<PAGE>
Davis Intermediate
Investment Grade
Bond Fund
Semi-Annual Report
September 30, 1998
[Davis Funds Logo]
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501
===============================================================================
Dear Shareholder:
The Board of Directors approved changing the investment focus of the Fund from
high-yield, lower quality securities to high-quality, investment-grade
securities, effective October 6, 1998. The Board made this change in response
to the changing investment environment for high-yield securities, which involve
substantially greater risks and offer less liquidity than they once did.
The Fund has also been renamed the Davis Intermediate Investment Grade Bond
Fund to reflect its new investment strategy. The Fund intends to build a
diversified portfolio of investment grade bonds issued by U.S. corporations and
government entities with an average weighted maturity ranging between five and
ten years. The Fund's portfolio manager is Carolyn H. Spolidoro, who has worked
at the Davis Funds since 1985 and also manages Davis Government Bond Fund and
Davis Government Money Market Fund.
This semi-annual report reflects operations for the six months ended September
30, 1998 when the Fund was still investing primarily in high-yield lower
quality securities.
The Davis Intermediate Investment Grade Bond Fund outperformed other high-yield
bond funds on average, but still generated a loss for the three months and six
months ended September 30, 1998. The Fund's Class A shares declined 5.47% for
the three-month period and 5.77% for the six-month period.1 This compares with
average declines of 7.18% for the 282 funds in Lipper Analytical Services' high
current yield fund category during the three-month period and 6.84% for the 271
funds covered by Lipper during the six-month period. Over the 12 months ended
September 30, 1998, the Fund's Class A shares dropped 3.37% versus an average
drop of 1.77% for the 233 high-yield funds tracked by Lipper.2
The first half of 1998 was a rosy period for the high-yield bond market, with
interest rates dropping and the stock market rallying. However, credit quality
fears began to emerge in mid-July and gained momentum as the third quarter
progressed. Triggering the sharp reversal in market sentiment were growing
concerns about international financial problems along with the threat of a
global credit crunch and rising interest rates. Even after the Federal
Reserve's two rate cuts--one in late September and the other in
mid-October--the markets continue to be gripped by volatility and illiquidity.
The Fund's performance lagged other high-yield funds in the first half of 1998
because its portfolio was defensively positioned with respect to credit quality
and interest-rate movements and because three bonds in the portfolio traded off
sharply after their issuers unexpectedly went into bankruptcy. However, during
the market's third-quarter downturn, the Fund outperformed because the higher
quality securities it owned were generally penalized less than lower quality
credits. The Fund's average credit quality rating, BBB, was considerably higher
than most other high-yield bond funds, which typically average a B rating.3
During September, the Fund also liquidated some holdings and increased its cash
position. This was an advantageous move as the junk bond market fell
dramatically along with the stock market, which hit a peak in mid-July.
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501
===============================================================================
INCREASING RISKS IN HIGH-YIELD BONDS
Normally, lower quality bonds offer investors higher interest rates to
compensate for the increased risk that interest and principal payments might
not be made on a timely basis. However, up until fairly recently, credit
quality spreads--that is, the difference in yields between low-quality bonds
and high-quality bonds--had narrowed to record tight levels because investor
demand for high-yielding issues was so strong. As a result, investors were not
being fully compensated for the additional risk of purchasing high-yield
securities.
Now that situation has sharply reversed itself, with investors rushing to
quality and away from risk in an uncertain market climate. By the last week of
September, the spread between high-yield bonds and U.S. Treasury securities had
widened to around 6.20%, 300 basis points more than it was in February of this
year and the widest this spread had been since the 1990 recession.
Some investors might say such a big spread represents a buying opportunity. But
what concerns us is that spreads are so large at this stage of the business
cycle when corporate credit quality is under little pressure and defaults are
not widespread. If the worldwide recession now circling outside U.S. borders
actually enters the United States, the number of companies defaulting on their
debt would probably increase considerably. In all likelihood, this would cause
credit-quality spreads to widen significantly and high-yield bonds would
continue to trade quite poorly.
Because the risks in the high-yield market are so much greater today, we think
it is appropriate to lower the Fund's risk profile by adopting a more
conservative investment focus. As always, we recognize the importance of
remaining alert to changing investment opportunities. We remain dedicated to
helping our shareholders build and preserve wealth through strategies designed
to minimize volatility and optimize long-term risk-adjusted returns.
Sincerely,
/s/ Shelby M.C. Davis /s/ B. Clark Stamper /s/ Carolyn H. Spolidoro
Shelby M.C. Davis B. Clark Stamper Carolyn H. Spolidoro
Chief Investment Officer Former Portfolio Manager Portfolio Manager
November 10, 1998
2
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501
===============================================================================
This Semi-Annual Report is furnished to you by Davis Distributors, LLC, which
acts as the distributor for Davis Intermediate Investment Grade Bond Fund. This
Semi-Annual Report is authorized for distribution only when accompanied or
preceded by a current prospectus of Davis Intermediate Investment Grade Bond
Fund which contains more information about fees and expenses. Please read the
prospectus carefully before investing or sending money.
1 Average annual total return assumes reinvestment of dividends and capital
gain distributions. Prior to October 6, 1998, the fund invested primarily in
high-yield, high-risk securities. Past performance is not a guarantee of future
results. Investment return and principal value will vary so that, when
redeemed, an investor's shares may be worth more or less than when purchased.
* (Without a sales charge taken into consideration for the period ended
September 30, 1998)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
FUND NAME 1 YEAR 3 YEAR 5 YEAR 10 YEAR INCEPTION
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Davis Intermediate Investment
Grade Bond Fund Class A (3.37%) 5.24% 5.93% 5.86% 8.41% - 05/29/80
- ---------------------------------------------------------------------------------------------------------------
Davis Intermediate Investment
Grade Bond Fund Class B (3.98%) 4.42% N/A N/A 5.50% - 12/05/94
- ---------------------------------------------------------------------------------------------------------------
Davis Intermediate Investment
Grade Bond Fund Class C (4.17%) N/A N/A N/A (0.98%) - 08/12/97
- ---------------------------------------------------------------------------------------------------------------
Davis Intermediate Investment
Grade Bond Fund Class Y (3.18%) N/A N/A N/A 2.50% - 03/20/97
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
** (With a 4.75% sales charge or any applicable contingent deferred sales
charge taken into consideration for the period ended September 30, 1998)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
FUND NAME 1 YEAR 3 YEAR 5 YEAR 10 YEAR INCEPTION
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Davis Intermediate Investment
Grade Bond Fund Class A (7.93%) 3.56% 4.91% 5.35% 8.12% - 05/29/80
- ---------------------------------------------------------------------------------------------------------------
Davis Intermediate Investment
Grade Bond Fund Class B (7.53%) 3.60% N/A N/A 5.10% - 12/05/94
- ---------------------------------------------------------------------------------------------------------------
Davis Intermediate Investment
Grade Bond Fund Class C (5.05%) N/A N/A N/A (0.98%) - 08/12/97
- ---------------------------------------------------------------------------------------------------------------
Davis Intermediate Investment
Grade Bond Fund Class Y (3.18%) N/A N/A N/A 2.50% - 03/20/97
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
2 Lipper Analytical Services rankings are based on total returns but do not
consider sales charges.
3
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501
===============================================================================
3 Standard & Poor's Corporate Bond Ratings -
BBB--Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
B--Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
An investment in the Fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
4
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND
SCHEDULE OF INVESTMENTS
At September 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
==============================================================================================================
VALUE
PRINCIPAL (NOTE 1)
--------- --------
<S> <C> <C>
CORPORATE BONDS AND NOTES - (48.62%)
AEROSPACE/AVIATION - (1.39%)
$ 500,000 K & F Industries, Sr. Sub. Notes, Ser. B, 9.25%, 10/15/07.................... $ 490,000
500,000 Simula Inc., Sr. Conv. Sub. Notes, Series C, 10.00%, 09/15/99 (c)............ 465,000
-------------
955,000
-------------
AUTOMOTIVE - (0.26%)
200,000 Glasstech Inc., Sr. Notes, 12.75%, 07/01/04.................................. 181,000
-------------
BROADCASTING - (2.05%)
500,000 Pegasus Media & Communications, Sr. Sub. Notes, Series B,
12.50%, 07/01/05............................................................ 542,500
329,000 SFX Broadcasting Inc., Sr. Sub. Notes, Series B, 10.75%, 05/15/06............ 361,900
500,000 Sinclair Broadcast Group, Sr. Sub. Notes, 9.00%, 07/15/07.................... 500,000
-------------
1,404,400
-------------
BUILDING MATERIALS - (0.64%)
500,000 Pacalta Resources, Ltd., Sr. Notes, Ser. B, 10.75%, 06/15/04................. 440,000
-------------
CABLE - (1.25%)
150,000 Fundy Cable Ltd., Sr. Secured 2nd Priority Notes, 11.00%, 11/15/05........... 157,875
650,000 Rifkin Acquisition Partners, L.P., Sr. Sub. Notes, 11.125%, 01/15/06......... 700,375
-------------
858,250
-------------
CHEMICALS - (0.41%)
500,000 Trikem S.A., 10.625%, 07/24/07 (b)........................................... 283,750
-------------
COMPUTER PRODUCTS AND SERVICES - (0.76%)
250,000 Coinmach Corporation, Sr. Notes, Series C, 11.75%, 11/15/05................. 263,750
1,950,000 JTS Corporation, Conv. Sub. Deb., 5.25%, 04/29/02++.......................... 121,875
279,200 San Jacinto Holdings Inc., Sr. Notes, 12.00%, 12/31/02 (c)................... 139,600
-------------
525,225
-------------
DATA PROCESSING - (0.66%)
500,000 Axiohm Transaction Solutions Inc., Sr. Sub. Notes, 9.75%, 10/01/07........... 450,000
-------------
ECOLOGICAL/ENVIRONMENTAL - (1.29%)
319,000 Envirotest System Corp., Sr. Notes, 9.125%, 03/15/01......................... 319,000
500,000 Norcal Waste Systems Inc., Sr. Notes, Series B, 13.50% Incr. rate,
11/15/05 (d)............................................................... 567,500
-------------
886,500
-------------
ELECTRONICS - (0.68%)
5,000 Andersen Group, Inc., Conv. Sub. Deb., 10.50%, 10/15/02...................... 4,550
760,000 Broadband Technologies Inc., Conv. Sub. Notes, 5.00%, 05/15/01............... 438,900
558,273 Comptronix Corp., Conv. Sub. Deb., 6.75%, 03/01/02++ (c)..................... 23,447
-------------
466,897
-------------
EQUIPMENT LEASING - (0.05%)
670,700 Technical Equipment Leasing Corp., Jr. Sub. Deb., Series A, 18.375%,
04/01/96++ (c)............................................................. 33,535
-------------
5
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND
SCHEDULE OF INVESTMENTS - CONTINUED
At September 30, 1998 (Unaudited)
==============================================================================================================
VALUE
PRINCIPAL (NOTE 1)
--------- --------
CORPORATE BONDS AND NOTES - CONTINUED
FARMING & AGRICULTURE - (0.64%)
$ 500,000 Iowa Select Farms, L.P., Sr. Sub. Notes, 10.75%, 12/01/05 (b)................ $ 442,500
-------------
FINANCIAL SERVICES AND INSURANCE - (4.53%)
500,000 Dollar Financial Group Inc., Sr. Notes, Series A, 10.875%, 11/15/06.......... 482,500
500,000 GPA Delaware Inc., Gtd. Notes, 8.75%, 12/15/98............................... 500,000
500,000 Imperial Credit Capital Trust, Series B, 10.25%, 06/15/32.................... 480,753
750,000 Nationwide Credit, Inc., Sr. Notes, 10.25%, 01/15/08 (b)..................... 716,250
750,000 Ocwen Asset Investment, Sr. Notes, 11.50%, 07/01/05 (b)...................... 603,750
500,000 PennCorp Financial Group, Inc., Sr. Sub. Notes, 9.25%, 12/15/03.............. 327,500
-------------
3,110,753
-------------
FOOD SERVICE - (1.07%)
258,000 Envirodyne Industries, Inc., 1st Priority Sr. Secured Notes, 12.00%,
06/15/00................................................................... 261,870
500,000 Imperial Holly Corp., Sr. Sub Notes, 9.75%, 12/15/07......................... 476,250
-------------
738,120
-------------
GROCERY - (4.49%)
500,000 B & G Foods, Inc., Sr. Sub. Notes, 9.625%, 08/01/07......................... 467,500
500,000 Homeland Stores, Inc., Sr. Notes, 10.00%, 08/01/03........................... 452,500
690,000 Kroger Co., Lease Cert., 6.00%, 04/01/03.................................... 696,339
675,000 Kroger Co., Lease Cert., 12.95%, 02/01/09.................................... 712,123
1,000,000 Southland Corp., Sub. Deb., Ser. B, 4.00%, 06/15/04.......................... 755,000
-------------
3,083,462
-------------
HEALTHCARE AND PHARMACEUTICAL - (1.82%)
250,000 Alliance Imaging, Inc., Sr. Sub. Notes, 9.625%, 12/15/05..................... 235,000
863,000 Glycomed Inc., Conv. Sub. Deb., 7.50%, 01/01/03.............................. 773,464
346,000 National Patent Development Corp., Conv. Bds., 5.00%, 08/31/99............... 242,200
-------------
1,250,664
-------------
HOTELS, LODGING & GAMING - (3.16%)
250,000 Claridge Hotel & Casino Co., 1st Mtg. Notes, 11.75%, 02/01/02 ............... 200,000
1,448,000 Courtyard By Marriott II, L.P., Sr. Secured Notes, 10.75%, 02/01/08.......... 1,516,780
500,000 Venetian Casino, 1st Mtg. Notes, 12.25%, 11/15/04............................ 452,500
-------------
2,169,280
-------------
LEISURE, ENTERTAINMENT & FITNESS - (1.03%)
250,000 Discovery Zone Inc., Sr. Secured Notes, 13.50%, 08/01/02..................... 187,500
58 Discovery Zone Inc., Units, 13.50%, 05/01/02 (b)............................. 57,130
984,599 Underwater World Mall of America, Sr. Rev. Bds., 13.75%, 03/01/02++ (c)...... 462,762
-------------
707,392
-------------
MANUFACTURING - (1.04%)
750,000 Alliance Laundry Systems, Sr. Sub. Notes, 9.625%, 05/01/08 (b)............... 712,500
-------------
6
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND
SCHEDULE OF INVESTMENTS - CONTINUED
At September 30, 1998 (Unaudited)
==============================================================================================================
VALUE
PRINCIPAL (NOTE 1)
--------- --------
CORPORATE BONDS AND NOTES - CONTINUED
MEDICAL EQUIPMENT - (0.66%)
$ 500,000 Wright Medical Technology, Inc., Sr. Secured Notes, Series D,
11.75%, 07/01/00........................................................... $ 450,000
-------------
METALS & MINING - (0.16%)
100,000 EES Coke Battery Inc., Sr. Secured Notes, Series B, 9.328%, 04/15/07 (b)..... 109,523
-------------
MOBILE & WIRELESS TELECOMMUNICATIONS - (0.46%)
500,000 Millicom International Cellular S.A., Sr. Sub. Disc. Notes, 0%/13.50%,
06/01/06 (d).............................................................. 317,500
-------------
NATURAL GAS & OIL DISTRIBUTORS - (0.85%)
100,000 Amerigas Partners L.P., Sr. Notes, Series B, 10.125%, 04/15/07.............. 101,000
500,000 Statia Terminals International CDA Inc., 1st Mtg. Notes, 11.75%, 11/15/03.... 482,500
-------------
583,500
-------------
OIL & GASOLINE - (8.77%)
250,000 Clark R & M Inc., Sr. Notes, 8.375%, 11/15/07................................ 228,750
250,000 Clark R & M Inc., Sr. Sub. Notes, 8.875%, 11/15/07........................... 216,250
250,000 Costilla Energy, Inc., Sr. Notes, 10.25%, 10/01/06........................... 217,500
500,000 Dailey International Inc., Sr. Notes, 9.50%, 02/15/08....................... 325,000
500,000 Deeptech International, Inc., Sr. Secured Notes, 12.00%, 12/15/00............ 545,000
800,000 Forman Petroleum Corp., Sr. Secured Notes, Series B, 13.50%, 06/01/04........ 804,000
1,000,000 Gerrity Oil & Gas Corp., Sr. Sub. Notes, 11.75%, 07/15/04.................... 1,005,000
500,000 Gulfmark Offshore, Inc., Sr. Notes, 8.75%, 06/01/08.......................... 452,500
500,000 HS Resources Inc., Sr. Sub. Notes, 9.875%, 12/01/03.......................... 490,000
500,000 Northern Offshore Inc., Sr. Notes, 10.00%, 05/15/05 (b)...................... 372,500
500,000 Parker Drilling Co., Sr. Notes, Series C, 9.75%, 11/15/06 (b)................ 465,000
500,000 Ram Energy Inc., Sr. Notes, 11.50%, 02/15/08................................. 415,000
1,000,000 Transamerica Energy Corp., Sr. Secured Disc. Notes,
0%/13.00%, 06/15/02 (d).................................................... 485,000
-------------
6,021,500
-------------
PAPER PRODUCTS - (0.56%)
2,000,000 Crown Packaging Enterprises, Ltd., Sr. Secured Disc. Notes, 0%/14.00%,
08/01/06 (c) (d)........................................................... 30,000
500,000 Grupo Industrial Durango S.A. DE C.V., Notes, 12.00%, 07/15/01............... 352,500
-------------
382,500
-------------
PRECIOUS METALS - (1.81%)
1,170,000 Crown Resources Corp., Conv. Sub. Deb., 5.75%, 08/27/01...................... 877,500
500,000 Echo Bay Mines Ltd., Capital Securities, 11.00%, 04/01/27.................... 332,500
1,000,000 Pegasus Gold, Inc., Sub. Notes, 6.25%, 04/30/02++............................ 30,000
-------------
1,240,000
-------------
7
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND
SCHEDULE OF INVESTMENTS - CONTINUED
At September 30, 1998 (Unaudited)
==============================================================================================================
VALUE
PRINCIPAL (NOTE 1)
--------- --------
CORPORATE BONDS AND NOTES - CONTINUED
PROTECTION SERVICES - (0.21%)
$ 150,000 Loomis Fargo and Company, Sr. Sub. Notes, 10.00%, 01/15/04................... $ 144,000
-------------
RESTAURANT - (0.31%)
250,000 TPI Enterprises Inc., Conv. Sub. Deb., 8.25%, 07/15/02....................... 212,500
-------------
TELECOMMUNICATIONS - (5.25%)
500,000 EchoStar Communications Corp., Sr. Secured Disc. Notes, 0%/12.875%,
06/01/04 (d)............................................................... 487,500
500,000 Hyperion Telecommunications, Sr. Disc. Notes, Series B, 0%/13.00%,
04/15/03 (d).............................................................. 345,000
1,000,000 ICG Holdings (USA), Inc., Sr. Disc. Notes, 0%/12.50%, 05/01/06 (d)........... 715,000
250,000 L 3 Communications Co., Sr. Sub. Notes, 10.375%, 05/01/07.................... 274,375
250,000 Nextlink Communications LLC, Sr. Notes, 12.50%, 04/15/06..................... 268,750
500 Startec Global Communications, Units, 12.00%, 05/01/08 (b)................... 442,500
250,000 Telegroup, Inc., Sr. Disc. Notes, 0%/10.50%, 11/01/04 (d).................... 162,500
500,000 Versatel Teleommunications, Sr. Notes, 13.25%, 05/15/08 (b).................. 472,500
650,000 Winstar Communications, Inc., Sr. Disc. Notes, 0%/14.00%, 10/15/05 (d)....... 438,750
-------------
3,606,875
-------------
TRANSPORTATION/SHIPPING - (0.66%)
375,000 Golden Ocean Group Ltd., Sr. Notes, 10.00%, 08/31/01 (b)..................... 183,750
250,000 Moran Transportation Co., 1st Preferred Shipping Mtg. Notes, Series B,
11.75%, 07/15/04........................................................... 268,750
-------------
452,500
-------------
UTILITIES - (1.70%)
500,000 Midland Funding Corporation II, Sub. Secured Lease, 13.25%, 07/23/06......... 634,465
498,978 Panda Funding, Series A-1, 11.625%, 08/20/12................................. 533,906
-------------
1,168,371
-------------
TOTAL CORPORATE BONDS AND NOTES
- (identified cost $40,008,257).................................... 33,387,997
-------------
MORTGAGE BACKED BONDS - (8.72%)
370,000 Arkansas St. Dev. Fin. Sngl. Fam. Mtg. Rev. Refunding Bds., Mtg. Bkd.
Secs. Prg., Ser-C, GNMA/FNMA, 7.75%, 01/01/00.............................. 376,756
224,452 Chase Mortgage Finance Corp., Series '93-G-A1, REMIC, 7.00%, 04/25/01........ 226,641
165,268 Citicorp Mtg. Securities, Inc., Series '89-16, CL A-1, 6.425%, 04/01/19 ..... 164,028
29,456 CTS Home Equity Loan Trust, Asset Backed Certificates, Series `91-1-A,
8.80%, 01/15/06............................................................ 29,421
69,170 Fannie Mae, REMIC, Series `91-38, CL SA, Inverse Support Tranche,
10.1862%, 04/25/21......................................................... 73,909
2,000,000 Federal Home Loan Bank, Series T702, 5.50%, 04/15/02......................... 2,000,000
8
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND
SCHEDULE OF INVESTMENTS - CONTINUED
At September 30, 1998 (Unaudited)
==============================================================================================================
VALUE
PRINCIPAL (NOTE 1)
--------- --------
MORTGAGE BACKED BONDS - CONTINUED
$ 2,000,000 Federal Home Loan Bank, 5.62%, 10/20/03...................................... $ 2,000,000
194,523 First Nationwide Trust, Series '89-AR4-1, 9.50%, 09/25/19.................... 194,016
203,205 Freddie Mac, CL 1567 A, 6.025%, 08/15/23..................................... 197,233
100,000 Freddie Mac, REMIC, CL 1630 E, 6.00%, 09/15/23............................... 98,784
293,852 Freddie Mac, REMIC, CL 1668 F, 7.5875%, 02/15/14............................. 299,718
135,662 Manufacturers Hanover Mortgage Corporation, Series A, 11.50%, 04/20/15....... 141,427
179,000 The Prudential Mortgage Securities Company, Mtg. Pass-Through
Certificates, Series '92-038, CL A-8, Fixed Rate, 6.95%, 11/25/22.......... 182,863
4,825 Resolution Trust Corporation, American Res. Mtg. Corp., Service Mtg.
Pass-Through Certificates, Series '92 M4 CL A-1, 8.00%, 09/25/21........... 4,885
-------------
TOTAL MORTGAGE BACKED BONDS - (identified cost $5,874,299)............ 5,989,681
-------------
TAXABLE MUNICIPAL BONDS - (18.74%)
670,000 Adams Cnty., CO, IDR Series A Pool Gtd. - Executive Life, 9.00%,
11/01/96+.................................................................. 6,700
1,070,000 Adams Cnty., CO, Sngl. Fam. Taxable Mtg. Rev. Bds., Capital Appreciation,
Zero Cpn., 06/01/12........................................................ 367,331
1,905,000 Austin, TX, Hsg. Fin. Corp. Sngl. Fam. Mtg. Rev. Bds., Compounded
Interest, Series `84, Zero Cpn., 02/01/16.................................. 253,879
615,000 California Hsg. Fin. Agy. Rev. Bds., Taxable Home Mtg., Series D,
9.30%, 02/01/26............................................................ 674,034
1,000,000 Camden Cnty., GA, JT Dev. Auth., Taxable Rev. Bds., 7.10%, 12/01/12......... 1,126,150
130,000 Commerce Refuse to Energy Auth., Taxable Ref. Rev. Bds., '90 Series,
10.50%, 07/01/00........................................................... 135,496
700,000 Connecticut St. Health & Edl. Facs. (Sheriden Woods Ctr.), Taxable Rev.
Bds., 8.73%, 11/01/17...................................................... 850,010
700,000 Connecticut St. Hsg. Fin. Auth., Taxable Hsg. Mtg. Program, Series G,
7.625%, 05/15/21.......................................................... 802,970
80,000 Connecticut St. Hsg. Fin. Auth., Taxable Hsg. Mtg. Program, Series H,
7.875%, 11/15/26.......................................................... 90,776
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+......................... 1,950
85,000 Galveston Cnty., TX, Wtr. Auth., Canal Sys. Contract Wtr. Rev. Bds.,
AMBAC Insured, 9.60%, 07/01/99............................................. 85,329
620,000 Harrisburg, PA, G.O. Capital Appreciation Bds., Zero Cpn., 04/01/13.......... 266,042
215,000 Illinois HFA Rev. Bds., Series C, MBIA Insured, 10.30%, 08/15/03............. 217,920
385,000 Illinois Hsg. Dev. Auth., Taxable Multifam. Program, Series 8, 8.52%,
09/01/31................................................................... 438,142
165,000 Lancaster, TX, Combined Tax & Golf Course Park Rev. Bds., Series B,
Certificates of Obligation, MBIA Insured, 9.375%, 08/01/02................. 165,607
9
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND
SCHEDULE OF INVESTMENTS - CONTINUED
At September 30, 1998 (Unaudited)
==============================================================================================================
VALUE
PRINCIPAL/SHARES (NOTE 1)
---------------- --------
TAXABLE MUNICIPAL BONDS - CONTINUED
$ 640,000 Los Angeles County, CA, Pension Obligation, Capital Appreciation Bds.,
Series C, MBIA Insured, Zero Cpn., 06/30/07................................ $ 395,712
100,000 Louisiana Hsg. Fin. Agy., Taxable Home Mtg., Series `86A, 8.61%,
08/01/49+.................................................................. 1,000
100,000 Louisiana St. Agriculture Fin. Auth., Series `86A, 8.80%, 10/01/96+.......... 1,000
190,000 Mayor and City Council of Baltimore, Econ. Dev. Taxable Lease Rev. Bds.
(Arcade Ltd. Partnership Prj.) Series `92, 8.50%, 08/01/02................. 204,959
50,000 Mayor and City Council of Baltimore, Econ. Dev. Taxable Lease Rev. Bds.
(Arcade Ltd. Partnership Prj.) Series `92, 9.50%, 08/01/14................. 55,329
675,480 Memphis, TN Hlth. Educ. & Hsg. Fac. Brd., Multi Fam. Hsg. Rev.
Securitized, Series '86A, 8.68%, 09/15/96+................................. 6,755
115,000 Missouri St., Hsg. Dev. Cmnty., Multi Fam. Hsg. Rev. Bds., FHA Insured
Mtg. Loans, 9.25%, 12/01/30................................................ 125,925
20,000 Nebraska Invst. Fin. Auth., Agriculture Rev. Bds., Series A, Gtd. Executive
Life, 8.34%, 11/01/93+..................................................... 200
2,500,000 New Jersey Econ. Dev. Auth., Taxable Rev. Bds., Zero Cpn., 02/15/19.......... 514,750
440,000 New York St. HFA Rev. Multi Fam. Mtg. Series B, Sonyma Prg.
Insurance, 8.875%, 08/15/14................................................ 514,536
250,000 Oklahoma City, OK, Airport Trust Taxable Rev. Bds. (Fed. Bureau of
Prisons), 8.40%, 11/01/14.................................................. 284,000
1,930,000 Orange County, CA, Pension Obligation, Capital Appreciation Bds.,
Series A, Zero Cpn., 09/15/13.............................................. 808,284
428,763 Polk Cnty., FL, HFA REMIC Collateralized Mtg. Bds., Series 1, CL 2-A,
9.55%, 01/15/11............................................................ 449,858
130,000 San Bernadino CA Assd. Cmntys. Fing. Auth. Health Care Ref. &
Improvement Bds. (Granada) Series B, 8.80%, 05/01/17....................... 153,478
807,000 The Southeast TX Hsg. Fin. Corp. Securitized Multi Fam. Hsg. Rev. Bds
Series '86A, 8.60%, 09/01/96+.............................................. 8,070
2,130,000 Texas St., Dept. Hsg. & Comm. Taxable Mtg. Rev. Ref. Bds., Jr. Lien,
Ser. B, 9.50%, 03/01/16.................................................... 2,159,394
1,000,000 University of Southern CA, 9.80%, 10/01/06................................... 1,003,830
275,000 Utah St. Hsg. Fin. Agy. Taxable RHA Cmnty. Services, Series B, 9.00%,
07/01/02................................................................... 289,603
2,460,000 Wagner College, NY, G.O. Capital Appreciation Bds., Zero Cpn., 10/01/22...... 307,992
315,000 York, PA, G.O. Capital Appreciation Bds., Series A, Zero Cpn., 02/01/17...... 102,470
-------------
TOTAL TAXABLE MUNICIPAL BONDS
- (identified cost $12,395,120)..................................... 12,869,481
-------------
PREFERRED STOCKS - (0.03%)
2,100 Westmoreland Coal Co., Dep. Shares Conv. Pfd., Series A, 8.50%++ ............ 22,838
-------------
TOTAL PREFERRED STOCKS - (identified cost $27,405)..................... 22,838
-------------
10
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND
SCHEDULE OF INVESTMENTS - CONTINUED
At September 30, 1998 (Unaudited)
==============================================================================================================
VALUE
SHARES/UNITS/PRINCIPAL (NOTE 1)
- ---------------------- --------
COMMON STOCKS - (1.22%)
135,951 Canyon Resources Corporation* ............................................... $ 50,982
260,000 Crown Packaging Enterprises Ltd.* ........................................... 2,600
1,386 GP Strategies Corp........................................................... 13,860
1,161 Nextel Communications Inc., Class A*......................................... 23,438
222 San Jacinto Hldgs. Inc....................................................... 222
852,880 Sunshine Mining & Refining Co.*.............................................. 746,270
-------------
TOTAL COMMON STOCKS - (identified cost $1,698,391)......................... 837,372
-------------
WARRANTS - (0.14%)
500 Chattem Inc., expire 08/17/99 (c)............................................ 100
869 Empire Gas Corp., expire 07/15/04 (c)........................................ 1,629
800 Forman Petroleum Corp., expire 06/01/04 (b).................................. 400
500 Hyperion Telecommunications, expire 04/01/01 (c)............................. 22,500
500 Primus Telecommunications, expire 08/01/04................................... 750
100 Spanish Broadcasting Systems Inc., expire 06/30/99 (c)....................... 49,000
21,825 Sunshine Mining & Refining Co., expire 03/09/99.............................. 2,728
500 Versatel Telecommunications, expire 05/15/08 (b)............................. 5,000
205 Wright Medical Technology, Inc., expire 06/30/03 (b)......................... 13,325
-------------
TOTAL WARRANTS - (identified cost $18,299)................................. 95,432
-------------
SHORT TERM - (24.83%)
$ 7,610,000 Federal Home Loan Mortgage Discount Note, 5.32%, 10/07/98.................... 7,603,252
9,450,000 State Street Corporation Repurchase Agreement, 5.35%, 10/01/98, dated
09/30/98, repurchase value of $9,451,404 (collateralized by $9,450,000
par value U.S. Treasury Notes, 5.625%, 02/28/01, market value
$9,686,250)................................................................ 9,450,000
-------------
TOTAL SHORT TERM - (identified cost $17,053,252)...................... 17,053,252
-------------
TOTAL INVESTMENTS (identified cost $77,075,023) - (102.30%)(a)............... 70,256,053
LIABILITIES LESS OTHER ASSETS - (2.30%)...................................... (1,581,065)
-------------
NET ASSETS - 100% ................................................... $68,674,988
=============
</TABLE>
+ 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 $77,075,023.
(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. These securities amounted to $4,880,378 and 7.11%
of the Fund's net assets as of September 30, 1998.
(c) Restricted or illiquid securities. See Note 6 of the Notes to Financial
Statements.
(d) Represents a step bond: a zero coupon bond that converts to a fixed or
variable interest rate at a designated future date.
At September 30, 1998, unrealized appreciation (depreciation) of securities for
Federal income tax purposes was as follows:
Unrealized appreciation........................................ $ 2,013,816
Unrealized depreciation........................................ (8,832,786)
-----------
Net unrealized depreciation................................. $(6,818,970)
SEE NOTES TO FINANCIAL STATEMENTS
11
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
At September 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
=============================================================================================================
<S> <C>
ASSETS:
Investments in securities, at value (including repurchase agreements of $9,450,000)
(identified cost $77,075,023) (See accompanying Schedule of Investments)............ $ 70,256,053
Cash ................................................................................... 18,538
Receivables:
Interest............................................................................ 1,082,500
Capital stock sold.................................................................. 127,670
Investments sold.................................................................... 1,879,527
Prepaid expenses........................................................................ 21,585
--------------
Total assets................................................................... 73,385,873
--------------
LIABILITIES:
Payables:
Capital stock redeemed.............................................................. 64,390
Investments purchased............................................................... 4,510,300
Accrued expenses........................................................................ 136,195
--------------
Total liabilities.............................................................. 4,710,885
--------------
NET ASSETS (NOTE 7).......................................................................... $ 68,674,988
==============
CLASS A SHARES
Net assets.............................................................................. $ 33,473,403
Shares outstanding...................................................................... 7,785,968
Net asset value and redemption price per share.......................................... $ 4.30
========
Maximum offering price per share (100/95.25 of $4.30)*.................................. $ 4.51
========
CLASS B SHARES
Net assets.............................................................................. $ 26,303,880
Shares outstanding...................................................................... 6,165,993
Net asset value, offering and redemption price per share................................ $ 4.27
========
CLASS C SHARES
Net assets.............................................................................. $ 4,921,423
Shares outstanding...................................................................... 1,145,876
Net asset value, offering and redemption price per share................................ $ 4.29
========
CLASS Y SHARES
Net assets.............................................................................. $ 3,976,282
Shares outstanding...................................................................... 919,884
Net asset value, offering and redemption price per share................................ $ 4.32
========
NET ASSETS CONSIST OF:
Par value of shares of capital stock ................................................... $ 800,886
Additional paid-in capital ............................................................. 94,187,592
Deficit in undistributed net income .................................................... (585,514)
Net unrealized depreciation of investments ............................................. (6,818,970)
Accumulated net realized loss on investments ........................................... (18,909,006)
--------------
Net assets.......................................................................... $ 68,674,988
==============
</TABLE>
* On purchases of $100,000 or more, the offering price is reduced.
SEE NOTES TO FINANCIAL STATEMENTS
12
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND
STATEMENT OF OPERATIONS
For the six months ended September 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
=============================================================================================================
INVESTMENT INCOME:
<S> <C> <C>
Income:
Interest............................................................................ $ 3,138,291
-----------
Expenses:
Management fees (Note 3)........................................... 262,448
Custodian fees..................................................... 8,540
Transfer agent fees
Class A........................................................ 44,049
Class B........................................................ 26,715
Class C........................................................ 4,301
Class Y........................................................ 618
Audit fees.......................................................... 8,050
Legal fees.......................................................... 12,170
Accounting fees (Note 3)............................................ 3,000
Reports to shareholders............................................. 26,583
Directors' fees and expenses........................................ 13,924
Registration and filing fees (Note 3)............................... 47,536
Miscellaneous....................................................... 7,385
Payments under distribution plan (Note 4):
Class A....................................................... 45,021
Class B....................................................... 129,967
Class C........................................................ 19,266
-----------
Total expenses............................................................. 659,573
Expenses paid indirectly (Note 5) ........................................ (754)
-----------
Net expenses............................................................... 658,819
-----------
Net investment income.................................................. 2,479,472
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized loss from investment transactions......................................... (1,473,837)
Net increase in unrealized depreciation of investments.................................. (5,488,865)
-----------
Net realized and unrealized loss on investments................................ (6,962,702)
-----------
Net decrease in net assets resulting from operations........................... $(4,483,230)
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
13
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
==============================================================================================================
SIX MONTHS
ENDED
OPERATIONS: SEPTEMBER 30, YEAR ENDED
1998 MARCH 31,
(UNAUDITED) 1998
----------- ----
<S> <C> <C>
Net investment income............................................... $ 2,479,472 $ 4,442,825
Net realized gain (loss) from investment transactions.............. (1,473,837) 1,600,540
Net (increase) decrease in unrealized depreciation of investment... (5,488,865) 66,318
----------- -----------
Net increase (decrease) in net assets resulting from
operations......................................... (4,483,230) 6,109,683
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A....................................................... (1,770,393) (3,217,912)
Class B....................................................... (977,567) (913,850)
Class C....................................................... (134,091) (60,594)
Class Y....................................................... (182,935) (250,469)
Paid-in capital
Class A....................................................... - (760,545)
Class B....................................................... - (214,746)
Class C....................................................... - (19,800)
Class Y....................................................... - (60,064)
CAPITAL SHARE TRANSACTIONS (Note 7)................................... 4,426,510 13,070,923
----------- -----------
Total increase (decrease) in net assets............................. (3,121,706) 13,682,626
NET ASSETS:
Beginning of year................................................... 71,796,694 58,114,068
----------- -----------
End of year......................................................... $68,674,988 $71,796,694
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
14
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND
NOTES TO FINANCIAL STATEMENTS
For the six months ended September 30, 1998 (Unaudited)
===============================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
The Fund 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 Fund also seeks
capital growth so long as such objective is consistent with its primary
objective. Until October 6, 1998, the Fund invested 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. Effective October
6, 1998, the Fund invests primarily in high-quality, investment-grade bonds.
The Fund 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 and the Class B and
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. Income, expenses
(other than those attributable to a specific class) and gains and losses are
allocated daily to each class of shares based upon the relative proportion of
net assets represented by each class. Operating expenses directly attributable
to a specific class are charged against the operations of that class. 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 Fund in the
preparation of its financial statements.
SECURITY VALUATION.
Portfolio securities may be valued on the basis of prices provided by an
independent pricing service or broker 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 Fund's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute
substantially all of its taxable income to shareholders. Therefore, no
provision for federal income or excise tax is required. At September 30, 1998,
the Fund had approximately $17,435,000 of capital loss carryovers available to
offset future capital gains, if any, of which $7,606,000, $4,382,000,
$1,409,000, $3,505,000, $81,000 and $452,000 expire in 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 realized 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 over the lives
of the respective securities in accordance with the requirements of the
Internal Revenue Code.
15
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For the six months ended September 30, 1998 (Unaudited)
===============================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS.
Dividends and distributions to shareholders are recorded on the
ex-dividend date. The character of the distributions made during the year from
net investment income may differ from its ultimate characterization for federal
income tax purposes. Also, due to the timing of distributions, the fiscal year
in which amounts are distributed may differ from the fiscal year in which
income or gain was recorded by the Fund. The Fund adjusts the classification of
distributions to shareholders to reflect the differences between financial
statement amounts and distributions determined in accordance with income tax
regulations.
USE OF ESTIMATES IN FINANCIAL STATEMENTS.
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of income and expenses during the reporting period. Actual
results may differ from these estimates.
NOTE 2 - PURCHASES AND SALES OF SECURITIES.
Purchases and sales of investment securities (excluding short term
securities) during the six months ended September 30, 1998, were $18,688,093
and $20,978,745, respectively.
NOTE 3 - INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
The Fund pays advisory fees for investment management and advisory
services under a management agreement with Davis Selected Advisers, L.P. (the
"Adviser"). Until October 6, 1998, the management agreement provided for a fee
at the annual rate of 0.70% of the first $250 million of average net assets of
the Fund, 0.60% of the next $250 million of average net assets of the Fund and
0.55% of average net assets over $500 million. Effective October 6, 1998, the
management fee was reduced to 0.55% of all average net assets.
The Adviser is paid for registering Fund shares for sale in various
states. The fee for the six months ended September 30, 1998 amounted to $6,498.
Boston Financial Data Services is the Fund's primary transfer agent. The
Adviser is also paid for certain transfer agent services. The fee for these
services for the six months ended September 30, 1998 amounted to $5,704. State
Street Bank & Trust Co. is the Fund's primary accounting provider. Fees for
such services are included in the custodian fee. The Adviser is also paid for
certain accounting services. The fee for the six months ended September 30,
1998 amounted to $3,000. Certain directors and officers of the Fund are also
directors and officers of the general partner of Davis Selected Advisers, L.P.
Davis Selected Advisers-NY, Inc. ("DSA-NY"), a wholly-owned subsidiary
of the Adviser, acts as sub-adviser to the Fund. The Fund pays no fees directly
to DSA-NY.
16
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For the six months ended September 30, 1998 (Unaudited)
===============================================================================
NOTE 4 - DISTRIBUTION AND UNDERWRITING FEES
CLASS A SHARES
Class A shares of the Fund 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, 1998, Davis Distributors, LLC,
the Fund's Underwriter (the "Underwriter" or "Distributor") received $128,155
from commissions earned on sales of Class A shares of the Fund of which $21,608
was retained by the Underwriter and the remaining $106,547 was re-allowed to
investment dealers. The Underwriter paid the costs of prospectuses in excess of
those required to be filed as part of the Fund'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 service
fee with respect to Class A shares sold by dealers which remain outstanding
during the period. The service 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 for which the Underwriter pays no service fees
to other firms. The service fee for Class A shares of the Fund for the six
months ended September 30, 1998 was $45,021.
CLASS B SHARES
Class B shares of the Fund 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 Fund pays a distribution fee to reimburse the Distributor for
commission advances on the sale of the Fund's Class B shares. The National
Association of Securities Dealers, Inc., ("NASD") limits the percentage of the
Fund's average annual 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 Fund may pay for
distribution-related services 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, 1998, Class B shares of the Fund
made distribution plan payments which included distribution fees of $97,390 and
service fees of $32,577.
Commission advances by the Distributor for the six months ended
September 30, 1998 on the sale of Class B shares of the Fund amounted to
$330,379, of which $324,549 was reallowed to qualified selling dealers.
The Distributor intends to seek payment from Class B shares of the Fund
in the amount of $826,046, representing the cumulative commission advances by
the Distributor on the sale of the Fund's Class B shares, plus interest,
reduced by cumulative distribution fees paid by the Fund and cumulative
contingent deferred sales charges paid by redeeming shareholders. The Fund 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 Fund or the Distributor.
17
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For the six months ended September 30, 1998 (Unaudited)
===============================================================================
NOTE 4 - DISTRIBUTION AND UNDERWRITING FEES - (CONTINUED)
CLASS B SHARES - CONTINUED
A contingent deferred sales charge is imposed upon redemption of certain
Class B shares of the Fund 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 six
months ended September 30, 1998 the Distributor received contingent deferred
sales charges of $24,511 from redemptions of Class B shares of the Fund.
CLASS C SHARES
Class C shares of the Fund 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 Fund pays the Distributor 1% of the Fund's
average annual 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, 1998, Class C shares of the Fund
made distribution payments of $19,266. During the six months ended September
30, 1998, the Distributor received $1,745 in contingent deferred sales charges
from redemptions of Class C shares of the Fund.
NOTE 5 - CUSTODIAN FEES
Under an agreement with the custodian bank, custodian fees are reduced for
earnings on cash balances maintained at the custodian by the Fund. Such
reductions amounted to $754 during the six months ended September 30, 1998.
NOTE 6 - RESTRICTED AND ILLIQUID SECURITIES
Restricted securities are not registered under the Securities Act of 1933
and may have contractual restrictions on resale. They are valued under methods
approved by the Board of Directors as reflecting fair value. Securities may be
considered illiquid if they lack a readily available market or if valuation has
not changed for a certain period of time. The aggregate value of restricted or
illiquid securities is $1,227,573, or 1.79% of the Fund's total net assets as
of September 30, 1998. Information concerning restricted securities is as
follows:
<TABLE>
<CAPTION>
ACQUISITION COST VALUATION PER UNIT
SECURITY DATE PER UNIT AS OF SEPTEMBER 30, 1998
- -------- ---- -------- ------------------------
<S> <C> <C> <C>
San Jacinto Holdings Inc., Sr. Notes,
10.75%, 12/31/02 03/27/96 81.97 50.00
Simula Inc., Sr. Conv. Sub. Notes,
Series C, 10.00%, 09/15/99 09/17/96 100.00 93.00
Technical Equipment Leasing Corp.,
Jr. Sub. Deb., Series A,
18.375%, 04/01/96 06/15/84 100.00 5.00
</TABLE>
18
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For the six months ended September 30, 1998 (Unaudited)
===============================================================================
NOTE 7 - CAPITAL STOCK
At September 30, 1998, 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>
CLASS A SIX MONTHS
ENDED
SEPTEMBER 30, 1998
(UNAUDITED)
---------------------------
SHARES AMOUNT
------------ -------------
<S> <C> <C>
Shares subscribed................................. 1,539,577 $ 7,064,979
Shares issued in reinvestment of distributions.... 212,225 979,386
------------ -------------
1,751,802 8,044,365
Shares redeemed................................... (3,213,297) (14,704,358)
------------ -------------
Net decrease.............................. (1,461,495) $(6,659,993)
============ =============
YEAR ENDED
MARCH 31, 1998
---------------------------
SHARES AMOUNT
------------ -------------
Shares subscribed................................. 2,266,192 $ 10,770,163
------------ -------------
Shares issued in reinvestment of distributions.... 509,944 2,413,253
------------ -------------
2,776,136 13,183,416
Shares redeemed................................... (3,686,564) (17,452,719)
------------ -------------
Net decrease.............................. (910,428) $ (4,269,303)
============ =============
CLASS B SIX MONTHS
ENDED
SEPTEMBER 30, 1998
(UNAUDITED)
---------------------------
SHARES AMOUNT
------------ -------------
Shares subscribed................................. 3,191,473 $ 14,604,267
Shares issued in reinvestment of distributions.... 98,202 448,544
------------ -------------
3,289,675 15,052,811
Shares redeemed................................... (1,696,717) (7,620,322)
------------ -------------
Net increase.............................. 1,592,958 $ 7,432,489
============ =============
YEAR ENDED
MARCH 31, 1998
---------------------------
SHARES AMOUNT
------------ -------------
Shares subscribed................................. 3,357,235 $ 15,840,614
Shares issued in reinvestment of distributions.... 114,872 540,264
------------ -------------
3,472,107 16,380,878
Shares redeemed................................... (1,082,952) (5,110,090)
------------ -------------
Net increase.............................. 2,389,155 $ 11,270,788
============ =============
19
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For the six months ended September 30, 1998 (Unaudited)
===============================================================================
NOTE 7 - CAPITAL STOCK - (CONTINUED)
CLASS C SIX MONTHS
ENDED
SEPTEMBER 30, 1998
(UNAUDITED)
---------------------------
SHARES AMOUNT
------------ -------------
Shares subscribed................................. 1,090,218 $ 5,044,703
Shares issued in reinvestment of distributions.... 13,284 60,734
------------ -------------
1,103,502 5,105,437
Shares redeemed................................... (362,757) (1,663,120)
------------ -------------
Net increase.............................. 740,745 $ 3,442,317
============ =============
YEAR ENDED
MARCH 31, 1998
---------------------------
SHARES AMOUNT
------------ -------------
Shares subscribed................................. 823,575 $ 3,941,412
Shares issued in reinvestment of distributions.... 6,474 30,758
------------ -------------
830,049 3,972,170
Shares redeemed................................... (424,918) (2,023,211)
------------ -------------
Net increase.............................. 405,131 $ 1,948,959
============ =============
CLASS Y SIX MONTHS
ENDED
SEPTEMBER 30, 1998
(UNAUDITED)
---------------------------
SHARES AMOUNT
------------ -------------
Shares subscribed................................. 11,392 $ 52,130
Shares issued in reinvestment of distributions.... 39,192 181,306
------------ -------------
50,584 233,436
Shares redeemed................................... (4,655) (21,739)
------------ -------------
Net increase.............................. 45,929 $ 211,697
============ =============
YEAR ENDED
MARCH 31, 1998
---------------------------
SHARES AMOUNT
------------ -------------
Shares subscribed................................. 809,065 $ 3,818,471
Shares issued in reinvestment of distributions.... 64,889 309,128
------------ -------------
873,954 4,127,599
Shares redeemed................................... (1,476) (7,120)
------------ -------------
Net increase.............................. 872,478 $ 4,120,479
============ =============
</TABLE>
20
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND
FINANCIAL HIGHLIGHTS
===============================================================================
The following represents selected data for a share of capital stock outstanding
throughout each period.
<TABLE>
<CAPTION>
SIX MONTHS
CLASS A ENDED
SEPTEMBER 30, YEAR ENDED MARCH 31,
1998 ----------------------------------------------------
UNAUDITED 1998 1997 1996 1995 1994
--------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period...................... $ 4.76 $ 4.71 $ 4.84 $ 4.86 $ 5.14 $ 5.18
------- ------- ------- ------- ------- -------
Income From Investment Operations
Net Investment Income................... 0.15 0.34 0.39 0.43 0.46 0.50
Net Realized and Unrealized Gains or
Losses................................. (0.41) 0.13 (0.06) 0.03 (0.24) 0.06
------- ------- ------- ------- ------- -------
Total From Investment Operations..... (0.26) 0.47 0.33 0.46 0.22 0.56
------- ------- ------- ------- ------- -------
Dividends and Distributions
Dividends from Net
Investment Income...................... (0.20) (0.34) (0.39) (0.43) (0.46) (0.50)
Returns of Capital....................... - (0.08) (0.07) (0.05) (0.04) -
Distribution in Excess of
Realized Gains......................... - - - - - (0.10)
------- ------- ------- ------- ------- -------
Total Dividends and Distributions.... (0.20) (0.42) (0.46) (0.48) (0.50) (0.60)
Net Asset Value, End of Period.............. $ 4.30 $ 4.76 $ 4.71 $ 4.84 $ 4.86 $ 5.14
======= ======= ======= ======= ======= =======
Total Return 1.............................. (5.77%) 10.40% 7.08% 9.93% 4.69% 11.29%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted).. $33,473 $44,058 $47,890 $53,816 $56,405 $64,663
Ratio of Expenses to
Average Net Assets..................... 1.47%* 1.40%2 1.48%2 1.51% 1.53% 1.48%
Ratio of Net Investment Income to
Average Net Assets..................... 6.90%* 7.11% 8.13% 8.92% 9.49% 9.31%
Portfolio Turnover Rate 3................ 28.55% 71.54% 66.10% 118.34% 98.94% 98.31%
</TABLE>
1 Assumes hypothetical initial investment on the business day before the
first day of the fiscal period, with all dividends and distributions
reinvested in additional shares on the reinvestment date, and redemption
at the net asset value calculated on the last business day of the fiscal
period. Sales charges are not reflected in the total returns. Total
returns are not annualized for periods of less than one full year.
2 Ratio of expenses to average net assets after the reduction of custodian
fees under a custodian agreement was 1.39% and 1.47% for the years ended
March 31, 1998 and March 31, 1997, respectively. Prior to 1997, such
reductions were reflected in the expense ratios.
3 The lesser of purchases or sales of portfolio securities for a period,
divided by the monthly average of the market value of portfolio securities
owned during the period. Securities with a maturity or expiration date at
the time of acquisition of one year or less are excluded from the
calculation.
* Annualized
21
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND
FINANCIAL HIGHLIGHTS
===============================================================================
The following represents selected data for a share of capital stock outstanding
throughout each period.
CLASS B
<TABLE>
<CAPTION>
SIX DECEMBER 5, 1994
MONTHS (COMMENCEMENT
ENDED YEAR ENDED OF OPERATIONS)
SEPTEMBER 30, MARCH 31, THROUGH
1998 ---------------------------- MARCH 31,
(UNAUDITED) 1998 1997 1996 1995
----------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period............ $ 4.73 $ 4.68 $ 4.81 $ 4.85 $ 4.80
-------- ------- ------- ------- -------
Income From Investment Operations
Net Investment Income........................ 0.15 0.33 0.36 0.40 0.11
Net Realized and Unrealized Gains or Losses.. (0.43) 0.10 (0.07) - 0.05
-------- ------- ------- ------- -------
Total From Investment Operations......... (0.28) 0.43 0.29 0.40 0.16
-------- ------- ------- ------- -------
Dividends and Distributions
Dividends from Net Investment Income......... (0.18) (0.33) (0.36) (0.40) (0.11)
Returns of Capital........................... - (0.05) (0.06) (0.04) -
-------- ------- ------- ------- -------
Total Dividends and Distributions........ (0.18) (0.38) (0.42) (0.44) (0.11)
-------- ------- ------- ------- -------
Net Asset Value, End of Period.................. $ 4.27 $ 4.73 $ 4.68 $ 4.81 $ 4.85
======== ======= ======= ======= =======
Total Return 1.................................. (6.18%) 9.53% 6.26% 8.68% 4.28%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted)..... $ 26,304 $21,624 $10,217 $ 6,599 $ 1,900
Ratio of Expenses to Average Net Assets...... 2.25%2* 2.16%2 2.30%2 2.32% 2.36%*
Ratio of Net Investment Income to Average
Net Assets................................. 6.13%* 6.35% 7.28% 8.11% 8.66%*
Portfolio Turnover Rate 3.................... 28.55% 71.54% 66.10% 118.34% 98.94%
</TABLE>
1 Assumes hypothetical initial investment on the business day before the
first day of the fiscal period (or inception of offering), with all
dividends and distributions reinvested in additional shares on the
reinvestment date, and redemption at the net asset value calculated on the
last business day of the fiscal period. Sales charges are not reflected in
the total returns. Total returns are not annualized for periods of less
than one full year.
2 Ratio of expenses to average net assets after the reduction of custodian
fees under a custodian agreement was 2.24%, 2.15%, and 2.29% for the six
months ended September 30, 1998 and the years ended March 31, 1998 and
March 31, 1997, respectively. Prior to 1997, such reductions were
reflected in the expense ratios.
3 The lesser of purchases or sales of portfolio securities for a period,
divided by the monthly average of the market value of portfolio securities
owned during the period. Securities with a maturity or expiration date at
the time of acquisition of one year or less are excluded from the
calculation.
* Annualized
22
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND
FINANCIAL HIGHLIGHTS
===============================================================================
The following represents selected data for a share of capital stock outstanding
throughout each period.
CLASS C
<TABLE>
<CAPTION>
SIX AUGUST 12, 1997
MONTHS (COMMENCEMENT
ENDED OF OPERATIONS)
SEPTEMBER 30, THROUGH
1998 MARCH 31,
(UNAUDITED) 1998
----------- ----
<S> <C> <C>
Net Asset Value,
Beginning of Period...................... $ 4.76 $ 4.71
------ ------
Income From Investment Operations
Net Investment Income................... 0.16 0.16
Net Realized and Unrealized Gains or
Losses................................. (0.45) 0.10
------ ------
Total From Investment
Operations........................ (0.29) 0.26
------ ------
Dividends and Distributions
Dividends from Net
Investment Income...................... (0.18) (0.16)
Returns of Capital....................... - (0.05)
------ ------
Total Dividends and Distributions.... (0.18) (0.21)
Net Asset Value,
End of Period............................ $ 4.29 $ 4.76
====== ======
Total Return 1.............................. (6.36%) 5.61%
Ratios/Supplemental Data
Net Assets, End of Period
(000 omitted).......................... $4,921 $1,928
Ratio of Expenses to
Average Net Assets..................... 2.26%* 2.09%2*
Ratio of Net Investment Income to
Average Net Assets..................... 6.11%* 6.42%*
Portfolio Turnover Rate 3................ 28.55% 71.54%
</TABLE>
1 Assumes hypothetical initial investment on the business day before the
first day of the fiscal period (or inception of offering), with all
dividends and distributions reinvested in additional shares on the
reinvestment date, and redemption at the net asset value calculated on the
last business day of the fiscal period. Sales charges are not reflected in
the total returns. Total returns are not annualized for periods of less
than one full year.
2 Ratio of expenses to average net assets after the reduction of custodian
fees under a custodian agreement was 2.08% for the period ended March 31,
1998.
3 The lesser of purchases or sales of portfolio securities for a period,
divided by the monthly average of the market value of portfolio securities
owned during the period. Securities with a maturity or expiration date at
the time of acquisition of one year or less are excluded from the
calculation.
* Annualized
23
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND
FINANCIAL HIGHLIGHTS
===============================================================================
The following represents selected data for a share of capital stock outstanding
throughout each period.
CLASS Y
<TABLE>
<CAPTION>
SIX MARCH 20, 1997
MONTHS (COMMENCEMENT
ENDED YEAR OF OPERATIONS)
SEPTEMBER 30, ENDED THROUGH
1998 MARCH 31, MARCH 31,
(UNAUDITED) 1998 1997
----------- ---- ----
<S> <C> <C> <C>
Net Asset Value,
Beginning of Period.......................... $ 4.79 $ 4.72 $ 4.74
------ ------ ------
Income From Investment Operations
Net Investment Income....................... 0.17 0.34 -
Net Realized and Unrealized Gains or Losses.. (0.43) 0.14 (0.02)
------ ------ ------
Total From Investment
Operations............................ (0.26) 0.48 (0.02)
------ ------ ------
Dividends and Distributions
Dividends from Net Investment Income......... (0.21) (0.34) -
Returns of Capital........................... - (0.07) -
------ ------ ------
Total Dividends and Distributions........ (0.21) (0.41) -
Net Asset Value,
End of Period................................ $ 4.32 $ 4.79 $ 4.72
====== ====== ======
Total Return 1.................................. (5.74%) 10.64% (0.42)%
Ratios/Supplemental Data
Net Assets, End of Period
(000 omitted).............................. $3,976 $4,187 $7
Ratio of Expenses to
Average Net Assets......................... 1.07%* 1.05%2 1.21%2*
Ratio of Net Investment Income to
Average Net Assets......................... 7.30%* 7.46% 8.89%*
Portfolio Turnover Rate 3.................... 28.55% 71.54% 66.10%
</TABLE>
1 Assumes hypothetical initial investment on the business day before the
first day of the fiscal period (or inception of offering), with all
dividends and distributions reinvested in additional shares on the
reinvestment date, and redemption at the net asset value calculated on the
last business day of the fiscal period. Total returns are not annualized
for periods of less than one full year.
2 Ratio of expenses to average net assets after the reduction of custodian
fees under a custodian agreement was 1.04% and 1.20% for the year ended
March 31, 1998 and for the period ended March 31, 1997, respectively.
3 The lesser of purchases or sales of portfolio securities for a period,
divided by the monthly average of the market value of portfolio securities
owned during the period. Securities with a maturity or expiration date at
the time of acquisition of one year or less are excluded from the
calculation.
* Annualized
24
<PAGE>
DAVIS INTERMEDIATE INVESTMENT
GRADE BOND FUND
124 East Marcy Street, Santa Fe, New Mexico 87501
===============================================================================
DIRECTORS OFFICERS
Wesley E. Bass, Jr. Jeremy H. Biggs
Jeremy H. Biggs Chairman
Marc P. Blum Shelby M.C. Davis
Andrew A. Davis President
Christopher C. Davis Kenneth C. Eich
Jerry D. Geist Vice President
D. James Guzy Sharra L. Reed
G. Bernard Hamilton Vice President, Treasurer
LeRoy E. Hoffberger & Assistant Secretary
Laurence W. Levine Thomas D. Tays
Christian R. Sonne Vice President & Secretary
Andrew A. Davis
Vice President
Christopher C. Davis
Vice President
Carolyn H. Spolidoro
Vice President
INVESTMENT ADVISER
Davis Selected Advisers, L.P.
124 East Marcy Street
Santa Fe, New Mexico 87501
1-800-279-0279
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
KPMG Peat Marwick LLP
707 Seventeenth Street, Suite 2300
Denver, CO 80202
COUNSEL
D'Ancona & Pflaum
30 North LaSalle Street
Chicago, Illinois 60602
===============================================================================
FOR MORE INFORMATION ABOUT DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND,
INCLUDING MANAGEMENT FEE, CHARGES AND EXPENSES, SEE THE CURRENT PROSPECTUS
WHICH MUST PRECEDE OR ACCOMPANY THIS REPORT.
25
