<PAGE>
DAVIS HIGH
INCOME FUND
SEMI-ANNUAL REPORT
SEPTEMBER 30,1997
DAVIS
FUNDS
<PAGE>
DAVIS HIGH INCOME FUND, INC.
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501
- -------------------------------------------------------------------------------
Dear Shareholder:
PERFORMANCE REVIEW
The Davis High Income Fund continues to focus on providing current income and
building wealth for shareholders over time with less volatility than its
competitors. This focus has enabled your Fund to generate good risk-adjusted
performance over the long term. While the Fund's absolute total returns have
trailed other high-yield bond funds over recent periods, its credit quality is
significantly higher and your Fund has outperformed funds that are more
comparable in credit quality.
Over the six-month period ended September 30, 1997, the Davis High Income
Fund's Class A shares provided a total return on net asset value of 7.66%
versus an total return of 10.96% for the 199 High Current Yield funds tracked
by Lipper Analytical Services, Inc. Over the one-year, five-year and ten-year
periods ended that same date, the Fund's Class A shares produced average
annual total returns on net asset value of 11.95%, 10.13% and 6.34%,
respectively. This compares with an average annual total return of 15.57% for
the 171 funds in the Lipper High Current Yield fund category for the latest
one-year period, an average annual total return of 11.27% for the 65 funds in
that category for the latest five-year period and an average annual total
return of 10.39% for the 45 funds in that category for the latest ten-year
period.(1)
One key distinction of the Davis High Income Fund is that the average credit
quality of its portfolio is BB+ for the securities that are rated. This is
considerably higher than the quality rating of most other high-yield bond
portfolios, which typically average a B rating.
The Davis High Income Fund's risk-adjusted performance has also been
recognized by independent mutual fund rating services. Your Fund's Class A
shares earned Morningstar's highest ***** (five-star) rating for the five-year
period ended September 30, 1997, which is the longest period that Portfolio
Manager B. Clark Stamper has managed the Fund. For the latest three-year
period, the Fund held a **** (four-star) Morningstar rating.(2)
A RESEARCH-DRIVEN PROCESS
In managing your Fund, we employ a research-driven and value-oriented
investment approach, seeking to uncover attractive yields in bonds that are
overlooked, under-researched and mispriced, yet make sound investment sense.
We focus primarily on evaluating the risk and reward trade-offs of different
investments. Our objective is to provide the maximum yield relative to credit
quality--that is, to get the most reward for the risk taken. We do this by
constantly reviewing each individual investment's credit and security
characteristics in terms of upside potential and downside protection.
Our fundamental tool is bottom-up credit research in order to minimize credit
risk. Purchasing high-yield bonds is like making a loan. Our major concern is
assuring that the credit quality of your Fund's investments does not
deteriorate and that the Fund is paid back interest and principal on schedule.
We also seek to minimize interest rate risk (the risk that interest rates will
rise, causing prices of fixed-coupon bonds to decline) and call risk (the risk
that bonds will be called before maturity, particularly after interest rates
have dropped, meaning proceeds must be reinvested at lower yields). In
addition, we monitor the portfolio
<PAGE>
DAVIS HIGH INCOME FUND, INC.
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501
- -------------------------------------------------------------------------------
overall to make sure we are properly diversified among different sectors and
strategies. A more recent concern is the risk of credit quality spreads
widening, causing lower quality bonds to underperform higher quality bonds
(see below).
A CAUTIOUS APPROACH WITH A TIGHT REIN ON RISK
Consistent with our strategy of maximizing upside potential and downside
protection, your Fund offers a hybrid approach between the tactics used by
traditional high-yield bond funds and those used by higher quality, more
interest-rate-sensitive BBB-rated funds. The Davis High Income Fund takes more
credit risk than BBB funds with the intention of achieving greater returns
over the long term.
We have gained extra yield and extra downside protection by relinquishing some
upside potential, which is why the Fund lagged as the riskier, general
high-yield category continued to rally over the last six months. At the same
time, the Fund's defensive strategies position it to outperform in a flat to
declining market. Indeed, in the first quarter of 1997, when bond prices
declined sharply, your Fund's performance more than doubled that of the
average high-yield fund, according to Lipper.(3)
THE IMPACT OF NARROWING CREDIT QUALITY SPREADS
Normally, lower quality bonds offer investors higher interest rates to
compensate for their greater credit risk. However, over the last year or two
the difference in yields, or the spread, between low quality and high quality
bonds has been the smallest we have ever seen. As a result, investors are
being paid very little extra yield for taking on the considerable risk that
the high-yield market entails.
Investors appear to have an almost insatiable, and we think irrational,
appetite for low-quality bonds that far exceeds the supply of these issues and
that has significantly reduced yields on these bonds. In our view, this
indiscriminate demand has created a sort of self-perpetuating cycle. That is,
high-yield bonds have performed so well since early 1991 that investors are
pouring money into the market in the expectation that those good returns will
continue, even though the market, in general, no longer offers good value or
compelling upside/downside characteristics.
We believe that when the demand subsides the market will drop back to more
reasonable valuation levels and credit quality spreads will widen. That means
yields on lower rated bonds should rise and their prices should fall.
Accordingly, we have maintained a defensive posture throughout 1997 as we did
in 1996, and we expect to benefit from that posture when the market declines.
CAPITALIZING ON UNRECOGNIZED OPPORTUNITIES
Given record tight credit quality spreads, we have found little value in most
traditional corporate high-yield bonds. However, through careful research, we
have been able to identify good values in less followed areas of the bond
market, such as busted convertibles, private-label mortgage-backed securities
and taxable municipals, which offer better yields relative to credit quality
and more favorable risk/return ratios.
BUSTED CONVERTIBLES
Busted convertibles are convertibles trading below the price at which the
bonds can be converted into the issuing company's stock. Busted convertibles
are not widely researched and there is little demand for them, which means
their prices tend to be low and their yields high.
2
<PAGE>
DAVIS HIGH INCOME FUND, INC.
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501
- -------------------------------------------------------------------------------
For example, we recently added to an investment we had previously made in the
5% convertibles due in 2001 of Broadband Technology, a manufacturer and
marketer of electronic telephone communications systems. While the bonds are
unrated, we consider their credit quality to be reasonably strong. The
company's debt ratio is a moderate 46% (based on market value), and its
working capital is about equal to its long-term debt.
We made our most recent purchase of these bonds at a discount price of 75
($750 per bond), which equates to a yield to maturity of approximately 14%,
and their maturity is only four years way. This compares with a yield of just
around 9% for the average B-rated junk bond, which is a much riskier
investment.
MORTGAGE-BACKED SECURITIES
Recently, your Fund also made an attractive investment in a high-quality,
high-yielding, private-label mortgage-backed security--the Resolution Trust
Corporation's 8 5/8% bonds due on July 25, 2030. These bonds are backed by the
Resolution Trust Corporation, the government agency that handled the
liquidation of the savings and loans. They are rated Aa2 by Moody's Investors
Service and not rated by Standard & Poor's.
We made this investment at just above par ($1,000 per bond) in September.
Because the bonds will be prepaid if homeowners prepay the underlying
mortgages, it is highly unlikely that the bonds will remain outstanding until
maturity. If the bonds remain outstanding at least six months, the Fund will
earn a yield of 8.36% on these holdings; if the bonds are outstanding at least
one year, as we expect, that yield will climb to around 8.50%.
TAXABLE MUNICIPALS
We also continue to purchase taxable municipal bonds when we can do so at
favorable yields. In late September, your Fund bought newly issued Utah State
Housing 9% bonds due July 1, 2002. These bonds were issued to finance the
purchase or lease of facilities in the Salt Lake City area that serve
individuals with developmental disabilities.
These taxable municipals are secured by a first lien on the borrower's pledged
revenues and on the real property being acquired, as well as by a debt service
reserve fund. Debt service coverage for 1998 is forecast at 1.4 times, or 2.1
times before deducting subordinated fees. While the bonds are unrated, we
consider them the equivalent of a BB+ rating. These bonds came to market at a
slight discount to par, resulting in a yield of 9.26% to their short maturity
date in 2002--an attractive return given the yields generally available on
lower quality bonds at the time of purchase.
TRADITIONAL HIGH-YIELD BONDS
Even in an overvalued junk bond market, we have found good investment
opportunities, on a selective basis, in traditional high-yield bonds. One
example is the Coinmach Corporation's 11 3/4% bonds due November 15, 2005.
Coinmach (stock symbol: WDRY-Nasdaq) owns and operates approximately 337,000
coin-operated washers and dryers in more than 30,000 multifamily housing
properties in 30 states.
The company's cash flow is stable and covers its interest expense by 2.4
times. Furthermore, 39% of the company's market-valued balance sheet is below
the bonds. The bonds are rated B2/B+ and they yield 9.27% to their November
15, 2002 call date, when the issuer can redeem the bonds at par.
3
<PAGE>
DAVIS HIGH INCOME FUND, INC.
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501
- -------------------------------------------------------------------------------
PRUDENTLY POSITIONED FOR UNCERTAIN MARKETS
Over the past year, bond yields generally have decreased somewhat, with the
yield on the bellwether 30-year U.S. Treasury bond declining from around 6.75%
at the end of September 1996 to just below 6.40% at the end of September 1997.
At the same time, volatility has stepped up, in large part because leveraged
investors, such as arbitrageurs and hedgers who tend to trade in and out
frequently, have become a bigger factor in all the bond markets. This
increased volatility suggests that the market may be turning and rates may be
heading back up.
Given this uncertain environment, the Davis High Income Fund continues to be
defensively positioned with respect to credit quality and interest rate
movements. Our objective is to provide shareholders with strong relative and
absolute performance, consistent with our focus on minimizing volatility and
maximizing long-term, risk-adjusted returns. We think our strategies are the
right ones to accomplish that aim.
Sincerely,
/s/ Shelby M.C.Davis /s/ B. Clark Stamper
- ------------------------ --------------------
Shelby M.C. Davis B. Clark Stamper
Chief Investment Officer Portfolio Manager
November 21, 1997
(1) All performance figures cited in this letter are calculated without
considering sales commissions. The average annual total return for the Davis
High Income Fund's Class A shares, including the maximum front-end sales
charge of 4.75%, for the six-month, one-year, five-year and ten-year periods
ended September 30, 1997 were 2.65%, 6.55% , 9.07% and 5.83%, respectively.
(2) Morningstar proprietary ratings reflect historical risk-adjusted performance
as of September 30, 1997. Subject to change every month, Morningstar ratings
are calculated from a fund's three-, five- and 10-year average annual returns
in excess of 90-day Treasury bill (T-bill) returns, with appropriate fee
adjustments and a risk factor that reflects fund performance below 90-day
T-bill returns. The Fund's Class A shares were rated against 1,309, 713 and
301 fixed-income funds for the three-, five- and 10-year periods,
respectively. The Fund's Class A shares received one star for the 10-year
period ended September 30, 1997. Ten percent of the funds in an investment
category receive five stars; 22.5%, four stars; 35%, three stars; 22.5%, two
stars; and 10%, one star. Star ratings for the fund's other classes of shares
may vary and are available only for those classes with at least three years of
performance history. Past performance is no guarantee of future results.
(3) For the three months ending March 31, 1997, the Davis High Income Fund's
Class A shares provided a total return of 1.59% at net asset value, .86 of a
percentage point higher than the .73% average total return of the 183 funds in
the Lipper High Current Yield fund category.
4
<PAGE>
DAVIS HIGH INCOME FUND, INC.
SCHEDULE OF INVESTMENTS
At September 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
VALUE
PRINCIPAL (NOTE 1)
CORPORATE BONDS AND NOTES - (72.97%)
<S> <C> <C>
ADVERTISING - (0.41%)
$ 250,000 Outdoor Systems, Inc., Sr. Sub. Notes, 8.875%, 06/15/07...................... $ 256,250
-------------
AEROSPACE/AVIATION - (2.09%)
760,000 K & F Industries Inc., Sr. Secured Notes, 11.875%, 12/01/03.................. 807,500
500,000 Simula Inc., Sr. Conv. Sub. Notes, Series C, 10.00%, 09/15/99 (c)............ 515,000
-------------
1,322,500
-------------
AUTOMOTIVE - (0.34%)
200,000 Glasstech Inc., Sr. Notes, 12.75%, 07/01/04.................................. 214,500
-------------
BROADCASTING - (2.72%)
500,000 Pegasus Media & Communications, Sr. Sub. Notes, Series B,
12.50%, 07/01/05............................................................ 557,500
500,000 SFX Broadcasting Inc., Sr. Sub. Notes, Series B, 10.75%, 05/15/06 (b)........ 550,625
500,000 Sinclair Broadcast Group, Sr. Sub. Notes, 9.00%, 07/15/07.................... 498,750
100,000 Spanish Broadcasting Systems Inc., Sr. Notes, 7.50%, 06/15/02................ 114,500
-------------
1,721,375
-------------
CABLE - (2.45%)
150,000 Fundy Cable Ltd., Sr. Secured 2nd Priority Notes, 11.00%, 11/15/05........... 164,250
1,000,000 Marcus Cable Holding Co., L.P., Sr. Secured Notes, Zero Cpn., 12/15/05....... 837,500
500,000 Rifkin Acquisition Partners, L.P., Sr. Sub. Notes, 11.125%, 01/15/06 (b)..... 545,000
-------------
1,546,750
-------------
CHEMICALS - (0.80%)
500,000 Trikem Organizacao Odebrecht, Notes, 10.625%, 07/24/07....................... 503,750
-------------
COMPUTER PRODUCTS AND SERVICES - (1.78%)
1,950,000 JTS Corporation, Conv. Sub. Deb., 5.25%, 04/29/02............................ 745,875
279,200 San Jacinto Holdings Inc., Sr. Notes, 10.75%, 12/31/02 (c)................... 189,856
250,000 Sapiens International N.V., Euro Conv. Notes, 5.00%, 09/20/03................ 187,500
-------------
1,123,231
-------------
CONSUMER PRODUCTS & MERCHANDISE - (1.59%)
1,000,000 International Semi-Tech Microelectronics Inc., Sr. Notes, 11.50%,
08/15/03................................................................... 640,000
210,000 L.A. Gear, Inc., Conv. Sub. Deb., 7.75%, 11/30/02............................ 78,750
281,000 MacAndrews & Forbes Holdings, Inc., Sub. Deb., 13.00%, 03/01/99.............. 283,459
-------------
1,002,209
-------------
DATA PROCESSING - (0.40%)
250,000 Axiohm Transaction Solutions Inc., Sr. Sub. Notes, 9.750%, 10/01/07.......... 253,750
-------------
DIVERSIFIED SERVICES - (1.86%)
624,604 Emcor Group Inc., Sr. Notes, Series C, 11.00%, 12/15/01...................... 658,957
500,000 Jordan Industry Inc., Sr. Notes, 10.375%, 08/01/07........................... 516,250
-------------
1,175,207
-------------
</TABLE>
5
<PAGE>
DAVIS HIGH INCOME FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At September 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
VALUE
PRINCIPAL (NOTE 1)
CORPORATE BONDS AND NOTES - CONTINUED
<S> <C> <C>
ECOLOGICAL/ENVIRONMENTAL - (1.45%)
$ 319,000 Envirotest System Corp., Sr. Notes, 9.125%, 03/15/01......................... $ 314,215
67,000 Molten Metal Technology Inc., Sub. Notes, 5.50%, 05/01/06.................... 27,135
500,000 Norcal Waste Systems Inc., Sr. Notes, Series B, 12.50% Incr. rate,
11/15/05 (b)............................................................... 577,500
-------------
918,850
-------------
EDUCATION - (0.41%)
250,000 La Petite Holdings Corp., Sr. Secured Notes, 9.625%, 08/01/01................ 258,750
-------------
ELECTRONICS - (1.36%)
43,000 Andersen Group, Inc., Conv. Sub. Deb., 10.50%, 10/15/02...................... 41,065
360,000 Broadband Technologies Inc., Conv. Sub. Notes, 5.00%, 05/15/01............... 264,600
690,498 Porta Systems Corp., Sr. Conv. Sub. Notes, Zero Cpn., 01/02/98++............. 554,988
-------------
860,653
-------------
EQUIPMENT LEASING - (3.47%)
942,810 Alps 96-1 D Asset Backed Lease, Aircraft Lease CL D, 12.75%, 06/15/06........ 1,022,949
1,065,174 Central Transport Rental Finance Corp., Secured Notes, 9.50%, 04/30/03....... 1,137,073
670,700 Technical Equipment Leasing Corp., Jr. Sub. Deb., Series A, 18.375%,
04/01/96++ (c)............................................................. 33,535
-------------
2,193,557
-------------
FINANCIAL SERVICES AND INSURANCE - (3.80%)
50,000 CII Financial, Inc., Conv. Sub. Deb., 7.50%, 09/15/01........................ 47,563
500,000 Dollar Financial Group Inc., Sr. Notes, 10.875%, 11/15/06 (b)................ 540,000
500,000 GPA Delaware Inc., Gtd. Notes, 8.75%, 12/15/98............................... 510,000
500,000 Imperial Credit Capital Trust, Remarketed Par Securities, Series A,
0%/13.0%, 06/14/02 ........................................................ 515,405
250,000 Ocwen Capital Trust, Capital Securities, 10.875%, 08/01/27................... 263,750
500,000 PennCorp Financial Group, Inc., Sr. Sub. Notes, 9.25%, 12/23/03.............. 522,500
-------------
2,399,218
-------------
FOOD SERVICE - (4.02%)
750,000 Envirodyne Industries, Inc., 1st Priority Sr. Secured Notes, 12.00%,
06/15/00................................................................... 819,375
500,000 Fresh Del Monte Produce N.V., Sr. Notes, Series B, 10.00%, 05/01/03 (b)...... 533,125
1,500,000 PM Holdings Corp., Sub. Disc. Deb., Series B, 0%/11.50%, 09/01/05............ 1,185,000
-------------
2,537,500
-------------
GROCERY - (4.31%)
500,000 B/G Foods, Inc., Sr. Sub. Notes, 9.625%, 08/01/07........................... 501,875
690,000 Kroger Co., Lease Cert., 6.00%, 04/01/03.................................... 669,134
675,000 Kroger Co., Lease Cert., 12.95%, 02/01/09.................................... 750,209
793,000 New Almacs Inc., Sr. Sub. Notes, 11.50%, 11/18/04++.......................... 35,685
1,000,000 Southland Corporation, Deb., 4.00%, 06/15/04................................. 763,750
-------------
2,720,653
-------------
</TABLE>
6
<PAGE>
DAVIS HIGH INCOME FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At September 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
VALUE
PRINCIPAL (NOTE 1)
CORPORATE BONDS AND NOTES - CONTINUED
<S> <C> <C>
HEALTHCARE AND PHARMACEUTICAL - (2.61%)
$ 863,000 Glycomed Inc., Conv. Sub. Deb., 7.50%, 01/01/03.............................. $ 795,039
346,000 National Patent Developement Corp., Conv. Bds., 5.00%, 08/31/99.............. 256,040
250,000 Regency Health Services, Inc., Sub. Notes, 12.25%, 07/15/03 (b).............. 298,750
425,000 UroMed Corp., Conv. Sub. Notes, 6.00%, 10/15/03.............................. 299,625
-------------
1,649,454
-------------
HOTELS, LODGING & GAMING - (2.18%)
250,000 CapStar Hotel Co., Sr. Sub. Notes, 8.75%, 08/15/07........................... 253,750
250,000 Claridge Hotel & Casino Co., 1st Mtg. Notes, 11.75%, 02/01/02 ............... 216,250
600,000 Courtyard By Marriott II, L.P., Sr. Secured Notes, 10.75%, 02/01/08 (b)...... 654,000
250,000 Isle Capri Black Hawk, LLC, 1st Mtg. Notes, 13.00%, 08/31/04................. 253,750
-------------
1,377,750
-------------
LEISURE, ENTERTAINMENT & FITNESS - (3.87%)
500,000 Act III Theaters Inc., Sr. Sub. Notes, 11.875%, 02/01/03..................... 538,750
250,000 Bally's Health & Tennis Corp., Sr. Sub. Notes, 13.00%, 01/15/03.............. 271,250
250,000 Discovery Zone Inc., Sr. Secured Notes, 13.50%, 08/01/02..................... 268,125
500,000 Spectrum Holobyte Inc., Conv. Sub. Notes, 6.50%, 09/15/02 (b)................ 384,375
984,599 Underwater World Mall of America, Sr. Rev. Bds., 13.75%, 03/01/02 (b)........ 980,907
-------------
2,443,407
-------------
METALS & MINING - (0.98%)
100,000 EES Coke Battery Inc., Sr. Secured Notes, Series B, 9.328%, 04/15/07......... 103,987
500,000 Florida Steel Corp., Deb., 11.50%, 12/15/00.................................. 517,500
-------------
621,487
-------------
MOBILE & WIRELESS TELECOMMUNICATIONS - (0.62%)
500,000 Millicom International Cellular S.A., Sr. Sub. Disc. Notes, 0%/13.50%,
06/01/06.................................................................. 390,000
-------------
NATURAL GAS & OIL DISTRIBUTORS - (2.78%)
100,000 Amerigas Partners L.P., Sr. Notes, Series B, 10.125%, 04/15/07.............. 105,500
630,000 Empire Gas Corp., Sr. Secured Notes, 7.00%/12.875%, 07/15/04................. 581,175
500,000 Statia Terminals International CDA Inc., 1st Mtg. Notes, 11.75%, 11/15/03.... 530,625
500,000 Trident NGL Holdings, Inc., Sub. Notes, 10.25%, 04/15/03..................... 536,875
-------------
1,754,175
-------------
OIL & GASOLINE - (8.14%)
500,000 Clark Oil & Refining Corp., Sr. Notes, 10.50%, 12/01/01...................... 517,500
1,000,000 Clark R & M Holdings Inc., Sr. Secured Notes, Series A, Zero Cpn.,
02/15/00................................................................... 791,250
250,000 Daily Petroleum Services Corp., Sr. Notes, 9.750%, 08/15/07................. 261,250
500,000 Deeptech International, Inc., Sr. Secured Notes, 12.00%, 12/15/00............ 532,500
1,000,000 Gerrity Oil & Gas Corp., Sr. Sub. Notes, 11.75%, 07/15/04.................... 1,095,000
500,000 HS Resources Inc., Sr. Sub. Notes, 9.875%, 12/01/03.......................... 521,875
100,000 Moran Energy Inc., Conv. Sub. Deb., 8.75%, 01/15/08.......................... 98,250
</TABLE>
7
<PAGE>
DAVIS HIGH INCOME FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At September 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
VALUE
PRINCIPAL (NOTE 1)
CORPORATE BONDS AND NOTES - CONTINUED
<S> <C> <C>
OIL & GASOLINE - CONTINUED
$ 500,000 National Energy Group, Sr. Notes, 10.75%, 11/01/06........................... $ 525,000
1,000,000 Transamerica Energy Corp., Sr. Secured Disc. Notes, 10.251%, 06/15/02........ 798,750
-------------
5,141,375
-------------
PAPER PRODUCTS - (1.04%)
2,000,000 Crown Packaging Enterprises, Ltd., Sr. Secured Disc. Notes, 0%/14%,
08/01/06................................................................... 105,000
500,000 Grupo Industrial Durango S.A. DE C.V., Notes, 12.00%, 07/15/01............... 552,500
-------------
657,500
-------------
PRECIOUS METALS - (3.82%)
1,170,000 Crown Resources Corp., Conv. Sub. Deb., 5.75%, 08/27/01...................... 1,076,400
500,000 Echo Bay Mines Ltd., Capital Securities, 11.00%, 04/01/27.................... 488,750
500,000 Pegasus Gold Inc., Conv. Sub. Notes, 6.25%, 04/30/02......................... 362,500
500,000 Royal Oak Mines Inc., Sr. Sub. Notes, Series B, 11.00%, 08/15/06............. 487,500
-------------
2,415,150
-------------
PROTECTION SERVICES - (0.24%)
150,000 Loomis Fargo and Company, Sr. Sub. Notes, 10.00%, 01/15/04 (b)............... 153,750
-------------
RESTAURANT - (0.33%)
250,000 TPI Enterprises Inc., Conv. Sub. Deb., 8.25%, 07/15/02....................... 205,313
-------------
RETAIL - (0.91%)
500,000 Brazos Sportswear, Inc., Sr. Notes, 10.50%, 07/01/07......................... 502,500
125,000 Emerson Radio Corp., Sr. Conv. Sub. Deb., 8.50%, 08/15/02.................... 70,469
-------------
572,969
-------------
TELECOMMUNICATIONS - (8.30%)
1,000,000 American Communication Services, Inc., Sr. Disc. Notes, 0%/12.75%,
04/01/06................................................................... 690,000
500,000 EchoStar Communications Corp., Sr. Secured Disc. Notes, Zero Cpn.,
06/01/04................................................................... 453,125
100,000 Globalstar, L.P., Sr. Notes, 11.25%, 06/15/04................................ 104,250
1,000,000 ICG Holdings (Canada), Inc., Sr. Disc. Notes, 12.50%, 05/01/03............... 750,000
500,000 Jordan Telecommunications, Sr. Sub. Disc. Notes, 11.75%, 08/01/07............ 392,500
250,000 L 3 Communications Co., Sr. Sub. Notes, 10.375%, 05/01/07.................... 270,000
250,000 Nextlink Communications LLC, Sr. Notes, 12.50%, 04/15/06 (b)................. 288,750
500,000 Primus Telecommunications, Sr. Notes, 11.75%, 08/01/21....................... 535,000
500,000 UTS Hyperion Telecommunications, Sr. Disc. Notes, Series B, 7%/13.00%,
04/15/03 (b).............................................................. 353,750
1,000,000 Viatel Inc., Sr. Disc. Notes, 0%/15.00%, 01/15/05............................ 715,000
325,000 Winstar Communications, Inc., Sr. Sub. Disc. Notes, Zero Cpn., 10/15/05...... 230,750
650,000 Winstar Communications, Inc., Sr. Disc. Notes, 0%/14.00%, 10/15/05........... 459,875
-------------
5,243,000
-------------
</TABLE>
8
<PAGE>
DAVIS HIGH INCOME FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At September 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
VALUE
PRINCIPAL (NOTE 1)
CORPORATE BONDS AND NOTES - CONTINUED
<S> <C> <C>
TRANSPORTATION/SHIPPING - (2.09%)
$ 750,000 Golden Ocean Group Ltd., Sr. Notes, 10.00%, 08/31/01......................... $ 581,250
250,000 Moran Transportation Co., 1st Preferred Shipping Mtg. Notes, Series B,
11.75%, 07/15/04 (b)....................................................... 281,875
100,000 Piedmont Aviation Inc., Equip. Trust Certificates, Series `88 I, 9.55%,
05/08/98................................................................... 100,375
444,000 Preston Corp., Conv. Sub. Deb., 7.00%, 05/01/11.............................. 357,420
-------------
1,320,920
-------------
UTILITIES - (1.80%)
500,000 Calpine Corp., Sr. Notes, 8.75%, 07/15/07.................................... 511,250
500,000 Midland Funding Corporation II, Sub. Secured Lease, 13.25%, 07/23/06......... 629,332
-------------
1,140,582
-------------
TOTAL CORPORATE BONDS AND NOTES
- (identified cost $44,519,544).................................... 46,095,535
-------------
MORTGAGE BACKED BONDS - (6.46%)
390,000 Arkansas St. Dev. Fin. Sngl. Fam. Mtg. Rev. Refunding Bds., Mtg. Bkd.
Secs. Prg., Ser-C, GNMA/FNMA, 7.75%, 01/01/00.............................. 395,612
275,936 Capstead Securities Corp., IV, CMO, Series '92-7, CL Z-1, 8.75%, 05/25/23.... 273,867
369,859 Chase Mortgage Finance Corp., Series '93-G-A1, REMIC, 7.00%, 04/25/01........ 372,459
225,937 Citicorp Mtg. Securities, Inc., Series '89-16, 6.43%, 04/01/19............... 219,159
115,344 CTS Home Equity Loan Trust, Asset Backed Certificates, Series `91-1-A,
8.80%, 01/15/06............................................................ 116,695
85,443 Fannie Mae, REMIC, Series `91-38, CL SA, Inverse Support Tranche,
10.1862%, 04/25/21......................................................... 88,260
298,580 First Nationwide Trust, Series '89-AR4-1, 9.50%, 09/25/19.................... 297,881
293,852 Freddie Mac, CMO, Series '94, CL 1628 F, 7.40%, 02/15/14..................... 303,320
100,000 Freddie Mac, CMO, Series '93, CL 1630 E, 6.00%, 09/15/23..................... 90,885
235,085 Freddie Mac, REMIC, Series '93, CL 1567 A, 5.837%, 08/15/23.................. 223,833
167,852 Manufacturers Hanover Mortgage Corporation, Series A, 11.50%, 04/20/15....... 174,146
179,000 The Prudential Mortgage Securities Company, Mtg. Pass-Through
Certificates, Series '92-038, CL A-8, Fixed Rate, 6.95%, 11/25/22.......... 170,821
262,887 Resolution Trust Corporation, American Res. Mtg. Corp., Service Mtg.
Pass-Through Certificates, Series '92 M4 CL A-1, 8.00%, 03/25/22........... 264,858
108,866 Resolution Trust Corporation, American Res. Mtg. Corp., Service Mtg.
Pass-Through Certificates, Series '92-7, CL A-1, 6.592%, 03/25/22.......... 100,701
998,026 Resolution Trust Corporation, REMIC, Series `92 M-3, CL A-2, 8.625%,
07/25/30.................................................................. 990,541
-------------
TOTAL MORTGAGE BACKED BONDS - (identified cost $3,981,805)............ 4,083,038
-------------
</TABLE>
9
<PAGE>
DAVIS HIGH INCOME FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At September 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
VALUE
PRINCIPAL (NOTE 1)
TAXABLE MUNICIPAL BONDS - (10.49%)
<S> <C> <C>
$ 450,363 Adams Cnty., CO, IDR Series A Pool Gtd. - Executive Life, 9.00%,
11/01/96+.................................................................. $ 40,200
275,000 Alaska St. HFC, 1st Mtg. Bds, Series G, 10.55%, 01/15/18..................... 279,125
2,000,000 Austin, TX, Hsg. Fin. Corp. Sngl. Fam. Mtg. Rev. Bds., Compounded
Interest, Series `84, Zero Cpn., 02/01/16.................................. 239,420
990,000 California Hsg. Fin. Agy. Rev. Bds., Taxable Home Mtg., Series D,
9.30%, 02/01/26............................................................ 1,051,271
500,000 City of Providence, RI, Taxable, FSA Insured, Series B, 8.00%, 07/15/19...... 519,255
220,000 Commerce Refuse to Energy Auth., Taxable Ref. Rev. Bds., '90 Series,
10.50%, 07/01/00........................................................... 229,750
700,000 Connecticut St. Hsg. Fin. Auth., Taxable Hsg. Mtg. Program, Series G,
7.625%, 05/15/21.......................................................... 710,997
80,000 Connecticut St. Hsg. Fin. Auth., Taxable Hsg. Mtg. Program, Series H,
7.875%, 11/15/26.......................................................... 82,722
38,388 El Paso Hsg. Fin. Corp., Multi-Fam. Res. Loan Program, Securitized Mult-
Fam. Hsg. Rev. Bds., Series '86A, 8.88%, 10/15/96+......................... 11,700
100,000 Galveston Cnty., TX, Wtr. Auth., Canal Sys. Contract Wtr. Rev. Bds.,
AMBAC Insured, 9.60%, 07/01/99............................................. 102,818
170,000 Galveston Cnty., TX, Wtr. Auth., Canal Sys. Contract Wtr. Rev. Bds.,
AMBAC Insured, 9.80%, 07/01/01............................................. 175,037
392,000 Illinois HFA Rev. Bds., Series C, MBIA, 10.30%, 08/15/03..................... 396,943
200,000 Lancaster, TX, Combined Tax & Golf Course Park Rev. Bds., Series B,
Certificates of Obligation, MBIA Insured, 9.375%, 08/01/02................. 205,726
42,560 Louisiana HFA Multi Fam. Mtg. Rev. Bds., Gtd. Executive Life, 8.61%,
08/01/98+.................................................................. 6,000
46,803 Louisiana St. Agriculture Fin. Auth., Security Agriculture Rev. Bds.,
Series A, Gtd. Executive Life, 8.80%, 10/01/99+............................ 6,000
230,000 Mayor and City Council of Baltimore, Econ. Dev. Taxable Lease Rev. Bds.
(Arcade Ltd. Partnership Prj.) Series `92, 8.50%, 08/01/02................. 243,913
283,630 Memphis, TN Hlth. Educ. & Hsg. Fac. Brd., Multi Fam. Hsg. Rev.
Securitized, Series '86A, 8.68%, 09/15/96+................................. 41,009
115,000 Missouri St., Hsg. Dev. Cmnty., Multi Fam. Hsg. Rev. Bds., FHA Insured
Mtg. Loans, 9.25%, 12/01/30................................................ 122,235
4,796 Nebraska Invst. Fin. Auth., Agriculture Rev. Bds., Series A, Gtd. Executive
Life, 8.34%, 11/01/93+..................................................... 1,200
250,000 New Jersey Econ. Dev. Auth., Series `97A-'97H, MBIA, 7.425%, 02/15/29........ 262,738
440,000 New York St. HFA Rev. Multi Fam. Mtg. Series B, Sonyma Prg.
Insurance, 8.875%, 08/15/14................................................ 472,182
711,371 Polk Cnty., FL, HFA REMIC Collateralized Mtg. Bds., Series 1, CL 2-A,
9.55%, 01/15/11............................................................ 734,498
</TABLE>
10
<PAGE>
DAVIS HIGH INCOME FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At September 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
VALUE
PRINCIPAL/SHARES/UNITS (NOTE 1)
TAXABLE MUNICIPAL BONDS - CONTINUED
<S> <C> <C>
$ 130,000 San Bernadino CA Assd. Cmntys. Fing. Auth. Health Care Ref. &
Improvement Bds. (Granada) Series B, 8.80%, 05/01/17....................... $ 134,372
368,411 The Southeast TX Hsg. Fin. Corp. Securitized Multi Fam. Hsg. Rev. Bds.
Series '86A, 8.60%, 09/01/96+.............................................. 48,420
5,000 Utah St. Hsg. Fin. Agy. Sngl. Fam. Mtg., Series A, 9.40%, 07/01/99........... 5,244
315,000 Utah St. Hsg. Fin. Rev., Taxable RHA Cmnty. Services, Series B, 9.00%,
07/01/02................................................................... 315,006
2,460,000 Wagner College, NY, G.O. Capital Appreciation Bds., Zero Cpn., 10/01/22...... 190,429
-------------
TOTAL TAXABLE MUNICIPAL BONDS
- (identified cost $7,180,641)..................................... 6,628,210
-------------
PREFERRED STOCKS - (0.51%)
2,500 Adelphia Communications Co., Pfd. Exchangeable, Series A..................... 278,750
6,200 Westmoreland Coal Co., Dep. Shares Conv. Pfd., Series A, 8.50%++............ 40,300
-------------
TOTAL PREFERRED STOCKS - (identified cost $330,910)................... 319,050
-------------
COMMON STOCKS - (2.41%)
16,920 Alaris Medical Inc.,*........................................................ 70,320
135,951 Canyon Resources Corporation*................................................ 373,865
260,000 Crown Packaging Enterprises Ltd.*............................................ 2,600
1,688 National Patent Development Corp.*........................................... 20,362
1,161 Nextel Communications Inc., Class A*......................................... 33,451
2,707 Pegasus Media & Communications, Class A* (b)................................. 57,862
222 San Jacinto Hldgs. Inc.,..................................................... 897
852,880 Sunshine Mining & Refining Co.*.............................................. 852,880
24,066 Viatel Inc.* (b)............................................................. 109,801
-------------
TOTAL COMMON STOCKS - (identified cost $1,935,432).................... 1,522,038
-------------
WARRANTS - (0.18%)
500 Chattem Inc., expire 06/17/99................................................ 2,900
869 Empire Gas Corp., expire 07/15/04............................................ 30,415
100 Spanish Broadcasting Systems Inc., expire 06/30/99........................... 33,000
21,825 Sunshine Mining & Refining Co., expire 03/09/99.............................. 7,843
500 UTS Hyperion Telecommunications, expire 04/01/01 (b)......................... 20,000
205 Wright Medical Technology, Inc., expire 06/30/03 (b)......................... 20,500
-------------
TOTAL WARRANTS - (identified cost $18,241)............................. 114,658
-------------
</TABLE>
11
<PAGE>
DAVIS HIGH INCOME FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At September 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
VALUE
PRINCIPAL (NOTE 1)
<S> <C> <C>
SHORT TERM - (6.18%)
$ 3,905,000 State Street Bank and Trust Company Repurchase Agreement, 5.80%,
10/01/97, dated 09/30/97, repurchase value of $3,905,629 (collateralized
by $3,960,000 par value U.S. Treasury Notes, 5.875%, 02/28/99, market
value $3,986,088) - (identified cost $3,905,000).......................... $ 3,905,000
-------------
TOTAL INVESTMENTS (identified cost $61,871,573) -
(99.20%)(a)....................................................... 62,667,529
OTHER ASSETS LESS LIABILITIES - (0.80%)............................. 505,674
-------------
NET ASSETS - 100%................................................. $ 63,173,203
=============
+ These securities are in default but have made partial payments.
++ These securities are in default and are not currently paying interest or
dividends.
* Non-income producing security.
(a) Aggregate cost for Federal income tax purposes is $61,871,573.
(b) 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.
(c) Non-marketable securities valued in good faith by the Board of Directors.
At September 30, 1997, unrealized appreciation (depreciation) of securities
for Federal income tax purposes was as follows:
Unrealized appreciation........................................................ $ 4,632,188
Unrealized depreciation........................................................ (3,836,232)
-------------
Net unrealized appreciation.............................................. $ 795,956
=============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
12
<PAGE>
DAVIS HIGH INCOME FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
At September 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments in securities, at value (identified cost $61,871,573) (Note 1).............. $ 62,667,529
Cash ................................................................................... 19,780
Receivables:
Interest............................................................................ 1,021,583
Capital stock sold.................................................................. 98,625
Investments sold.................................................................... 992,762
--------------
Total assets................................................................... 64,800,279
--------------
LIABILITIES:
Payables:
Capital stock reacquired............................................................ 195,861
Investments purchased............................................................... 1,349,534
Accrued expenses........................................................................ 81,681
--------------
Total liabilities.............................................................. 1,627,076
--------------
NET ASSETS (NOTE 5).......................................................................... $ 63,173,203
==============
CLASS A SHARES
Net assets.............................................................................. $ 45,290,547
Shares outstanding...................................................................... 9,332,524
Net asset value and redemption price per share (net assets/shares outstanding).......... $ 4.85
========
Maximum offering price per share (100/95.25 of $4.85)*.................................. $ 5.09
========
CLASS B SHARES
Net assets.............................................................................. $ 13,975,666
Shares outstanding...................................................................... 2,903,305
Net asset value, offering and redemption price per share (net assets/shares outstanding) $ 4.81
======
CLASS C SHARES
Net assets.............................................................................. $ 205,241
Shares outstanding...................................................................... 42,432
Net asset value, offering and redemption price per share (net assets/shares outstanding) $ 4.84
======
CLASS Y SHARES
Net assets.............................................................................. $ 3,701,749
Shares outstanding...................................................................... 758,922
Net asset value, offering and redemption price per share (net assets/shares outstanding) $ 4.88
======
NET ASSETS CONSIST OF:
Deficit in undistributed net income..................................................... $ (266,108)
Unrealized appreciation of investments.................................................. 795,956
Accumulated net realized loss on investments............................................ (22,493,571)
Paid-in capital......................................................................... 85,136,926
--------------
Net assets.......................................................................... $ 63,173,203
==============
</TABLE>
* On purchases of $100,000 or more, the offering price is reduced.
SEE NOTES TO FINANCIAL STATEMENTS
13
<PAGE>
DAVIS HIGH INCOME FUND, INC.
STATEMENT OF OPERATIONS
For the six months ended September 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
<S> <C> <C>
Income:
Interest............................................................................ $ 2,822,671
--------------
Expenses:
Management fees (Note 3)........................................... 211,716
Custodian fees..................................................... 35,655
Transfer agent fees
Class A....................................................... 29,162
Class B....................................................... 6,554
Class C....................................................... 29
Class Y....................................................... 72
Audit fees......................................................... 15,734
Legal fees......................................................... 7,602
Accounting fees (Note 3)........................................... 16,001
Reports to shareholders............................................ 10,703
Directors' fees and expenses....................................... 10,568
Registration and filing fees (Note 3).............................. 28,246
Miscellaneous...................................................... 5,262
Commissions paid under distribution plan (Note 4):
Class A....................................................... 54,149
Class B....................................................... 60,529
Class C....................................................... 104
-------------
Total expenses............................................................. 492,086
Fee reduction (Note 7) .................................................... (4,812)
--------------
Net expenses............................................................... 487,274
--------------
Net investment income.................................................. 2,335,397
--------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss from investment transactions......................................... (140,742)
Net increase in unrealized appreciation of investments during the period................ 2,192,379
--------------
Net realized and unrealized gain on investments................................ 2,051,637
--------------
Net increase in net assets resulting from operations........................... $ 4,387,034
==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
14
<PAGE>
DAVIS HIGH INCOME FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED
1997 MARCH 31,
OPERATIONS: (UNAUDITED) 1997
------------- ----------
<S> <C> <C>
Net investment income............................................... $ 2,335,397 $ 4,771,887
Net realized loss from investment transactions..................... (140,742) (452,398)
Net increase in unrealized appreciation (depreciation) of investments 2,192,379 (260,076)
--------------- --------------
Net increase in net assets resulting from operations..... 4,387,034 4,059,413
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A ($0.21 and $0.39 per share, respectively)............. (1,993,523) (4,139,503)
Class B ($0.19 and $0.36 per share, respectively)............. (472,524) (632,384)
Class C ($0.02 per share)..................................... (108) -
Class Y ($0.19 per share)..................................... (135,350) -
Paid-in capital
Class A ($0.07 per share)..................................... - (752,105)
Class B ($0.06 per share)..................................... - (114,589)
CAPITAL SHARE TRANSACTIONS (Note 5)................................... 3,273,606 (721,597)
--------------- ---------------
Total increase (decrease) in net assets............................. 5,059,135 (2,300,765)
NET ASSETS:
Beginning of year................................................... 58,114,068 60,414,833
--------------- --------------
End of year......................................................... $ 63,173,203 $ 58,114,068
=============== ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
15
<PAGE>
DAVIS HIGH INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS
Six Months Ended September 30, 1997 (Unaudited)
- -------------------------------------------------------------------------------
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. The Company offers shares in
four classes, Class A, Class B, Class C and Class Y. The Class A shares are
sold with a front-end sales charge, the Class B shares are sold at net asset
value and may be subject to a contingent deferred sales charge upon redemption
and the Class C shares are sold at net asset value and may be subject to a
contingent deferred sales charge upon redemption. Class Y shares are sold at
net asset value and are not subject to any contingent deferred sales charge.
Class Y shares are only available to certain qualified investors. 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 September 30, 1997, the
Fund had approximately $22,353,000 of capital loss carryovers available to
offset future capital gains, if any, of which $4,918,000, $7,606,000,
$4,382,000, $1,409,000, $3,505,000, $81,000 and $452,000 expire in 1998, 1999,
2000, 2001, 2003, 2004 and 2005, 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.
16
<PAGE>
DAVIS HIGH INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Six Months Ended September 30, 1997 (Unaudited)
- -------------------------------------------------------------------------------
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 six months ended September 30, 1997, were $19,269,336
and $16,972,258, 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 management agreement provides for a monthly fee of .0583 of 1%
(equivalent to .70 of 1% per annum) of the first $250 million of average daily
net assets of the Company.
Effective June 1, 1997, Davis Distributors, LLC (the "Distributor"),
and subsidiary of the Adviser, became the Underwriter and Distributor of the
Fund. Until June 1, 1997, the Adviser also acted as Underwriter and
Distributor. The Distributor is paid for registering Company shares for sale
in various states. The fee for the six months ended September 30, 1997
amounted to $6,000. The Distributor is also paid for certain transfer agent
services. The fee for the six months ended September 30, 1997 amounted to
$2,588.
The Adviser is paid for certain accounting services. The fee for the
six months ended September 30, 1997 amounted to $16,001. Certain directors and
officers of the Company are also directors and officers of the general partner
of Davis Selected Advisers, L.P.
Davis Selected Advisers-NY, Inc. ("DSA-NY"), wholly-owned subsidiary of
the Adviser, acts as sub-adviser to the Company. The Company pays no fees
directly to DSA-NY.
Stamper Capital & Investments, Inc. ("Stamper") acts as sub-adviser of
the Company. Stamper manages the day-to-day investment operations for the
Company. The Company pays no fees directly to Stamper. Stamper receives from
the Adviser a percentage of the total annual investment advisory fees paid by
the Company to the Adviser.
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 six months ended September 30, 1997, Davis Distributors, LLC
(or its predecessor, Davis
17
<PAGE>
DAVIS HIGH INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Six Months Ended September 30, 1997 (Unaudited)
- -------------------------------------------------------------------------------
NOTE 4 - DISTRIBUTION AND UNDERWRITING FEES - (CONTINUED)
Selected Advisers, L.P.), the Company's Underwriter (the "Underwriter")
received $82,936 from commissions earned on sales of Class A shares of the
Fund of which $12,595 was retained by the Underwriter and the remaining
$70,341 was reallowed to investment dealers. The Underwriter 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.
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 six months ended September 30, 1997 was $54,149.
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 six months ended September 30, 1997, Class B shares of the
Company made distribution plan payments which included commissions of $44,996
and maintenance fees of $15,533.
Commissions earned by the Distributor for the six months ended
September 30, 1997 on the sale of Class B shares of the Company amounted to
$151,922 of which $114,426 was reallowed to qualified selling dealers.
The Distributor intends to seek payment from Class B shares of the
Company in the amount of $342,422, 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
18
<PAGE>
DAVIS HIGH INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Six Months Ended September 30, 1997 (Unaudited)
- -------------------------------------------------------------------------------
NOTE 4 - DISTRIBUTION AND UNDERWRITING FEES - (CONTINUED)
asset value of the shares redeemed or the total cost of such shares. For the
six months ended September 30, 1997 the Distributor received contingent
deferred sales charges of $10,141 from redemptions of Class B shares of the
Company.
CLASS C SHARES
Class C shares of the Company are sold at net asset value and are
redeemed at net asset value less a contingent deferred sales charge of 1% if
redeemed within one year of purchase. The Company pays the Distributor 1% of
the Fund's annual average net assets attributable to Class C shares, of which
0.75% may be used to pay distribution expenses and 0.25% may be used to pay
shareholder service fees. During the six months ended September 30, 1997,
Class C shares of the Company made distribution payments of $104.
19
<PAGE>
DAVIS HIGH INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Six Months Ended September 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
NOTE 5 - CAPITAL STOCK
At September 30, 1997, there were 1,000,000,000 shares of capital stock ($0.05
par value per share) authorized. Transactions in capital stock were as
follows:
FOR THE SIX MONTHS
ENDED
CLASS A SEPTEMBER 30, 1997
(UNAUDITED)
----------------------
SHARES AMOUNT
------ ------
<S> <C> <C>
Shares subscribed............................................................. 1,131,680 $ 5,348,072
Shares issued to shareholders in connection with reinvestment of distributions 256,306 1,204,082
---------- -----------
1,387,986 6,552,154
Shares reacquired............................................................. (2,213,353) (10,415,112)
---------- -----------
Net decrease.......................................................... (825,367) $(3,862,958)
========== ===========
FOR THE YEAR ENDED
MARCH 31, 1997
-----------------------
SHARES AMOUNT
------ ------
Shares subscribed............................................................. 1,237,463 $ 5,873,114
Shares issued to shareholders in connection with reinvestment of distributions 647,205 3,066,164
---------- -----------
1,884,668 8,939,278
Shares reacquired............................................................. (2,841,857) (13,495,219)
---------- -----------
Net decrease.......................................................... (957,189) $(4,555,941)
========== ===========
FOR THE SIX MONTHS
ENDED
CLASS B SEPTEMBER 30, 1997
(UNAUDITED)
-----------------------
SHARES AMOUNT
------ ------
Shares subscribed............................................................. 1,167,803 $ 5,467,837
Shares issued to shareholders in connection with reinvestment of distributions 46,577 217,148
---------- -----------
1,214,380 5,684,985
Shares reacquired............................................................. (494,955) (2,318,244)
---------- -----------
Net increase.......................................................... 719,425 $ 3,366,741
========== ===========
FOR THE YEAR ENDED
MARCH 31, 1997
-----------------------
SHARES AMOUNT
------ ------
Shares subscribed............................................................. 1,230,183 $ 5,801,708
Shares issued to shareholders in connection with reinvestment of distributions 76,289 358,617
---------- -----------
1,306,472 6,160,325
Shares reacquired............................................................. (495,300) (2,332,982)
Net increase.......................................................... 811,172 $ 3,827,343
========== ===========
</TABLE>
20
<PAGE>
DAVIS HIGH INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Six Months Ended September 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
NOTE 5 - CAPITAL STOCK - (CONTINUED)
FOR THE SIX MONTHS
ENDED
CLASS C SEPTEMBER 30, 1997
(UNAUDITED)
------------------
SHARES AMOUNT
------ ------
<S> <C> <C>
Shares subscribed............................................................. 69,826 $ 332,173
Shares issued to shareholders in connection with reinvestment of distributions 16 78
------- ----------
69,842 332,251
Shares reacquired............................................................. (27,410) (130,452)
Net increase.......................................................... 42,432 $ 201,799
======= ==========
FOR THE SIX MONTHS
ENDED
CLASS Y SEPTEMBER 30, 1997
(UNAUDITED)
------------------
SHARES AMOUNT
------ ------
Shares subscribed............................................................. 728,867 $3,432,962
Shares issued to shareholders in connection with reinvestment of distributions 28,578 135,062
757,445 3,568,024
Shares reacquired............................................................. - -
------- ----------
Net increase.......................................................... 757,445 $3,568,024
======= ==========
FOR THE YEAR ENDED
MARCH 31, 1997
------------------
SHARES AMOUNT
------ ------
Shares subscribed............................................................. 1,477 $ 7,001
Shares issued to shareholders in connection with reinvestment of distributions - -
------- ----------
1,477 7,001
Shares reacquired............................................................. - -
------- ----------
Net increase.......................................................... 1,477 $ 7,001
======= ==========
</TABLE>
NOTE 6 - MATTERS SUBMITTED TO A VOTE OF SHAREHOLDERS
An annual meeting of shareholders was held on March 25, 1997.
Matters submitted for approval included consideration of a Sub-Advisory
Agreement between Davis Selected Advisers, L.P., the Investment Adviser of the
Company, and Davis Selected Advisers-NY, Inc., an affiliate of the Adviser and
election of Christian R. Sonne, LeRoy E. Hoffberger and Jeremy H. Biggs as
directors of the Company. With respect to consideration of the Sub-Advisory
Agreement, 6,986,732 votes were cast in favor, 92,149 votes were cast against
and 475,570 votes abstained. With respect to the election of Mr. Sonne,
7,230,963 votes were cast in favor and 323,488 votes were withheld. With
respect to the election of Mr. Hoffberger, 7,246,548 votes were cast in favor
and 307,903 votes were withheld. With respect to the election of Mr. Biggs,
7,230,963 votes were cast in favor and 323,488 votes were withheld. The terms
of office of Wesley E. Bass, Jr., Marc P. Blum, Shelby M.C. Davis, Eugene M.
Feinblatt, Jerry D. Geist, D. James Guzy, G. Bernard Hamilton, Laurence W.
Levine and Edwin R. Werner also continued after the meeting.
21
<PAGE>
DAVIS HIGH INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Six Months Ended September 30, 1997 (Unaudited)
- -------------------------------------------------------------------------------
NOTE 7 - CUSTODY FEES
Under an agreement with the custodian bank, custody fees are reduced by
credits for cash balances. Such reductions amounted to $4,812 during the six
months ended September 30, 1997.
22
<PAGE>
DAVIS HIGH INCOME FUND, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
The following represents selected data for a share of capital stock
outstanding throughout each period.
CLASS A
SIX
MONTHS
ENDED YEAR ENDED MARCH 31,
9/30/97 --------------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993
----------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.............. $4.71 $4.84 $4.86 $5.14 $5.18 $4.92
-------- ------- ------ ------ ------- ------
Income From Investment Operations
Net Investment Income........... 0.19 0.39 0.43 0.46 0.50 0.61
Net Gains or Losses on
Securities (both realized
and unrealized)................ 0.16 (0.06) 0.03 (0.24) 0.06 0.25
-------- ------- ------ ------ ------- ------
Total From Investment
Operations................ 0.35 0.33 0.46 0.22 0.56 0.86
-------- ------- ------ ------ ------- ------
Less Distributions
Dividends (from net
investment income)............. (0.21) (0.39) (0.43) (0.46) (0.50) (0.60)
Returns of Capital............... - (0.07) (0.05) (0.04) - -
Distribution in Excess of
Realized Gains................. - - - - (0.10) -
-------- ------- ------ ------ ------- ------
Total Distributions.......... (0.21) (0.46) (0.48) (0.50) (0.60) (0.60)
Net Asset Value,
End of Period.................... $4.85 $4.71 $4.84 $4.86 $5.14 $5.18
===== ===== ===== ===== ===== =====
Total Return (1).................... 7.66% 7.08% 9.93% 4.69% 11.29% 18.81%
Ratios/Supplemental Data
Net Assets, End of Period
(000 omitted).................. $45,291 $47,890 $53,816 $56,405 $64,663 $38,305
Ratio of Expenses to
Average Net Assets............. 1.48%(2)* 1.48%(2) 1.51% 1.53% 1.48% 1.81%
Ratio of Net Income to
Average Net Assets............. 7.90%* 8.13% 8.92% 9.49% 9.31% 11.91%
Portfolio Turnover Rate.......... 30.41% 66.10% 118.34% 98.94% 98.31% 84.93%
</TABLE>
(1) Sales charges are not reflected in calculation.
(2) Ratio of expenses to average net assets after the reduction of custodian
fees under a custodian agreement was 1.47% for the six months ended
September 30, 1997 and for the year ended March 31, 1997. Prior to 1997,
such reductions were reflected in the expense ratios.
* Annualized
23
<PAGE>
DAVIS HIGH INCOME FUND, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
The following represents selected data for a share of capital stock
outstanding throughout each period.
--------------------------------CLASS B---------------------------
SIX DECEMBER 5, 1994
MONTHS (COMMENCEMENT
ENDED YEAR OF OPERATIONS)
SEPTEMBER 30, ENDED THROUGH
1997 MARCH 31, MARCH 31,
(UNAUDITED) 1997 1996 1995
----------- ---- ---- ----
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period................ $4.68 $4.81 $4.85 $4.80
------ ------ ------ ------
Income From Investment Operations
Net Investment Income............. 0.17 0.36 0.40 0.11
Net Gains or Losses on
Securities (both realized
and unrealized).................. 0.15 (0.07) - 0.05
------ ------ ------ ------
Total From Investment
Operations.................. 0.32 0.29 0.40 0.16
------- ------ ------ -------
Less Distributions
Dividends (from net
investment income)............... (0.19) (0.36) (0.40) (0.11)
Returns of Capital................. - (0.06) (0.04) -
------ ------ ------ ------
Total Distributions............ (0.19) (0.42) (0.44) (0.11)
Net Asset Value,
End of Period...................... $4.81 $4.68 $4.81 $4.85
====== ====== ====== =======
Total Return (1)...................... 7.03% 6.26% 8.68% 4.28%
Ratios/Supplemental Data
Net Assets, End of Period
(000 omitted).................... $13,976 $10,217 $6,599 $1,900
Ratio of Expenses to
Average Net Assets............... 2.29%(2)* 2.30%(2) 2.32% 2.36%*
Ratio of Net Income to
Average Net Assets............... 7.02%* 7.28% 8.11% 8.66%*
Portfolio Turnover Rate............ 30.41% 66.10% 118.34% 98.94%
</TABLE>
(1) Sales charges are not reflected in calculation.
(2) Ratios of expenses to average net assets after the reduction of custodian
fees under a custodian agreement were 2.27% and 2.29% for September 30,
1997 and March 31, 1997, respectively. Prior to 1997, such reductions
were reflected in the expense ratios.
* Annualized
24
<PAGE>
DAVIS HIGH INCOME FUND, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
The following represents selected data for a share of capital stock
outstanding throughout each period.
-------CLASS C------- -----------CLASS Y-----------
AUGUST 12, 1997
(COMMENCEMENT SIX MARCH 20, 1997
OF OPERATIONS) MONTHS (COMMENCEMENT
THROUGH ENDED OF OPERATIONS)
SEPTEMBER 30, SEPTEMBER 30, THROUGH
1997 1997 MARCH 31,
(UNAUDITED) (UNAUDITED) 1997
--------- --------- ----
<S> <C> <C> <C>
Net Asset Value,
Beginning of Period................ $4.71 $4.72 $4.74
------ ------ -------
Income From Investment Operations
Net Investment Income............. 0.03 0.17 -
Net Gains or Losses on
Securities (both realized
and unrealized).................. 0.12 0.18 (0.02)
------ ------- -------
Total From Investment
Operations.................. 0.15 0.35 (0.02)
------ ------- -------
Less Distributions
Dividends (from net
investment income)............... (0.02) (0.19) -
Returns of Capital................. - - -
------ ------- -------
Total Distributions............ (0.02) (0.19) -
------ ------- -------
Net Asset Value,
End of Period...................... $4.84 $4.88 $4.72
===== ===== =====
Total Return (1)...................... 3.19% 7.71% (0.42)%
Ratios/Supplemental Data
Net Assets, End of Period
(000 omitted).................... $205 $3,702 $7
Ratio of Expenses to
Average Net Assets............... 2.18%(2)* 1.16%(2)* 1.21%(2)*
Ratio of Net Income to
Average Net Assets............... 4.95%* 8.03%* 8.89%*
Portfolio Turnover Rate............ 30.41% 30.41% 66.10%
</TABLE>
(1) Sales charges are not reflected in calculation.
(2) Ratios of expenses to average net assets after the reduction of custodian
fees under a custodian agreement were 2.17% for the period ended
September 30, 1997 for Class C shares and 1.14% and 1.20% for the six
months ended September 30, 1997 and the period ended March 31, 1997,
respectively, for Class Y shares. Prior to 1997, such reductions were
reflected in the expense ratios.
* Annualized
25
<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
Andrew A. Davis President
Christopher C. Davis Eileen R. Street
Eugene M. Feinblatt Vice President, Treasurer
Jerry D. Geist & Secretary
D. James Guzy Kenneth C. Eich
G. Bernard Hamilton Vice President
LeRoy E. Hoffberger Andrew A. Davis
Laurence W. Levine Vice President
Christian R. Sonne Christopher C. Davis
Edwin R. Werner Vice President
Carolyn H. Spolidoro
Vice President
Sharra L. Reed
Assistant Treasurer
& Assistant Secretary
INVESTMENT ADVISER
Davis Selected Advisers, L.P.
124 East Marcy Street
Santa Fe, New Mexico 87501
DISTRIBUTOR
Davis Distributors, LLC
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, INCLUDING MANAGEMENT FEE,
CHARGES AND EXPENSES, SEE THE CURRENT PROSPECTUS WHICH MUST PRECEDE OR
ACCOMPANY THIS REPORT.
===============================================================================
<PAGE>
DAVIS HIGH
INCOME FUND
SEMI-ANNUAL REPORT
SEPTEMBER 30,1997
DAVIS
FUNDS
