see "Investment Objectives
and Policies - Davis Government Bond Fund."
Maturity. The Fund limits its investments to securities and repurchase
agreements which will mature 397 days or less from the date of purchase.
Such period is calculated pursuant to the provisions of Rule 2a-7 under the
Investment Company Act of 1940 which governs the use of amortized cost
valuation. Maturities of securities collateralizing repurchase agreements
are not so limited.
Net Asset Value. It is the policy of the Fund to seek to maintain a
net asset value of $1.00 per share. However, the maintenance of a $1.00
share price is not assured. The U.S. Government and its agencies and
instrumentalities do not guarantee the value of the
<PAGE> 78
shares issued by the Fund. The Fund values its assets on the basis of
amortized cost which permits it to maintain a dollar weighted average portfolio
maturity not exceeding 90 days. See "Determining the Price of Shares."
Portfolio Activity. Generally, the Fund holds its securities until
maturity. However, the Fund may attempt, from time to time, to increase its
yield by trading to take advantage of variations in the markets or yields for
short-term money market instruments. Portfolio securities in the Fund may
also be disposed of prior to maturity if, on the basis of a revised credit
evaluation of the issuer or other financial or investment considerations,
such disposition is deemed advisable by the Adviser. The policy of investing
in securities with short maturities will result in high portfolio turnover.
However, this would not usually affect the Fund since normally brokerage
commissions are not paid in connection with the purchase or sale of
short-term instruments.
Investment Risks. While the Fund intends to invest in high quality
money market instruments, these investments are not entirely without risk.
It may invest in obligations issued or guaranteed by the U.S. Treasury which
include bills, notes and bonds which differ from each other only in interest
rates, maturities and time of issuance: Treasury bills have maturities of one
year or less, Treasury notes have initial maturities of up to ten years and
Treasury bonds have initial maturities of greater than ten years. The Fund
may also invest in obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities, which are supported by any of the
following: (a) the full faith and credit of the U.S. Government (such as GNMA
Certificates); (b) the right of the issuer to borrow an amount limited to a
specific line of credit from the U.S. Government (such as Federal Farm Credit
Bank-FFCB); (c) discretionary borrowing authority of the U.S. Government
agency or instrumentality (such as Student Loan Marketing Association -
SLMA); or (d) the credit of the instrumentality (such as Financing
Corporation-FICO).
Other Policies. For information concerning other investment policies,
risk and considerations, see "General Fund Policies and Risks" below.
Davis Financial Fund
General. The investment objective of Davis Financial Fund is growth of
capital. It invests primarily in common stocks and other securities such as
securities convertible into common stock. Such investments will consist of
issuers which the Adviser believes have capital growth potential due to
factors such as undervalued assets or earnings potential, the development and
demand of new products and services, favorable operating ratios, resources
for expansion, management abilities, improved competitive positions and
favorable overall business prospects.
Concentrated Area of Investment. Generally, the Fund will concentrate
25% or more of its total assets in obligations of domestic and foreign
companies in each of the banking and financial services industries. For
purposes of a concentrated area, an issuer will 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 banking industry include U.S. and foreign commercial
and industrial banking and savings institutions (including their parent
holding companies). Companies in the financial services industry include
commercial and industrial finance companies, diversified financial services
companies, investment banking, securities brokerage and investment advisory
companies, leasing companies and insurance companies (including multi-line,
property, casualty and life insurance companies) and insurance holding
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
<PAGE> 79
respect to those risks associated with regulatory developments in or related to
such industries.
The banking and financial services industries are currently
experiencing change as existing distinctions between such industries become
less clear, as new regulations may create new opportunities for companies in
the area, and as some companies may become attractive acquisition candidates.
There are congressional and executive department proposals that would make
significant changes in the federal laws governing the range of business in
which federally regulated banks can engage. These proposals would allow
certain banks and their holding companies to offer a wide range of financial
products and services, including insurance, mutual fund underwriting, and
securities underwriting and sales. These changes would eliminate many
distinctions between commercial and investment banking.
Investment Considerations and Risks Concerning the Banking Industry.
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.
Recent legislation has significantly altered the regulatory environment
for savings institutions. The number of such institutions with financial
problems, the unsettled economic environment and poor commercial lending
performance has prompted Congress to raise capital requirements as well as
other industry standards. Recent regulatory action has also increased
capital requirements and raised other standards applicable to banks.
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 aggressive
expansion of larger, publicly held foreign banks may result in increased
competition and a decline in the number of publicly traded regional banks.
Investment Considerations and Risks Concerning the Financial Services
Industry. Many of the investment considerations discussed in connection with
banks and savings associations 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 and investment advisory companies
are particularly subject to government regulation and the risks inherent in
securities trading and underwriting activities. 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
<PAGE> 80
inadequacies, problems in investment portfolios (for example, due to real
estate or "junk" bond holdings) and failures of reinsurance carriers.
Other Policies. 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. For information concerning other
investment policies, risks and considerations, see "General Fund Policies and
Risks."
Davis Convertible Securities Fund
General. The investment objective of Davis Convertible Securities Fund
is total return. It seeks this objective through a combination of current
income and capital appreciation. The Fund will, under normal circumstances,
invest 65% or more of its total assets in convertible securities. Securities
received upon conversion of a convertible security may be retained by the
Fund to permit orderly disposition or to establish long-term holdings for
federal income tax purposes. In the event that less than 65% of total assets
are invested in convertible securities due to the exercise of conversion
rights, the Fund will invest available funds in additional convertible
securities as soon as practicable. The remaining assets may be invested in
other securities, including common and preferred stock, corporate debt
securities, Real Estate Investment Trust ("REITs"), U.S. Government
Securities, and money market instruments (including repurchase agreements).
For a discussion of the risks associated with investing in REITs see "Davis
Real Estate Fund".
Generally, convertible securities are bonds, debentures, notes,
preferred stocks or other securities that convert or are exchanged into
shares of the underlying common stock at a stated exchange ratio. Usually,
the conversion or exchange is solely at the option of the holder. However,
some convertible securities may be convertible or exchangeable at the option
of the issuer or are automatically converted or exchanged at a time certain,
or upon the occurrence of certain events, or have a combination of these
characteristics. Usually a convertible security provides a long term call on
the issuer's common stock and therefore tends to appreciate in value as the
underlying common stock appreciates in value. A convertible security may also
be subject to redemption by the issuer after a date certain and under certain
circumstances (including a specified price) established on issue. If a
convertible security held by the Fund is called for redemption, the Fund
could be required to tender it for redemption, convert it into the underlying
common stock or sell it.
In selecting convertible securities for the Fund, the Adviser will seek
to achieve a high level of total return and will consider the following
factors, among others: (1) the Adviser's own evaluations of the basic
underlying value of assets and business of the issuers; (2) the interest or
dividend income generated by the securities; (3) the potential for capital
appreciation of the securities and the underlying common stocks; (4) the
prices of the securities relative to the underlying common stocks; (5) the
prices of the securities relative to other comparable securities; (6) whether
the securities are entitled to the benefits of sinking funds or other
protective conditions; (7) the existence of any anti-dilution protections of
the security; and (8) the diversification of the Fund's portfolio as to
issuers. The Fund may convert a convertible security which it holds (A) when
necessary to permit orderly disposition of the investment when a convertible
security approaches maturity or has been called for redemption; (B) to
facilitate a sale of the position; (C) if the dividend rate on the underlying
common stock increases above the yield on the convertible security; or (D)
whenever the Adviser believes it is otherwise in the best interests of the
Fund.
<PAGE> 81
Investment Considerations and Risks Generally. Fixed-income securities
are generally considered to be interest rate sensitive. The market value of
the Fund's investments will change in response to changes in interest rates.
During periods of falling interest rates, the value of debt securities held
by the Fund 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. Due to its conversion feature, the
price of a convertible security will normally vary in some proportion to
changes in the price of the underlying common stock. A convertible security
will normally also provide a higher yield than the underlying common stock
(but generally lower than comparable non-convertible securities). Due to
their higher yield, convertible securities generally sell above their
"conversion value," which is the current market value of the stock to be
received upon conversion. The difference between this conversion value and
the price of convertible securities will vary over time depending on the
value of the underlying common stocks and interest rates. When the
underlying common stocks decline in value, convertible securities will tend
not to decline to the same extent because the yield acts as a price support.
When the underlying common stocks rise in value, the value of convertible
securities may also be expected to increase but will generally not increase
to the same extent as common stocks.
High Yield, High Risk Debt Securities. Convertible securities are
often viewed by the issuer as future common stock subordinated to other debt
and carry a lower rating than the issuer's non-convertible debt obligations.
The debt securities in which the Fund may invest (including convertible
securities) include high yield, high risk debt securities (including
convertible securities) rated BBB or lower by Standard & Poor's Corporation
("S&P") or Baa or lower by Moody's Investor Services ("Moody's") or unrated
securities deemed by the Adviser to be of an equivalent rating. A brief
description of the quality ratings of these two services is contained herein
under "Portfolio Composition" and a more complete description is contained in
the Appendix. Securities rated BBB by S&P or Baa by Moody's have speculative
characteristics; changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments. Securities rated BB or lower by S&P and Ba or lower by Moody's are
referred to in the financial community as "junk bonds" and may include D
rated securities of issuers in default. The Fund intends not to purchase
securities rated BB or Ba or lower if such purchase would then cause 35% or
more of the Fund's net assets to be invested in such securities. While likely
to have some quality and protective characteristics, such securities, whether
or not convertible into common stock, usually involve increased risk as to
payment of principal and interest.
The Adviser considers the ratings assigned by S&P or Moody's as one of
several factors in its independent credit analysis of issuers. Ratings
assigned by credit agencies do not evaluate market risks.
Issuers of high yield, high risk securities may be highly leveraged and
may not have available to them traditional methods of financing. Therefore,
the risks associated with acquiring the securities of such issuers generally
are greater than is the case with higher rated securities. For example,
during an economic downturn or a sustained period of rising interest rates,
issuers of high yield securities may be more likely to experience financial
stress, especially if such issuers are highly leveraged. During such
periods, such issuers may not have sufficient revenues to meet their
principal and interest payment obligations. The issuer's ability to service
its debt obligations also may be adversely affected by specific issuer
developments, or the issuer's inability to meet specific projected business
forecasts, or the unavailability of additional financing. The risk of loss
due to
<PAGE> 82
default by the issuer is significantly greater for the holders of high yield
securities because such securities may be unsecured and may be subordinated to
other creditors of the issuer.
Such securities are subject to greater price volatility than higher
rated securities, tend to decline in price more steeply than higher rated
securities in periods of economic difficulty or accelerating interest rates
and are subject to greater risk of payment in adverse economic times. There
may be a thin trading market for such securities. This may have an adverse
impact on market price and the ability of the Funds to dispose of particular
issues and may cause the Fund to incur special securities registration
responsibilities, liabilities and costs and liquidity and valuation
difficulties. Unexpected net redemptions may force the Fund to sell high
yield, high risk debt securities without regard to investment merit, thereby
possibly reducing return rates. Such securities may be subject to
redemptions or call provisions which, if exercised when investment rates are
declining, could result in the replacement of such securities with lower
yielding securities, resulting in a decreased return. To the extent that the
Fund invests in bonds that are original issue discount, zero coupon, pay-in-
kind or deferred interest bonds, the Fund may have taxable interest income in
excess of the cash actually received on these issues. In order to avoid
taxation to the Fund, the Fund may have to sell portfolio securities to meet
taxable distribution requirements.
See the Statement of Additional Information for more detailed
information on high yield, high risk debt securities.
Portfolio Composition. The table below reflects Davis Convertible
Securities Fund's portfolio quality rating for December 31, 1996. The table
reflects the percentage of total assets represented by fixed income
securities rated by Moody's or S&P, by unrated fixed income securities and by
other assets. The percentages shown reflect the higher of the Moody's or S&P
rating. U.S. Government Securities, whether or not rated, are reflected as
Aaa and AAA (highest quality). Other assets may include money market
instruments, repurchase agreements, equity securities, net payables and
receivables and cash. The allocations in the table are not necessarily
representative of the composition of the Fund's portfolio at other times.
Portfolio quality rating will change over time.
<TABLE>
Portfolio Composition of the Davis Convertible Securities Fund Portfolio by
Quality Rating As a Percentage of Total Assets at December 31, 1996
<CAPTION>
Moody's S&P Rating Category Percentage Fund's Assessment
- --------------------------- ---------- -----------------
<S> <C> <C>
General Definition
of Unrated Securities
of Bond Quality
Aaa/AAA -- --
Highest quality
Aa/AA -- --
High quality
A/A 7.76% --
Upper medium grade
Baa/BBB 5.93% --
Medium grade
Ba/BB 5.49% 1.85%
Some speculative elements
B/B 5.19% --
Speculative
Caa/CCC -- --
More speculative
Ca,C/CC,C,D -- --
Very speculative, may be in default
Not Rated 1.85% --
Not rated by Moody's or S&P
Common and Convertible
Preferred Stock 71.78% --
Short-term Investments 2.00% --
100% 1.85%
</TABLE>
<PAGE> 83
The description of each bond quality category set forth in the table
above is intended to be a general guide and not a definitive statement as to
how Moody's and S&P define such rating category. A more complete description
of the rating categories is set forth in the Appendix. The ratings of
Moody's and S&P represent their opinions as to the quality of the securities
that they undertake to rate. It should be emphasized, however, that ratings
are relative and subjective and are not absolute standards of quality. There
is no assurance that a rating assigned initially will not change. The Fund
may retain a security whose rating has changed or has become unrated.
Other Policies. For information concerning other investment policies,
risks and considerations see "General Fund Policies and Risks" below.
Davis Real Estate Fund
General. The investment objective of Davis Real Estate Fund is total
return through a combination of growth and income. It invests primarily in
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 invested in securities of 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. It does not invest directly in real estate. Real estate companies
include real estate investment trusts, or other securitized real estate
investments, brokers, developers, lenders and companies with substantial real
estate holdings such as paper, lumber, hotel and entertainment companies. It
invests in common stocks and other equity securities and debt securities. In
keeping with its primary growth objective, it will normally invest primarily
in equity securities (including securities convertible into equity
securities). It may also invest in fixed income securities for income or as
a defensive strategy when the Adviser believes that adverse economic or
market conditions require such strategy.
The remaining 35% of the Fund's assets may be invested in securities of
companies in any other industries. These may include companies which are not
primarily involved in real estate operations or ownership but which have
products or services relating to the real estate industry, such as
manufacturers and distributors of building supplies, financial institutions
which make or service real estate loans or companies which have substantial
real estate assets such as some companies in the energy, retailing or
railroad industries. There is no limitation on such investments except that
the Fund intends to invest less than 25% of its total assets in the
securities of any industry other than the real estate industry.
The Fund will invest in shares of real estate investment trusts
("REITs"). 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 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.
<PAGE> 84
Investment Considerations and Risks Generally. Because the Fund
invests primarily in the real estate industry, it is subject to risks
associated with the direct ownership of real estate. The Fund 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. If the Fund has
rental income or income from the disposition of real property, the receipt of
such income may adversely affect its ability to retain its tax status as a
regulated investment company.
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. 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 Fund, a shareholder will bear not only his proportionate share of the
expense of the Fund, but also, indirectly, similar expenses of the REITs,
including compensation of management.
High Yield, High Risk Debt Securities. The Fund may also invest in the
same types of high yield, high risk securities as Davis Convertible
Securities Fund. However, the Fund generally will not purchase securities
rated BB or Ba or lower if such purchase would then cause more than 30% of
the Fund's net assets to be invested in such securities. The Fund currently
has none of its assets invested in high yield, high risk securities and does
not presently intend to have over 5% of its assets invested in such
securities in the near future.
Other Policies. For information concerning other investment policies,
risks and considerations see "General Fund Policies and Risks" below.
General Fund Policies and Risks
With respect to this section, the Funds are referred to as follows:
Davis Growth Opportunity Fund as the "Growth Fund"
Davis Government Bond Fund as the "Bond Fund"
Davis Government Money Market Fund as the "Money Market Fund"
Davis Financial Fund as the "Financial Fund"
Davis Convertible Securities Fund as the "Convertible Fund"
Davis Real Estate Fund as the "Real Estate Fund"
Diversification. The Growth, Bond and Money Market Funds limit
investments in one issuer to 5% of total assets. The Financial, Convertible
and Real Estate Funds have the same limitation, but only as to 75% of their
respective total assets. The remaining 25% of each Fund's total assets may
be invested without regard to this 5% limitation. This may involve greater
risk than if the 5% limitation is applied to all assets. Note that no Fund
has any limitations on investments in U.S. Government Securities or
repurchase agreements with respect to such securities.
<PAGE> 85
Concentration. No Fund, other than the Financial Fund and Real Estate
Fund, will make any investment which would cause 25% or more of its total
assets to be invested in any one industry. This limitation does not apply to
investments in U.S. Government Securities.
Temporary Investments of Funds other than the Money Market Fund. The
Funds may temporarily invest in high grade money market instruments,
repurchase agreements, or may hold cash or cash equivalents for defensive
purposes or to accommodate inflows of cash awaiting more permanent
investment.
Foreign Investments. Funds other than the Bond and Money Market Funds
may invest in securities of foreign issuers or securities which are
principally traded in foreign markets ("foreign securities"). When foreign
investments are made, the Adviser or Sub-Adviser will attempt to take
advantage of differences between economic trends and the performance of
securities markets in various countries to maximize investment performance.
In most instances, foreign investments will be made in companies principally
based in developed countries.
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") covering such
securities and through U.S. registered investment companies investing
primarily in foreign securities. The Funds, however, may not invest in the
securities of other registered investment companies if more than 10% of a
Fund's total assets would then be so invested. Other registered investment
companies usually have their own management costs or fees and the Adviser
will also earn its regular fee on Fund assets invested in such other
companies. Operating expenses of a Fund investing in foreign securities are
likely to be higher than that of one investing exclusively in U.S.
securities, since management, custodial and certain other expenses are
expected to be higher.
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 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
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.
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 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 in respect to a different foreign currency than 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, a Fund will not
<PAGE> 86
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 its total assets (excluding in such 5% asset
calculation 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 a Fund 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 a Fund than if it had not entered into such
contracts. When taking a position in an anticipatory hedge, a Fund is
required to set aside cash or high grade liquid securities to fully secure
the obligation.
Portfolio Transactions. The Adviser (and Sub-Advisers with respect to
Growth Fund) is responsible for the placement of portfolio transactions,
subject to the supervision of the Board of Directors. It is the Company's
policy to seek 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 shares of the Company may be taken into
account as a factor in placement of portfolio transactions. In seeking its
investment objective, a Fund predominantly investing in equity securities may
trade to some degree in securities for the short term if the Adviser (or Sub-
Advisers) believes that the growth potential of a security no longer exists,
considers that other securities have more growth potential, or otherwise
believes that such trading is advisable. As discussed above, the Bond Fund
may engage in portfolio trading to take advantage of yield disparities.
Because of differences among investment policies, portfolio turnover rate
will be different for each Fund. At times it could be high, which could
require the payment of larger amounts in brokerage commissions. However,
Bond and Money Market Funds' trades are usually principal transactions
involving no commissions. The Adviser is 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.
Writing Covered Options. For income purposes, the Funds other than the
Money Market Fund may write covered call options on its portfolio securities.
However, the Funds have not done so to any significant extent and do not
currently intend to engage in any such transaction if it would cause more
than 10% of net assets to be subject to options.
Repurchase Agreements. The Funds may enter into repurchase agreements,
but normally do not enter into repurchase agreements maturing in more than
seven days, and may make repurchase agreement transactions through a joint
account with other funds which have the same investment adviser. A
repurchase agreement, as referred to herein, involves a sale of securities to
the Funds, with the concurrent agreement of the seller (a member bank of the
Federal Reserve System 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,
<PAGE> 87
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.
Restricted and Illiquid Securities. Funds, other than the Money Market
Fund, may invest in restricted securities, i.e., securities which, if sold,
would cause the Funds to be deemed "underwriters" under the Securities Act of
1933 or 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 any Fund's net assets would then
be illiquid. If at any time more than 15% of a Fund's net assets are
illiquid, steps will be taken as soon as practicable to reduce the percentage
of illiquid assets to 15% or less.
The restricted securities which a Fund 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 Fund, to trade in
privately placed securities even though such securities are not registered
under the 1933 Act. The Adviser, or the Sub-Adviser in the case of Growth
Fund, under criteria established by the Company's Board of Directors, will
consider whether Rule 144A Securities being purchased or held by the Fund are
illiquid and thus subject to the Fund's policy limiting investments in
illiquid securities. In making this determination, the Adviser or the
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 or the Sub-Adviser and, if as a result of changed
conditions, it is determined that a Rule 144A Security is no longer liquid,
the Fund's holding of illiquid securities will be reviewed to determine what,
if any, action is appropriate in light of the policy limiting investments in
such securities. There is no limitation on the percentage of the Fund's
assets that can be invested in liquid Rule 144A 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. No Fund will borrow money except from banks for temporary
or emergency purposes (usually to facilitate orderly redemption of its shares
while avoiding untimely disposition of portfolio holdings.) Except for the
Money Market Fund, a Fund may not (i) borrow money in excess of 10% of the
value of its total assets (excluding the amount borrowed) at the time of the
borrowing or (ii) mortgage, pledge or hypothecate any assets except to secure
permitted borrowings and then only in an amount not in excess of 15% of the
value of its total assets (excluding the amount borrowed) at the time of such
borrowings. The Money Market Fund may not (a) borrow in excess of 25% of the
value of its total assets (including the amounts borrowed) at the time of
borrowing or (b) pledge or hypothecate any of its assets except to secure
permitted borrowing and then in an amount not in excess of 10% of the value
of its net assets (including the amount borrowed) at the time of such
borrowing. No Fund will purchase securities while any borrowing exceeds 5%
of net assets.
Fundamental and Non-Fundamental Policies. The investment restrictions
set forth in the Statement of Additional Information including those in
respect to borrowing, concentration and diversification as discussed above
are fundamental policies. The
<PAGE> 88
investment objectives and policies with respect to eligible investments are
fundamental policies of Money Market Fund and cannot be changed without a
shareholder vote. All other investment objectives and policies of the
Company's Funds are not fundamental and may be changed without shareholder
approval. In the event that a Fund's objective should ever be changed, such
change may result in an objective different from the objective the shareholder
considered appropriate at the time of investment in such Fund. Except for the
restrictions on illiquid securities, any percentage restrictions set forth in
the prospectus or in the Statement of Additional Information apply as of the
time of investment without regard to later increases or decreases in the values
of securities or total or net assets.
ADVISER, SUB-ADVISERS AND DISTRIBUTOR
Davis Selected Advisers, L.P., (the "Adviser") whose principal office
is at 124 East Marcy Street, Santa Fe, New Mexico 87501, serves as the
adviser for the Funds. Venture Advisers, Inc. is the Adviser's sole general
partner. Shelby M.C. Davis is 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
Davis Government Bond Fund, Davis Government Money Market Fund, Davis
Financial Fund, Davis Convertible Securities Fund and Davis Real Estate Fund,
and manages the business operations of the Davis Growth Opportunity Fund.
Davis Distributors, LLC (the "Distributor"), a subsidiary of the Adviser
serves as the distributor or principal underwriter of the Fund's shares. As
discussed below, the Adviser has hired Tanaka Capital Management, Inc. as the
Sub-adviser for the Growth Opportunity Fund. Davis Selected Advisers-NY, Inc.
("DSA-NY"), a wholly-owned subsidiary of the Adviser, performs research and
other services for the Funds on behalf of the Adviser under a Sub-Advisory
Agreement with the Adviser. This Agreement does not affect the services
provided by Tanaka Capital Management. The Adviser also acts as investment
adviser and distributor for Davis High Income Fund, Inc., Davis Tax-Free High
Income Fund, Inc., Davis New York Venture Fund, Inc. and Davis International
Series, Inc., (collectively with the Funds, the "Davis Funds") and Selected
American Shares, Inc., Selected Special Shares, Inc. and Selected Capital
Preservation Trust (collectively the "Selected Funds"). The Distributor also
acts as the principal underwriter for the Davis and Selected Funds.
The Davis Government Bond Fund pays the Adviser a fee at the annual
rate of 0.50% of total net assets. Davis Government Money Market Fund pays
the Adviser a fee at the annual rate of 0.50% on the first $250 million of
average net assets, 0.45% on the next $250 million of net assets and 0.40% on
assets over $500 million. The other Funds each pay the Adviser a fee at the
annual rate of 0.75% on the first $250 million of average net assets, 0.65%
on the next $250 million of net assets and 0.55% on assets over $500 million.
The fees for these other Funds are higher than those charged by many mutual
funds with similar objectives. The Company also reimburses the Adviser for
its costs of providing certain accounting and financial reporting,
shareholder services and compliance with state securities laws. Under the
Sub-Advisory Agreement with DSA-NY, the Adviser pays all of DSA-NY's direct
and indirect costs of operations. All the fees paid to DSA-NY are paid by
the Adviser and not the Funds.
Tanaka Capital Management, Inc. (the "Sub-Adviser"), is a sub-adviser
for the Davis Growth Opportunity Fund. The Sub-Adviser manages the day to
day investment operations for the Davis Growth Opportunity Fund. The Company
pays no fees directly to the Sub-Adviser. The Sub-Adviser receives from the
Adviser a reallowed portion of its advisory fee equal to 0.30% of the first
$100 million of the Davis Growth Opportunity Fund's annual average net assets
and 0.25% of such Fund assets over $100 million with a minimum annual fee of
$100,000. However, the Sub-Adviser's fees on Fund assets over $100 million
may not exceed one-third of the fees paid to the Adviser from the Davis
<PAGE> 89
Growth Opportunity Fund. The Sub-Adviser also provides investment advisory
services to employee benefit plans, institutions, trusts and individuals.
The Sub-Adviser's offices are located at 230 Park Avenue, Suite 1432, New
York, New York 10169. Graham Y. Tanaka is the owner of the Sub-Adviser.
Since February, 1987, Mr. Tanaka has been the controlling shareholder, Chief
Executive Officer and sole director of the Sub-Adviser. Prior to December,
1990, he was employed by the Adviser.
Portfolio Management. Carolyn H. Spolidoro is the primary portfolio
manager of the Davis Government Bond Fund. She has been employed by the
Adviser since August 1985. She is Vice President of the Adviser's General
Partner and Vice President of all of the Davis Funds. She is also the
portfolio manager of the Davis Government Money Market Fund, the Selected
U. S. Government Income Fund and the Selected Daily Government Fund.
Graham Y. Tanaka has been the primary portfolio manager of Davis Growth
Opportunity Fund since January, 1987.
Christopher C. Davis and Kenneth Charles Feinberg are the co-portfolio
managers of the Davis Financial Fund. Christopher C. Davis was the
co-portfolio manager of this Fund with Shelby M.C. Davis from its inception
until December 1, 1994. He has been employed by the Adviser since September,
1989 as an assistant portfolio manager and research analyst.
Kenneth Charles Feinberg has been employed by the Adviser since
December of 1994 as a research analyst. He previously served as Assistant
Vice President of Investor Relations for Continental Corporation from 1988 to
1994.
Andrew A. Davis is the primary portfolio manager of the Davis
Convertible Securities Fund and the Davis Real Estate Fund. He was the
co-portfolio manager of these funds, with Shelby M.C. Davis, from their
inception until December 1, 1994. Andrew A. Davis is a Vice President of the
Company and President of the Adviser's General Partner. Until February 1993,
he was the Vice President and head of convertible research at PaineWebber,
Incorporated.
Shelby M.C. Davis, is the Chief Investment Officer of the Adviser. As
Chief Investment Officer, he is active in providing investment themes,
strategies, and individual stock selection to one or more of the Funds. He
is the controlling shareholder of the Adviser, was the primary portfolio
manager of the Davis Financial Fund and the co-portfolio manager of the Davis
Convertible Securities Fund and the Davis Real Estate Fund until December 1,
1994. He will continue to consult with Andrew A. Davis and Christopher C.
Davis.
The Distributor, is reimbursed by each Fund for some of its
distribution expenses through Distribution Plans which have been adopted with
respect to Class A, Class B and Class C shares of each Fund and approved by
the Company's Board of Directors of such classes in accordance with Rule
12b-1 under the Investment Company Act of 1940. See "Distribution Plans" below
for more details. The Class Y shares are not subject to Rule 12b-1 fees.
PURCHASE OF SHARES
General. Class Y shares are offered through this Prospectus to (i)
trust companies, bank trusts, endowments, or foundations ("Institutions")
acting on behalf of their own account or one or more clients for which such
Institution acts in a fiduciary capacity and
<PAGE> 90
investing at least $5,000,000 at any one time; (ii) any state, county, city,
department, authority or similar agency which invests at least $5,000,000
("Government Entities"); and (iii) any investor with an account established
under a "wrap account" or other similar fee-based program sponsored and
maintained by a registered broker-dealer approved by the Fund's Adviser ("Wrap
Program Investors"). Wrap Program Investors may only purchase Class Y shares
through the sponsors of such programs who have entered into agreements with
Davis Selected Advisers, L.P.
Shareholders whose Davis Government Money Market Fund accounts are
established for distributions of earnings or principal from a unit investment
trust sponsored by Clayton Brown & Associates, Inc. may make initial and
subsequent investments of amounts below the stated minimum.
Wrap Program Investors should be aware that both Class A and Class Y
shares are made available by the Fund at net asset value to sponsors of wrap
programs. However, Class A shares are subject to additional expenses under
the Fund's Rule 12b-1 Plan and sponsors of wrap programs utilizing Class A
shares are generally entitled to payments under the Plan. If the sponsor has
selected Class A shares, investors should discuss these charges with their
program's sponsor and weigh the benefits of any services to be provided by
the sponsor against the higher expenses paid by Class A shareholders.
Purchase by Bank Wire. Shares may be purchased at any time by wiring
federal funds directly to State Street. Prior to an initial investment by
wire, the institutional shareholder or wrap program sponsor should telephone
Davis Distributors, LLC at 1-800-279-0279 to advise them of the investment
and class of shares and to obtain an account number and instructions. To
assure proper credit, the wire instructions should be made as follows:
State Street Bank and Trust Company,
Boston MA 02210
Attn.: Mutual Fund Services
DAVIS SERIES, INC.
(Please specify Fund)
Shareholder Name,
Shareholder Account Number,
Federal Routing Number 011000028,
DDA Number 9904-606-2
After your initial investment, you can make additional investments.
Simply mail a check payable to "The Davis Funds" to State Street Bank and
Trust Company, c/o The Davis Funds, P.O. Box 8406, Boston, MA 02266-8406.
The check should be accompanied by a form which State Street will provide
after each purchase. If you do not have a form, you should tell State Street
that you want to invest the check in Class Y shares of a Fund. If you know
your account number, you should also give it to State Street.
The Funds do not issue certificates for Class Y shares. Each time you
add to or withdraw from your account, you will receive a statement showing
the details of the transaction and any other transactions you had during the
current year.
TELEPHONE PRIVILEGE
Unless you have provided in your application that the telephone
privilege is not to be available, the telephone privilege is automatically
available under certain circumstances for exchanging shares and for redeeming
shares. By exercising the telephone privilege to
<PAGE> 91
sell or exchange shares, you agree that the Company shall not be liable for
following telephone instructions reasonably believed to be genuine. Reasonable
procedures will be employed to confirm that such instructions are genuine and
if not employed, the Company may be liable for unauthorized instructions. Such
procedures will include a request for personal identification (account or
social security number) and tape recording of the instructions. You should
be aware that during unusual market conditions we may have difficulty in
accepting telephone requests, in which case you should contact us by mail.
See "Exchange of Shares - By Telephone", "Redemption of Shares - By
Telephone" and "Redemption of Shares - Expedited Redemption Privilege."
EXCHANGE OF SHARES
General. You may exchange Class Y shares of any Fund for Class Y
shares of the other Davis Funds. The Davis Funds offer a variety of
investment objectives that includes common stock funds, tax-exempt and
corporate bond funds, and a money market fund. However, each Fund, except
the Davis Government Money Market Fund is intended as a long-term investment
and not for the short-term. The net asset value of the initial shares being
acquired must be at least $5,000,000 for Institutions and Government Entities
or minimums set by wrap program sponsors. Class A shareholders who are
eligible to purchase Class Y shares may exchange their shares for Class Y
shares of the Fund.
Before you decide to make an exchange, you must obtain the current
prospectus of the desired fund. Call your broker or the Distributor for
information and a prospectus for any of the other Davis Funds registered in
your state. Read the prospectus carefully. If you decide to exchange your
shares, send State Street a written unconditional request for the exchange
and follow the instructions regarding delivery of share certificates
contained in the section on "Redemption of Shares". A signature guarantee is
not required for such an exchange. However, if shares are also redeemed for
cash in connection with the exchange transaction, a signature guarantee may
be required. See "Redemption of Shares." Your dealer may charge an
additional fee for handling an exercise of the exchange privilege.
An exchange involves both a redemption and a purchase, and normally
both are done on the same day. However, in certain instances such as where a
large redemption is involved, the investment of redemption proceeds into
shares of other Davis Funds may take up to seven days. For federal income
tax purposes, exchanges are treated as a sale and purchase. Therefore, there
will usually be a recognizable capital gain or loss due to an exchange.
By Telephone. You may exchange shares by telephone into accounts with
identical registrations. Please see the discussion of procedures in respect
to telephone instructions in the section entitled "Telephone Privilege," as
such procedures are also applicable to exchanges.
The number of times a shareholder may exchange shares among the Davis
Funds within a specified period of time may be limited at the discretion of
the Adviser. Currently, more than three exchanges out of a Fund during a
twelve month period are not permitted without the prior written approval of
the Adviser. The Company reserves the right to terminate or amend the
exchange privilege at any time upon at least 60 days' notice.
REDEMPTION OF SHARES
All Funds Except Davis Government Money Market Fund. You can redeem,
or sell back to the Company, all or part of your shares at any time. You can
do this by sending a
<PAGE> 92
written request to State Street Bank and Trust Company, c/o The Davis Funds,
P.O. Box 8406, Boston, MA 02266-8406, indicating how many of your shares or
what dollar amount you want to redeem. If more than one person owns the shares
to be redeemed, all owners must sign the request. The signatures on the request
must correspond to the account from which the shares are being redeemed.
Sometimes State Street needs more documents to verify authority to make
a redemption. This usually happens when the owner is a corporation,
partnership or fiduciary (such as a trustee or the executor of an estate) or
if the person making the request is not the registered owner of the shares.
For the protection of all shareholders, the Company also requires that
signatures appearing on a share certificate, stock power or redemption
request where the proceeds would be more than $50,000 must be guaranteed by a
bank, credit union, savings association, securities exchange, broker, dealer
or other guarantor institution. A signature guarantee is also required in
the event that any modification to the Company's application is made after
the account is established, including the selection of the Expedited
Redemption Privilege. In some situations such as where corporations, trust
or estates are involved, additional documents may be necessary to effect the
redemption. The transfer agent may reject a request from any of the
foregoing eligible guarantors, if such guarantor does not satisfy the
transfer agent's written standards or procedures or if such guarantor is not
a member or participant of a signature guarantee program. This provision
also applies to exchanges when there is also a redemption for cash. A
signature guarantee on redemption requests where the proceeds would be
$50,000 or less is not required, provided that such proceeds are being sent
to the address of record and, in order to ensure authenticity of an address
change, such address of record has not been changed within the last 30 days.
All notifications of address changes must be in writing.
Redemption proceeds are normally paid to you within seven days after
State Street receives your proper redemption request. Payment for
redemptions can be suspended under certain emergency conditions determined by
the Securities and Exchange Commission or if the New York Stock Exchange is
closed for other than customary or holiday closings. If any of the shares
redeemed were just bought by you, payment to you may be delayed until your
purchase check has cleared (which usually takes up to 15 days from the
purchase date). You can avoid any such redemption delay by paying for your
shares with a certified or cashier's check or by bank wire or federal funds.
Your shares may also be redeemed through participating brokers or
dealers. The Distributor may repurchase shares from your dealer if your
dealer is a member of the Distributor's selling group. Your dealer may, but
is not required to, use this method in selling back your shares and may place
any repurchase request by telephone or wire. Any broker dealer may charge you
a service fee or commission. No charge is payable if you redeem your own
shares through State Street rather than having a dealer arrange for a
repurchase.
Davis Government Money Market Fund. You may request redemption of part
or all of your shares in the Davis Government Money Market Fund by mail by
sending your request to State Street Bank and Trust Company, c/o Davis Funds,
P.O. Box 8406, Boston, MA 02266-8406. You may also redeem shares through
the Check Writing Privilege or by Expedited Redemption Privilege to a
pre-designated bank account. Normally, except for payment to a pre-designated
bank account, State Street will send payment for the Davis Government Money
Market Fund shares redeemed within three business days, but in no event,
later than seven days, after receipt of a redemption request in proper form.
Redemption of the Davis Government Money Market Fund shares which
<PAGE> 93
were acquired by exchange from shares subject to a contingent deferred sales
charge may be subject to such a charge.
Check Writing Privilege. For Davis Government Money Market, State
Street will provide, upon request, forms of drafts to be drawn on your
account that will clear through State Street. These drafts may be made
payable to the order of any person in any amount not less than $100. When a
draft is presented to State Street for payment, State Street will redeem a
sufficient number of full and fractional shares in your account to cover the
amount of the draft. This enables you to continue earning daily income
dividends until the draft has cleared.
If you elect to use this method of redemption, please so signify on the
Check Writing Privilege Form. You will be subject to State Street's rules
and regulations governing such drafts, including the right of State Street
not to honor drafts in amounts exceeding the value of the regular account at
the time they are presented for payment. Drafts in excess of the value of
the Davis Government Money Market Fund regular account cannot be honored by
redemption of any other Fund account. The Company and State Street reserve
the right to modify or terminate this service at any time.
A shareholder may issue a "Stop Payment" on any draft by calling State
Street at (617) 847-8543. The "Stop Payment" order will become effective if
it is given on a timely basis pursuant to the "Stop Payment" rules in effect
at State Street with respect to their regular checking accounts.
DETERMINING THE PRICE OF SHARES
The net asset value per share of each class is determined daily by
dividing the total value of investments and other assets, less any
liabilities, by the total number of outstanding shares of each class.
Valuation of a Fund's portfolio securities (which comprise most of a Fund's
assets) is based upon their market valuation. Securities traded on a
national securities exchange are valued at the last published sales prices on
the principal exchange where listed, 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 (maturing in sixty
days 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. Normally, the share price of the
Davis Government Money Market Fund does not fluctuate. However, if there are
unusually rapid changes in interest rates which in the Board's view cause a
material deviation between amortized cost and market value, the Board will
consider whether such conditions require taking any temporary action to
maintain the normal fixed price or to prevent material dilution or other
unfavorable results to shareholders. Such action could include withholding
dividends, paying dividends out of surplus, realizing gains or losses or
using market valuation.
The net asset value per share is normally determined as of the earlier
of the close of the New York Stock Exchange or 4:00 p.m. Eastern Time on each
day the Exchange is open. The price per share for purchases or redemptions
made directly through State Street normally is such value next computed after
State Street receives the purchase order or redemption request. If the
purchase order or redemption request is placed with your dealer, then the
applicable price is normally computed as of 4:00 p.m. Eastern Time on the
day the dealer receives the order, provided that the dealer receives the
order before 4:00 p.m. Eastern Time. Otherwise, the applicable price is the
next determined net asset value. It is
<PAGE> 94
the responsibility of your dealer to promptly forward purchase and redemption
orders to the Distributor. Note that in the case of redemptions and
repurchases of shares owned by corporations, trusts or estates, State Street
may require additional documents to effect the redemption and the applicable
price will be determined as of the close of the next computation following the
receipt of the required documentation. See "Redemption of Shares".
DIVIDENDS AND DISTRIBUTIONS
Davis Growth Opportunity Fund and Davis Financial Fund. Income
dividends and distributions from any net realized capital gains are
distributed annually.
Davis Government Bond Fund. Income dividends are paid monthly. You
will receive quarterly confirmation statements for dividends declared and
shares purchased through reinvestment of dividends. Distributions from any
net realized capital gain not offset by capital loss carryovers are
distributed annually. The Davis Government Bond Fund declares distributions
based on the Adviser's projections of estimated net investment income and net
realized short-term gains. The amount of each distribution may differ from
actual net investment income and gains determined in accordance with
generally accepted accounting principles. The Davis Government Bond Fund at
times may continue to pay distributions based on expectations of future
investment results to provide stable distributions for its shareholders even
though, as a result of temporary market conditions or other factors
(including losses realized later in a fiscal year which have the effect of
affecting previously realized gains), the Davis Government Bond Fund may have
failed to achieve projected investment results for a given period. In such
cases, the Davis Government Bond Fund's distributions may include a return of
capital to shareholders. Shareholders who reinvest their distributions are
largely unaffected by such returns of capital. In the case of shareholders
who do not reinvest, a return of capital is equivalent to a partial
redemption of the shareholder's investment.
Davis Government Money Market Fund. Dividends from net income are
declared daily on shares outstanding as of the close of business the
preceding day and are paid monthly. You will receive monthly confirmation
statements for dividends declared and shares purchased through reinvestment
of dividends. Income for Saturdays, Sundays and holidays are accrued on
Fridays. Dividends declared during each calendar month are paid on the last
business day of the month. Shares earn dividends as of the first business
day after the effective purchase date up through the date of redemption.
Davis Convertible Securities Fund and Davis Real Estate Fund. Income
dividends are normally paid quarterly. Distributions from any net realized
capital gains are made annually.
All Funds. Information concerning distributions will be mailed to
shareholders annually. Shareholders have the option to receive all dividends
and distributions in cash, to have all dividends and distributions
reinvested, or to have income dividends and short-term capital gain
distributions paid in cash and long-term capital gain distributions
reinvested. The reinvestment of dividends and distributions is made at net
asset value (without any sales charge) on the dividend payment date. Upon
receipt of the second dividend check which has been returned to State Street
as undeliverable, undelivered dividends will be invested in additional shares
at the current net asset value and the account designated as a dividend
reinvestment account.
<PAGE> 95
FEDERAL INCOME TAXES
This section and the additional tax information in the Statement of
Additional Information are not intended to be a full discussion of all the
aspects of the federal income tax law and its effects on shareholders.
Shareholders may be subject to state and local taxes on distributions. Each
investor should consult his or her own tax adviser regarding the effects of
federal, state and local tax laws on investments in the Funds.
Under the Internal Revenue Code (the "Code"), the Funds are treated as
separate entities. The Company intends to continue to qualify the Funds as
regulated investment companies under the Code and, if so qualified, the Funds
will not be liable for federal income tax to the extent their earnings are
distributed. If, for any calendar year, the required distribution of the
Funds exceed the amount distributed, an excise tax equal to 4% of the excess
will be imposed. The Company intends to make distributions during each
calendar year sufficient to prevent imposition of the excise tax.
Distributions of net investment income and of net realized short-term
capital gains will be taxable to shareholders as ordinary income.
Distributions of net long-term capital gains will be taxable to shareholders
as long-term capital gain regardless of how long the shares have been held.
Distributions will be treated the same for tax purposes whether received in
cash or in additional shares.
A gain or loss for tax purposes may be realized on the redemption of
shares. If the shareholder realizes a loss on the sale or exchange of any
shares held for six months or less and if the shareholder received a capital
gain distribution during such period, then such loss is treated as a
long-term capital loss to the extent of such capital gain distribution.
Dividends declared in the last three calendar months to shareholders of record
in such months and paid by the end of the following January are treated as
received by the shareholder in the year in which they are declared.
Davis Real Estate Fund may invest in real estate investment trusts
("REITs") that hold residual interests in real estate mortgage investment
conduits ("REMICs"). Under Treasury regulations that have not yet been
issued, but may apply retroactively, a portion of the Fund's income from a
REIT that is attributable to the REIT's residual interest in a REMIC
(referred to in the Code as an "excess inclusion") will be subject to Federal
income tax in all events. See "Certain Federal Tax Aspects of Mortgage
REITs" in the Statement of Additional Information.
COMPANY SHARES
The Company's capital stock is currently divided into six series of
common stock, each series representing one of the Company's funds. Each
series is divided into classes as described previously. Class A, Class B,
Class C and Class Y shares. Due to the differing expenses of the classes,
dividends of Class B and Class C shares are likely to be lower than for Class
A shares, and are likely to be higher for Class Y shares than for any other
class of shares. For more information regarding the Class A, B and C shares
please call 1-800-279-0279 to request a prospectus for those shares.
The Board of Directors may offer additional Funds and classes in the
future and may at any time discontinue the offering of any Fund or class.
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 share of each Fund
represents an interest in the assets of that Fund and has identical voting,
dividend, liquidation and other rights and the same terms and conditions as
any other shares of that Fund 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
<PAGE> 96
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.
In accordance with Maryland law and its Articles of Incorporation, the
Company does not hold regular annual shareholder meetings. Shareholder
meetings are held when they are required under the Investment Company Act of
1940 or otherwise called for special purposes. Special meetings may be
called upon the written request of holders of at least 10% of the votes that
could be cast at the meeting.
Major Shareholders. Shelby Cullom Davis & Co., which may be deemed to be an
affiliate of the Adviser, may be deemed to control the Company due to its
beneficial ownership of more than 25% of the Company's outstanding shares.
PERFORMANCE DATA
From time to time, the Fund may advertise information regarding its
performance. Such information may consist of its "yield," "total return" and
"distribution rate" and will be calculated separately for each class. These
performance figures are based upon historical results and are not intended to
indicate future performance.
"Yield" is computed by dividing the net investment income per share (as
defined in applicable regulations of the Securities and Exchange Commission)
during a specified 30-day period by the maximum offering price per share on
the last day of such period. Yield is an annualized figure, in that it
assumes that the same level of net investment income is generated over a
one-year period. The yield formula annualizes net investment income by
providing for semi-annual compounding.
"Distribution rate" is determined by dividing the income dividends per
share for a stated period by the net asset value per share on the last day of
such period. Distribution rates published are measures of the level of
income dividends distributed during a specified period. Thus, such rates
differ from yield (which measures income actually earned by a Fund) and total
return (which measures actual income, plus realized and unrealized gains or
losses of a Fund's investments). Consequently, distribution rates alone
should not be considered complete measures of performance.
"Average annual total return" refers to the Fund's average annual
compounded rate of return over a stated period that would equate an initial
amount invested at the beginning of the period to the ending redeemable value
of the investment.
"Total return" refers to the Fund's compounded rate of return over a
stated period that would equate an initial amount invested at the beginning
of the period to the ending redeemable value of the investment. Total return
is not annualized. In the event the Fund advertises its total return or
average annual total return, the stated periods will be one, five and ten
years, and may also include longer or shorter periods, including the life of
the Fund. The computation of total and average annual total return assumes
reinvestment of all dividends and distributions, and deduction of all charges
and expenses. In addition, a table showing the performance of an assumed
investment of $10,000 may be used from time to time.
<PAGE> 97
The Fund may also quote average annual total return and total return on
net asset value. Such data will be calculated substantially as described
above except that sales charges will not be deducted.
In reports or other communications to shareholders and in advertising
material, the performance of the Fund may be compared to recognized unmanaged
indices or averages of the performance of similar securities. Also, the
performance of the Fund may be compared to that of other funds of similar
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 Fund may use evaluations published by nationally recognized
independent ranking services and publications.
The Fund's 1997 Annual Report contains additional performance
information and will be made available upon request and without charge.
SHAREHOLDER INQUIRIES
Shareholder inquiries should be directed to Davis Distributors, LLC, by
writing to State Street Bank and Trust Company, c/o The Davis Funds, P.O. Box
8406, Boston, MA 02266-8406 or by calling a Shareholder Services
Representative or Davis Direct Access at 1-800-279-0279. Davis Direct Access
is the Davis Funds' automated telephone system that enables Shareholders to
perform a number of account transactions automatically by using a touch-tone
phone. Shareholders may obtain fund and account specific information and
make purchases, exchanges and redemptions.
<PAGE> 98
APPENDIX
QUALITY RATINGS OF DEBT SECURITIES
Moody's Investors Service, Inc. Corporate Bond Ratings
Aaa - Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk. Interest payments are
protected by a large or by an exceptionally stable margin and principal is
secure. While the various protective elements are likely to change, such
changes as can be visualized are unlikely to impair the fundamentally strong
position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuation
of protective elements may be of greater amplitude or there may be other
elements present which make the long term risks appear somewhat larger than
Aaa securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations.
Factors giving security to principal and interest are considered adequate,
but elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade
obligations, i.e. they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any longer period of time may
be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
<PAGE> 99
Standard & Poor's Corporation Corporate Bond Ratings
AAA - Debt rated `AAA' has the highest rating assigned by Standard and
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated `A' has a very strong capacity to pay interest and
repay principal and differs from the highest rated issues only in small
degree.
A - Debt rated `A' has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB - Debt rated `BBB' is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher rated categories.
BB - Debt rated `BB' has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
The 'BB' rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied `BBB-' rating.
B - Debt rated `B' has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal
repayments. Adverse business, financial or economic conditions will likely
impair capacity or willingness to pay interest and repay principal. The `B'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied `BB' or `BB-' rating.
CCC - Debt rated `CCC' has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial, or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The `CCC'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied `B' or `B-' rating.
CC - The rating `CC' is typically applied to debt subordinated to
senior debt that is assigned an actual or implied `CCC' rating.
C - The rating `C' is typically applied to debt subordinated to senior
debt which is assigned an actual or implied `CCC-' debt rating. The `C'
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
CI - The rating `CI' is reserved for income bonds on which no interest
is being paid.
D - Debt rated `D' is in payment default. The `D' rating category is
used when interest payments or principal payments are not made on the date
due even if the applicable grace period has not expired, unless S&P believes
that such payments will be made during such grace period. The `D' rating
also will be used upon the filing of a bankruptcy petition if debt service
payments are jeopardized.
<PAGE> 100
DAVIS GOVERNMENT MONEY MARKET FUND
CHECK WRITING PRIVILEGE
[ ] If you wish the check writing privilege please check the box to the
left and complete the signature card below.
INFORMATION CONCERNING THE DRAFTS USED FOR THE DAVIS GOVERNMENT MONEY MARKET
FUND CHECK WRITING PRIVILEGE:
1. Your Davis Series, Inc. Davis Government Money Market Fund drafts are
paid from an account of Davis Series, Inc. at State Street Bank and Trust
Company ("State Street").
2. In connection with this account, you will have the same rights and
duties with respect to stop payment orders, "stale" drafts, unauthorized
signatures, alterations, and unauthorized endorsements as bank checking
account customers do under the Massachusetts Uniform Commercial Code. All
notices with regard to those rights and duties must be given to State Street.
3. Stop payment instructions must be given to State Street, by calling
State Street's service telephone number for Davis Series, Inc. shareholders:
(617) 847-8543. State Street's address is State Street Bank and Trust
Company, c/o The Davis Funds, P. O. Box 8406, Boston, MA. 02266-8406.
4. These rules may be amended from time to time.
Check Writing Privilege Signature Card (Type or Print)
BY SIGNING THIS SIGNATURE CARD THE UNDERSIGNED AGREE(S) TO BE SUBJECT TO THE
INSTRUCTIONS AND RULES, AS NOW IN EFFECT AND AS AMENDED FROM TIME TO
TIME, OF DAVIS SERIES, INC., THAT PERTAIN TO THE USE OF REDEMPTION CHECKS.
(SOME OF THE CURRENT RULES APPEAR ABOVE.) EACH SIGNATORY GUARANTEES THE
OTHER'S SIGNATURE.
Account Number _____________________________
- ----------------------------------- -----------------------------------
Shareholder Name Co-Shareholder Name
[ ] Check here if both signatures are required on checks.
[ ] Check here if only one signature is required on checks.
If neither box is checked, all checks will require both signatures.
- ----------------------------------- -----------------------------------
Signature Signature
<PAGE> 101
<TABLE>
TABLE OF CONTENTS
<CAPTION>
PAGE
----
<S> <C>
Summary 2
Financial Highlights 5
Investment Objective and Policies 13
Adviser, Sub-Advisers and Distributor 25
Purchase of Shares 27
Telephone Privilege 28
Exchange of Shares 28
Redemption of Shares 29
Determining the Price of Shares 30
Dividends and Distributions 31
Federal Income Taxes 32
Company Shares 33
Performance Data 33
Shareholder Inquiries 34
Appendix - Quality Ratings of Debt Securities 34
</TABLE>
<PAGE> 102
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1997
As Revised August 6, 1997
Davis Series, Inc.
124 East Marcy Street
Santa Fe, New Mexico 87501
1-800-279-0279
<TABLE>
TABLE OF CONTENTS
<CAPTION>
Topic Page
<S> <C>
Investment Restrictions 2
High Yield, High Risk Debt Securities 5
Additional Information Concerning
Davis Government Bond Fund 6
Hedging of Foreign Currency Risks 6
Repurchase Agreements 8
Writing Covered Call Options 8
Federal Tax Aspects of Certain
Mortgage Reits for Davis Real Estate
Fund 9
Portfolio Transactions 9
Directors and Officers 11
Directors' Compensation Schedule 13
Certain Shareholders of the Funds 14
Investment Advisory Services 16
Custodian 18
Auditors 18
Determining the Price of Shares 18
Reduction of Class A Sales Charge 18
Exemptions to Class B Sales
And Conversion Features 20
Distribution of Fund Shares 21
Performance Data 22
</TABLE>
This Statement of Additional Information is not a prospectus and
should be read in conjunction with the Class A, Class B and Class C
Prospectus dated May 1, 1997 as revised August 6, 1997, and the Class Y
Prospectus dated May 1, 1997 as revised August 6, 1997. The Prospectuses may
be obtained from the Company.
The Company's December 31, 1996 Annual Report to Shareholders
accompanies this Statement of Additional Information. The Financial
Statements appearing in these reports are incorporated herein by reference.
All interim financial information reflects all adjustments which are, in the
opinion of management, necessary to a fair statement of the results for such
interim period.
<PAGE> 103
INVESTMENT RESTRICTIONS
The investment restrictions set forth below may not be changed with
respect to any Fund 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.
Restrictions In General
1. The Funds may not purchase or sell commodities or commodity
contracts, except that the Funds other than the Davis Government Bond Fund
and Davis Government Money Market Fund may invest in contracts in respect to
foreign currencies for hedging (risk reduction) purposes.
2. The Funds other than the Davis Government Money Market Fund may
invest in securities secured by real estate or interests therein or
securities issued by companies which invest in real estate or interests
therein, but will not otherwise invest in real estate. (This does not
prevent a Fund from owning and liquidating real estate or real estate
interests incident to a default on portfolio securities.) The Davis
Government Money Market Fund may not invest in real estate, interests therein
or real estate investment trusts.
3. The Funds other than the Davis Government Money Market Fund may not
purchase more than 10% of any one class of an issuer's securities, other than
securities issued or guaranteed by the U.S. Government, its agencies and
instrumentalities ("U.S. Government Securities"), repurchase agreements
relating thereto, certificates of deposit or the like, bankers' acceptances
or bank repurchase agreements. For purposes of this restriction, all debt
securities of an issuer are deemed to comprise a single class. The Davis
Government Money Market Fund, may not purchase more than 10% of the
outstanding debt securities (other than U.S. Government Securities and
repurchase agreements related thereto) of any one issuer.
4. The Funds may not purchase the securities (other than U.S. Government
Securities or repurchase agreements related thereto) of any issuer if
immediately after such purchase more than 5% of the value of a Fund's total
assets would be invested in such issuer; except that up to 25% of the value
of the total assets of Davis Financial Fund, Convertible Securities Fund and
Davis Real Estate Fund may be invested without regard to this 5% limitation.
This restriction does not apply to the Davis Government Money Market Fund.
5. The Funds may not invest in or write puts, calls or combinations
thereof ("option transactions"), except that a Fund other than the Davis
Government Money Market Fund may (a) write calls so long as at the time of so
doing the security underlying the call is listed on a national securities
exchange, the call is issued by The Options Clearing Corporation and is
traded on a registered securities exchange, such calls do not exceed 10% of
that Fund's total assets and are covered calls, (b) make closing purchase
transactions in order to close out outstanding call options previously
written by a Fund and (c) engage in option transactions in respect of foreign
currencies for hedging purposes. (The convertible feature of convertible
securities are not deemed to be puts, calls or combinations thereof.) With
respect to the Davis Government Money Market Fund, it may not invest in puts,
calls, straddles, spreads or any combination thereof.
<PAGE> 104
6. The Funds may not buy the securities of companies in continuous
operation for less than three years (including predecessors) if more than 5%
of a Fund's total assets would then be invested in such securities. This
does not apply to the Davis Government Bond Fund or the Davis Government
Money Market Fund which both invest in U.S. Government Securities or to
investments made by the Davis Real Estate Fund in real estate investment
trusts ("REITs").
7. The Funds may not buy securities of other registered investment
companies, except that Funds other than Davis Government Bond Fund and Davis
Government Money Market Fund may invest in (i) shares of investment companies
investing primarily in foreign securities provided that such purchase does
not cause a Fund to (a) have more than 5% of the value of its total assets
invested in any one such company, (b) have more than 10% of the value of its
total assets invested in the aggregate of all such companies, or (c) own more
than 3% of the total outstanding voting stock of any such company. All Funds
may acquire securities of other registered companies as a part of a merger,
consolidation, reorganization or acquisition of assets.
8. The Funds may not purchase securities on margin, make short sales of
securities or maintain a short position, except that (i) all Funds except the
Davis Growth Opportunity Fund and Davis Government Money Market Fund may
engage in such investments when at the time of sale a Fund has, by reason of
its ownership of other securities, the right to obtain securities equivalent
in kind and amount to the securities sold without payment of additional
consideration and such other securities are retained so long as the Fund is
in a short position and (ii) all Funds except the Davis Government Bond Fund
and Davis Government Money Market Fund may engage in such transactions where
they are in respect to foreign currencies for hedging purposes. These
restrictions do not apply to transactions in respect to foreign currencies
for hedging purposes.
9. The Funds may not invest for the purpose of exercising control or
management of other companies.
10. The Funds, other than the Davis Government Money Market Fund, may not
borrow money except from banks for extraordinary or emergency purposes in
amounts not exceeding 10% of the value of a Fund's total assets (excluding
the amount borrowed) at the time of such borrowing. The Funds may not pledge
or hypothecate any of their assets, except in connection with permitted
borrowing in amounts not exceeding 15% of the value of a Fund's total assets
(excluding the amount borrowed) at the time of such borrowing. These
restrictions do not apply to the use of margin deposits in connection with
transactions in foreign currencies for hedging purposes. The Davis
Government Money Market Fund may not borrow except from banks for
extraordinary emergency purposes in amounts not exceeding 25% of the value of
its total assets (including the amount borrowed) and may pledge or
hypothecate assets not exceeding 10% of the value of its net assets
(including any amount borrowed) in connection with such borrowing. Both
limits are calculated as of the time of such borrowing.
11. The Funds may not buy or continue to hold securities if any officers
or directors of the Company, the Adviser or the Adviser's General Partner own
too many of the same securities. This would happen if any of these
individuals own 1/2 of 1% or more of the securities and all such individuals
who own that much or more own 5% of such securities.
12. The Funds do not engage in the underwriting of securities; however,
the Funds may technically be considered "underwriters" if they sell
restricted securities.
<PAGE> 105
13. The Funds may not make loans except through the purchase of debt
obligations (including entering into repurchase agreements) in accordance
with the Fund's investment objectives and policies.
Securities received upon conversion or exercise of warrants or
subscription rights and securities remaining upon the breakup of units or
detachment of warrants may be retained to permit advantageous disposition.
Special Restriction as to Davis Growth Opportunity Fund and Davis Government
Bond Fund
1. Neither Fund may purchase the securities of issuers conducting their
principal business activities in the same industry if immediately after such
purchase the value of a Fund's investments in such industry would exceed 25%
of the value of its total assets, provided that (a) as to utility companies,
the gas, electric, water and telephone businesses will be considered separate
industries and, as to finance companies, personal credit and business credit
will be considered separate industries, and (b) there is no limitation with
respect to or arising out of investments in U.S. Government Securities and
repurchase agreements with respect thereto, certificates of deposit or the
like, bankers' acceptances and bank repurchase agreements.
2. Neither Fund may engage in arbitrage transactions.
Special Restrictions as to Davis Government Money Market Fund
1. The Fund may not purchase any security which has a maturity date
exceeding that prescribed in Rule 2a-7 under the Investment Company Act of
1940
2. The Fund may not invest in restricted securities; provided, however,
that this restriction shall not apply to repurchase agreements.
3. The Fund may not invest in oil, gas or other mineral exportations or
development programs.
Special Restrictions as to Davis Financial Fund
1. The Fund may not invest less than 25% of its total assets (except
investments for temporary defensive periods) in companies principally engaged
in each of the banking and financial services industries. Companies in the
banking industry include U.S. and foreign commercial and industrial banking
and savings institutions (including their parent holding companies).
Companies in the financial services industry include commercial and
industrial finance companies, diversified financial services companies,
investment banking, securities brokerage and investment advisory companies,
leasing companies and insurance and insurance holding companies.
2. Except for companies in the industries identified above, the Fund may
not purchase the securities of issues conducting their principal business
activities in the same industry if immediately after such purchase the value
of the Fund's investments in such industry would constitute 25% or more of
the value of the Fund's total assets, provided that (a) as to utility
companies, the gas, electric, water and telephone businesses will be
considered separate industries, and (b) there is no limitation with respect
to or arising out of investments in U.S. Government Securities and repurchase
agreements fully collateralized by such Government Securities.
<PAGE> 106
Special Restrictions as to Davis Convertible Securities Fund
1. Convertible Securities Fund may not purchase the securities of
issuers conducting their principal business activities in the same industry
if immediately after such purchase the value of the Fund's investments in
such industry would constitute 25% or more of the value of the Fund's total
assets, provided that (a) as to utility companies, the gas, electric, water
and telephone businesses will be considered separate industries, and (b)
there is no limitation with respect to or arising out of investments in U.S.
Government Securities and repurchase agreements fully collateralized by such
government securities.
Special Restrictions as to Davis Real Estate Fund
1. Real Estate Securities Fund may not purchase the securities of
issuers conducting their principal business activities in the same industry
if immediately after such purchase the value of the Fund's investments in
such industry would constitute 25% or more of the value of the Fund's total
assets, provided that (a) as to utility companies, the gas, electric, water
and telephone businesses will be considered separate industries, and (b)
there is no limitation with respect to or arising out of investments in U.S.
Government Securities and repurchase agreements fully collateralized by such
government securities or investments in securities of companies in the real
estate industry or which own significant amounts of real estate or have
products or services relating to the real estate industry.
HIGH YIELD, HIGH RISK DEBT SECURITIES
As discussed in the prospectus, Davis Convertible Securities Fund and
Davis Real Estate Fund may invest in certain high yield, high risk
securities, commonly referred to as "junk bonds." These lower rated
securities are considered speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation
and generally will involve more credit risk than securities in the higher
rating categories. Accordingly, an investment in the Funds may not
constitute a complete investment program and may not be appropriate for all
investors, or for short term investing.
The market values of such securities tend to reflect individual
corporate developments to a greater extent than do higher rated securities,
which react primarily to fluctuations in the general level of interest rates.
Such lower rated securities also tend to be more sensitive to economic and
industry conditions than are higher rated securities. Adverse publicity and
investor perceptions, whether or not based on fundamental analysis regarding
individual lower rated bonds and the high yield, high risk market may depress
the prices for such securities. If the negative factors such as the
aforementioned adversely impact the market value of high yield, high risk
securities, net asset value will be adversely affected.
The high yield, high risk bond market comprised a small piece of the
general bond market until the middle 1980's when issuance increased
dramatically. Since that time the high yield, high risk bond market has
experienced only one recessionary environment but never has been exposed to a
significant increase in interest rates. During the economic downturn that
was experienced, prices of high yield, high risk bonds declined and defaults
rose. Future economic downturns and/or significant increases in interest
rates are likely to have a negative effect on the high yield, high risk bond
market and consequently on the value of these bonds, as well as increase the
incidence of defaults on such bonds.
High yield, high risk bonds may be issued in a variety of
circumstances. Some of the more common circumstances are issuance by
corporations in the growth stage of their
<PAGE> 107
development, in connection with a corporate reorganization or as part of a
corporate takeover. Companies that issue such high yielding, high risk bonds
often are highly leveraged and may not have available to them more traditional
methods of financing. Therefore, the risk associated with acquiring the bonds
of such issuers generally is greater than is the case with higher rated bonds.
For example, during an economic downturn or recession, highly leveraged issuers
of high yield, high risk bonds may experience financial stress. During such
periods, such issuers may not have sufficient revenues to meet their principal
and interest payment obligations. The issuer's ability to service its debt
obligations may also be adversely affected by specific corporate developments,
or the issuer's inability to meet specific projected business forecasts, or the
unavailability of additional financing. The risk of loss due to default by
the issuer is significantly greater for the holders of high yielding bonds
because such bonds are generally unsecured and are often subordinated to
other creditors of the issuer. The costs associated with recovering
principal and interest once a security has defaulted may impact the return to
holders of the security. If a Fund experiences unexpectedly large net
redemptions, it may be forced to sell high yield, high risk bonds out of the
portfolio without regard to the investment merits of such sales. This could
decrease the Fund's net assets. Since some of a Fund's expenses are fixed,
this could also reduce the Fund's rate of return.
The Funds may have difficulty disposing of certain high yield, high
risk bonds because there may be a thin trading market for such bonds.
Because not all dealers maintain markets in all high yield, high risk bonds,
the Company anticipates that such bonds could be sold only to a limited
number of dealers or institutional investors. The lack of a liquid secondary
market may have an adverse impact on market price and the ability to dispose
of particular issues and may also make it more difficult to obtain accurate
market quotations or valuations for purposes of valuing a Fund's assets.
Market quotations generally are available on many high yield issues only from
a limited number of dealers and may not necessarily represent firm bid prices
of such dealers or prices for actual sales. In addition, adverse publicity
and investor perceptions may decrease the values and liquidity of high yield,
high risk bonds regardless of a fundamental analysis of the investment merits
of such bonds. To the extent that a Fund purchases illiquid or restricted
bonds, it may incur special securities registration responsibilities,
liabilities and costs, and liquidity and valuation difficulties relating to
such bonds.
Bonds may be subject to redemption or call provisions. If an issuer
exercises these provisions when investment rates are declining, the Company
will be likely to replace such bonds with lower yielding bonds resulting in a
decreased return. Zero coupon, pay-in-kind and deferred interest bonds
involve additional special considerations. Zero coupon bonds are debt
obligations that do not entitle the holder to any periodic payments of
interest prior to maturity or a specified cash payment date when the
securities begin paying current interest (the "cash payment date") and
therefore are issued and traded at a discount from their face amount or par
value. The market prices of zero coupon securities are generally more
volatile than the market prices of securities that pay interest periodically
and are likely to respond to changes in interest rates to a greater degree
than do securities paying interest currently having similar maturities and
credit quality. Pay-in-kind bonds pay interest in the form of other
securities rather than cash. Deferred interest bonds defer the payment of
interest to a later date. Zero coupon, pay-in-kind or deferred interest
bonds carry additional risk in that, unlike bonds which pay interest in cash
throughout the period to maturity, a Fund will realize no cash until the cash
payment date unless a portion of such securities are sold. There is no
assurance of the value or the liquidity of securities received from
pay-in-kind bonds. If the issuer defaults, a Fund may obtain no return at
all on its investment. To the extent that a Fund invests in bonds that are
original issue discount, zero coupon, pay-in-kind or deferred interest bonds,
the Fund may have taxable interest income in excess of the cash actually
received on these issues. In order to distribute such income to avoid
<PAGE> 108
taxation to a Fund, the Fund may have to sell portfolio securities to meet
its taxable distribution requirements under circumstances that could be
adverse.
Federal tax legislation limits the tax advantages of issuing certain
high yield, high risk bonds. This could have a materially adverse effect on
the market for high yield, high risk bonds.
ADDITIONAL INFORMATION CONCERNING DAVIS GOVERNMENT BOND FUND
Davis Government Bond Fund will invest in debt securities which are
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. For temporary periods, to accommodate inflows of cash
awaiting more permanent investment, it may also invest in short-term
investments eligible for purchase by Davis Government Money Market Fund.
U.S. Government securities include (1) U.S. Treasury obligations, which
differ only in their interest rates, maturities and times of issuance, U.S.
Treasury bills (maturities of one year or less), U.S. Treasury notes
(maturities of one to ten years) and U.S. Treasury bonds (generally
maturities of greater than ten years); and (2) obligations issued or
guaranteed by U.S. Government agencies and instrumentalities which are
supported by any of the following: (a) the full faith and credit of the U.S.
Government (such as GNMA Certificates), (b) the right of the issuer to borrow
an amount limited to a specific line of credit from the U.S. Government (such
as Federal Farm Credit Bank - FFCB), (c) discretionary borrowing authority of
the U.S. Government agency or instrumentality (such as Student Loan Marketing
Association - SLMA), or (d) the credit of the instrumentality (such as
Financing Corporation - FICO).
The Fund may engage in portfolio trading primarily to take advantage
of yield disparities. Examples of some circumstances in which it may employ
trading are: (1) shortening the average maturity of the portfolio; (2)
lengthening the average maturity of the portfolio; and (3) changing from one
bond to an essentially similar bond when their respective prices are
distorted due to market factors. However, due to the fact that it is
primarily invested in U.S. Government Securities, trading is not an emphasis
of the Fund and portfolio turnover is expected to continue to be low.
HEDGING OF FOREIGN CURRENCY RISKS
Davis Growth Opportunity Fund, Davis Financial Fund, Davis
Convertible Securities Fund and Davis Real Estate Fund may purchase or sell
forward foreign currency exchange contracts ("forward contracts") to attempt
to minimize the risk to the Funds from adverse changes in the relationship
between the U.S. dollar and foreign currencies. 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 futures
position in a negotiated currently non-regulated market. The Funds 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, for example, when the Adviser or Sub-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 its portfolio
securities denominated in such foreign currency, or when the Adviser or
Sub-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
<PAGE> 109
a forward contract in respect to a different foreign currency for a fixed U.S.
dollar amount ("cross hedge"). This may be done, for example, where the Adviser
or Sub-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 Funds
are denominated.
Davis Growth Opportunity Fund, Davis Financial Fund, Davis
Convertible Securities Fund and Davis Real Estate Fund 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 the Fund's
position, the Funds 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.
Davis Growth Opportunity Fund, Davis Financial Fund, Davis
Convertible Securities Fund and Davis Real Estate Fund 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 will not enter into
any futures contracts or options on currency futures contracts if immediately
thereafter the aggregate of initial margin deposits on all the outstanding
currency futures contracts and premiums paid on outstanding options on
currency futures contracts would exceed 5% of the market value of total
assets (excluding in such market value any in-the-money amount of any
option).
Davis Growth Opportunity Fund, Davis Financial Fund, Davis
Convertible Securities Fund and Davis Real Estate Fund 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
currencies. The Funds will not use leverage. 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. The Funds will not enter into a currency hedging
position that exposes it 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 cash
and high grade liquid debt securities in a segregated account with its
custodian bank in the amount prescribed. The Fund's custodian will maintain
the value of such segregated account equal to the prescribed amount by adding
or removing additional cash or liquid securities to account for
<PAGE> 110
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 ability of Davis Growth Opportunity Fund, Davis Financial Fund,
Davis Convertible Securities Fund and Davis Real Estate Fund 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 to realize any profit and (ii) the Funds may not be able to sell
currencies covering an option written by it 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.
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.
REPURCHASE AGREEMENTS
All of the Funds may engage in repurchase agreement transactions. A
repurchase agreement involves a sale of securities to a Fund, with the
concurrent agreement of the seller (a member bank of the Federal Reserve
System or securities dealer which the Adviser or Sub-Adviser believes to be
financially sound) 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, which are securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. 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. 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 will not enter into a repurchase
agreement maturing in more than seven days if it would cause more than 10% of
the value of their total assets to be invested in such transactions.
Repurchase agreements are not deemed illiquid securities for the purpose of
the 10% limitation on illiquid securities.
WRITING COVERED CALL OPTIONS
The Funds other than the Davis Government Money Market Fund may each
write covered call options on a portion of their portfolio securities and
purchase call options in closing transactions. The investment restrictions
provide that such an option may not be written if thereafter the market value
of a Fund's portfolio securities subject to options
<PAGE> 111
would exceed 10% of the value of such Fund's net assets. The Funds would only
write options on securities in their portfolios and would not write options on
loaned securities. The Funds will limit income derived from the writing of
options that expire in less than three months so as to continue to meet the
requirements for qualification as a regulated investment company under the
Internal Revenue Code. As a matter of non-fundamental policy, none of the
Funds intend to write calls if the market value of portfolio securities
subject to such calls would exceed 5% of the value of a Fund's total assets.
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 obligation is terminated upon exercise of the call option, its
expiration or when a 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, the Fund would lose the
opportunity for realizing any gain over and above the premium through sale of
the underlying security and if the security is declining in price the Fund
would continue to experience such decline.
FEDERAL TAX ASPECTS OF CERTAIN MORTGAGE REITs FOR DAVIS REAL ESTATE FUND
Davis Real Estate Fund may invest in real estate investment trusts
("REITs") that hold residual interests in real estate mortgage investment
conduits ("REMICs"). Under Treasury regulations that have not yet been
issued, but may apply retroactively, a portion of the Fund's income from a
REIT that is attributable to the REIT's residual interest in a REMIC
(referred to in the Code as an "excess inclusion") will be subject to Federal
income tax. These regulations are also expected to provide that excess
inclusion income of a regulated investment company, such as the Fund, will be
allocated to shareholders of the regulated investment company in proportion
to the dividends received by such shareholders, with the same consequences as
if the shareholders held the related REMIC residual interest directly. In
general, excess inclusion income allocated to shareholders (i) cannot be
offset by net operating losses (subject to a limited exception for certain
thrift institutions), (ii) will constitute unrelated business taxable income
to entities (including a qualified pension plan, an individual retirement
account, a 401(k) plan, a Keogh plan or other tax-exempt entity) subject to
tax on unrelated business income, thereby potentially requiring such an
entity that is allocated excess inclusion income, and otherwise might not be
required to file a tax return, to file a tax return and pay tax on such
income, and (iii) in the case of a foreign shareholder, will not qualify for
any reduction in U.S. federal withholding tax. In addition, if at any time
during any taxable year a "disqualified organization" (as defined in the
Code) is a record holder of a share in a regulated investment company, then
the regulated investment company will be subject to a tax equal to that
portion of its excess inclusion income for the taxable year that is allocable
to the
<PAGE> 112
disqualified organization, multiplied by the highest federal income
tax rate imposed on corporations.
PORTFOLIO TRANSACTIONS
Davis Selected Advisers, L.P (the "Adviser"), Davis Selected
Advisers-New York ("DSA-NY") and Tanaka Capital Management, Inc. ("Tanaka"),
the Sub-Adviser for Davis Growth Opportunity Fund, make investment decisions
and arrange for the placement of buy and sell orders and the execution of
portfolio transactions for the Company subject to review by the Board of
Directors. In this regard, the Adviser, DSA-NY and Tanaka will seek to
obtain the most favorable price and execution for the transaction given the
size and risk involved. In placing executions and paying brokerage
commissions, the Adviser, DSA-NY and Tanaka consider the financial
responsibility and reputation of the broker or dealer, the range and quality
of the services made available to the Company and the broker's or dealer's
professional services, 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, DSA-NY's and Tanaka'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, DSA-NY and Tanaka by or through
brokers who effect portfolio transactions may be used in servicing other
accounts managed by the Adviser, DSA-NY and Tanaka and likewise research
services provided by brokers used for transactions of other accounts may be
utilized by the Adviser, DSA-NY and Tanaka 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 brokerage.
On occasions when the Adviser, DSA-NY or Tanaka deem the purchase or
sale of a security to be in the best interests of a Fund as well as other
fiduciary accounts, the Adviser, DSA-NY or Tanaka may aggregate the
securities to be sold or purchased for the 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, DSA-NY or Tanaka in the manner considered to be most equitable and
consistent with its fiduciary obligations to all such fiduciary accounts,
including the Fund. In some instances, this procedure could adversely affect
a Fund but the Company deems 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, DSA-NY and Tanaka believe that research from brokers and
dealers is desirable, although not essential, in carrying out its functions,
in that such outside research supplements the efforts of the Adviser, DSA-NY
and Tanaka by corroborating data and enabling them 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, obtaining quotations
on securities prices and obtaining information on the activities of other
institutional investors. The Adviser, DSA-NY and Tanaka research, at their
own expense, each security included in, or being considered for inclusion in,
a Fund's portfolio. As any particular research obtained by the Adviser,
DSA-NY or Tanaka may be useful to a Fund, the Board of Directors or its
Committee on brokerage, in considering the reasonableness of the commissions
paid by a Fund, will not attempt to allocate, or require the Adviser, DSA-NY
or Tanaka to allocate, the relative costs or benefits of research.
<PAGE> 113
The Adviser is authorized to place portfolio transactions with Shelby
Cullom Davis & Co., ("SCD"), 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 total brokerage
commissions paid to SCD during the year ended December 31, 1996 were $1,200
and $372 for Davis Financial Fund and Davis Convertible Securities Fund,
respectively.
With respect to Davis Growth Opportunity Fund, for the years ended
December 31, 1996, 1995 and 1994 brokerage commissions amounted to $14,490,
$40,769, and $64,495, respectively.
With respect to Davis Financial Fund, for the year ended December 31,
1996, brokerage commissions amounted to $58,435 of which $46,501 was paid to
brokers who provided research as well as execution and $11,934 was paid to
brokers who sold shares of the Fund as well as provided research and
execution. With respect to the year ended December 31, 1995, brokerage
commissions amounted to $76,406, of which $73,706 was paid to brokers who
provided research as well as execution and $2,700 was paid to brokers who
sold shares of the Fund as well as provided research and execution. During
the year ended December 31, 1994, brokerage commissions amounted to $109,654
of which $100,264 was paid to brokers who provided research as well as
execution and $9,390 was paid to brokers who sold shares of the Fund as well
as provided research and execution.
With respect to Davis Convertible Securities Fund, for the year ended
December 31, 1996, brokerage commissions amounted to $58,057, of which
$49,571, was paid to brokers who provided research as well as execution and
$8,486 was paid to brokers who sold shares of the Fund as well as provided
research and execution. During the year ended December 31, 1995, brokerage
commissions amounted to $71,218, of which $66,436, was paid to brokers who
provided research as well as execution and $4,782 was paid to brokers who
sold shares of the Fund, as well as provided research and execution. During
the year ended December 31, 1994, brokerage commissions amounted to $43,886,
of which $36,251, was paid to brokers who provided research as well as
execution and $7,635 was paid to brokers who sold shares of the Fund, as well
as provided research and execution.
With respect to Davis Real Estate Fund, for the one year ended
December 31, 1996, brokerage commissions amounted to $49,848, of which
$41,208, was paid to brokers who provided research as well as execution and
$8,640 was paid to brokers who sold shares of the Fund as well as provided
research and execution. During the year ended December 31, 1995, brokerage
commissions amounted to $54,514, of which $51,394, was paid to brokers who
provided research as well as execution and $3,120 was paid to brokers who
sold shares of the Fund as well as provided research and execution. During
the year ended December 31, 1994, brokerage commissions amounted to $40,471,
of which $15,100 was paid to brokers who provided research as well as
execution and $25,371 was paid to brokers who sold shares of the Fund as well
as provided research and execution.
Davis Government Bond Fund and Davis Government Money Market Fund
have not paid brokerage commissions during any of these fiscal years.
Generally, securities for these Funds are purchased from and sold to
securities dealers on a principal basis without commissions. Such
transactions may involve profit to the dealer involved.
<PAGE> 114
DIRECTORS AND OFFICERS
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. The asterisk following the names of
Shelby M.C. Davis and Jeremy H. Biggs indicates that they are considered to
be "interested persons" of the Company, as defined in the Investment Company
Act. As indicated below, certain directors and officers of the Fund hold
similar positions with the following funds that are managed by the Adviser:
Davis New York Venture Fund, Inc., Davis High Income Fund, Inc., Davis
Tax-Free High Income Fund, Inc. and Davis International Series, Inc.
(collectively the "Davis Funds").
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,
L.P.; Member, Gordon, Feinblatt, Rothman, Hoffberger and Hollander, LLC
(attorneys); Director, Mid-Atlantic Realty Trust.
Eugene M. Feinblatt (10/28/19), 233 East Redwood Street, Baltimore, MD 21202.
Director of the Company and each of the Davis Funds except Davis
International Series, Inc.; of Counsel, Gordon, Feinblatt, Rothman,
Hoffberger and Hollander, LLC (attorneys).
Jerry D. Geist (5/23/34), 931 San Pedro Dr. 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.; 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 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 except Davis
International Series, Inc.; 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 and President, CPC, Inc. (a real estate
company); Director and Vice President, Merchant Terminal Corporation;
formerly, Director of Equitable Bancorporation, Equitable Bank and Maryland
<PAGE> 115
National Bank, and formerly, Director and President, O-W Fund, Inc. (a
private investment fund).
Laurence W. Levine (4/9/31), c/o Bigham Englar Jones & Houston, 14 Wall
Street, 21st, Floor, New York, NY 10005-2140. 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).
Edwin R. Werner (4/1/22), 207 Gosling Hill Drive, Manhasset, NY 11030.
Director of the Company and each of the Davis Funds except Davis
International Series, Inc.; President, The Estates of North Hills New York;
formerly, Chairman and CEO, Empire Blue Cross and Blue Shield of New York.
Shelby M.C. Davis (3/20/37),* 4135 North Steers Head Road, Jackson Hole, WY
83001. President of the Fund and each of the Davis Funds; President of
Selected American Shares, Inc., Selected Special shares, Inc. and Selected
Capital Preservation Trust; Director, Chairman and Chief Executive Officer,
Venture Advisers, Inc., effective August 15, 1995; Employee of Capital Ideas,
Inc. (financial consulting firm); Consultant to Fiduciary Trust Company
International; Director, Shelby Cullom Davis Financial Consultants, Inc.
Andrew A. Davis (6/25/63), 124 East Marcy Street, Santa Fe, NM 87501. Vice
President of the Company and each of the Davis Funds; Director and President,
Venture Advisers, Inc. effective August 15, 1995; formerly, Vice President
and head of convertible security research, PaineWebber, Incorporated.
Christopher C. Davis (7/13/65), 70 Pine Street, 43rd Floor, New York, NY
10270-0108. Vice President of the Company and each of the Davis Funds except
Davis International Series, Inc.; Director, Venture Advisers, Inc.
Kenneth C. Eich (8/14/53), 124 East Marcy Street, Santa Fe, NM 87501. Vice
President of the Fund and each of the Davis Funds, Selected American Shares,
Inc., Selected Special Shares, Inc. and Selected Capital Preservation Trust;
Chief Operating Officer, Davis Selected Advisers, L.P. 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; Vice President,
Venture Advisers, Inc.
Eileen R. Street (3/11/62), 124 East Marcy Street, Santa Fe, NM 87501.
Treasurer and Assistant Secretary of the Company and each of the Davis Funds,
Selected American Shares, Inc., Selected Special Shares, Inc. and Selected
Capital Preservation Trust; Senior Vice President and Chief Financial
Officer, Venture Advisers, Inc.
Samuel P. Ynzunza (8/13/62), 124 East Marcy Street, Santa Fe, NM 87501.
Vice President and Secretary of the Company and each of the Davis Funds,
Selected American Shares, Inc., Selected Special Shares, Inc., and Selected
Capital Preservation Trust. Senior
<PAGE> 116
Vice President and General Counsel, Davis Selected Advisers, L.P. Former
Corporate Counsel for INVESCO Funds Group, Inc. and Franklin Resources, Inc.
Sheldon R. Stein (11/29/28), 30 North LaSalle Street, Suite 2900, Chicago, IL
60602, Assistant Secretary of the Company and each of the Davis Funds,
Selected American Shares, Inc., Selected Special Shares, Inc. and Selected
Capital Preservation Trust; Partner D'Ancona & Pflaum, the Company's legal
counsel.
Arthur Don (9/24/53), 30 North LaSalle Street, Suite 2900, Chicago, IL
60602, Assistant Secretary of the Company and each of the Davis Funds,
Selected American Shares, Inc., Selected Special Shares, Inc. and Selected
Capital Preservation Trust; Partner D'Ancona & Pflaum, the Company's legal
counsel.
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. See "Investment
Advisory Services."
DIRECTORS' COMPENSATION SCHEDULE
During the fiscal year ended December 31, 1996, the compensation paid
to the directors who are not considered to be interested persons of the
Company was as follows:
Davis Series, Inc.
<TABLE>
<CAPTION>
Aggregate Company Total
Name Compensation Complex Compensation<F*>
<S> <C> <C>
Wesley E. Bass 10,250 26,750
Marc P. Blum 10,100 26,050
Eugene M. Feinblatt 9,050 23,300
Jerry D. Geist 9,000 26,200
G. Bernard Hamilton 9,050 23,200
LeRoy E. Hoffberger 10,100 26,000
Laurence W. Levine 9,100 23,500
Christian R. Sonne 10,100 26,050
Edwin R. Werner 10,050 25,700
<FN>
<F*> Complex compensation is the aggregate compensation paid, for services as a
Director, by all mutual funds with the same investment adviser.
</TABLE>
<PAGE> 117
CERTAIN SHAREHOLDERS OF THE FUNDS
The following information sets forth as of August 4, 1997 the name and
holdings of each person known by the Company to be a record owner of 5% or
more of the Class A and Class B shares of Davis Growth Opportunity Fund,
Davis Government Bond Fund, Davis Government Money Market Fund, Davis
Financial Fund, Davis Convertible Securities Fund and Davis Real Estate Fund
and Class C shares of Davis Government Money Market Fund and the shares of
the Funds beneficially owned by the directors and officers of the Company as
a group. As of such date there were 1,526,992.285, 2,844,895.945,
429,104,266.053, 8,352,507.470, 2,443,380.295 and 3,973,723.542 Class A
shares, respectively, of Davis Growth Opportunity Fund, Davis Government Bond
Fund, Davis Government Money Market Fund, Davis Financial Fund, Davis
Convertible Securities Fund and Davis Real Estate Fund, outstanding. As of
such date, there were 2,039,888.804, 1,977,589.129, 7,343,989.377,
3,647,511.729, 413,876.702 and 2,561,155.460 Class B shares, respectively of
Davis Growth Opportunity Fund, Davis Government Bond Fund, Davis Government
Money Market Fund, Davis Financial Fund, Davis Convertible Securities Fund
and Davis Real Estate Fund, outstanding and 1,820,454.420 Class C shares of
Davis Government Money Market Fund outstanding. As of such date, there were
40,966.467, 1,344,148.398 and 895,700.950 Class Y shares, respectively of
Davis Financial Fund, Davis Convertible Securities Fund and Davis Real Estate
Fund, outstanding. On that date, the directors and officers of the Company,
as a group owned 56,037.239 shares or 3.670% of Davis Growth Opportunity
Fund's outstanding Class A shares, 19,312.234 shares or 0.679% of Davis
Government Bond Fund's outstanding Class A shares, 21,824,801.700 shares or
5.086% of Davis Government Money Market Fund's outstanding Class A shares,
owned 636,051.830 shares or 7.615% of Davis Financial Fund's outstanding
Class A shares, 166,658.077 shares or 6.821% of Davis Convertible Securities
Fund's Class A shares, and 245,874.140 shares or 6.187% of Davis Real Estate
Fund's Class A shares. The directors and officers of the Funds do not
presently own any Class B, Class C or Class Y shares of these funds.
<TABLE>
<CAPTION>
Class A Shares
Number of Percent of Class
Name and Address Shares Owned Outstanding
<S> <C> <C>
Davis Government Money Market Fund
The Bank of New York TRS FOR 300,000,000 69.91%
Shelby Cullom Davis
FBO the Bank of New York as Pledgee
One Wall Street
New York, NY 10286-0001
Shelby Cullom Davis & Co. 32,814,620 7.65%
Investment #3
609 5th Avenue, 11th Floor
New York, NY 10017-1021
Capital Ideas, Inc. 22,230,076 5.18%
c/o Post and Parcel
Box 25185
Jackson, WY 83001
<PAGE> 118
Davis Financial Fund
Shelby Cullom Davis & Co. 2,870,734 34.37%
Investment #3
70 Pine Street
New York, NY 10270-0002
Merrill Lynch Pierce Fenner & Smith 552,960 6.62%
Mutual Fund Operations
4800 Deerlake Drive East, 3rd Floor
Jacksonville, FL 32246-6484
Davis Convertible Securities Fund
Shelby Cullom Davis & Co. 1,129,033 46.21%
Investment #3
609 5th Avenue, 11th Floor
New York, NY 10017-1021
Davis Real Estate Fund
Shelby Cullom Davis & Co. 220,297 5.54%
Investment #3
609 5th Avenue, 11th Floor
New York, NY 10017-1021
Merrill Lynch Pierce Fenner & Smith 255,755 6.44%
Mutual Fund Operations
4800 Deerlake Dr. East, 3rd Floor
Jacksonvill, FL 32264-6484
Charles Schwab and Co., Inc. 274,083 6.90%
101 Montgomery St.
San Francisco, CA 94104-4122
Class B Shares
Davis Government Money Market Fund
Leo W. Stout, Florence A. Stout 399,912 5.45%
and Patricia A. Stout-Smith Trustees
Leo W. Stout Trust dated 3-17-94
6 Beacon Avenue
Albany, NY 12203-2704
Davis Financial Fund
Merrill Lynch Pierce Fenner & Smith 1,756,705 48.16%
Mutual Fund Operations
4800 Deerlake Drive East, 3rd Floor
Jacksonville, FL 32246-6484
<PAGE> 119
Davis Government Bond Fund
Merrill Lynch Pierce Fenner & Smith 123,434 6.24%
Mutual Fund Operations
4800 Deerlake Drive East, 3rd Floor
Jacksonville, FL 32246-6484
Davis Convertible Securities Fund
Merrill Lynch Pierce Fenner & Smith 122,360 29.56%
Mutual Fund Operations
4800 Deerlake Drive East, 3rd Floor
Jacksonville, FL 32246-6484
Davis Real Estate Fund
Merrill Lynch Pierce Fenner & Smith 624,315 24.38%
Mutual Fund Operations
4800 Deerlake Drive East, 3rd Floor
Jacksonville, FL 32246-6484
Class C Shares
Davis Government Money Market Fund
Gregory R. McQueen 97,322 5.35%
P.O. Box 251
Los Alamos, NM 87544-0251
Bruce Anderson 256,018 14.08%
612 West Indiana Avenue
Englewood, FL 34223-2728
Class Y Shares
Davis Financial Fund
Merrill Lynch Pierce Fenner & Smith 40,293 98.36%
Mutual Fund Operations
4800 Deerlake Drive East, 3rd Floor
Jacksonville, FL 32246-6484
Davis Convertible Securities Fund
Currie and Co. 1,308,561 97.35%
c/o Fiduciary Trust Co. Int'l
P.O. Box 3199
Church Street Station
New York, NY 10008-3199
Davis Real Estate Fund
Currie and Co. 865,916 96.67%
c/o Fiduciary Trust Co. Int'l
P.O. Box 3199
Church Street Station
New York, NY 10008-3199
</TABLE>
<PAGE> 120
INVESTMENT ADVISORY SERVICES
Davis Selected Advisers, L.P. serves as investment adviser for each
of the Funds pursuant to an Advisory Agreement adopted in accordance with the
requirements of the Investment Company Act. Pursuant to the Advisory
Agreement, the Adviser, subject to the general supervision of the Company's
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 are requested by the Board of Directors. The
Funds bear all expenses other than those specifically assumed by the Adviser
under the Advisory Agreement, including preparation of tax returns, financial
reports to regulatory authorities, dividend determinations and transaction
and accounting matters related to its custodian bank, transfer agency,
custodial and shareholder services, and qualification of its shares under
federal and state laws. Expenses not specifically allocable to a particular
Fund are allocated among the Company's Funds in proportion to their
respective net assets.
Tanaka Capital Management, Inc. serves as the Sub-Adviser of Davis
Growth Opportunity Fund under the Sub-Advisory Agreement. The Company pays
no fees directly to the Sub-Adviser. The Sub-Adviser receives from the
Adviser a reallowed portion of its advisory fee equal to 0.30% of the first
$100 million of the Davis Growth Opportunity Fund's annual average net asset
and 0.25% of such Fund assets over $100 million with a minimum annual fee of
$100,000. However, the Sub-Adviser's fees on Fund assets over $100 million
may not exceed one-third of the fees paid to the Adviser from the Davis
Growth Opportunity Fund.
The Manager has entered into a Sub-Advisory Agreement with its
wholly-owned subsidiary, Davis Selected Advisers-NY, Inc. ("DSA-NY"). DSA-NY
performs research and other services for the funds on behalf of the Manager.
Under the Sub-Advisory Agreement with DSA-NY, the Manager pays all of
DSA-NY's direct and indirect costs of operations. All the fees paid to
DSA-NY are paid by the Manager and not the funds.
Effective May 1, 1996, the Davis Government Bond Fund pays the
Adviser a fee at the annual rate of 0.50% of total net assets. Prior to May
1, 1996 it paid 0.75% on the first $250 million of average net assets; 0.65%
on the next $250
<PAGE> 121
million of average net assets; and 0.55% on average net assets in excess of $500
million. For the Adviser's services, the Funds each pay the Adviser a monthly
fee at an annual rate based on average net assets, as follows: 0.75% on the
first $250 million of average net assets; 0.65% on the next $250 million of
average net assets; and 0.55% on average net assets in excess of $500 million.
Davis Government Money Market Fund pays the Adviser 0.50% on the first $250
million of average net assets; 0.45% on the next $250 million of average net
assets; and 0.40% on average net assets in excess of $500 million. The aggregate
advisory fees paid by Davis Growth Opportunity Fund to the Adviser for the years
ended December 31, 1996, 1995 and 1994 were $465,709, $413,012, and $448,502,
respectively. The aggregate advisory fees paid by Davis Government Bond Fund to
the Adviser for the years ended December 31, 1996, 1995 and 1994 were $200,005,
$283,797, and $321,705, respectively. The aggregate advisory fees paid by Davis
Government Money Market Fund to the Adviser for the years ended December 31,
1996, 1995 and 1994 were $1,825,917, $1,480,642, and $858,821 respectively. The
aggregate advisory fees paid by Davis Financial Fund to the Adviser for the
years ended December 31, 1996, 1995 and 1994 were $700,862, $516,765, and
$405,600, respectively. The aggregate advisory fees paid by Davis Convertible
Securities Fund to the Adviser the years ended December 31, 1996, 1995 and
1994 were $494,195, $399,922, and $349,226, respectively. The aggregate
amount of advisory fees paid by Davis Real Estate Fund to the Adviser for the
years ended December 31, 1996, 1995 and 1994 were $286,302, $197,296 and
$121,236, respectively.
For Davis Growth Opportunity Fund, the reimbursable costs for certain
accounting and administrative services for the years ended December 31, 1996,
1995 and 1994 were $15,996, $15,498, and $14,004, respectively. The
reimbursable costs for qualifying the Funds shares for sale with state
agencies for years ended December 31, 1996, 1995 and 1994 were $9,000,
$8,250, and $6,000, respectively. The reimbursable costs for providing
shareholder services for the years ended December 31, 1996, 1995 and 1994
were $6,058, $8,713, and $7,756, respectively.
For Davis Government Bond Fund, the reimbursable costs for certain
accounting and administrative services for years ended December 31, 1996,
1995 and 1994 were $17,004, $17,004, and $17,004, respectively. The
reimbursable costs for qualifying the Funds shares for sale with state
agencies for the years ended December 31, 1996, 1995 and 1994 were $9,000,
$8,250, and $6,000, respectively. The reimbursable costs for providing
shareholder services for the years ended December 31, 1996, 1995 and 1994
were $4,291, $7,567, and $6,769, respectively.
For Davis Government Money Market Fund, the reimbursable costs for
certain accounting and administrative services for the years ended December
31, 1996, 1995 and 1994 were $12,000, $11,499, and $9,996, respectively. The
reimbursable costs for qualifying the Funds shares for sale with state
agencies for the years ended December 31, 1996, 1995 and 1994 were $9,000,
$8,250, and $6,000, respectively. The reimbursable costs for providing
shareholder services for the years ended December 31, 1996, 1995 and 1994
were $12,905, $11,580, and $10,252, respectively.
For Davis Financial Fund, the reimbursable costs for certain
accounting and administrative services for the years ended December 31, 1996,
1995 and 1994 were $15,996, $13,998, and $8,004, respectively. The
reimbursable costs for qualifying such Funds shares for sales with state
agencies for the years ended December 31, 1996, 1995 and 1994 were $9,000,
$8,250, and $6,000, respectively. The reimbursable costs for providing
shareholder services for the years ended December 31, 1996, 1995 and 1994
were $4,328, $3,276, and $3,488, respectively.
For Davis Convertible Securities Fund, the reimbursable costs for
certain accounting and administrative services for the years ended December
31, 1996, 1995 and 1994 were $15,996, $13,998, and $8,004, respectively. The
reimbursable costs for qualifying such Fund's shares for sale with state
agencies for the years ended December
<PAGE> 122
31, 1996, 1995 and 1994 were $9,000, $8,250, and $6,000, respectively. The
reimbursable costs for providing shareholder services for the years ended
December 31, 1996, 1995 and 1994 were $1,421, $1,284 and $1,288, respectively.
For Davis Real Estate Fund, the reimbursable costs for certain
accounting and administrative services for the years ended December 31, 1996,
1995 and 1994 were $12,000, $11,001 and $8,004, respectively. The
reimbursable costs for qualifying such Fund's shares for sale with state
agencies for the years ended December 31, 1996, 1995 and 1994 were $9,000,
$8,250 and $6,000, respectively and the reimbursable costs for providing
shareholder services for such period were $2,702, $1,992 and $2,668,
respectively.
The Advisory Agreement also make provisions for portfolio
transactions and brokerage policies of the Funds which are discussed above
under "Portfolio Transactions."
In accordance with the provisions of the Investment Company Act, the
Advisory Agreement will terminate automatically upon assignment and is
subject to cancellation upon 60 days written notice by the Company's Board of
Directors or by vote of the Funds' shareholders or by the Adviser. The
continuance of the Agreement with respect to any Fund must be approved at
least annually by the Company's Board of Directors or by the vote of holders
of a majority of the outstanding shares of that Fund. 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 agreement or interested
persons of any such party.
The Adviser and the Sub-Adviser for the Davis Growth Opportunity Fund
have each adopted a Code of Ethics which regulate the personal securities
transactions of the Adviser's and the Sub-Adviser's investment personnel and
other employees and affiliates with access to information regarding
securities transactions of the Funds. Both Codes of Ethics require investment
personnel to disclose personal securities holdings upon commencement of
employment and all subsequent trading activity to the firm'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. Additionally, such
personnel are prohibited from purchasing securities in an initial public
offering and are prohibited from trading in any securities (i) for which a
Fund has a pending buy or sell order, (ii) which a Fund is considering buying
or selling, or (iii) which a Fund purchased or sold within seven calendar
days. DSA-NY has adopted a code of ethics that is identical to the Adviser's
Code of Ethics.
CUSTODIAN
The Custodian of the Company's assets is State Street Bank and Trust
Company, Two Heritage Drive, North Quincy, Massachusetts 02171. The
Custodian maintains all of the instruments representing the investments of
the Company and all cash. The Custodian delivers securities against payment
upon sale and pays for securities against delivery upon purchase. The
Custodian also remits Company assets in payment of Company expenses, pursuant
to instructions of officers or resolutions of the Board of Directors.
AUDITORS
The Company's auditors are Tait, Weller & Baker, Two Penn Center,
Suite 700, Philadelphia, Pennsylvania 19102-1707. The audit includes
examination of annual financial statements furnished to shareholders and
filed with the Securities and Exchange Commission, consultation on financial
accounting and reporting matters, and meeting with
<PAGE> 123
the Audit Committee of the Board of Directors. In addition, the auditors review
federal and state income tax returns and related forms.
DETERMINING THE PRICE OF SHARES
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, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
REDUCTION OF CLASS A SALES CHARGE
There are a number of ways to reduce the sales charge imposed on the
purchase of the Fund's Class A shares, as described below. These reductions
are based upon the fact that there is less sales effort and expense involved
in respect to purchases by affiliated persons and purchases made in large
quantities.
Family or Group Purchases. Certain purchases made by or for more
than one person may be considered to constitute a single purchase, including
(i) purchases for family members, including spouses and children under 21,
(ii) purchases by trust or other fiduciary accounts and purchases by
Individual Retirement Accounts for employees of a single employer and (iii)
purchases made by an organized group of persons, whether incorporated or not,
if the group has a purpose other than buying shares of mutual funds. For
further information on group purchase reductions, contact the Adviser or your
dealer.
Statements of Intention. Another way to reduce the sales charge is
by signing a Statement of Intention. A Statement is included in the
Application Form included in the Prospectus. Please read it carefully before
completing it.
If you enter into a Statement of Intention you (or any "single
purchaser") may state that you intend to invest at least $100,000 in a Fund's
Class A shares over a 13-month period. The amount you say you intend to
invest may include Class A shares which you already own, valued at the
offering price, at the end of the period covered by the Statement. A
Statement may be backdated up to 90 days to include purchases made during
that period, but the total period covered by the Statement may not exceed 13
months.
Shares having a value of 5% of the amount you state you intend to
invest will be held "in escrow" to make sure that any additional sales
charges are paid. If any Fund's Class A shares are in escrow pursuant to a
Statement and such shares are exchanged for shares of another Davis Fund, the
escrow will continue with respect to the acquired shares.
No additional sales charge will be payable if you invest the amount
you have indicated. Each purchase under a Statement will be made as if you
were buying at one time the total amount indicated. For example, if you
indicate that you intend to invest $100,000, you will pay a sales charge of
3-1/2% on each purchase.
If you buy additional amounts during the period to qualify for an
even lower sales charge, you will be charged such lower charge. For example,
if you indicate that intend to invest $100,000 and actually invest $250,000,
you will, by retroactive adjustment, pay a sales charge of 2-1/2%.
If during the 13-month period you invest less than the amount you
have indicated, you will pay an additional sales charge. For example, if you
state that you intend to invest
<PAGE> 124
$250,000 and actually invest only $100,000, you will, by retroactive adjustment,
pay a sales charge of 3-1/2%. The sales charge you actually pay will be the same
as if you had purchased the shares in a single purchase.
A Statement does not bind you to buy, nor does it bind the Adviser to
sell, the shares covered by the Statement.
Rights of Accumulation. Another way to reduce the sales charge is
under a right of accumulation. This means that the larger purchase entitled
to a lower sales charge need not be in dollars invested at one time. The
larger purchases that you (or any "single purchaser") make at any one time
can be determined by adding to the amount of a current purchase the value of
a Fund's shares (at offering price) already owned by you.
For example, if you owned $100,000 worth (at offering price) of Davis
Growth Opportunity Fund's Class A shares and invest $5,000 in new shares, the
sales charge on that $5,000 investment would be 3-1/2%, not 4-3/4%.
If you claim this right of accumulation, you or your dealer must so
notify the Adviser (or State Street, if the investment is mailed to State
Street) when the purchase is made. Enough information must be given to
verify that you are entitled to such right.
Combined Purchases with other Davis Funds. Your ownership or
purchase of Class A shares of other Funds advised and distributed by the
Adviser, including Davis New York Venture Fund, Inc., Davis High Income Fund,
Inc., Davis Tax-Free High Income Fund, Inc. and Davis International Series,
Inc. may also reduce your sales charges in connection with the purchase of a
Fund's Class A shares. This applies to all three situations for reduction of
sales charges discussed above.
If a "single purchaser" decides to buy Class A shares of Davis Growth
Opportunity Fund or Davis Government Bond Fund as well as Class A shares of
any of the other Davis Funds (other than shares of the Company's Davis
Government Money Market Fund) at the same time, these purchases will be
considered a single purchase for the purpose of calculating the sales charge.
For example, a single purchaser can invest at the same time $100,000 in Davis
Growth Opportunity Fund's Class A shares and $150,000 in the Class A shares
of Davis High Income Fund, Inc. and pay a sales charge of 2-1/2%, not 3-1/2%.
Similarly, a Statement of Intention for a Fund's Class A shares and
for the Class A shares of the other Davis Funds (other than the Company's
Davis Government Money Market Fund) may be aggregated. In this connection, a
Fund's Class A shares and the Class A shares of the other Davis Funds which
you already own, valued at the current offering price at the end of the
period covered by your Statement of Intention, may be included in the amount
you have stated you intend to invest pursuant to your Statement.
Lastly, the right of accumulation applies also to the Class A shares
of the other Davis Funds (other than the Company's Davis Government Money
Market Fund) which you own. Thus, the amount of current purchases of Class A
shares of a Fund which you make may be added to the value of the Class A
shares of the other Davis Funds (valued at their current offering price)
already owned by you in determining the applicable sales charge. For
example, if you owned $100,000 worth of shares of Davis High Income Fund,
Inc. and the Company's Davis Financial Fund and Davis Convertible Securities
Fund (valued at the applicable current offering price) and invest $5,000 in
Class A shares of Davis Growth Opportunity Fund, the sales charge on your
investment would be 3-1/2%, not 4-3/4%.
<PAGE> 125
In all the above instances where you wish to claim this right of
combining the Fund's shares you own of the other Davis Funds you or your
dealer must notify the Adviser (or State Street, if the investment is mailed
to State Street) of the pertinent facts. Enough information must be given to
permit verification as to whether you are entitled to a reduction in sales
charges.
Issuance of Shares at Net Asset Value. There are many situations
where the sales charge will not apply to the purchase of Class A shares, as
discussed in the Prospectus. In addition, the Company occasionally may be
provided with an opportunity to purchase substantially all the assets of a
public or private investment company or to merge another such company into
the Company. This offers the Company the opportunity to obtain significant
assets. No dealer concession is involved. It is industry practice to effect
such transactions at net asset value as it would adversely affect the
Company's ability to do such transactions if the Company had to impose a
sales charge.
EXEMPTIONS TO CLASS B SALES AND CONVERSION FEATURES
Class B shares of the Davis High Income Fund, Inc. are made available
to Retirement Plan Participants such as 401K or 403B Plans at NAV with the
waiver of contingent deferred sales charge (CDSC) if:
the Plan is recordkept on a daily valuation basis by Merrill Lynch and, on
the date the Plan sponsor signs the Merrill Lynch Recordkeeping Service
Agreement, the Plan has less than $3 million in assets invested in broker
/dealer funds not advised or managed by Merrill Lynch Asset Management, L.P.
("MLAM") that are made available pursuant to a Services Agreement between
Merrill Lynch and the fund's principal underwriter or distributor and in
funds advised or managed by MLAM (collectively, the "Applicable
Investments"); or the Plan is recordkept on a daily valuation basis by an
independent recordkept whose services are provided through a contract or
alliance arrangement with Merrill Lynch, and on the date the Plan Sponsor signs
the Merrill Lynch Recordkeeping Service Agreement, the Plan has less than $3
million in assets, excluding money market funds, invested in Applicable
Investments; or
the Plan has less than 500 eligible employees, as determined by the Merrill
Lynch plan conversion manager, on the date the Plan Sponsor signs the Merrill
Lynch Recordkeeping Service Agreement.
Plans recordkept on a daily basis by Merrill Lynch or an independent
recordkeeeper under a contract with Merrill Lynch that are currently
investing in Class B shares of the Davis mutual funds convert to Class A
shares once the Plan has reached $5 million invested in Applicable
Investments. The Plan will receive a Plan level share conversion. The Fund
may make similar exceptions for other financial institutions sponsoring or
administering similar benefit plans.
DISTRIBUTION OF FUND SHARES
Davis Distributors, LLC (the 'Distributor) acts as principal
underwriter of the shares of each of the Funds on a continuing basis Pursuant
to a Distributing Agreement. Prior to June 1, 1997, the Adviser served as
underwriter for the funds. Pursuant to such 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
prospectuses in excess of those which the Company must file with the
Securities and Exchange Commission or those forwarded to existing
shareholders. The continuation and assignment provisions of the Distributing
Agreement are the same as those of the Advisory Agreement.
<PAGE> 126
The following sales charges (which the Funds do not pay) were paid to
the Distributor or its predecessor with respect to Class A shares. With
respect to Davis Financial Fund, for the years ended December 31, 1996, 1995
and 1994, the Distributor received total sales charges of $167,334, $81,236,
and $89,932, respectively, of which $134,887, $68,404, and $72,247,
respectively, were reallowed to investment dealers. With respect to Davis
Convertible Securities Fund, for the years ended December 31, 1996, 1995, and
1994, the Distributor received total sales charges of $52,343, $41,669, and
$120,053, respectively, of which $41,837, $32,782, and $97,691, respectively,
were reallowed to investment dealers. With respect to Davis Real Estate
Fund, for the years ended December 31, 1996, 1995 and 1994, the Distributor
received total sales charges of $317,436, $16,112 and $234,956, respectively,
of which $262,083, $13,561 and $234,956 were reallowed to investment dealers.
For the year ended December 31, 1996, the Distributor received $47,530 and
$18,190, respectively, from commissions earned on sales of Class A shares of
Davis Growth Opportunity Fund and Davis Government Bond Funds of which
$57,376 and $14,870, respectively, were reallowed to investment dealers.
In addition, each of the Funds have Distribution Plans adopted
pursuant to Rule 12b-1 under the Investment Company Act as described in the
prospectus. See "Distribution Plans."
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 Fund's Independent Directors or a majority of the 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 Plans. The Distribution Plans may be amended provided that all
such amendments comply with the applicable requirements then in effect under
Rule 12b-1. Presently, Rule 12b-1 requires, among other procedures, that it
be continued only if a majority of the Independent Directors approve
continuation at least annually and that amendments materially increasing the
amount to be spent for distribution be approved by the Independent Directors
and the shareholders. As long as the Distribution Plans are in effect, the
Fund must commit the selection and nomination of candidates for new
Independent Directors to the sole discretion of the existing Independent
Directors.
The following commissions were paid to the Distributor or its
predecessor, with respect to Davis Growth Opportunity Fund and Davis
Government Bond Fund under the Class B Distribution Plans. With respect to
Davis Growth Opportunity Fund, for the years ended December 31, 1996 1995 and
1994, the Distributor received commissions of $190,981, $270,982, and
$575,959, respectively, of which $165,409, $134,428, and $532,815,
respectively, was paid to dealers. With respect to Davis Government Bond
Fund, for years ended December 31, 1996, 1995 and 1994, respectively, the
Distributor received commissions of $57,311, $126,585, and $406,784,
respectively, of which $56,774, $50,420, and $128,415, respectively, was
reallowed to dealers. As stated in the Prospectus, as of the years ended
December 31, 1996, 1995 and 1994, the Distributor paid $180,986, $295,361 and
$425,391 and $408,923, $439,891 and $469,666, respectively, in commissions
with respect to the sale of shares of Davis Growth Opportunity Fund and Davis
Government Bond Fund, respectively, for which the Distributor had not yet
received reimbursement under the applicable Class B Distribution Plan.
Also, during the year ended December 31, 1996, Class B shares of the
Davis Financial Fund, Davis Convertible Securities Fund and Davis Real Estate
Fund made distribution plan payments which included commissions of $32,304,
$8,209 and $20,407, respectively.
<PAGE> 127
The Distributor intends to seek payment from Class B shares of the
Davis Financial Fund, Davis Convertible Securities Fund and Davis Real Estate
Fund in the amounts of $242,356, $46,038 and $339,925, respectively,
representing the cumulative commissions earned by the Distributor on the sale
of the Funds' Class B shares reduced by cumulative commissions paid by the
Funds and cumulative contingent deferred sales charges paid by redeeming
shareholders.
With respect to shares of Davis Government Money Market Fund, for the
years ended December 31, 1996, 1995 and 1994, the Adviser paid $3,507,
$11,871 and $12,331, respectively, to qualified dealers out of its own
resources, as provided in the current Distribution Plan.
It is contemplated that, pursuant to the Plans, payments will be made
to a registered investment adviser to be owned and managed, in part, by
members of the immediate family of LeRoy E. Hoffberger, an independent
director of the company. These payments will be made in connection with
shareholder services provided by that investment adviser to its clients that
are shareholders of the fund (which include, among others, Mr. Hoffberger and
members of his immediate family and trusts of which they are beneficiaries or
trustees), the cost of which had previously been borne by the clients. Mr.
Hoffberger will not have any ownership interest in or control the investment
adviser.
PERFORMANCE DATA
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 Funds' portfolio. Average
annual total return is calculated separately for each class in accordance
with the standardized method prescribed by the Securities and Exchange
Commission by determining the average annual compounded rates of return over
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 of initial payment
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.
Davis Growth Opportunity Funds average annual total return with
respect to Class A shares for the year ended December 31, 1996 and the period
from December 1, 1994 through December 31, 1996 (life of the Class) were
13.09% and 25.74%, respectively.
<PAGE> 128
Davis Growth Opportunity Fund's average annual total return with respect to its
Class B shares for the one, five and ten year periods ended December 31, 1996 is
14.86%, 10.98% and 13.91%, respectively.
Davis Financial Fund's average annual total return with respect to
Class A shares for the one year and five years ended December 31, 1996 and
for the period from May 1, 1991 through December 31, 1996 (life of the Class)
were 25.28%, 22.31% and 23.93%, respectively. Davis Financial Funds average
annual total return with respect to Class B shares for the year ended
December 31, 1996 and the period from December 27, 1994 through December 31,
1996 (life of the Class) were 27.29% and 37.32%, respectively
Davis Convertible Securities Fund's average annual total return with
respect to Class A shares for the year ended December 31, 1996 and the period
from May 1, 1992 through December 31, 1996 (life of the Class) were 23.30%,
and 15.12%, respectively. Davis Convertible Securities Funds average annual
total return with respect to Class B shares for the year ended December 31,
1996 and the period from February 3, 1995 through December 31, 1996 (life of
the Class) were 25.21% and 25.30%, respectively.
Davis Real Estate Fund's average annual total return with respect to
Class A shares for the one year ended December 31, 1996 and for the period
January 3, 1994 through December 31, 1996 (life of the Class) were 30.54% and
18.50%, respectively. Davis Real Estate Funds average annual total return
with respect to Class B shares for the year ended December 31, 1996 and the
period from December 27, 1994 through December 31, 1996 (life of the Class)
were 33.00% and 25.10%, respectively.
Total return is the cumulative rate of investment growth which
assumes that income dividends and capital gains are reinvested. It is
determined by assuming a hypothetical investment at the net asset value at
the beginning of the period, 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.
Davis Growth Opportunity Funds total return with respect to its
Class A shares for the one year ended December 31, 1996 and the period from
December 1, 1994 through December 31, 1996 (life of the Class) were 13.09%
and 61.21%, respectively. Davis Growth Opportunity Fund's total return with
respect to its Class B shares for the one, five, and ten year periods ended
December 31, 1996 is 14.86%, 68.43%, and 268.32%, respectively.
Davis Financial Fund's total return with respect to Class A shares
for the one year and five years ended December 31, 1996 and for the period
from May 1, 1991 through December 31, 1996 (life of the Class) were 25.28%,
173.98% and 237.80%, respectively. Davis Financial Funds total return with
respect to Class B shares for the one year ended December 31, 1996 and the
period from December 27, 1994 through December 31, 1996 (life of the Class)
were 27.29% and 89.38%, respectively.
Davis Convertible Securities Fund's total return with respect to
Class A shares for the year ended December 31, 1996 and the period from May
1, 1992 through December 31, 1996 (life of the Class) were 23.30% and
93.08%, respectively. Davis Convertible Securities Funds total return with
respect to Class B shares for the year ended December 31, 1996 and the period
from February 3, 1995 through December 31, 1996 (life of the Class) were
25.21% and 53.84%, respectively.
<PAGE> 129
Davis Real Estate Fund's total return with respect to Class A shares
for the one year ended December 31, 1996 and for the period January 3, 1994
through December 31, 1996 (life of the Class) were 30.54% and 66.25%,
respectively. Davis Real Estate Funds total return with respect to Class B
shares for the year ended December 31, 1996 and for the period from December
27, 1994 through December 31, 1996 (life of the Class) were 33.00% and
56.97%, respectively.
In reports or other communications to shareholders and in advertising
material, Davis Growth Opportunity Fund may compare its performance to
various economic and securities indices or averages such as the Consumer
Price Index, the Dow Jones Industrial Average, the Standard & Poor's 500
Stock Index and to the performance of mutual fund indices as reported by
Lipper Analytical Services, Inc. ("Lipper") or CDA Investment Technologies,
Inc. ("CDA"), or other widely recognized independent mutual fund reporting
services. Lipper and CDA performance calculations include reinvestment of all
capital gain and income dividends for the periods covered by the
calculations. The Consumer Price Index is generally considered to be a
measure of inflation. Averages and indices like The Dow Jones Industrial
Average and the Standard & Poor's 500 Stock Index are unmanaged indices of
common stocks which are considered to be generally representative of the
United States stock market. The market prices and yields of these stocks
will fluctuate.
In reports or other communications to shareholders and in advertising
material, the Company may also include evaluations of Funds published by
nationally recognized ranking services and by financial publications that are
nationally recognized, such as Business Week, Forbes, Kiplinger's,
Institutional Investor and Money Magazine. Any given performance comparison
should not be considered representative of the Fund's performance for any
future period.
Davis Government Money Market Fund. The current and effective yields
for Davis Government Money Market Fund's Class A shares for the seven day
period ended December 31, 1996 was 4.75% and 4.86% respectively.
Yield quotations are calculated in accordance with the following
formulas:
Yield = [(C-D) n BV] x (365/7)
Effective Yield = [ [ [ (C-D) n BV] + 1]365/7] - 1
C = Net change (excluding capital change in value of hypothetical account
with balance of one share at beginning of seven-day period).
D = Deductions charged to hypothetical account.
BV = Value of hypothetical account at beginning of seven-day period
for which yield is quoted.
The yields of Davis Government Money Market Fund and Davis Government
Bond Fund 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.
<PAGE> 130
FORM N-1A
DAVIS SERIES, INC.
------------------
POST-EFFECTIVE AMENDMENT NO. 38 UNDER THE
SECURITIES ACT OF 1933
REGISTRATION STATEMENT No. 2-57209
AND
AMENDMENT NO. 34 UNDER THE INVESTMENT COMPANY
ACT OF 1940 REGISTRATION NO. 811-2679
PART C
OTHER INFORMATION
-----------------
Item 24. Financial Statements and Exhibits
---------------------------------
(a) Financial Statements:
Included in Part A:
Financial Highlights
Included in Part B by incorporation by reference:
(i) Schedule of Investments at December 31, 1996.
(ii) Statement of Assets & Liabilities at December 31,
1996.
(iii) Statement of Operations for the year ended
December 31, 1996.
(iv) Statement of Changes in Net Asset Value for the
years ended December 31, 1996 and 1995.
(v) Notes to Financial Statements.
(vi) Report of Tait, Weller & Baker.
(b) Exhibits:
(1) (a) Composite Articles of Incorporation,
incorporated by reference to Exhibit 1 of
Registrant's Post-Effective Amendment No. 35
File 2-57209.
(1) (b) Articles Supplementary dated September 1, 996.
(2) Amended and Restated Bylaws, incorporated by
reference to Exhibit 2 of Registrant's
Post-Effective Amendment No. 35, File No.
2-57209.
(3) Not applicable.
1
<PAGE> 131
(4) Specimen Common Stock Certificates for the
Growth Fund, the Bond Fund and the Financial
Value Fund (formerly Global Value Fund),
incorporated by reference to Exhibit 4 of
Registrant's Post-Effective Amendment No. 25,
File No. 2-57209.
(5) (a) Investment Advisory Agreement, incorporated by
reference to Exhibit 5 (a) of Registrant's
Post-Effective Amendment No., 35, File No.
2-57209.
(5) (b) Amendment of Investment Advisory Agreement,
incorporated by reference to Exhibit 5 (b) of
Registrant's Post-Effective Amendment No., 35,
File No. 2-57209.
(5) (c) Sub-Advisory Agreement with respect to the
Davis Growth Opportunity Fund, incorporated by
reference to Exhibit 5 (c) of Registrant's
Post-Effective Amendment No., 35, File No.
2-57209.
(5) (d) Sub-Advisory Agreement dated December 1, 1996,
incorporated by reference to exhibit 5 (d) of
Registrant's Post-Effective Amendment No. 37
File No. 2-57209.
(6) (a) Distributing Agreement incorporated by
reference to Exhibit (b) of Registrant's
Post-Effective Amendment No. 35, File No.
2-57209.
(6) (b) Distributor's Transfer and Assumption
Agreement.
(7) Not applicable.
(8) (a) Custodian Contract in respect of the Davis
Growth Opportunity Fund, incorporated by
reference to Exhibit (8)(a) of Registrant's
Post-Effective Amendment No. 25, File No.
2-57209.
(8) (b) Custodian Contract in respect of the Davis
Government Bond Fund, incorporated by
reference to Exhibit (8)(b) of Registrant's
Post-Effective Amendment No. 25, File No.
2-57209.
(8) (c) Custodian Contract in respect of the Davis
Government Money Market Fund, incorporated by
reference to Exhibit (8)(c) of Registrant's
Post-Effective Amendment No. 25, File No.
2-57209.
(8) (d) Transfer Agency and Service Agreement,
incorporated by reference to Exhibit (8)(d) of
Registrant's Post-Effective Amendment No. 25,
File No. 2-57209.
(8) (e) Letter Agreement with Custodian and Transfer
Agent Concerning the Davis Financial Fund,
incorporated by reference to Exhibit (8)(e) of
Registrant's Post-Effective Amendment No. 25,
File No. 2-57209.
(9) Transfer and Assumption Agreement, incorporated
by reference to Exhibit (9) of Registrant's
Post-Effective Amendment No. 25, File No.
2-57209.
2
<PAGE> 132
(10) Opinion and Consent of Counsel, cover letter
incorporated by reference to Registrant's
Registration Statement.
(11) Consent of Auditors.
(12) Financial Statements, included in prospectus
and Statement of Additional Information.
(14) (a) Prototype Money Purchase Pension and Profit
Sharing Plan, Prototype Defined Contribution
Trust and Adoption Agreements, incorporated by
reference to Exhibit (14)(a) of Registrant's
Post-Effective Amendment No. 25, File No.
2-57209.
(14) (b) Prototype Defined Contribution Profit
Sharing/401(k) Plan, Prototype Profit
Sharing/401(k) Trust and Adoption Agreements,
incorporated by reference to Exhibit (14)(b)
of Registrant's Post-Effective Amendment No.
25, File No. 2-57209.
(14) (c) 403(b)(7) Retirement Plan Custodial Account,
incorporated by reference to Exhibit (14)(c)
of Registrant's Post-Effective Amendment No.
25, File No. 2-57209.
(15) (a) Distribution Plan for Class A shares.
(15) (b) Distribution Plan in respect to Davis
Government Money Market, incorporated by
reference to Exhibit (15)(b) of Registrant's
Post-Effective Amendment No. 25, File No.
2-57209.
(15) (c) Distribution Plan for Class B shares,
incorporated by reference to Exhibit (15)(c)
of Registrant's Post-Effective Amendment No.
32, File No. 2-57209.
(15) (d) Distribution Plan for Class C Shares.
(16) Sample Computation of Total Return,
incorporated by reference to Exhibit 16 of
Registrant's Post-Effective Amendment No. 15,
File No. 2-57209.
(17) Not applicable.
(18) (a) Powers of Attorney, incorporated by reference
to Exhibit 18 (a) of Registrant's Post
Effective Amendment No. 34, File No. 2-57209.
(18) (b) Plan pursuant to 18f-3, as amended.
(18) (c) Power of Attorney of Eileen Street,
incorporated by reference to Exhibit 18 (c) to
Registrant's Post-Effective Amendment No. 37
File No. 2-57209.
Item 25. Persons Controlled by or Under Common Control With Registrant
-------------------------------------------------------------
Not applicable
3
<PAGE> 133
Item 26. Number of Holders of Securities
-------------------------------
<TABLE>
<CAPTION>
Number of Record Holders
Title of Class as of March 31, 1997
-------------- ------------------------
Common Stock Class A Class B Class C Class Y
Shares Shares Shares Shares
------- ------- ------- --------
<S> <C> <C> <C> <C>
Growth Opportunity Fund 1,535 2,343 ------ 1
Government Bond Fund 1,112 688 ------ 1
Government Money Market Fund 3,154 272 62 4
Financial Fund 2,532 961 ------ 1
Convertible Securities Fund 641 180 ------ 2
Real Estate Fund 1,866 1,555 ------ 4
</TABLE>
Item 27. Indemnification
---------------
Item 15 of Registrant's registration statement on Form N-14 (No.
33-30571) filed on or about August 17, 1989 is incorporated by reference. In
addition, Registrant's Articles of Incorporation exculpate directors and
officers with respect to monetary damages except to the extent that an
individual actually receives an improper benefit in money, property or
services or to the extent that a final adjudication finds that the individual
acted with active or deliberate dishonesty.
Item 28. Business and Other Connections of Investment Adviser
----------------------------------------------------
The Investment Adviser of the Registrant, Selected/Venture
Advisers, L.P., is also the investment adviser for Davis New York Venture
Fund, Inc., Davis High Income Fund, Inc., Davis Tax-Free High Income Fund,
Inc., Selected American Shares, Inc., Selected Special Shares, Inc., Selected
Capital Preservation Trust and Venture Series, Inc. It also may engage as an
investment adviser for accounts other than mutual funds, although this is not
presently business of a substantial nature.
Shelby M.C. Davis is a Director, Chairman, Chief Executive
Officer and principal owner of Venture Advisers, Inc. (the "General Partner")
and is a Director of Shelby Cullom Davis Financial Consultants, Inc., 70 Pine
Street, New York, New York 10270.
Item 29. Principal Underwriter
--------------------
(a) Davis Selected Advisers, L.P. the principal underwriter for
the Registrant also acts as principal underwriter for Davis New York Venture
Fund, Inc., Davis High Income Fund, Inc., Davis Tax-Free High Income Fund,
Selected American Shares, Inc., Selected Special Shares, Inc., Selected
Capital Preservation Trust and Davis International Series, Inc.
(b) Management of Principal Underwriters
<TABLE>
<CAPTION>
POSITIONS AND OFFICES POSITIONS AND
NAME AND PRINCIPAL WITH GENERAL PARTNER OFFICES WITH
BUSINESS ADDRESS OF UNDERWRITER REGISTRANT
- ---------------- -------------- ----------
<S> <C> <C>
Shelby M.C. Davis Chairman President
P.O. Box 205 and Chief Executive
Hobe Sound, FL 33455 Officer
Carolyn H. Spolidoro Vice President Vice President
124 East Marcy Street
Santa Fe, NM 87501
4
<PAGE> 134
Andrew A. Davis Co-President Vice President
124 East Marcy Street
Santa Fe, NM 87501
Christopher C. Davis Employee of Vice President
70 Pine Street, 43rd Floor Davis Selected
New York, NY 10270-0108 Advisers, L.P.
Kenneth C. Eich Senior Vice President, Vice President
124 Marcy Street Chief Operating Officer
Santa Fe, NM 87501
Eileen R. Street Senior Vice President Treasurer and
124 East Marcy Street Assistant Secretary
Santa Fe, NM 87501
Samuel P. Ynzunza Senior Vice President, Vice President and
124 East Marcy Street General Counsel Secretary
Santa Fe, NM 87501
</TABLE>
(c) Not applicable.
Item 30. 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;
the Registrant's custodian, State Street Bank and Trust Company, One Heritage
Drive, North Quincy, Massachusetts 02171; and the Registrant's transfer agent
State Street Bank and Trust Company, c/o Service Agent, BFDS, Two Heritage
Drive, 7th Floor, North Quincy, Massachusetts 02171.
Item 31. Management Services
-------------------
Not applicable
Item 32. Undertakings
------------
Registrant undertakes to furnish each person to whom a prospectus
is delivered a copy of Registrant's latest annual report to shareholders upon
request and without charge.
5
<PAGE> 135
DAVIS SERIES, INC.
SIGNATURES
----------
This registration statement is being filed under rule 485(b)(ix)
pursuant to permission granted by the Securities and Exchange Commission.
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 11th day of
August, 1997.
DAVIS SERIES, INC.
<*>By: /s/ Arthur Don
-------------------------------
Arthur Don,
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 and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Shelby M.C. Davis<F*> President August 11, 1997
- ----------------- (Chief Executive
Shelby M.C. Davis Officer)
Eileen R. Street<F*> Vice President, August 11, 1997
- -------------------- principal accounting
Eileen R. Street officer
</TABLE>
<F*>By: /s/ Arthur Don
------------------------------
Arthur Don,
Attorney-in-Fact
[FN]
<F*>Arthur Don signs this document on behalf of the Registrant and the
foregoing officers pursuant to the powers of attorney filed as Exhibit
(18)(a) to Post-Effective Amendment 34 and Exhibit (18)(c) to Post Effective
Amendment No.37 to Registrant's Registration Statement.
6
<PAGE> 136
DAVIS SERIES, INC.
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment has been signed on August 11, 1997 by the following
persons in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
Wesley E. Bass, Jr.<F*> Director
- ----------------------------------
Wesley E. Bass, Jr.
Jeremy H. Biggs<F*> Director
- ----------------------------------
Jeremy H. Biggs
Marc P. Blum<F*> Director
- ----------------------------------
Marc P. Blum
Shelby M.C. Davis<F*> Director
- ----------------------------------
Shelby M.C. Davis
Eugene M. Feinblatt<F*> Director
- ----------------------------------
Eugene M. Feinblatt
Jerry D. Geist<F*> Director
- ----------------------------------
Jerry D. Geist
D. James Guzy<F*> Director
- ----------------------------------
D. James Guzy
G. Bernard Hamilton<F*> Director
- ----------------------------------
G. Bernard Hamilton
LeRoy E. Hoffberger Director
- ----------------------------------
LeRoy E. Hoffberger
Laurence W. Levine<F*> Director
- ----------------------------------
Laurence W. Levine
Christian R. Sonne<F*> Director
- ----------------------------------
Christian R. Sonne
Edwin R. Werner<F*> Director
- ----------------------------------
Edwin R. Werner
<FN>
<F*>Arthur Don signs this document on behalf of each of the foregoing
persons pursuant to the powers of attorney filed as Exhibit 18(a) to
Post-Effective Amendment 34 to Registrant's Registration Statement.
</TABLE>
/s/Arthur Don
------------------------------
Arthur Don,
Attorney-in-Fact
7
<PAGE> 1
Exhibit 1(b)
DAVIS SERIES, INC.
ARTICLES SUPPLEMENTARY
TO
ARTICLES OF INCORPORATION PURSUANT
TO SECTIONS 2-208 AND 2-208.1 OF THE MARYLAND
GENERAL CORPORATION LAW
Davis Series, Inc., a Maryland corporation, having its principal office
in Baltimore, Maryland, hereby certifies to the State Department of
Assessments and Taxation of Maryland that:
FIRST: Prior to the designation and reclassification of the common stock of
the corporation, the corporation had a total of 5,000,000,000 shares, a $.01
par value per share, 2,000,000,000 shares of which are unclassified and
3,000,000,000 shares of which are classified as 225,000,000 shares of Growth
Fund Class A Common Stock, 225,000,000 shares of Growth Fund Class B Common
Stock, 50,000,000 shares of Growth Fund Class C Common Stock, 225,000,000 shares
of Bond Fund Class A Common Stock, 225,000,000 shares of Bond Fund Class B
Common Stock, 50,000,000 shares of Bond Fund Class C Common Stock,
225,000,000 shares of Financial Value Fund Class A Common Stock, 255,000,000
shares of Financial Value Fund Class B Common Stock, 50,000,000 shares of
Financial Value Fund Class C Common Stock, 225,000,000 shares of Convertible
Securities Fund Class A Common Stock, 225,000,000 shares of Convertible
Securities Fund Class B Common Stock, 50,000,000 shares of Convertible
Securities Fund Class C Common Stock, 225,000,000 shares of Real Estate
Securities Class A Common Stock, 225,000,000 shares of Real Estate Securities
Class B Common Stock, 50,000,000 shares of Real Estate Securities Class C
Common Stock, 175,000,000 shares of Government Money Market Fund Class A Common
Stock, 175,000,000 shares of Government Money Market Fund Class B Common Stock
and 150,000,000 shares of Government Money Market Fund Class C Common Stock,
each with $.01 par value per share. The aggregate par value of all the stock is
$50,000,000 of which $20,000,000 is unclassified and $30,000,000 is classified.
SECOND: The Articles of Incorporation are hereby supplemented by (i) changing
the description of certain terms and conditions under which the classes of
Common Stock may be issued; (ii) reclassifying 25,000,000 shares of the
authorized and unissued shares of the Class A Common Stock and Class B Common
Stock of each Fund as Class Y Common Stock of the same Fund; and (iii)
designating 300,000,000 shares of the authorized and unissued stock of the
corporation as 50,000,000 shares of Class Y Common Stock of each Fund.
THIRD: The Class A Common Stock, Class B Common Stock, Class C Common Stock
and the Class Y Common Stock of each Fund shall represent investment in the
same pool of assets with respect to each Fund and shall have the same
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and conditions of
redemption except as set forth in the Articles of Incorporation of the
Corporation and as set forth below:
The Class A Common Stock of all Funds, other than the Government Money Market
Fund, may be subject to a front-end load and Rule 12b-1 distribution fee as
determined by the Board of Directors from time to time prior to issuance of
such stock and, in addition, Class
<PAGE> 2
A Common Stock issued after the filing of these Articles may also be subject to
a contingent deferred sales charge as determined by the Board of Directors from
time to time prior to issuance of such stock;
The Class B Common Stock of all Funds, other than Government Money Market
Fund, may be sold without a front-end sales load and may be subject to a
contingent deferred sales charge and a Rule 12b-1 distribution fee as
determined by the Board of Directors from time to time prior to issuance of
such stock and shall be converted to the Class A Common Stock of its
respective Fund at the end of eight (8) years after purchase or such shorter
period as determined by the Board of Directors giving effect to reciprocal
exchange privileges;
The Government Money Market Fund Class A Stock may be sold without a
front-end load and without a Rule 12b-1 distribution fee.
The Government Money Market Fund Class B Common Stock may be subject to a
contingent deferred sales charge, shall be converted to Government Money
Market Class A Common Stock at the end of eight (8) years after purchase, and
may be sold without a Rule 12b-1 distribution fee.
The Class C Common Stock of all Funds may be sold without a front-end sales
load and may be subject to a contingent deferred sales charge and to a Rule
12b-1 distribution fee as determined by the Board of Directors from time to
time prior to issuance.
The Class Y Common Stock of all Funds may be sold without a front-end sales
or contingent deferred sales charge and without a Rule 12b-1 distribution
fee.
Nothing herein shall prohibit the imposition of a redemption fee or exchange
fee upon any Class.
FOURTH: Immediately following the designation and reclassification of stock,
the corporation will have a total of 5,000,000,000 shares, $.01 par value per
share, 1,700,000,000 which shall be unclassified and 3,300,000,000 which
shall be classified as 200,000,000 shares of Growth Fund Class A Common
Stock, 200,000,000 shares of Growth Fund Class B Common Stock, 50,000,000
shares of Growth Fund Class C Common Stock, 100,000,000 shares of Growth Fund
Class Y Common Stock, 200,000,000 shares of Bond Fund Class A Common Stock,
200,000,000 shares of Bond Fund Class B Common Stock, 50,000,000 shares of
Bond Fund Class C Common Stock, 100,000,000 shares of Bond Fund Class Y Common
Stock, 200,000,000 shares of Financial Value Fund Class A Common Stock,
200,000,000 shares of Financial Value Fund Class B Common Stock, 50,000,000
shares of Financial Value Fund Class C Common Stock, 100,000,000 shares of
Financial Value Fund Class Y Common Stock, 200,000,000 shares of Convertible
Securities Fund Class A Common Stock, 200,000,000 shares of Convertible
Securities Fund Class B Common Stock, 50,000,000 shares of Convertible
Securities Fund Class C Common Stock, 100,000,000 shares of Convertible
Securities Fund Class Y Common Stock, 200,000,000 shares of Real Estate
Securities Fund Class A Common Stock, 200,000,000 shares of Real Estate
Securities Fund Class B Common Stock, 50,000,000 shares of Real Estate Fund
Class C Common Stock, 100,000,000 shares of Real Estate Securities Fund Class Y
Common Stock, 150,000,000 shares of Government Money Market Fund Class A Common
Stock, 150,000,000 shares of Government Money Market Fund Class B Common Stock,
150,000,000 shares of Government Money Market Fund Class C Common Stock,
100,000,000 shares of Government Money Market Fund Class Y Common Stock, each
with a $.01 par value per
<PAGE> 3
share. The aggregate par value of all the stock is $50,000,000 of which
$17,000,000 is unclassified and $33,000,000 is classified.
FIFTH: The stock of the Corporation has been classified by the Board of
Directors of the Corporation in accordance with and pursuant to the Article
FIFTH, Section (b) of the Articles of Incorporation of the Corporation.
SIXTH: The Corporation is registered as an open-end investment company with
the Securities and Exchange Commission pursuant to the Investment Company Act
of 1940.
SEVENTH: The Board of Directors duly adopted a resolution (i) redesignating
the preferences of certain classes of Common Stock of all the Funds, except
the Government Money Market Fund, issued after the filing of these Articles;
(ii) reclassifying 50,000,000 shares of the Class A Common Stock and Class B
Common Stock of each Fund as Class Y Common Stock of the same fund; and (iii)
designating 300,000,000 shares of the authorized and unissued stock of the
corporation as 50,000,000 shares of Class Y Common Stock of each Fund.
EIGHTH: The effective date of these Articles Supplementary shall be September
1, 1996.
IN WITNESS WHEREOF, Davis Series, Inc., has caused these presents to be
signed in its name and on behalf by its Vice President and witnessed by its
Secretary on August 28, 1996.
DAVIS SERIES, INC.
By:----------------------------
ATTEST:
- -----------------------------
Raymond O. Padilla, Secretary
<PAGE> 1
Exhibit 6(b)
TRANSFER AND ASSUMPTION
THIS TRANSFER AND ASSUMPTION is entered into as of June 1, 1997 by
and among Davis Selected Advisors, L.P., a Colorado limited partnership (the
"Transferor"), Davis Distributors, L.L.C., a Delaware limited liability
company (the "Transferee") and Davis Series, Inc. ("Series"), a Maryland
corporation.
WHEREAS, this Transferor is the sole member of the Transferee and
controls and manages the business of the Transferee; and
WHEREAS, the Transferor was organized to assume and continue the
distribution services business with respect to the investment companies for
which the Transferor serves as investment advisor; and
WHEREAS, the Transferor has entered into a Distributing Agreement
(the "Agreement") dated April 15, 1993 with Series, pursuant to which the
Transferor serves as distributor of shares of capital stock of Series;
NOW THEREFORE, the parties hereto agree as follows:
The Transferor hereby transfers unto the Transferee all of its rights,
obligations and liabilities under the Agreement.
The Transferee, in consideration of the transfer to it of all Transferor's
rights, obligations and liabilities under the Agreement, hereby accepts and
assumes such rights, obligations and liabilities.
All references to Transferor in the Agreement shall, as of June 1, 1997, be
deemed to refer to the Transferee.
Series hereby acknowledges and approves this transfer and agrees that, as of
June 1, 1997, the transferee shall be the other party to the Agreement in
lieu of the Transferor.
IN WITNESS THEREOF, the undersigned have caused this Transfer and Assumption
to be executed on their behalf as of the date written above.
DAVIS SELECTED ADVISERS, L.P. DAVIS SERIES, INC.
By: Venture Advisers, Inc.
General Partner
By:------------------------------
By:------------------------------
DAVIS DISTRIBUTORS, LLC
By:------------------------------
<PAGE> 1
Exhibit 11
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the reference to our firm in the Registration Statement, (Form
N-1A), and related Statement of Additional Information of Davis Series, Inc.
and to the inclusion of our report dated February 5, 1997 to the Shareholders
and Board of Directors of Davis Series, Inc.
/s/ Tait, Weller & Baker
Tait, Weller & Baker
Philadelphia, Pennsylvania
August 11, 1997
<PAGE> 1
Exhibit 15(a)
DAVIS FUNDS
MASTER RULE 12b-1 DISTRIBUTION PLAN
FOR CLASS A SHARES
The Plan:
Purpose. The Company shall finance the distribution of its Class A shares
pursuant to Rule 12b-1 under the Investment Company Act of 1940 ("Act")
according to the terms of this Distribution Plan (the "Plan").
Fees. Amounts, not exceeding in the aggregate a maximum annual amount equal
to 0.25% of the average of the daily net asset values of the Class A 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: (1) 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 its other
distribution expenses, after application of the Distributor's portion of
sales charges incurred in the 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.
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 Class A shares of the Company. In addition, the
Plan shall not take effect until it has been approved, together with any related
agreements, by votes 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.
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 least quarterly, a written report of the amounts so expended
and the purposes for which such expenditures were made.
Termination. Subject to paragraph 8, the Plan may be terminated at any time
by a vote of a majority of the Independent Directors, or by a majority vote
of the outstanding Class A shares.
<PAGE> 2
Related Agreements. Any agreement related to the Plan shall be in writing,
and shall provide:
That such agreement may be terminated at any time, without payment of
penalty, by a vote of a majority of the Independent Directors or by a
majority vote of the Class A shares on not more than 60 days written notice
to any other party to the agreement; and
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 for 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 Class A shares of any series and no amendment may
be effected to increase materially the amount of distribution expenses as to
the Class A shares of any series until it has been approved by the Board of
Directors, the Independent Directors and the Class A 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 a majority vote of the Independent
Directors and by a majority vote of the Class A shareholders of the series.
<PAGE> 1
Exhibit 15(d)
DAVIS HIGH INCOME FUND, INC.
DAVIS TAX-FREE HIGH INCOME FUND, INC.
DAVIS SERIES, INC.
MASTER RULE 12B-1 DISTRIBUTION PLAN
FOR CLASS C SHARES
THE PLAN:
- --------
PURPOSE. The Company shall finance the distribution of its Class C shares
pursuant to Rule 12b-1 under the Investment Company Act of 1940 ("Act")
according to the terms of this Distribution Plan (the "Plan").
FEES. Amounts, not exceeding in the aggregate a maximum amount equal to the
lesser of (a) .3125% of the averages of the daily net asset values of the
Company or (b) the maximum amount provided by an applicable rule or regulation
of the National Association of Securities Dealer, Inc. during each fiscal
quarter of the Company elapsed after the inception of the Plan may be paid by
the Company to the Distributor at any time after the inception of the Plan in
order: (i) to pay the Distributor commissions in respect of shares of the
Company previously sold at any time after the inception of the Plan, all or
any part of which may be or may have been reallowed or otherwise paid to
others by the Distributor in respect of or in furtherance of sales of shares
of the Company after the inception of the Plan; and (ii) to enable the
Distributor to pay or to have paid to others who sell the Company's shares a
maintenance or service fees, at such intervals as the distributor may
determine, in respect of that Company's shares previously sold by any such
others at any time after the inception of the Plan and remaining outstanding
during the period in respect of which such fee is or has been paid.
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.
REQUIRED APPROVALS AND TERMS. Subject to paragraph 8, the Plan shall not take
effect until it has been approved, together with any related agreements, by
votes 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 (the
"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.
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 least quarterly, a written report of the amounts so expended
and the purposes for which such expenditures were made.
TERMINATION. Subject to paragraph 8, the Plan may be terminated at any time
by a vote of a majority of the Independent Directors, or by a majority vote of
the Company's outstanding Class C shares.
<PAGE> 2
RELATED AGREEMENTS. Any agreement related to the Plan shall be in writing,
and shall provide:
That such agreement may be terminated at any time, without payment of
penalty, by vote of a majority of the Independent Directors or by a majority
vote of the Company's outstanding Class C shares on not more than 60 days
written notice to any other party to the agreement; and
That such agreement shall terminate automatically in the event of its
assignment.
AMENDMENTS. The Plan may not be amended to increase materially the amount of
distribution expenses provided 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.
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 Class C shares of any series and no amendment may be effected
to increase materially the amount of distribution expenses as to the Class C
shares of any series until it has been approved as to the Class C shares of
such series by the Board of Directors and the Independent Directors 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 or by majority vote of the Class C shareholders of the
series.
<PAGE> 1
Exhibit 18(b)
Davis Series, Inc.
Plan Pursuant to Rule 18f-3, as amended
---------------------------------------
Registrant elects to offer different classes of shares of its common stock
pursuant to Rule 18f-3 under the following Plan.
1. Registrant's current Plan encompasses four classes of shares
that may be offered as follows:
(a) Class A shares with a front end sales charge ("FESC")
subject to certain exceptions, a contingent deferred sales charge ("CDSC")
under certain circumstances, and to Rule 12b-1 fees ("Rule 12b-1 fees"). The
applicable FESC, including reductions and exceptions, application of the CDSC
and the Rule 12b-1 fees are set forth in Exhibits "A" and "E" attached
hereto.
(b) Class B shares at net asset value subject to (i) Rule 12b-1
fees and (ii) a CDSC for redemptions or repurchases by the Registrant
effected within a certain period of time not exceeding eight years from the
date of purchase. Class B shares outstanding will automatically convert to
Class A shares within eight years after the end of the month in which the
shares were purchased. (However, for shares purchased before December 1,
1994 which are represented by stock certificates, the stock certificates must
be returned to the transfer agent to effect conversion.) In addition,
certain Class B shares held by certain defined contribution plans
automatically convert to Class A shares based on increases of plan assets.
The deferred sales charges, conversion and Rule 12b-1 fees are as set forth
in Exhibits "B" and "E" attached hereto.
(c) Class C shares at net asset value subject to a fee upon
redemption within one year of purchase and Rule 12b-1 fees. The terms and
conditions of the Class C shares are as set forth in Exhibits "C" and "E"
attached hereto.
(d) Class Y shares at net asset value with no Rule 12b-1
charges. Class Y shares are available only to certain types of investors as
defined in Exhibit "D" attached hereto.
<PAGE> 2
(e) Exchange Privileges: The exchange privileges are set forth
in Exhibit "F" hereto. In summary, for a nominal exchange fee, shares of a
class may be exchanged for shares of the same class of certain other
registrants with the same investment adviser or distributor (or any series
issued by such registrants) at net asset value except that: (i) Any shares
issued in exchange for shares still subject to any unpaid FESC or CDSC or
other charge payable upon redemption remain subject to such unpaid charges;
(ii) Money market series Class A shares which were initially purchased from
the money market series may be exchanged for any class of shares at the
public offering price of the acquired shares (which may include a sales
charge) and are subject to any CDSC or other charge upon redemption normally
applicable to the acquired shares; and (iii) Class A shareholders who are
eligible to purchase Class Y shares may exchange their shares for Class Y
shares of the Fund.
2. Income, realized and unrealized capital gains and losses and
expenses not allocated to a particular class are allocated to each class on
the basis of relative net assets.
Expenses allocable to a specific class are expenses specifically
incurred for such class including the following:
(a) Rule 12b-1 expenses
(b) Incremental transfer agency expenses
(c) Incremental costs of preparing, printing and mailing
shareholder reports, proxy materials and prospectuses related to such class
(d) Registration fees and other expenses of registration of the
shares of such class under laws or regulations of any jurisdiction in which
the class of shares is to be offered
(e) Directors' fees and expenses incurred as a result of issues
relating solely to such class
(f) Legal and accounting expenses relating solely to such class
3. Each class will vote separately with respect to any matter
as required by applicable law or which separately affects that class. As
provided in the Articles of Incorporation, each dollar of net asset value per
share is entitled to one vote.
<PAGE> 3
Exhibit A
CLASS A SHARES. Class A shares are sold at their net asset
value plus a sales charge. The amounts of the sales charges are shown in the
following table.
<TABLE>
<CAPTION>
Customary
Sales Charge Charge as Concession to Your
as Percentage Approximate Percentage Dealer as Percentage
Amount of Purchase of Offering Price of Amount Invested of Offering Price
- ------------------ ----------------- ---------------------- --------------------
<S> <C> <C> <C>
$99,999 or less 4-3/4% 5.0% 4%
$100,000 to $249,999 3-1/2% 3.6% 3%
$250,000 to $499,999 2-1/2% 2.6% 2%
$500,000 to $749,999 2% 2.0% 1-3/4%
$750,000 to $999,999 1% 1.0% 3/4 of 1%
$1,000,000 or more 0% 0.0% 0%<F*>
<FN>
<F*> On purchases of $1 million or more, the investor pays no front-end sales
charge but a contingent deferred sales charge of 0.75% may be imposed if
shares purchased after May 1, 1997 are redeemed within the first year after
purchase. The Distributor may pay the financial service firm a commission
during the first year after such purchase at an annual rate as follows:
</TABLE>
<TABLE>
<CAPTION>
Purchase Amount Commission
--------------- ----------
<S> <C>
First $3,000,000 .75%
Next $2,000,000 .50%
Over $5,000,000 .25%
</TABLE>
Where a commission is paid for purchases of $1 million or more, such payment
will be made from 12b-1 distribution fees received from the Fund and, in
cases where the limits of the distribution plan in any year have been
reached, from the Distributor's own resources.
There are a number of ways to reduce the sales charge on the
purchase of Class A shares, as set forth below.
(i) Family Purchases: Purchases made by an individual, such
individual's spouse and children under 21 are combined and treated as a
purchase of a single person.
3
<PAGE> 4
(ii) Group Purchases: The purchases of an organized group,
whether or not incorporated, are combined and treated as the purchase of a
single person. The organization must have been organized for a purpose other
than to purchase shares of mutual funds.
(iii) Purchases for Employee Benefit Plans: Trusteed or other
fiduciary accounts and Individual Retirement Accounts ("IRA") of a single
employer are treated as purchases of a single person. Purchases of and
ownership by an individual and such individual's spouse under an IRA are
combined with their other purchases and ownership.
(iv) Purchases under a Statement of Intention: By executing the
"Statement of Intention" included in the Application Form at the back of the
Prospectus, purchases of Class A shares of $100,000 or more made over a
13-month period may be made at the applicable price for the aggregate shares
actually purchased during the period. Please see "Terms and Conditions" at
the back of this prospectus.
(v) Rights of Accumulation: If you notify your dealer or the
Distributor, you may include the Class A shares you already own (valued at
maximum offering price) in calculating the price applicable to your current
purchase.
(vi) Combined Purchases with other Davis Funds: Purchases of
Class A shares of the Fund may be combined with your purchases of Class A
shares of other Davis Funds, including Davis High Income Fund, Inc., Davis
Tax-Free High Income Fund, Inc., Davis International Series, Inc. and all
funds offered by Davis Series, Inc. (other than Davis Government Money Market
Fund), separately or under combined Statements of Intention or rights of
accumulation to determine the price applicable to your purchases of Class A
shares of the Fund.
(vii) Sales at Net Asset Value: The sales charge will not apply
to: (1) Class A shares purchased through the automatic reinvestment of
dividends and distributions (see "Dividends and Distributions"); (2) Class A
shares purchased by directors, officers and employees of any fund for which
the Adviser acts as investment adviser or officers and employees of the
Adviser, Sub-Adviser or Distributor including former directors and
4
<PAGE> 5
officers and any spouse, child, parent, grandparent, brother or sister
("immediate family members") of all of the foregoing, and any employee benefit
or payroll deduction plan established by or for such persons; (3) Class A shares
purchased by any registered representatives, principals and employees (and
any immediate family member) of securities dealers having a sales agreement
with the Distributor; (4) initial purchases of Class A shares totaling at
least $250,000 but less than $5,000,000, made at any one time by banks, trust
companies and other financial institutions on behalf of one or more clients
for which such institution acts in a fiduciary capacity; (5) Class A shares
purchased by any single account covering a minimum of 250 participants (this
250 participant minimum may be waived for certain fee based mutual fund
marketplace programs) and representing a defined benefit plan, defined
contribution plan, cash or deferred plan qualified under 401(a) or 401(k) of
the Internal Revenue Code or a plan established under section 403(b), 457 or
501(c)(9) of such Code or "rabbi trusts"; (6) Class A shares purchased by
persons participating in a "wrap account" or similar fee-based program
sponsored and maintained by a registered broker-dealer approved by the Fund's
Distributor or by investment advisors or financial planners who place trades
for their own accounts or the accounts of their clients and who charge a
management, consulting or other fee for their services; and clients of such
investment advisors or financial planners who place trades for their own
accounts if the accounts are linked to the master account of such investment
advisor or financial planner on the books and records of the broker or agent;
and (7) Class A shares amounting to less than $5,000,000 purchased by any
state, county, city, department, authority or similar agency. Investors may
be charged a fee if they effect purchases in fund shares through a broker or
agent. The Fund may also issue Class A shares at net asset value incident to
a merger with or acquisition of assets of an investment company.
5
<PAGE> 6
Exhibit B
CLASS B SHARES. Class B shares are offered at net asset value,
without a front-end sales charge. With certain exceptions described below,
the Fund imposes a deferred sales charge of 4% on shares redeemed during the
first year after purchase, 3% on shares redeemed during the second or third
year after purchase, 2% on shares redeemed during the fourth or fifth year
after purchase and 1% on shares redeemed during the sixth year after
purchase. However, on Class B shares of the Fund which are acquired upon
exchange from Class B shares of other Davis Funds which were purchased prior
to December 1, 1994, the Fund will impose a deferred sales charge of 4% on
shares redeemed during the first calendar year after purchase; 3% on shares
redeemed during the second calendar year after purchase; 2% on shares
redeemed during the third calendar year after purchase; and 1% on shares
redeemed during the fourth calendar year after purchase, and no deferred
sales charge is imposed on amounts redeemed after four calendar years from
purchase. Class B shares will be subject to a maximum Rule 12b-1 fee at the
annual rate of 1% of the class' average daily net asset value. The Fund will
not accept any purchase of Class B shares in the amount of $250,000 or more
per investor.
Class B shares that have been outstanding for eight years will
automatically convert to Class A shares without imposition of a front-end
sales charge. The Class B shares so converted will no longer be subject to
the higher expenses borne by Class B shares. Because the net asset value per
share of the Class A shares may be higher or lower than that of the Class B
shares at the time of conversion, although the dollar value will be the same,
a shareholder may receive more or less Class A shares than the number of
Class B shares converted. Under the Funds' private Internal Revenue Service
Ruling, such a conversion will not constitute a taxable event under the
federal income tax law. In the event that this ceases to be the case, the
Board of Directors will consider what action, if any, is appropriate and in
the best interests of the Class B shareholders. In addition, certain Class B
shares held by certain defined contribution plans automatically convert to
Class A shares based on increases of plan assets as described in the
Statement of Additional Information.
6
<PAGE> 7
Exhibit C
CLASS C SHARES. Class C shares are offered at net asset value
without a sales charge at the time of purchase. Class C shares redeemed
within one year of purchase will be subject to a 1% charge upon redemption.
Class C shares do not have a conversion feature. The Fund will not accept
any purchases of Class C shares when Class A shares may be purchased at net
asset value.
The Distributor will pay a commission to the firm responsible for
the sale of Class C shares. No other fees will be paid by the Distributor
during the one-year period following purchase. The Distributor will be
reimbursed for the commission paid from 12b-1 fees paid by the Fund during
the one-year period. If Class C shares are redeemed within the one-year
period after purchase, the 1% redemption charge will be paid to the
Distributor. After Class C shares have been outstanding for more than one
year, the Distributor will make quarterly payments to the firm responsible
for the sale of the shares in amounts equal to 0.75% of the annual average
daily net asset value of such shares for sales fees and 0.25% of the annual
average daily net asset value of such shares for service and maintenance
fees.
7
<PAGE> 8
Exhibit D
Class Y shares. Currently, Class Y shares are offered to (i)
trust companies, bank trusts, endowments, pension plans or foundations acting
on behalf of their own account or one or more clients for which such
institution acts in a fiduciary capacity and investing at least $5,000,000 at
any one time; (ii) any state, county, city, department, authority or similar
agency prohibited by law from paying a sales charge which invests at least
$5,000,000; and (iii) any investor with an account established under a Awrap
account@ or other similar fee-based program sponsored and maintained by a
registered broker-dealer approved by the Fund=s Adviser (AWrap Program
Investors@).
8
<PAGE> 9
Exhibit E
CONTINGENT DEFERRED SALES CHARGES. Any contingent deferred
sales charge imposed upon the redemption of Class A, Class B or Class C
shares is a percentage of the lesser of (i) the net asset value of the shares
redeemed or (ii) the original cost of such shares. No contingent deferred
sales charge is imposed when you redeem amounts derived from (a) increases in
the value of shares redeemed above the net cost of such shares or (b) certain
shares with respect to which the Fund did not pay a commission on issuance,
including shares acquired through reinvestment of dividend income and capital
gains distributions. Upon request for redemption, shares not subject to the
contingent deferred sales charge will be redeemed first. Thereafter, shares
held the longest will be the first to be redeemed.
The contingent deferred sales charge (CDSC) on Class A, B, and C
Shares that are subject to a CDSC will be waived if the redemption relates to
the following: (a) in the event of the total disability (as evidenced by a
determination by the federal Social Security Administration) of the
shareholder (including registered joint owner) occurring after the purchase
of the shares being redeemed; (b) in the event of the death of the
shareholder (including a registered joint owner); (c) for redemptions made
pursuant to an automatic withdrawal plan in an amount, on an annual basis, up
to 12% of the value of the account at the time the shareholder elects to
participate in the automatic withdrawal plan; (d) for redemptions from a
qualified retirement plan or IRA that constitute a tax-free return of
contributions to avoid tax penalty; (e) on redemptions of shares sold to
directors, officers and employees of any fund for which the Adviser acts as
investment adviser or officers and employees of the Adviser, Sub-Adviser or
Distributor including former directors and officers and immediate family
members of all of the foregoing, and any employee benefit or payroll
deduction plan established by or for such persons; (f) on redemptions
pursuant to the right of the Fund to liquidate a shareholder's account if the
aggregate net asset value of the shares held in such account falls below an
established minimum amount; (g) certain other exceptions related to defined
contribution plans as described in the Statement of Additional Information.
9
<PAGE> 10
Exhibit F
Exchange Privileges
Shares of a particular class of the Fund may be exchanged only for
shares of the same class of another Davis Fund except that Class A
shareholders who are eligible to purchase Class Y shares may exchange their
shares for Class Y shares of the Fund. All of the Davis Funds offer Class A,
Class B and Class C shares. The shares to be received upon exchange must be
legally available for sale in your state. The net asset value of the initial
shares being acquired must be at least $1,000 unless such exchange is under
the Automatic Exchange Program described below.
Shares may be exchanged at relative net asset value without any
additional charge. However, if any shares being exchanged are subject to an
escrow or segregated account pursuant to the terms of a Statement of
Intention or a CDSC, such shares will be exchanged at relative net asset
value, but the escrow or segregated account will continue with respect to the
shares acquired in the exchange. In addition, the terms of any CDSC, or
redemption fee, to which any Class B or Class C shares are subject at the
time of exchange will continue to apply to any shares acquired upon exchange.
Before you decide to make an exchange, you must obtain the current
prospectus of the desired fund. Call your broker or the Distributor for
information and a prospectus for any of the other Davis Funds registered in
your state. Read the prospectus carefully. If you decide to exchange your
shares, send State Street a written unconditional request for the exchange
and follow the instructions regarding delivery of share certificates
contained in the section on "Redemption of Shares". A signature guarantee is
not required for such an exchange. However, if shares are also redeemed for
cash in connection with the exchange transaction, a signature guarantee may
be required. See "Redemption of Shares". Your dealer may charge an
additional fee for handling an exercise of the exchange privilege.
AUTOMATIC EXCHANGE PROGRAM. The Fund also offers an automatic
10
<PAGE> 11
monthly exchange program. All accounts established or utilized
under this program must have the same registration and a minimum initial
value of at least $250. All subsequent exchanges must have a value of at
least $25. Each month, shares will be simultaneously redeemed and purchased
at the chosen Davis Fund's applicable offering price. If you would like to
participate in this program, you may use the appropriate designation on the
Application Form.
An exchange involves both a redemption and a purchase, and
normally both are done on the same day. However, in certain instances such
as where a large redemption is involved, the investment of redemption
proceeds into shares of other Davis Funds may take up to seven days. For
federal income tax purposes, exchanges between funds are treated as a sale
and purchase. Therefore, there will usually be a recognizable capital gain
or loss due to an exchange. An exchange between different classes of the
same fund is not a taxable event.
The number of times a shareholder may exchange shares among the
Davis Funds within a specified period of time may be limited at the
discretion of the Distributor. Currently, more than four exchanges out of a
fund during a twelve month period are not permitted without the prior written
approval of the Distributor. The Fund reserves the right to terminate or
amend the exchange privilege at any time upon 60 or more days' notice.
11
