DAVIS HIGH INCOME FUND, INC.
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501
=============================================================================
Dear Shareholder:
The Davis High Income Fund continues to produce long-term superior
returns on a risk-adjusted basis, although absolute performance for Class
A shares lagged somewhat during the most recent annual period ended
March 31, 1996. During this period, the Davis High Income Fund's net
asset value total return on Class A shares was 9.93%(1) compared to the
14.99% average annual total return of 130 High Yield funds tracked by
Lipper Analytical Inc. and published in the April 17, 1996 edition of
The Wall Street Journal.
- -----------------------
As an added benefit to our shareholders, the Fund's Board of Directors has
approved a reduction in management fees of 0.05% of average annual net
assets under $500 million. This change is effective May 1, 1996.
Over the long term, Class A shares of your Fund have earned Morningstar's
highest rating of Five Stars over the five-year period ended March 31,
1996(2), by employing a prudent management philosophy which maximizes
long-term risk-adjusted returns. Over the past three-year period also
ended March 31, 1996, your Fund's Class A shares have the eighth-best
Sharpe Ratio (a widely-used risk-adjusted performance measure
developed by Nobel Laureate William Sharpe) and the second-best
three-year average annual total return per three-year standard deviation
ratio (a measure of risk based on volatility) out of 78 High Yield funds
tracked by Morningstar(3).
We have produced strong long-term risk-adjusted and absolute
performance in the Davis High Income Fund by employing several key
strategies: diversifying in over 135 positions; carefully concentrating on
the upside potential and downside protection of each individual
investment; avoiding issues which we deem unlikely to outperform over an
entire business cycle; and investing in less-followed market segments
where we can find better yield per credit quality and more favorable
risk/return ratios.
Over the past year, the Davis High Income Fund's performance was
affected by the overall performance of the high yield bond market, which
typically deviated from the rest of the equity and fixed income markets.
In 1995, the high yield market rose along with stocks and bonds
(represented by US Treasuries), but its gain lagged behind. During the
first quarter of 1996, the high yield market underperformed stocks but
outperformed the other bond markets after their yields rose abruptly
causing a 10.5% drop in the price of the US Treasury long bond and a 3.7%
drop in the US Treasury's five-year bond.
We bolstered your Fund's performance over the past year by making
careful investments in selected distressed credits coming out of
restructuring or bankruptcy, and by avoiding opportunities that presented
too much downside default risk. We made a timely and profitable
investment in Kmart, the national discount retailer, by getting in after we
deemed that its price dropped too far following a widely-publicized rating
downgrade.
Looking forward, we are confident that our cautious positioning is
appropriate given the mixed economic signals and concerns over a
potential recession. In addition to employing the key management
strategies noted above, we are maintaining a fairly high yield despite our
average rating of BB+ by owning discount bonds (bonds with smaller
coupons that trade at much lower average dollar prices), highly-rated
private-label mortgage-backed securities, higher-rated taxable municipal
bonds, and cushion bonds (bonds with larger-than-average coupons).
<PAGE>
DAVIS HIGH INCOME FUND, INC.
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501
=============================================================================
To further limit volatility we own a few positions backed by companies
with cyclical profiles. To pick up additional downside protection we own
several positions in secured bonds that have stronger worst-case credit
quality profiles than the high yield market in general.
Due to this combination of defensive long- and short-term management
strategies, we believe that we have adequately positioned your Fund to
achieve continued strong relative and absolute performance over the next
year consistent with our emphasis on long-term risk-adjusted returns.
Sincerely,
/s/ Shelby M.C. Davis /s/ B. Clark Stamper
Shelby M.C. Davis B. Clark Stamper
President Portfolio Manager
April 29, 1996
(1) Annual average rates of return for Davis High Income Fund, Inc.,
Class A shares, including the maximum front end sales charge of 4.75%,
for the one, five and ten years ended March 31, 1996 are 4.76%, 12.19% and
5.55%, respectively.
(2) Individual fund Sharpe Ratios, total returns, standard deviations
were calculated by Morningstar and published in its Principia for Mutual
Funds diskette software (April 1996, version 1.0). Category average total
return, category average standard deviation, and individual fund total
return/standard deviation statistics were calculated from that published
data.
(3) The Morningstar proprietary ratings reflect historical risk-adjusted
performance as of March 31, 1996. The ratings are subject to change
every month. Past performance is no guarantee of future results.
Morningstar ratings are calculated from the fund's three-, five- and
ten-year average annual returns in excess of 90-day Treasury bill returns
with appropriate fee adjustments, and a risk factor that reflects fund
performance below 90-day T-bill returns. Davis High Income Class A
shares received 3, 5 and 2 stars for the three, five and ten year periods,
respectively. The Fund was rated against 2630, 1642 and 782 funds in a
combined universe of equity, fixed-income and hybrid funds for the
respective periods. The Fund's overall rating is three stars. Ten percent
of the funds in an investment category receive five stars, 22.5% receive
four stars, 35% receive three stars, 22.5% receive two stars, and the
bottom 10% receive one star. The rating listed were earned by the shares
listed above only. Star ratings for the other classes may vary, and are
available only for classes with at least three years of performance
history.
<PAGE>
DAVIS HIGH INCOME FUND, INC.
=============================================================================
Management's Discussion of Fund Performance
An interview with B. Clark Stamper, Portfolio Manager of the Fund.
Q. How is the Fund positioned currently and why?
A. The Fund is positioned defensively with respect to credit quality. In
January 1996, after the stock and bond market rallies of 1995, most stock
market indices were at or near record high levels. In addition, the yield of
the U.S. Treasury "long bond" had dropped to below 6%. Both the level for
the stock market and for the bond market appeared to be in positions
similar to late 1993 from which they posted poor results. Since early
January 1996, interest rates have risen dramatically resulting in about a
10% drop in the price of the long bond and about a 4% drop in the price of
the U.S. Treasury five year. So far the high yield market has outperformed
by having credit quality spreads tighten. My concern is that credit quality
spreads will begin to widen as they did during 1994, after the 1993 top.
Q. What could cause credit quality spreads to widen?
A. Weaker credit fundamentals. The economy is putting out mixed
signals. Some sectors appear to be getting stronger and others appear to
be getting weaker. The numbers say stronger but people say weaker. In
addition, I noticed almost a year ago that consumer installment debt as a
percent of per capita income was at record levels. In October 1995 I said,
"This could mean that individuals' borrowing capacity is at its limit and
that current levels of purchasing will be curtailed in the future." Since
then we have had a very weak retail environment and the consumers' debt
levels have become even worse. My fear is that spending will have to
continue to be curtailed, resulting in a slow-down in the economy and
deteriorating credit profiles of corporate credits. As credits weaken,
investors will require more yield to hold them; thus, credit quality
spreads would widen.
Q. What have you done to protect the Fund from deteriorating credit
quality?
A. Generally, I try to get the most yield per credit quality and the best
upside potential/downside protection characteristics that I can. I do this
in several ways. We own several categories that are not closely followed
by the investment community. These categories in effect have few
natural buyers. Examples are taxable municipal bonds, private label
mortgage-backed securities, and busted convertible bonds. I do not by any
of these investments that I believe cannot make it through the business
cycle or that will not make it to maturity. I do this by purchasing
investments with stronger credit profiles and with less volatile
underlying fundamentals. The result is our high average rating of BB+ (for
the securities that are rated).
Q. How would you describe your investment style?
A. I am a risk manager, my primary focus is on the tradeoffs between
the risks and rewards of different investments. The primary risk in the
high yield bond market is credit risk, the risk that principal and interest
will not be paid on a timely basis due to deteriorating credit quality,
which would also cause the price of a security to drop. Another risk of
bond funds is interest rate risk, the risk that interest rates will rise,
thus, causing the value of a fixed coupon bond to drop. Interest rate risk
is usually of less concern to a high yield portfolio because the large
coupon and short maturity of the typical high yield bond usually dampens
it. However, when credit quality yield spreads are tight as they are now,
it is something to keep an eye on. The reward is the coupon income and
price appreciation due to improving credit qualtiy and/or falling interest
rates. Of course, there are other types of risk and the tradeoffs among
them can result in dif-
DAVIS HIGH INCOME FUND, INC.
Management's Discussion of Fund Performance
=============================================================================
An interview with B. Clark Stamper, Portfolio Manager of the Fund -
(Continued)
ferent positive or negative returns depending upon the subtleties of
the specific credit and bond characteristics.
Q. How do you make your investment decisions?
A. My primary tool is bottom up credit research. My major concern is
that the credit quality of our investments does not deteriorate and that
we are paid back principal and interest on schedule. Purchasing high yield
bonds is like making a loan. There are numerous variables that you look at
to make sure you are going to be paid back. The potential return of the
investment is then compared to the credit quality of the investment and
the risk of something going wrong. I also apply this upside/downside
analysis to interest rate risk and call risk as well. In addition, I use
top-down management techniques where I look at the characteristics of
the portfolio as a whole. I use these techniques to monitor the proportion
of our stake in positions of similar type or strategy, and to make sure we
are properly diversified.
<PAGE>
DAVIS HIGH INCOME FUND, INC.
Comparison of Class A shares of Davis High Income Fund, Inc. and Salomon
Brothers Long-Term High-Yield Index
=============================================================================
Average Annual Total Return for the Periods ended March 31, 1996.
<TABLE>
CLASS A SHARES (This calculation includes an CLASS B SHARES (This calculation includes
initial sales charge of 4 3/4%.) any applicable contingent deferred sales charge.)
<S> <C> <C> <C>
One Year............................. 4.76% One Year.................................. 5.70%
Five Years........................... 12.19% Life of Class (December 5, 1994 through
Ten Years............................ 5.55% March 31, 1996)........................... 7.02%
</TABLE>
$10,000 invested over ten years. Let's say you invested $10,000 in Davis
High Income Fund, Inc., Class A shares on March 31, 1986 and paid a 4
3/4% sales charge. As the chart shows, by March 31, 1996 the value of
your investment would have grown to $17,178 - a 71.78% increase on your
initial investment. For comparison, the Salomon Brothers Long-Term High
Yield Index is also presented on the chart below.
Graph omitted. Details of graph are as follows:
<TABLE>
<CAPTION>
Measurement period Davis High Salomon Brothers
Income Fund Long-Term High-Yield
------------------ ------------------- ---------------
<S> <C> <C>
FYE 9/30/85 $ 9,525 $10,000
FYE 9/30/86 10,590 11,449
FYE 9/30/87 10,256 12,028
FYE 9/30/88 10,997 13,347
FYE 9/30/89 9,710 12,212
FYE 9/30/90 9,193 14,388
FYE 9/30/91 11,289 18,186
FYE 9/30/92 13,411 21,446
FYE 9/30/93 14,926 23,288
FYE 9/30/94 15,626 25,054
FYE 9/30/95 17,178 29,799
</TABLE>
Salomon Brothers Long-Term High-Yield Index is an unmanaged index and
has no specific investment objective. The index used includes net interest
reinvested, but does not take into account any sales charge.
The performance data for Davis High Income Fund, Inc. contained in this
report represents past performance and assumes that all distributions
were reinvested, and should not be considered as an indication of future
performance from an investment in the Fund today. The investment return
and principal value will fluctuate so that shares may be worth more or
less than their original cost when redeemed.
<PAGE>
<TABLE>
Davis High Income Fund, Inc.
Schedule of Investments
At March 31, 1996
=================================================================================================================================
CORPORATE BONDS AND NOTES - (74.46%)
<CAPTION>
Value
Principal (Note 1)
- --------- ------
<S> <C> <C>
AEROSPACE/AVIATION - (1.95%)
$1,085,000 K & F Industries Inc., Sr. Secured Notes, 11.875%, 12/01/03.......................................... $ 1,179,938
-----------
AUTOMOBILE - (1.19%)
700,000 Exide Corp., Sr. Notes, 10.75%, 12/15/02............................................................. 719,250
-----------
BUILDING AND BUILDING PRODUCTS - (3.04%)
500,000 Southdown, Inc., Sr. Sub. Notes, 10.00%, 03/01/06<F5>................................................ 503,750
750,000 Waxman Industries, Inc., Sr. Secured Notes, 12.25%, 09/01/98......................................... 746,250
640,000 Waxman Industries, Inc., Sr. Sub. Notes, 13.75%, 06/0/99............................................. 584,000
-----------
1,834,000
-----------
CABLE/BROADCASTING & MEDIA - (4.55%)
500,000 Continental Cablevision Inc., Sr. Sub. Notes, 10.625%, 06/15/02...................................... 546,250
150,000 Fundy Cable Ltd., Sr. Secured 2nd Priority Notes, 11.00%, 11/15/05................................... 156,000
1,000,000 Marcus Cable Holding Co. L.P., Sr. Secured Notes, Zero Cpn., 12/15/05<F3>............................ 645,000
500,000 News America Holdings Inc., Sr. Notes, 12.00%, 12/15/01.............................................. 548,735
500,000 Rifkin Acquisition Partners L.P., Sr. Sub. Notes, 11.125%, 01/15/06 <F5>............................. 507,500
250,000 Sinclair Broadcast Group Inc., Sr. Sub. Notes, 10.00%, 09/30/05...................................... 248,750
100,000 Spanish Broadcasting Systems Inc., Sr. Notes, 7.50%, 06/15/02........................................ 99,000
-----------
2,751,235
-----------
CHEMICALS - (0.88%)
500,000 Pioneer Americas Acquisition Corp., Sr. Notes, 13.375%, 04/01/05..................................... 533,750
-----------
COMPUTER PRODUCTS AND SERVICES - (3.16%)
500,000 Anacomp, Inc., Series B Notes, 12.25%, 10/26/97...................................................... 512,500
100,000 Atari Corp., Conv. Sub. Deb., 5.25%, 04/29/02........................................................ 61,500
279,200 San Jacinto Holdings Inc., Sr. Notes, 10.75%, 12/31/02............................................... 220,568
250,000 Sapiens International N.V., Euro Conv. Notes, 5.00%, 09/20/03........................................ 85,625
500,000 Triad Systems Corp., Sr. Notes, 12.25%, 08/01/99..................................................... 531,250
500,000 Unisys Corp., Sr. Notes, 12.00%, 04/15/03 <F5>....................................................... 497,500
-----------
1,908,943
-----------
CONSUMER PRODUCTS & MERCHANDISE - (1.66%)
1,000,000 International Semi-Tech Microelectronics Inc., Sr. Notes, Zero Cpn.,
08/15/03<F3>....................................................................................... 600,000
100,000 L.A. Gear, Inc., Conv. Sub. Deb., 7.75%, 11/30/02.................................................... 49,500
350,000 MacAndrews & Forbes Holdings, Inc., Sub. Deb., 13.00%, 03/01/99...................................... 353,063
-----------
1,002,563
-----------
DEFENSE CONTRACTORS & PRODUCTS - (1.60%)
200,000 DBA Systems, Inc., Conv. Sub. Deb., 8.25%, 11/01/10.................................................. 182,000
750,000 Tracor, Inc., Sr. Sub. Notes, 10.875%, 08/15/01...................................................... 783,750
-----------
965,750
-----------
DIVERSIFIED SERVICES - (1.04%)
697,604 Emcor Group Inc., Sr. Notes, Series C, 11.00%, 12/15/01.............................................. 631,332
-----------
Davis High Income Fund, Inc.
Schedule of Investments - Continued
At March 31, 1996
=================================================================================================================================
CORPORATE BONDS AND NOTES - Continued
Value
Principal (Note 1)
- --------- ------
ECOLOGICAL/ENVIRONMENTAL - (1.92%)
$ 735,000 Envirotest System Corp., Sr. Notes, 9.125%, 03/15/01................................................. $ 643,125
500,000 Norcal Waste Systems Inc., Sr. Notes, 12.50% Incr. rate 11/15/05 <F5>................................ 520,000
-----------
1,163,125
-----------
EDUCATION - (0.39%)
250,000 La Petite Holdings Corp., Sr. Secured Notes, 9.625%, 08/01/97........................................ 235,000
-----------
ELECTRONICS - (0.79%)
43,000 Andersen Group, Inc., Conv. Sub. Deb., 10.50%, 10/15/02.............................................. 34,454
250,000 Audiovox Corp., Conv. Sub. Deb., 6.25%, 03/15/01..................................................... 151,562
600,000 Comptronix Corp., Conv. Sub. Deb., 6.75%, 03/01/02................................................... 288,750
-----------
474,766
-----------
ENERGY - (7.26%)
100,000 Amerigas Partners L.P., Sr. Notes, Series B, 10.125%, 04/15/07...................................... 107,500
1,000,000 Clark R & M Holdings Inc., Sr. Secured Notes, Series A, Zero Cpn.,
02/15/00<F3>....................................................................................... 675,000
630,000 Empire Gas Corp., Sr. Secured Notes, 7.00%, 07/15/04................................................. 548,100
500,000 Falcon Drilling Inc., Sr. Notes, Ser. B, 9.75%, 01/15/01............................................. 517,500
626,000 Giant Industries Inc., Gtd. Sr. Sub. Notes, 9.75%, 11/15/03.......................................... 635,390
500,000 HS Resources Inc., Sr. Sub. Notes, 9.875%, 12/01/03.................................................. 486,250
100,000 Moran Energy Inc., Conv. Sub. Deb., 8.75%, 01/15/08.................................................. 85,000
250,000 Petroleum Heat & Power Co., Inc., Sub. Notes, 10.125%, 04/01/03...................................... 255,000
500,000 Trident NGL Holdings, Inc., Sub. Notes, 10.25%, 04/15/03............................................. 555,000
500,000 Tuboscope Vetco International Corp., Gtd. Sr. Sub. Notes, 10.75%, 04/15/03........................... 523,750
-----------
4,388,490
-----------
EQUIPMENT LEASING - (0.33%)
670,700 Technical Equipment Leasing Corp., Jr. Sub. Deb. Series A, 18.375%,
04/01/96<F2>....................................................................................... 201,210
-----------
FINANCIAL SERVICES AND INSURANCE _ (2.45%)
50,000 CII Financial, Inc., Conv. Sub. Deb., 7.50%, 09/15/01................................................ 45,437
500,000 GPA Delaware Inc., Gtd. Notes, 8.75%, 12/15/98....................................................... 503,750
500,000 Home Holdings, Inc., Sr. Notes, 7.875%, 12/15/03..................................................... 422,500
500,000 PennCorp Financial Group, Inc., Sr. Sub. Notes, 9.25%, 12/15/03...................................... 510,000
-----------
1,481,687
-----------
FOOD SERVICE AND DISTRIBUTION - (10.58%)
500,000 Darling International Inc., 1st Priority Sr. Sub. Notes, 11.00%, 07/15/00............................ 502,500
750,000 Envirodyne Industries, Inc., 1st Priority Sr. Secured Notes, 12.00%,
06/15/00........................................................................................... 746,250
1,154,000 Farm Fresh Inc., Conv. Sub. Deb., 7.50%, 03/01/10.................................................... 640,470
500,000 Fresh Del Monte Produce N.V., Series A, Sr. Notes, 10.00%, 05/01/03 <F5>............................. 467,500
690,000 Kroger Co., Lease Cert., 6.00%, 04/01/03............................................................. 579,600
675,000 Kroger Co., Lease Cert., 12.95%, 02/01/09............................................................ 756,000
Davis High Income Fund, Inc.
Schedule of Investments - Continued
At March 31, 1996
=================================================================================================================================
CORPORATE BONDS AND NOTES - Continued
Value
Principal (Note 1)
- --------- ------
FOOD SERVICE AND DISTRIBUTION - Continued
$ 793,000 New Almacs Inc. Sr. Sub. Notes, 11.50%, 11/18/04<F2>.................................................. $ 114,985
500,000 Penn Traffic Co., Sr. Notes., 10.375%, 10/01/04....................................................... 491,250
1,500,000 PM Holdings Corp., Sub. Disc. Deb., Series B, 0%/11.50%, 09/01/05<F3>................................. 862,500
500,000 Safeway Inc., Sr. Secured Deb., 9.30%, 02/01/07....................................................... 553,526
1,000,000 Southland Corporation, Deb., 4.00%, 06/15/04.......................................................... 677,500
-----------
6,392,081
-----------
HEALTHCARE AND PHARMACEUTICAL - (6.19%)
180,000 Advanced Medical, Inc., Conv. Sub. Deb., 15.00%, 07/15/99............................................. 125,550
2,660,000 American Medical International, N.V., Euro Deb., Zero Cpn., 08/12/97<F3>.............................. 2,385,687
863,000 Glycomed Inc., Conv. Sub. Deb., 7.50%, 01/01/03....................................................... 683,927
500,000 OrNda HealthCorp., Sr. Sub. Deb., 12.25%, 05/15/02.................................................... 545,000
-----------
3,740,164
-----------
HOTELS, LODGING & GAMING - (0.84%)
500,000 Courtyard By Marriott II L.P., Sr. Secured Notes, 10.75%, 02/01/08 <F3>............................... 503,750
-----------
LEISURE/ENTERTAINMENT - (3.55%)
500,000 Act III Theaters Inc., Sr. Sub. Notes, 11.875%, 02/01/03.............................................. 547,500
500,000 Cobb Theaters, Sr. Secured Notes, 10.625%, 03/01/03 <F3>.............................................. 513,750
100,000 Spectrum Holobyte Inc., Conv. Sub. Notes, 6.50%, 09/15/02 <F3>........................................ 74,000
1,000,000 Underwater World Mall of America, Sr. Rev. Bds., 13.75%, 03/01/02 <F3>................................ 1,010,000
-----------
2,145,250
-----------
MANUFACTURING - (1.82%)
100,000 Atlantis Group Inc., Sr. Notes, 11.00%, 02/15/03...................................................... 91,250
500,000 Carlisle Plastics Inc., Sr. Notes, 10.25%, 06/15/97................................................... 495,000
500,000 Key Plastics, Inc., Sr. Notes, Series B, 14.00%, 11/15/99............................................. 512,500
-----------
1,098,750
-----------
METALS - (1.27%)
500,000 Florida Steel Corp., Deb., 11.50%, 12/15/00........................................................... 512,500
250,000 Haynes International Inc., Sr. Secured Notes, Series. A, 11.25%, 06/15/98............................. 252,500
-----------
765,000
-----------
PAPER PRODUCTS - (0.78%)
500,000 Grupo Industrial Durango S.A. DE C.V. Notes, 12.00%, 07/15/01......................................... 468,750
-----------
PRECIOUS METALS - (2.34%)
450,000 Canyon Resources Corp., Sub. Notes, 6.00%, 06/01/98 <F3>.............................................. 466,312
1,170,000 Crown Resources Corp., Conv. Sub. Deb., 5.75%, 08/27/01............................................... 947,700
-----------
1,414,012
-----------
RESTAURANT - (1.58%)
725,000 Foodmaker, Inc., Sr. Sub. Notes, 14.25%, 05/15/98..................................................... 739,500
250,000 TPI Enterprises Inc., Conv. Sub. Deb., 8.25%, 07/15/02................................................ 212,500
-----------
952,000
-----------
Davis High Income Fund, Inc.
Schedule of Investments - Continued
At March 31, 1996
=================================================================================================================================
CORPORATE BONDS AND NOTES - Continued
Value
Principal (Note 1)
- --------- ------
RETAIL - (1.22%)
$ 687,127 Lehman ABS Corporation, Series 94-C2, Class A, 8.145%, 11/02/07....................................... $ 553,137
420,000 Tops Appliance City Inc., Conv. Sub. Deb., 6.50%, 11/30/03............................................ 184,800
-----------
737,937
-----------
TELECOMMUNICATIONS - (8.05%)
400,000 American Communication Services, Inc., Sr. Disc. Notes, 0%/12.75%,
04/01/06<F3>........................................................................................ 226,000
1,000,000 Echostar Communications Corp., Sr. Secured Disc. Notes, Zero Cpn.,
06/01/04<F3>........................................................................................ 735,000
111,000 Mastec Inc., Conv. Sub. Deb., 12.00%, 11/15/00........................................................ 111,000
500,000 Metrocall Inc., Sr. Sub. Notes, 10.375%, 10/01/07..................................................... 493,750
820,000 Moblemedia Communications Inc., Sr. Sub. Notes, Zero Cpn., 12/01/03<F3>............................... 635,500
500,000 Pegasus Media & Communications, Sr. Sub. Notes, 12.50%, 07/01/05...................................... 515,360
900,000 Porta Systems Inc., Conv. Sub. Deb., 6.00%, 07/01/02<F2>.............................................. 459,000
500,000 USA Mobile Communications Holdings Inc., Sr. Notes, 14.00%, 11/01/04.................................. 582,500
1,000,000 Viatel Inc., Sr. Disc. Notes, 0%/15.00%, 01/15/05<F3>................................................. 545,361
325,000 Winstar Communications Inc., Sr. Sub. Disc. Notes, Zero Cpn., 10/15/05<F3>............................ 195,000
650,000 Winstar Communications, Inc., Sr. Disc. Notes, 0%/14.00%, 10/15/05<F3>................................ 367,250
-----------
4,865,721
-----------
TRANSPORTATION/SHIPPING - (2.71%)
97,777 Continental Air Lines, Inc., Deferred Rent Notes, 12.00%, 06/30/96 <F5>............................... 98,266
250,000 Moran Transportation Co., 1st Preferred Shipping Mtg. Notes, 11.75%,
07/15/04 <F5>....................................................................................... 246,875
444,000 Preston Corp., Conv. Sub. Deb., 7.00%, 05/01/11....................................................... 330,780
596,000 Tiphook Finance Corporation, Sr. Secured Notes, 8.00%, 03/15/00....................................... 426,140
500,000 TNT Transport (Europe) PLC/TNT (USA) Inc., Sr. Notes, 11.50%,
04/15/04............................................................................................ 537,500
-----------
1,639,561
-----------
UTILITIES - (1.32%)
750,000 Consolidated Hydro Inc., Sr. Discount Notes, Zero Cpn., 07/15/03<F3>.................................. 243,750
500,000 Midland Funding Corporation II, Sub. Secured Lease, 13.25%, 07/23/06.................................. 552,687
-----------
796,437
-----------
TOTAL CORPORATE BONDS AND NOTES (identified
cost $45,073,951)........................................................................... 44,990,452
-----------
MORTGAGE BACKED BONDS - (4.58%)
247,639 Capstead Securities Corp., IV CMO, Series '92-7 CL Z-1, 8.75%, 05/25/23............................... 243,306
519,040 Chase Mortgage Finance Corp., Series '93-G-A1, REMIC, 7.00%, 04/25/01................................. 516,092
305,130 Citicorp Mtg. Securities, Inc., Series '89-16, 6.68%, 04/01/19........................................ 296,739
100,000 Federal Home Loan Mortgage Corporation, CMO, Series '93, CL 1630 E,
6.00%, 09/15/23..................................................................................... 85,183
Davis High Income Fund, Inc.
Schedule of Investments - Continued
At March 31, 1996
=================================================================================================================================
Value
Principal (Note 1)
- --------- ------
MORTGAGE BACKED BONDS - Continued
$ 293,852 Federal Home Loan Mortgage Corporation, CMO, Series ''94, CL 1628 F,
7.40%, 02/15/14..................................................................................... $ 301,339
486,799 First Nationwide Trust, Series '89-AR4-1, 9.50%, 09/25/19............................................. 485,392
72,433 Kidder, Peabody Mortgage Assets Trust, CMO, Series 21, CL C, Fixed
Rate, 8.20%, 11/20/19............................................................................... 72,249
407,902 Merrill Lynch Mtg. Invst. Inc., Mtg. Pass-Through Certificates, Series A,
CL-A, 6.59%, 02/01/18............................................................................... 401,783
179,000 The Prudential Mortgage Securities Company, Mtg. Pass-Through
Certificates Series '92-38, CL A-8, Fixed Rate, 6.95%, 11/25/22..................................... 161,340
17,986 Resolution Trust Corporation, REMIC, '92-Series M-3 CL A2, 8.625%,
07/25/30............................................................................................ 17,446
167,957 Resolution Trust Corporation, American Res. Mtg. Corp., Service Mtg.
Pass-Through Certificates, Series '92-7 CL A1, 6.82%, 03/25/22...................................... 145,702
38,000 Ryland Acceptance Corporation Four, CMO, Series '85, CL 85-D, 9.25%,
04/01/12............................................................................................ 38,285
-----------
TOTAL MORTGAGE BACKED BONDS (identified cost $2,686,504)......................................... 2,764,856
-----------
TAXABLE MUNICIPAL BONDS - (6.80%)
670,000 Adams Cnty., CO, IDR Series A Pool Gtd. - Executive Life, 9.00%,
11/01/96<F1>........................................................................................ 67,000
375,000 Commerce Refuse to Energy Auth., Taxable Ref. Rev. Bds., '90 Series,
10.50%, 07/01/00.................................................................................... 380,625
195,000 El Paso Hsg. Fin. Corp., Multi-Fam. Res. Loan Program, Securitized Mult-
Fam. Hsg. Rev. Bds., Series '86A, 8.88%, 10/15/96<F1>............................................... 13,650
449,000 Illinois HFA Rev. Bds., Series C, MBIA, 10.30%, 08/15/03.............................................. 458,954
20,000 Jackson Michigan Osteopathic Hosp., 1st Mtg. Ten Year Extendible Bds.,
9.50%, 12/01/11..................................................................................... 16,767
100,000 Louisiana HFA Multi Fam. Mtg. Rev. Bds., Gtd. Executive Life, 8.61%,
08/01/96<F1>........................................................................................ 10,000
100,000 Louisiana St. Agriculture Fin. Auth., Security Agriculture Rev. Bds.,
Series A, Gtd. Executive Life, 8.80%, 10/01/96<F1>.................................................. 21,000
1,845,000 Massachusetts St. HFA Res., Series C, 10.90%, 08/01/201,96............................................ 1,887
295,000 Mayor and City Council of Baltimore, Econ. Dev. Taxable Lease Rev. Bds.
(Arcade Ltd. Partnership Prj.) Series '92, 8.50%, 08/01/02.......................................... 309,027
675,480 Memphis, TN Hlth. Educ. & Hsg. Fac. Brd., Multi Fam. Hsg. Rev.
Securitized, Series '86A, 8.68%, 09/15/96<F1>....................................................... 94,573
115,000 Missouri St., Hsg. Dev. Cmnty., Multi Fam. Hsg. Rev. Bds., FHA Insured
Mtg. Loans, 9.25%, 12/01/30......................................................................... 120,741
20,000 Nebraska Invst. Fin. Auth., Agriculture Rev. Bds., Series A, Gtd. Executive
Life, 8.34%, 11/01/93<F1>........................................................................... 4,300
440,000 New York St. HFA Rev. Multi Fam. Mtg. Series B, Sonyma Prg.
Insurance, 8.875%, 08/15/14......................................................................... 462,814
Davis High Income Fund, Inc.
Schedule of Investments - Continued
At March 31, 1996
=================================================================================================================================
Value
Principal/Shares/Units (Note 1)
- ---------------------- ------
TAXABLE MUNICIPAL BONDS - Continued
$ 807,000 The Southeast TX Hsg. Fin. Corp. Securitized Multi Fam. Hsg. Rev. Bds.
Series '86A, 8.60%, 09/01/96<F1>.................................................................... $ 137,190
45,000 Utah St. Hsg. Fin. Agy. Sngl. Fam. Mtg., Series A, 9.40%, 07/01/99.................................... 46,932
-----------
TOTAL TAXABLE MUNICIPAL BONDS (identified
cost $4,817,721)............................................................................... 4,105,460
-----------
PREFERRED STOCKS - (0.96%)
53,170 Sunshine Mining Holding Co., Cum. Redeemable $1.19 Pfd.<F3>........................................... 531,700
6,200 Westmoreland Coal Co., Dep. Shares Pfd. Conv. Series A, 8.50%......................................... 46,500
-----------
TOTAL PREFERRED STOCK (identified cost $646,491)................................................. 578,200
-----------
COMMON STOCKS - (0.97%)
16,920 Advanced Medical, Inc.<F3>............................................................................ 41,242
222 San Jacinto Holdings Inc.<F3>......................................................................... 1,445
361,057 Sunshine Mining Co.<F3>............................................................................... 541,598
-----------
TOTAL COMMON STOCK (identified cost $1,026,438).................................................. 584,285
-----------
WARRANTS - (0.18%)
500 Chattem Inc., expire 8/17/99<F3>...................................................................... 1,443
869 Empire Gas Corp., expire 07/15/04<F3>................................................................. 26,070
500 Petro PSC Properties L.P., Petro Fin'l. Corp., expire 06/01/97<F3>.................................... 17,250
100 Spanish Broadcasting Systems Inc., expire 06/30/99<F3>................................................ 18,250
21,825 Sunshine Mining Co., expire 03/09/99<F3>.............................................................. 12,959
205 Wright Medical Technology, Inc., expire 06/30/03<F3>.................................................. 33,825
-----------
TOTAL WARRANTS (identified cost $18,291)......................................................... 109,797
-----------
Davis High Income Fund, Inc.
Schedule of Investments - Continued
At March 31, 1996
=================================================================================================================================
Value
Principal (Note 1)
- --------- ------
SHORT TERM - (13.33%)
$1,215,000 Federal Home Loan Bank Discount Note, 5.25%, 04/01/96................................................. $ 1,214,646
6,845,000 Federal Home Loan Mortgage Corporation Discount Note, 5.28%, 04/01/96................................. 6,842,992
-----------
TOTAL SHORT TERM (identified cost $8,057,638).................................................... 8,057,638
-----------
TOTAL INVESTMENTS (identified cost $62,327,034)-
(101.28%)<F4>................................................................................ 61,190,688
LIABILITIES LESS OTHER ASSETS - (1.28%)........................................................ (775,855)
-----------
NET ASSETS - 100%............................................................................ $60,414,833
===========
<FN>
<F1> These securities are in default but have made partial payments.
<F2> These securities are in default and are not currently paying interest.
<F3> Non-income producing security.
<F4> Aggregate cost for Federal income tax purposes is $62,327,034.
<F5> These securities are subject to Rule 144A. The Board of Directors
of the Fund has determined that there is sufficient liquidity in these
securities to realize current valuations.
At March 31, 1996, unrealized appreciation (depreciation) of securities
for Federal income tax purposes was as follows:
Unrealized appreciation.................................................................................. $ 1,883,375
Unrealized depreciation.................................................................................. (3,019,721)
-----------
Net unrealized depreciation......................................................................... $(1,136,346)
===========
</FN>
</TABLE>
See Notes to Financial Statements
<PAGE>
<TABLE>
Davis High Income Fund, Inc.
Statement of Assets and Liabilities
At March 31, 1996
=================================================================================================================================
<S> <C>
ASSETS:
Investments in securities, at value (identified cost $62,327,034) (Note 1).................................... $61,190,688
Cash ......................................................................................................... 22,844
Receivables:
Interest and dividends...................................................................................... 969,703
Capital stock sold.......................................................................................... 116,192
Investments sold............................................................................................ 41,604
Other assets.................................................................................................. 168,000
-----------
Total assets............................................................................................. 62,509,031
-----------
LIABILITIES:
Payables:
Capital stock reacquired.................................................................................... 90,835
Investments purchased....................................................................................... 1,893,630
Accrued expenses.............................................................................................. 109,733
-----------
Total liabilities........................................................................................ 2,094,198
-----------
NET ASSETS (Note 5)................................................................................................ $60,414,833
===========
CLASS A SHARES
Net assets.................................................................................................... $53,815,517
Shares outstanding............................................................................................ 11,115,080
Net asset value and redemption price per share (net assets/shares outstanding)................................ $ 4.84
=======
Maximum offering price per share (100/95.25 of $4.84)<F1>..................................................... $ 5.08
=======
CLASS B SHARES
Net assets.................................................................................................... $ 6,599,316
Shares outstanding............................................................................................ 1,372,708
Net asset value, offering and redemption price per share (net assets/shares outstanding) $ 4.81
=======
Net assets consist of:
Unrealized depreciation of investments........................................................................ $(1,136,346)
Accumulated net realized loss on investments.................................................................. (23,643,914)
Paid-in capital............................................................................................... 85,195,093
-----------
Net assets............................................................................................... $60,414,833
===========
<FN>
<F1> On purchases of $100,000 or more, the offering price is reduced.
</FN>
</TABLE>
See Notes to Financial Statements
<PAGE>
<TABLE>
Davis High Income Fund, Inc.
Statement of Operations
For the year ended March 31, 1996
=================================================================================================================================
INVESTMENT INCOME:
<S> <C> <C>
Income:
Interest.................................................................................................... $ 6,378,629
Dividends................................................................................................... 2,730
-----------
Total income............................................................................................. 6,381,359
-----------
Expenses:
Management fees (Note 3)........................................................................ 458,668
Custodian fees.................................................................................. 93,126
Transfer agent fees............................................................................. 86,780
Audit fees...................................................................................... 27,000
Legal fees...................................................................................... 14,591
Accounting fees (Note 3)........................................................................ 15,996
Reports to shareholders......................................................................... 26,731
Directors' fees and expenses.................................................................... 22,925
Registration and filing fees (Note 3)........................................................... 46,898
Miscellaneous................................................................................... 23,677
Commissions paid under distribution plan (Note 4):
Class A....................................................................................... 100,703
Class B....................................................................................... 46,899
Total expenses............................................................................................ 963,994
-----------
Net investment income................................................................................... 5,417,365
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss from investment transactions................................................................ (80,868)
Net decrease in unrealized depreciation of investments during the period...................................... 383,278
-----------
Net realized and unrealized gain on investments.......................................................... 302,410
-----------
Net increase in net assets resulting from operations..................................................... $ 5,719,775
===========
</TABLE>
See Notes to Financial Statements
<PAGE>
<TABLE>
Davis High Income Fund, Inc.
Statement Of Changes in Net Assets
=================================================================================================================================
<CAPTION>
For the Years
Ended March 31,
-----------------------------
1996 1995
---- ----
<S> <C> <C>
Operations:
Net investment income.................................................................. $ 5,417,365 $ 5,727,589
Net realized loss from investment transactions......................................... (80,868) (3,505,308)
Net decrease in unrealized depreciation of investments................................. 383,278 529,763
----------- -----------
Net increase in net assets resulting from operations................................. 5,719,775 2,752,044
Distributions to shareholders from:
Net investment income
Class A ($0.43 and $0.46 per share, respectively).................................... (5,039,427) (5,702,988)
Class B ($0.40 and $0.11 per share, respectively).................................... (377,939) (24,601)
Paid-in capital
Class A ($0.05 and $0.04 per share, respectively).................................... (525,379) (453,550)
Class B ($0.04 per share)............................................................ (46,649) _
Capital share transactions (Note 5)...................................................... 2,379,133 (2,928,958)
----------- -----------
Total increase (decrease) in net assets............................................ 2,109,514 (6,358,053)
Net Assets:
Beginning of year...................................................................... 58,305,319 64,663,372
----------- -----------
End of year............................................................................ $60,414,833 $58,305,319
=========== ===========
See Notes to Financial Statements
</TABLE>
<PAGE>
Davis High Income Fund, Inc.
Notes to Financial Statements
Year Ended March 31, 1996
===============================================================================
Note 1 - Summary of Significant Accounting Policies.
The Company is registered under the Investment Company Act of 1940, as
amended, as a diversified, open-end management investment company. Its
primary objective is to achieve a high level of current income. The
Company also seeks capital growth so long as such objective is consistent
with its primary objective. The Company invests primarily in high yield,
high risk, low rated and unrated bonds commonly referred to as "junk
bonds." Such securities are speculative and subject to greater market
fluctuations and risk of loss of income and principal than higher rated
bonds. On December 1, 1994, the Company commenced the offering of
shares in two classes, Class A and Class B. The Class A shares are sold
with a front-end sales charge and the Class B shares are sold at net asset
value and may be subject to a contingent deferred sales charge upon
redemption. All classes have identical rights with respect to voting
(exclusive of each Class' distribution arrangement), liquidation and
distributions. The following is a summary of significant accounting
policies followed by the Company in the preparation of its financial
statements.
Security Valuation.
Fixed income securities may be valued on the basis of prices provided by a
pricing agent when such prices are believed to reflect the fair market
value of such securities. (Pricing agents generally take into account
institutional size trading in similar groups of securities). Securities not
priced in this manner will be priced at the last published sales price if
traded on that day and, if not traded, at the mean between the most recent
quoted bid and asked prices provided by investment dealers. The pricing
service and valuation procedures are reviewed and subject to approval by
the Board of Directors. If no quotations are available, securities will be
valued at fair value as determined in good faith by the Board of Directors.
Short-term obligations are valued at amortized cost, which approximates
value.
Federal Income Taxes.
It is the Company's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to shareholders.
Therefore, no provision for federal income tax is required. At March 31,
1996, the Fund had approximately $23,644,000 of capital loss carryovers
available to offset future capital gains, if any, of which $1,743,000,
$4,918,000, $7,606,000, $4,382,000, $1,409,000, $3,505,000 and $81,000
expire in 1997, 1998, 1999, 2000, 2001, 2003 and 2004 respectively.
Securities Transactions and Related Investment Income.
Securities transactions are accounted for on the trade date (date the order
to buy or sell is executed) with gain or loss on the sale of securities being
determined based upon identified cost. Dividend income is recorded on the
ex-dividend date and interest income is recorded on the accrual basis.
Discounts and premiums on debt securities are amortized in accordance
with the requirements of the internal revenue code.
Dividends and Distributions to Shareholders.
Dividends and distributions to shareholders are recorded on the
ex-dividend date.
Davis High Income Fund, Inc.
Notes to Financial Statements - Continued
Year Ended March 31, 1996
===============================================================================
Note 1 - Summary of Significant Accounting Policies - (Continued)
Use of Estimates in Financial Statements.
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements, as well as the reported amounts of income and
expenses during the reporting period. Actual results may differ from
these estimates.
Note 2 - Purchases and Sales of Securities.
Purchases and sales of investment securities (excluding short term
securities) during the year ended March 31, 1996, were $64,693,354 and
$65,668,791, respectively.
Note 3 - Investment Advisory Fees and Other Transactions with Affiliates.
The Company pays advisory fees for investment management and advisory
services under a management agreement with Davis Selected Advisers,
L.P. (the "Adviser"). The agreement provides for a monthly fee of
.0625 of 1% (equivalent to .75 of 1% per annum) of the first $250 million
of average daily net assets of the Company. Effective May 1, 1996, the
management agreement was amended and the monthly fee was changed to
.0583 of 1% (equivalent to .70 of 1% per annum) of the first $250 million
of average daily net assets of the Company. Regardless of the above
provisions, the Adviser will pay or refund to the Company any expenses
(including the fee under the agreement but excluding interest, taxes,
brokerage fees, payments made to the Distributor under any Rule 12b-1
Distribution Plan adopted by the Company and, where permitted,
extraordinary expenses) in excess of the most restrictive applicable
expense limitation prescribed by any statute or regulatory authority of
any jurisdiction in which the Company's shares are qualified for offer and
sale. The Adviser believes that the most restrictive expense limitations
presently applicable are 2 1/2% for the first $30 million of average net
assets, 2% for the next $70 million of average net assets and 1 1/2% for
any additional average net assets. Davis Selected Advisers, L.P. is paid
for registering Company shares for sale in various states. The fee for the
year ended March 31, 1996 amounted to $12,000. Davis Selected Advisers,
L.P. is paid for certain transfer agent services. The fee for the year ended
March 31, 1996 amounted to $6,987. Davis Selected Advisers, L.P. is also
paid for certain accounting services. The fee for the year ended March 31,
1996 amounted to $15,996. Certain directors and officers of the Company
are also directors and officers of the general partner of Davis Selected
Advisers, L.P.
Note 4 - Distribution and Underwriting Fees
Class A Shares
Class A shares of the Company are sold at net asset value plus a
sales charge and are redeemed at net asset value (without a contingent
deferred sales charge).
During the year ended March 31, 1996, the Company's Underwriter,
Davis Selected Advisers, L.P., received $163,366 from commissions earned
on sales of Class A shares of the Fund of which $22,541 was retained by
the Underwriter and the remaining $140,825 was reallowed to investment
dealers. Davis Selected Advisers, L.P. paid the costs of prospectuses in
excess of those required to be filed as part of the Company's registration
statement, sales literature and other expenses assumed or incurred by it
in connection with such sales.
Davis High Income Fund, Inc.
Notes to Financial Statements - Continued
Year Ended March 31, 1996
Note 4 - Distribution and Underwriting Fees - (Continued)
Class A Shares - (Continued)
The Underwriter is reimbursed for amounts paid to dealers as a
maintenance fee with respect to Class A shares sold by dealers and
remaining outstanding during the period. The maintenance fee is paid at
the annual rate of 1/4 of 1% of the average net assets maintained by the
responsible dealers. The Underwriter is not reimbursed for accounts in
which the Underwriter pays no service fees to other firms. The
maintenance fee for Class A shares of the Company for the year ended
March 31, 1996 was $100,703.
Class B Shares
Class B shares of the Company are sold at net asset value and are
redeemed at net asset value less a contingent deferred sales charge if
redeemed within six years of purchase.
The Company pays the Distributor a 4% commission on the proceeds
from the sale of the Company's Class B shares and the Distributor
reallows 4% to the qualified dealer responsible for the sale of the shares.
A rule implemented by the National Association of Securities Dealers,
Inc., ("NASD") limits the percentage of the Company's annual average net
assets attributable to Class B shares which may be used to reimburse the
Distributor. The limit is 1%, of which 0.75% may be used to pay
distribution expenses and 0.25% may be used to pay shareholder service
fees. The NASD rule also limits the aggregate amount the Company may
pay for distribution to 6.25% of gross sales since inception of the Rule
12b-1 plan plus interest at 1% over the prime rate on unpaid amounts. The
Distributor intends to seek full payment (plus interest at prime plus 1%)
of distribution charges that exceed the 1% annual limit in some future
period or periods when the plan limits have not been reached.
For the year ended March 31, 1996, Class B shares of the Company
made distribution plan payments which included commissions of $35,710
and maintenance fees of $11,189.
Commissions earned by the Distributor for the year ended March 31,
1996 on the sale of Class B shares of the Company amounted to $156,278
of which $143,885 was reallowed to qualified selling dealers.
The Distributor intends to seek payment from Class B shares of the
Company in the amount of $136,231, representing the cumulative
commissions earned by the Distributor on the sale of the Company's Class
B shares reduced by cumulative commissions paid by the Company and
cumulative contingent deferred sales charge paid by redeeming
shareholders. The Company has no contractual obligation to pay any such
distribution charges and the amount, if any, timing and condition of such
payment are solely within the discretion of the Directors who are not
interested persons of the Company or the Distributor.
A contingent deferred sales charge is imposed upon redemption of
certain Class B shares of the Company within six years of the original
purchase. The charge is a declining percentage starting at 4% of the
lesser of net asset value of the shares redeemed or the total cost of such
shares. For the year ended March 31, 1996 the Distributor received
contingent deferred sales charges of $7,590 from redemptions of Class B
shares of the Company.
Davis High Income Fund, Inc.
Notes to Financial Statements - Continued
Year Ended March 31, 1996
===============================================================================
Note 5 - Capital Stock
At March 31, 1996, there were 1,000,000,000 shares of capital stock
($0.05 par value per share) authorized. Transactions in capital stock were
as follows:
<TABLE>
<CAPTION>
For the Year Ended
Class A March 31, 1996
- ------- ----------------------------
Shares Amount
------ ------
<S> <C> <C>
Shares subscribed................................................................. 2,023,310 $ 9,816,406
Shares issued to shareholders in connection with reinvestment of distributions.... 704,353 3,408,315
------------ ------------
2,727,663 13,224,721
Shares reacquired................................................................. (3,213,613) (15,601,779)
------------ ------------
Net decrease................................................................. (485,950) $ (2,377,058)
============ ============
For the Year Ended
March 31, 1995
----------------------------
Shares Amount
------ ------
Shares subscribed 2,407,613 $ 11,798,620
Shares issued to shareholders in connection with reinvestment of distributions.... 784,110 3,839,262
------------ ------------
3,191,723 15,637,882
Shares reacquired................................................................. (4,183,295) (20,452,967)
------------ ------------
Net decrease................................................................. (991,572) $ (4,815,085)
============ ============
For the Year Ended
Class B March 31, 1996
- ------- ------------------------------
Shares Amount
Shares subscribed................................................................. 1,288,020 $ 6,239,050
Shares issued to shareholders in connection with reinvestment of distributions.... 33,677 162,136
------------ ------------
1,321,697 6,401,186
Shares reacquired................................................................. (340,802) (1,644,995)
------------ ------------
Net increase................................................................. 980,895 $ 4,756,191
============ ============
For the Four
Months Ended
March 31, 1995
------------------------------
Shares Amount
------ ------
Shares subscribed................................................................. 492,336 $ 2,367,751
Shares issued to shareholders in connection with reinvestment of distributions.... 967 4,634
------------ ------------
493,303 2,372,385
Shares reacquired................................................................. (101,490) (486,258)
------------ ------------
Net increase................................................................. 391,813 $ 1,886,127
============ ============
</TABLE>
<PAGE>
<TABLE>
Davis High Income Fund, Inc.
Financial Highlights
======================================================================================================================
The following represents selcted data for a share of capital stock outstanding throughout each period.
<CAPTION>
-------------------------Class A----------------------------- -------Class B-------
Four
Year Months
Year ended March 31, ended ended
------------------------------------------------------------- March 31, March 31,
1996 1995 1994 1993 1992 1996 1995
---- ---- ---- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period...... $ 4.86 $ 5.14 $ 5.18 $ 4.92 $ 4.75 $ 4.85 $ 4.80
------ ------ ------ ------ ------ ------ ------
Income From Investment
- ----------------------
Operations
- ----------
Net Investment Income.... 0.43 0.46 0.50 0.61 0.53 0.40 0.11
Net Gains or Losses on
Securities (both
realized and
unrealized)............ 0.03 (0.24) 0.06 0.25 0.43 - 0.05
------ ------ ------ ------ ------ ------ ------
Total From
Investment
Operations......... 0.46 0.22 0.56 0.86 0.96 0.40 0.16
------ ------ ------ ------ ------ ------ ------
Less Distributions
- ------------------
Dividends (from
net investment
income)................ (0.43) (0.46) (0.50) (0.60) (0.53) (0.40) (0.11)
Returns of
Capital................ (0.05) (0.04) _ _ (0.26) (0.04) _
Distribution in
Excess of
Realized Gains......... _ _ (0.10) _ _ _ _
------ ------ ------ ------ ------ ------ ------
Total Distributions.. (0.48) (0.50) (0.60) (0.60) (0.79) (0.44) (0.11)
------ ------ ------ ------ ------ ------ ------
Net Asset Value,
End of Period............ $ 4.84 $ 4.86 $ 5.14 $ 5.18 $ 4.92 $ 4.81 $ 4.85
====== ====== ====== ====== ====== ====== ======
Total Return <F1>.......... 9.93% 4.69% 11.29% 18.81% 22.45% 8.68% 4.28%
- ------------
Ratios/Supplemental Data
- ------------------------
Net Assets, End of Period
(000 omitted).......... $53,816 $56,405 $64,663 $38,305 $24,986 $6,599 $1,900
Ratio of Expenses
to Average
Net Assets............. 1.51% 1.53% 1.48% 1.81% 1.93% 2.32% 2.36%<F2>
Ratio of Net
Income to
Average Net
Assets................. 8.92% 9.49% 9.31% 11.91% 11.01% 8.11% 8.66%<F2>
Portfolio Turnover
Rate................... 118.34% 98.94% 98.31% 84.93% 93.78% 118.34% 98.94%
<FN>
<F1> Sales charges are not reflected in calculation.
<F2> Annualized
</FN>
</TABLE>
<PAGE>
Davis High Income Fund, Inc.
Report of Independent Certified Public Accountants
============================================================================
To the Shareholders and Board of Directors
of Davis High Income Fund, Inc.
We have audited the accompanying statement of assets and
liabilities of Davis High Income Fund, Inc., including the schedule of
investments, as of March 31, 1996, and the related statement of
operations for the year then ended, the statement of changes in net assets
for each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended. These
financial statements and financial highlights are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these fi-nancial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of March 31, 1996, by correspondence
with the custodian and brokers. An audit also includes assessing the
accounting principles used and signifi-cant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Davis High Income Fund, Inc. as of March 31, 1996, the results
of its operations for the year then ended, the changes in its net assets for
each of the two years in the period then ended, and the financial highlights
for each of the five years in the period then ended, in conformity with
generally accepted accounting principles.
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
April 26, 1996
<PAGE>
DAVIS HIGH
INCOME FUND, INC.
124 East Marcy Street, Santa Fe, New Mexico 87501
============================================================================
Directors Officers
Jeremy H. Biggs Jeremy H. Biggs
Wesley E. Bass, Jr. Chairman
Marc P. Blum Shelby M.C. Davis
Shelby M.C. Davis President
Eugene M. Feinblatt Carl R. Luff
Jerry D. Geist Vice President, Treasurer
D. James Guzy & Assistant Secretary
G. Bernard Hamilton Raymond O. Padilla
LeRoy E. Hoffberger Vice President, Secretary
Laurence W. Levine & Assistant Treasurer
Martin H. Proyect Carolyn H. Spolidoro
Christian R. Sonne Vice President
Edwin R. Werner Christopher C. Davis
Vice President
B. Clark Stamper
Vice President
Andrew A. Davis
Vice President
Eileen R. Street
Assistant Treasurer
& Assistant Secretary
Investment Adviser & Distributor
Davis Selected Advisers, L.P.
124 East Marcy Street
Santa Fe, New Mexico 87501
Transfer Agent & Custodian
State Street Bank & Trust Company
c/o The Davis Funds
P. O. Box 8406
Boston, MA 02266-8406
Auditors
Tait, Weller & Baker
Two Penn Center Plaza Suite 700
Philadelphia, PA 19102-1707
Counsel
D'Ancona & Pflaum
30 North LaSalle Street
Chicago, Illinois 60602
============================================================================
For more information about Davis High Income Fund, Inc. including
management fee, charges and expenses, see the current prospectus which
must precede or accompany this report.
============================================================================
9605-15 DHIF80
