<PAGE>
ANNUAL REPORT March 31, 1999
DAVIS INTERMEDIATE
INVESTMENT GRADE
BOND FUND
[DAVIS FUNDS LOGO]
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501
================================================================================
Dear Shareholder,
During its latest fiscal year, the Davis Intermediate Investment Grade Bond
Fund, Inc. (formerly named the Davis High Income Fund, Inc.) successfully
completed the transition from a fund that focused primarily on high-yield, lower
quality securities to one that invests in intermediate-term, investment-grade
issues (the Fund may still invest up to 35% of total assets in high-yield, lower
quality securities). We repositioned the Fund effective October 6, 1998,
because, as stewards of our shareholders' capital, we concluded that high-yield
securities involve substantially greater risks than they once did without
providing sufficient yield compensation. Such risk/reward parameters are
incompatible with the long-term Davis investment philosophy, which seeks to
provide reliable results through full market cycles.
PERFORMANCE REVIEW
In the first quarter of 1999--the first full quarter that your Fund was invested
as an intermediate investment-grade bond fund--the Fund outperformed its
benchmark. Total return for the Class A shares declined .34%(2) (based on net
asset value), which compares favorably with the average decline of .52% for the
280 funds included in Lipper Analytical Services' intermediate investment-grade
debt category(3). For the one-year period ended March 31, 1999, the Fund's Class
A shares generated a negative total return of 10.41%(2) (based on net asset
value) compared with a positive return of 5.15% for the 258 funds in the Lipper
intermediate investment-grade debt category3. Until October 6, 1998, the Fund
was categorized as a high current yield fund, the average of which had a
negative return of 1.94% for the one-year period ended March 31, 1999, according
to Lipper(3).
Continuing the trend of recent years, the demand for high-yielding issues was so
strong throughout much of 1998 that the yield advantage these bonds typically
offer over U.S. Treasury securities largely disappeared. As a result, investors
were not being fully compensated for the additional risks of purchasing
high-yield bonds. However, the investment climate changed dramatically in August
due to very real concerns regarding the health of the worldwide economy, fears
that the United States would be pushed into recession and the threat of a global
credit crunch. Even after the Federal Reserve stepped in and cut rates in the
fall, the markets continued to be gripped by volatility and illiquidity.
The transition quarter for the Fund--October through December 1998--coincided
with the flight to quality and away from risk that occurred in this uncertain
market environment. During this period, low-quality bonds became almost illiquid
and suffered steep price declines as yields widened dramatically relative to
U.S. Treasuries. This sharp reversal amply demonstrates the risks involved in
holding these securities. Unfortunately, these were the conditions under which
we were liquidating the portfolio's high-yield investments, and that adversely
affected the Fund's results in the short run.
The yield spread between low-quality and high-quality bonds that became so wide
in the aftermath of this global financial crisis has since narrowed. But the
spread remains at levels that haven't been consistently seen since 1991 even
though our economy is in good shape. If the U.S. business cycle turns down, the
number of companies defaulting on their debt could accelerate and credit-quality
spreads could widen further, meaning high-yield bonds would trade poorly.
FINDING VALUE IN INVESTMENT-GRADE BONDS
Because the risks and volatility in the high-yield market are so much greater
today, we believe the Fund's more conservative investment focus is the
appropriate approach for our shareholders. Adhering to the fundamental Davis
Funds' principle of managing risk, our strategy is to invest with a long-term
perspective primarily in intermediate-term, investment-grade debt securities
issued by well-known, publicly traded companies that are selling at value
prices. Investment-grade securities are those rated in one of the four highest
credit-quality
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501
================================================================================
categories by nationally recognized rating organizations or which we believe to
be of comparable credit quality. Currently, the portfolio's average credit
quality is A and its average weighted length, taking into account call features
and sinking fund provisions that could shorten the life of bonds in our
portfolio, is 6 1/2 years.
Rigorous research is a key element in our investment process. Specifically we
look for corporate bonds that have the potential for credit-quality improvement.
One sector where we are finding great value--that is, higher yields relative to
credit quality--is the financial sector. As a result, we have made significant
investments in bonds of insurance carriers, securities firms and banks. For
example, the Fund bought A-rated bonds issued by Beneficial Corporation, a
consumer financial services company that has now merged with Household
International(4). These bonds are attractive because they offer the potential
for improving credit quality as well as a significant yield advantage over
Treasury securities of comparable maturity.
The energy sector is another sector that is generally inexpensive relative to
its credit quality. As an example, the Fund purchased BBB-rated bonds issued by
Enron, an oil and gas company(4). During the period we have owned these bonds,
they have outperformed comparable U.S. Treasuries, and we feel confident they
still represent good value because we expect the company's credit quality will
continue to improve.
While we have generally shifted assets into higher quality bonds, we continue to
hold certain high-yield, lower quality securities that we believe offer good
value. For example, the Fund still holds the bonds of Alliance Imaging with a
yield to maturity of over 9%(4). We have confidence in the company's ability to
make timely payments of interest and principal on its bonds because it is a
leader in an important market niche--providing hospitals with medical image
scanning equipment on a contract basis.
Our strategy going forward is to look for bonds that have the potential for
improving credit quality and that should remain liquid even under adverse market
conditions, rather than simply buying the highest-yielding securities that are
still investment-grade. Our goal is to obtain better yields than Treasury
securities of comparable maturity without assuming undue risk. We continue to
believe the best way to help our shareholders build and preserve wealth is
through strategies designed to minimize volatility and optimize long-term
risk-adjusted returns.
Sincerely,
/s/ Shelby M.C. Davis /s/ Carolyn Spolidoro
Shelby M.C. Davis Carolyn Spolidoro
Chief Investment Officer Portfolio Manager
May 7, 1999
2
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501
================================================================================
This Annual Report is furnished to you by Davis Distributors, LLC, which acts as
the distributor for Davis Intermediate Investment Grade Bond Fund, Inc. This
Annual Report is authorized for distribution only when accompanied or preceded
by a current prospectus of Davis Intermediate Investment Grade Bond Fund, Inc.
which contains more information about fees and expenses. Please read the
prospectus carefully before investing or sending money.
(1) Davis Intermediate Investment Grade Bond Fund's current investment policy
requires it to invest at least 65% of its total assets in investment-grade
debt securities and allows it to invest up to 35% of its total assets in
high yield, high-risk debt securities, commonly known as "junk bonds." In
the past, the Fund invested primarily in high yield, high-risk debt
securities and as of March 31, 1999, 23.02% of total assets were invested
in high yield, high-risk securities.
(2) 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.
<TABLE>
<CAPTION>
* (Without a 4.75% Sales Charge taken into consideration for the period ended March 31, 1999)
- ----------------------------------- ------------ ------------ ------------ ------------- ------------------------
FUND NAME 1 YEAR 3 YEAR 5 YEAR 10 YEAR INCEPTION
- ----------------------------------- ------------ ------------ ------------ ------------- ------------------------
<S> <C> <C> <C> <C> <C>
Davis Intermediate Investment
Grade Bond Fund "A" (10.41)% 1.93% 4.04% 5.14% 7.89% - 05/29/80
- ----------------------------------- ------------ ------------ ------------ ------------- ------------------------
Davis Intermediate Investment
Grade Bond Fund "B" (11.20)% 1.11% NA NA 3.52% - 12/05/94
- ----------------------------------- ------------ ------------ ------------ ------------- ------------------------
Davis Intermediate Investment
Grade Bond Fund "C" (11.34)% NA NA NA (3.95)% - 08/12/97
- ----------------------------------- ------------ ------------ ------------ ------------- ------------------------
Davis Intermediate Investment
Grade Bond Fund "Y" (10.16)% NA NA NA (0.51)% - 03/20/97
- ----------------------------------- ------------ ------------ ------------ ------------- ------------------------
<CAPTION>
** (With a 4.75% Sales Charge or any applicable contingent deferred sales charge
taken into consideration for the period ended March 31, 1999)
- ----------------------------------- ------------ ------------ ------------ ------------- ------------------------
FUND NAME 1 YEAR 3 YEAR 5 YEAR 10 YEAR INCEPTION
- ----------------------------------- ------------ ------------ ------------ ------------- ------------------------
<S> <C> <C> <C> <C> <C>
Davis Intermediate Investment
Grade Bond Fund "A" (14.71)% 0.30% 3.02% 4.63% 7.61% - 05/29/80
- ----------------------------------- ------------ ------------ ------------ ------------- ------------------------
Davis Intermediate Investment
Grade Bond Fund "B" (14.51)% 0.30% NA NA 3.19% - 12/05/94
- ----------------------------------- ------------ ------------ ------------ ------------- ------------------------
Davis Intermediate Investment
Grade Bond Fund "C" (12.17)% NA NA NA (3.95)% - 08/12/97
- ----------------------------------- ------------ ------------ ------------ ------------- ------------------------
Davis Intermediate Investment
Grade Bond Fund "Y" (10.16)% NA NA NA (0.51)% - 03/20/97
- ----------------------------------- ------------ ------------ ------------ ------------- ------------------------
(3) Lipper Analytical Services rankings are based on total returns but do not
consider sales charges.
</TABLE>
3
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501
================================================================================
(4) Davis Intermediate Investment Grade Bond Fund's portfolio securities as of
March 31, 1999, including the securities discussed in this letter, are
listed in the Schedule of Investments. Portfolio holdings are subject to
change.
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.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
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, INC.
COMPARISON OF CLASS A SHARES OF DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND
WITH SALOMON BROTHERS LONG-TERM HIGH-YIELD INDEX AND MERRILL LYNCH U.S.
CORPORATES, 5-10 YEARS INDEX
================================================================================
Average Annual Total Return for the Periods ended March 31, 1999.
---------------------------------------------------------
CLASS A SHARES (This calculation includes an initial
sales charge of 4 3/4%.)
One Year.................................. (14.71)%
Five Years................................ 3.02%
Ten Years................................. 4.63%
---------------------------------------------------------
$10,000 invested over ten years. Let's say you invested $10,000 in Davis
Intermediate Investment Grade Bond Fund, Class A ("DIIGBF-A") shares on March
31, 1989 and paid a 4 3/4% sales charge. As the chart shows, by March 31, 1999
the value of your investment would have grown to $15,731 - a 57.31% increase on
your initial investment. For comparison, the Salomon Brothers Long-Term High
Yield Index ("Salomon") and the Merrill Lynch U.S. Corporates, 5-10 Years Index
are also presented on the chart below.
Merrill Lynch Salomon DIIGBF-A
- -------------------------------------------------------------------------------
3/31/89 $10,000 $10,000 $9,525
3/31/90 $11,168 $9,150 $8,414
3/31/91 $12,479 $10,780 $7,966
3/31/92 $14,207 $13,625 $9,761
3/31/93 $16,489 $16,068 $11,596
3/31/94 $17,053 $17,448 $12,905
3/31/95 $17,988 $18,772 $13,511
3/31/96 $20,274 $22,327 $14,852
3/31/97 $21,247 $24,274 $15,905
3/31/98 $23,829 $29,672 $17,559
3/31/99 $25,284 $31,614 $15,731
Salomon Brothers Long-Term High-Yield Index and the Merrill Lynch U.S.
Corporates, 5-10 Years Index are unmanaged indexes and have no specific
investment objective. The indexes used include interest reinvested, but does not
take into account any sales charge.
The performance data for Davis Intermediate Investment Grade Bond Fund, Inc.
contained in this report represents past performance and assumes that all
distributions were reinvested, and should not be considered as an indication of
future performance from an investment in the Fund today. The investment return
and principal value will fluctuate so that shares may be worth more or less than
their original cost when redeemed.
5
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
COMPARISON OF CLASS B SHARES OF DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND
WITH SALOMON BROTHERS LONG-TERM HIGH-YIELD INDEX AND MERRILL LYNCH U.S.
CORPORATES, 5-10 YEARS INDEX
================================================================================
Average Annual Total Return for the Periods ended March 31, 1999.
---------------------------------------------------------
CLASS B SHARES (This calculation includes any
applicable contingent deferred sales charge.)
One Year.................................. (14.51)%
Life of Class (December 5, 1994 through
March 31, 1999) .........................3.19%
---------------------------------------------------------
$10,000 invested at inception. Let's say you invested $10,000 in Davis
Intermediate Investment Grade Bond Fund, Class B ("DIIGBF-B") shares on December
5, 1994 (inception of Class). As the chart shows, by March 31, 1999 the value of
your investment (less applicable contingent deferred sales charges) would have
grown to $11,451 - a 14.51% increase on your initial investment. For comparison,
the Salomon Brothers Long-Term High Yield Index ("Salomon") and the Merrill
Lynch U.S. Corporates, 5-10 Years Index are also presented on the chart below.
Merrill Lynch Salomon DIIGBF-B
- -------------------------------------------------------------------------------
12/5/94 $10,000 $10,000 $10,000
1995 $10,619 $10,945 $10,339
1996 $11,968 $13,018 $11,237
1997 $12,542 $14,153 $11,940
1998 $14,066 $17,301 $13,079
1999 $14,925 $18,433 $11,451
Salomon Brothers Long-Term High-Yield Index and the Merrill Lynch U.S.
Corporates, 5-10 Years Index are unmanaged indexes and have no specific
investment objective. The indexes used include interest reinvested, but does not
take into account any sales charge.
The performance data for Davis Intermediate Investment Grade Bond Fund, Inc.
contained in this report represents past performance and assumes that all
distributions were reinvested, and should not be considered as an indication of
future performance from an investment in the Fund today. The investment return
and principal value will fluctuate so that shares may be worth more or less than
their original cost when redeemed.
6
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
COMPARISON OF CLASS C SHARES OF DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND
WITH SALOMON BROTHERS LONG-TERM HIGH-YIELD INDEX AND MERRILL LYNCH U.S.
CORPORATES, 5-10 YEARS INDEX
================================================================================
Average Annual Total Return for the Periods ended March 31, 1999.
---------------------------------------------------------
CLASS C SHARES (This calculation includes any
applicable contingent deferred sales charge.)
One Year.................................. (12.17)%
Life of Class (August 12, 1997 through
March 31, 1999)...................... (3.95)%
---------------------------------------------------------
$10,000 invested at inception. Let's say you invested $10,000 in Davis
Intermediate Investment Grade Bond Fund, Class C ("DIIGBF-C") shares on August
12, 1997. As the chart shows, by March 31, 1999 the value of your investment
would have been $9,363 - a (6.37%) decrease on your initial investment. For
comparison, the Salomon Brothers Long-Term High Yield Index ("Salomon") and the
Merrill Lynch U.S. Corporates, 5-10 Years Index are also presented on the chart
below.
Merrill Lynch Salomon DIIGBF-C
- -------------------------------------------------------------------------------
8/12/97 $10,000 $10,000 $10,000
1998 $10,627 $10,996 $10,561
1999 $11,276 $11,715 $9,363
Salomon Brothers Long-Term High-Yield Index and the Merrill Lynch U.S.
Corporates, 5-10 Years Index are unmanaged indexes and have no specific
investment objective. The indexes used include interest reinvested, but does not
take into account any sales charge.
The performance data for Davis Intermediate Investment Grade Bond Fund, Inc.
contained in this report represents past performance and assumes that all
fdistributions were reinvested, and should not be considered as an indication of
future performance from an investment in the Fund today. The investment return
and principal value will fluctuate so that shares may be worth more or less than
their original cost when redeemed.
7
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
COMPARISON OF CLASS Y SHARES OF DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND
WITH SALOMON BROTHERS LONG-TERM HIGH-YIELD INDEX AND MERRILL LYNCH U.S.
CORPORATES, 5-10 YEARS INDEX
================================================================================
Average Annual Total Return for the Periods ended March 31, 1999.
---------------------------------------------------------
CLASS Y SHARES
One Year.................................. (10.16)%
Life of Class (March 20, 1997 through
March 31, 1999)...................... (0.51)%
---------------------------------------------------------
$10,000 invested at inception. Let's say you invested $10,000 in Davis
Intermediate Investment Grade Bond Fund, Class Y ("DIIGBF-Y") shares on March
20, 1997. As the chart shows, by March 31, 1999 the value of your investment
would have been $9,898 - a (1.02%) decrease on your initial investment. For
comparison, the Salomon Brothers Long-Term High Yield Index ("Salomon") and the
Merrill Lynch U.S. Corporates, 5-10 Years Index are also presented on the chart
below.
Merrill Lynch Salomon DIIGBF-Y
- -------------------------------------------------------------------------------
3/20/97 $10,000 $10,000 $10,000
1997 $9,932 $10,075 $9,958
1998 $11,139 $12,315 $11,017
1999 $11,819 $13,121 $9,898
Salomon Brothers Long-Term High-Yield Index and the Merrill Lynch U.S.
Corporates, 5-10 Years Index are unmanaged indexes and have no specific
investment objective. The indexes used include interest reinvested, but does not
take into account any sales charge.
The performance data for Davis Intermediate Investment Grade Bond Fund, Inc.
contained in this report represents past performance and assumes that all
distributions were reinvested, and should not be considered as an indication of
future performance from an investment in the Fund today. The investment return
and principal value will fluctuate so that shares may be worth more or less than
their original cost when redeemed.
8
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
PORTFOLIO HOLDINGS AS OF MARCH 31, 1999
================================================================================
PORTFOLIO MAKEUP (% OF FUND NET ASSETS)
- ----------------------------------------
Cash, Common Stock, Preferred Stock,
Short-term Bonds, Warrants & Other
Assets 6.2%
Bonds & Notes 93.8%
SECTOR WEIGHTINGS (% OF BONDS/NOTES)
- ------------------------------------
Hotels 3.3%
Automotive 4.3%
Communication 3.7%
Insurance 12.1%
Mortgage Backed Securities 2.4%
Oil & Gas 8.7%
Food Stores 3.1%
Health Services 3.0%
Other 10.7%
Security & Commodity Brokers 9.2%
Depository Institutions 4.5%
Electric, Gas and Sanitary Services 8.1%
Non Depository Institutions 3.3%
Single Family Mortgage 8.8%
Government Securities 8.2%
Executive, Legislative and General 6.6%
<TABLE>
<CAPTION>
Top 10 Holdings % of Fund Net Assets
- -----------------------------------------------------------------------------------------------------------
<S> <C>
Paine Webber Group, Inc., Sr. Notes, Series C, 6.73%, 04/03/08 4.70%
BankBoston, N.A., Sub. Notes, 7.00%, 09/15/07 4.24%
Enron Corp., Notes, 6.725%, 11/17/08 4.12%
Liberty Financial Co., Notes, 6.75%, 11/15/08 4.09%
ReliaStar Financial Corp., Notes, 6.50%, 11/15/08 4.08%
Ryder System Inc., Notes, Series P, 6.60%, 11/15/05 3.99%
Lehman Brothers Holdings, Notes, 6.625%, 02/05/06 3.97%
Potomac Capital Invest., Notes, Series D, 6.62%, 12/05/05 3.93%
Freddie Mac, 5.54%, 10/27/08 3.88%
Federal Home Loan Bank, 5.54%, 10/15/08 3.86%
</TABLE>
9
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
SCHEDULE OF INVESTMENTS
At March 31, 1999
================================================================================
<TABLE>
<CAPTION>
VALUE
PRINCIPAL (NOTE 1)
- --------- --------
CORPORATE AND TAXABLE MUNICIPAL BONDS AND NOTES - (83.82%)
<S> <C> <C>
AGRICULTURAL PRODUCTION LIVESTOCK - (0.82%)
$ 500,000 Iowa Select Farms, L.P., Sr. Sub. Notes, 10.75%, 12/01/05 (b)................ $ 403,125
-------------
AMUSEMENT AND RECREATION SERVICES - (1.51%)
58,000 Discovery Zone Inc., Units, 13.50%, 05/01/02 ++ (c).......................... 23,490
165,000 Lancaster, TX, Combined Tax & Golf Course Park Rev. Bds., Series B,
Certificates of Obligation, MBIA Insured, 9.375%, 08/01/02................. 165,561
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................. 199,375
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................. 53,564
984,599 Underwater World Mall of America, Sr. Rev. Bds., 13.75%, 03/01/02++ (c)...... 302,764
-------------
744,754
-------------
AUTO REPAIR, SERVICES AND PARKING - (3.99%)
2,000,000 Ryder System Inc., Notes, Series P, 6.60%, 11/15/05.......................... 1,972,958
-------------
BUSINESS SERVICES - (1.22%)
750,000 Nationwide Credit, Inc., Sr. Notes, 10.25%, 01/15/08......................... 581,250
670,700 Technical Equipment Leasing Corp., Jr. Sub. Deb., Series A, 18.375%,
04/01/96++ (c)............................................................. 20,121
-------------
601,371
-------------
CHEMICALS AND ALLIED PRODUCTS - (1.81%)
863,000 Glycomed Inc., Conv. Sub. Deb., 7.50%, 01/01/03.............................. 683,928
500,000 Trikem S.A., 10.625%, 07/24/07 (c)........................................... 208,750
-------------
892,678
-------------
COMMUNICATION - (3.47%)
250,000 Nextlink Communications LLC, Sr. Notes, 12.50%, 04/15/06..................... 276,250
500,000 Pegasus Media & Communications, Sr. Sub. Notes, Series B,
12.50%, 07/01/05........................................................... 560,000
329,000 SFX Broadcasting Inc., Sr. Sub. Notes, Series B, 10.75%, 05/15/06............ 365,190
500,000 Sinclair Broadcast Group, Sr. Sub. Notes, 9.00%, 07/15/07.................... 511,250
-------------
1,712,690
-------------
DEPOSITORY INSTITUTIONS - (4.24%)
2,000,000 BankBoston, N.A., Sub. Notes, 7.00%, 09/15/07................................ 2,095,802
-------------
EDUCATIONAL SERVICES - (0.63%)
2,460,000 Wagner College, NY, G.O. Capital Appreciation Bds.,
Zero Cpn., 10/01/22 (e).................................................... 308,976
-------------
ELECTRIC, GAS, AND SANITARY SERVICES - (7.57%)
130,000 Commerce Refuse to Energy Auth., Taxable Ref. Rev. Bds., '90 Series,
10.50%, 07/01/00........................................................... 132,972
500,000 Midland Funding Corporation II, Sub. Secured Lease, 13.25%, 07/23/06......... 622,008
498,978 Panda Funding, Series A-1, 11.625%, 08/20/12................................. 511,452
2,000,000 Potomac Capital Invest., Notes, Series D, 6.62%, 12/05/05 (b)................ 1,941,846
</TABLE>
10
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At March 31, 1999
================================================================================
<TABLE>
<CAPTION>
VALUE
PRINCIPAL (NOTE 1)
- --------- --------
CORPORATE AND TAXABLE MUNICIPAL BONDS AND NOTES - CONTINUED
<S> <C> <C>
ELECTRIC, GAS, AND SANITARY SERVICES - CONTINUED
$ 500,000 Statia Terminals International CDA Inc., 1st Mtg. Notes, Series B, 11.75%,
11/15/03................................................................... $ 535,000
-------------
3,743,278
ELECTRONIC AND OTHER ELECTRIC EQUIPMENT - (0.05%)
558,273 Comptronix Corp., Conv. Sub. Deb., 6.75%, 03/01/02++ (c)..................... 23,447
-------------
EXECUTIVE, LEGISLATIVE AND GENERAL - (6.15%)
670,000 Adams Cnty., CO, IDR Series A Pool Gtd. - Executive Life, 9.00%,
11/01/96+.................................................................. 6,700
1,000,000 Camden Cnty., GA, JT Dev. Auth., Taxable Rev. Bds., 7.10%, 12/01/12......... 1,049,450
620,000 Harrisburg, PA, G.O. Capital Appreciation Bds., Zero Cpn., 04/01/13 (e)...... 243,071
640,000 Los Angeles County, CA, Pension Obligation, Capital Appreciation Bds.,
Series C, MBIA Insured, Zero Cpn., 06/30/07 (e)............................ 382,118
100,000 Louisiana St. Agriculture Fin. Auth., Series `86A, 8.80%, 10/01/96++......... 1,000
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 (e)...... 529,000
1,930,000 Orange County, CA, Pension Obligation, Capital Appreciation Bds.,
Series A, Zero Cpn., 09/15/13 (e).......................................... 735,870
315,000 York, PA, G.O. Capital Appreciation Bds., Series A,
Zero Cpn., 02/01/17 (e).................................................... 92,333
-------------
3,039,742
-------------
FOOD STORES - (2.93%)
690,000 Kroger Co., Lease Cert., 6.00%, 04/01/03.................................... 684,624
1,000,000 Southland Corp., Sub. Deb., Ser. B, 4.00%, 06/15/04.......................... 765,000
-------------
1,449,624
-------------
HEALTH SERVICES - (2.84%)
700,000 Connecticut St. Health & Edl. Facs. (Sheriden Woods Ctr.), Taxable Rev.
Bds., 8.73%, 11/01/17...................................................... 781,760
215,000 Illinois HFA Rev. Bds., Series C, MBIA Insured, 10.30%, 08/15/03............. 217,776
130,000 San Bernadino CA Assd. Cmntys. Fing. Auth. Health Care Ref. & ...............
Improvement Bds. (Granada) Series B, 8.80%, 05/01/17....................... 124,488
275,000 Utah St. Hsg. Fin. Agy. Taxable RHA Cmnty. Services, Series B, 9.00%,
07/01/02................................................................... 279,648
-------------
1,403,672
-------------
HOTELS AND OTHER LODGING PLACES - (3.05%)
1,448,000 Courtyard By Marriott II, L.P., Sr. Secured Notes, Series B,
10.75%, 02/01/08........................................................... 1,509,540
-------------
INDUSTRIAL MACHINERY AND EQUIPMENT - (0.96%)
500,000 Axiohm Transaction Solutions Inc., Sr. Sub. Notes, 9.75%, 10/01/07........... 456,250
1,950,000 JTS Corporation, Conv. Sub. Deb., 5.25%, 04/29/02++.......................... 19,500
-------------
475,750
-------------
</TABLE>
11
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At March 31, 1999
================================================================================
<TABLE>
<CAPTION>
VALUE
PRINCIPAL (NOTE 1)
- --------- --------
CORPORATE AND TAXABLE MUNICIPAL BONDS AND NOTES - CONTINUED
<S> <C> <C>
INSTRUMENTS AND RELATED PRODUCTS - (0.50%)
$ 250,000 Alliance Imaging, Inc., Sr. Sub. Notes, 9.625%, 12/15/05..................... $ 248,750
-------------
INSURANCE CARRIERS - (11.35%)
1,500,000 American General Finance, Sr. Notes, Series D, 7.12%, 08/24/05............... 1,570,073
2,000,000 Liberty Financial Co., Notes, 6.75%, 11/15/08................................ 2,020,686
2,000,000 ReliaStar Financial Corp., Notes, 6.50%, 11/15/08............................ 2,016,500
-------------
5,607,259
-------------
JUSTICE, PUBLIC ORDER AND SAFETY - (0.53%)
250,000 Oklahoma City, OK, Airport Trust Taxable Rev. Bds. (Fed. Bureau of
Prisons), 8.40%, 11/01/14.................................................. 263,573
-------------
MULTI-FAMILY FAMILY MORTGAGE - (0.84%)
195,000 El Paso Hsg. Fin. Corp., Multi-Fam. Res. Loan Program, Securitized Multi-
fam. Hsg. Rev. Bds., Series '86A, 8.88%, 10/15/96++........................ 1,950
385,000 Illinois Hsg. Dev. Auth., Taxable Multifam. Program, Series 8, 8.52%,
09/01/31................................................................... 411,607
100,000 Louisiana Hsg. Fin. Agy., Taxable Home Mtg., Series `86A, 8.61%,
08/01/49++................................................................. 1,000
-------------
414,557
-------------
NONDEPOSITORY INSTITUTIONS - (3.09%)
1,500,000 Beneficial Corp., Sr. Notes, Series H, 6.85%, 09/11/04....................... 1,524,858
-------------
OIL AND GAS EXTRACTION - (6.18%)
2,000,000 Enron Corp., Notes, 6.725%, 11/17/08......................................... 2,035,600
1,000,000 Gerrity Oil & Gas Corp., Sr. Sub. Notes, 11.75%, 07/15/04.................... 1,021,250
-------------
3,056,850
-------------
PAPER AND ALLIED PRODUCTS - (0.06%)
2,000,000 Crown Packaging Enterprises, Ltd., Sr. Secured Disc. Notes, 0%/14.00%,
08/01/06 (c) (d)........................................................... 30,000
-------------
PETROLEUM AND COAL PRODUCTS - (1.97%)
250,000 Clark R & M Inc., Sr. Notes, 8.375%, 11/15/07................................ 224,063
250,000 Clark R & M Inc., Sr. Sub. Notes, 8.875%, 11/15/07........................... 211,250
500,000 Deeptech International, Inc., Sr. Secured Notes, 12.00%, 12/15/00............ 540,000
-------------
975,313
-------------
PRIMARY METAL INDUSTRIES - (0.19%)
100,000 EES Coke Battery Inc., Sr. Secured Notes, Series B, 9.382%, 04/15/07 (c)..... 94,613
-------------
SECURITY AND COMMODITY BROKERS - (8.66%)
2,000,000 Lehman Brothers Holdings, Notes, 6.625%, 02/05/06............................ 1,961,300
2,350,000 Paine Webber Group, Inc., Sr. Notes, Series C, 6.73%, 04/03/08.............. 2,321,121
-------------
4,282,421
-------------
SINGLE FAMILY MORTGAGE - (8.23%)
1,070,000 Adams Cnty., CO, Sngl. Fam. Taxable Mtg. Rev. Bds., Capital Appreciation,
Zero Cpn., 06/01/12 (e).................................................... 369,150
</TABLE>
12
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At March 31, 1999
================================================================================
<TABLE>
<CAPTION>
VALUE
PRINCIPAL (NOTE 1)
- --------- --------
CORPORATE AND TAXABLE MUNICIPAL BONDS AND NOTES - CONTINUED
<S> <C> <C>
SINGLE FAMILY MORTGAGE - CONTINUED
$ 260,000 California Hsg. Fin. Agy. Rev. Bds., Taxable Home Mtg., Series D,
9.30%, 02/01/26............................................................ $ 267,592
700,000 Connecticut St. Hsg. Fin. Auth., Taxable Hsg. Mtg. Program, Series G,
7.625%, 05/15/21........................................................... 728,700
75,000 Connecticut St. Hsg. Fin. Auth., Taxable Hsg. Mtg. Program, Series H,
7.875%, 11/15/26........................................................... 79,868
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................................................ 117,657
440,000 New York St. HFA Rev. Multi Fam. Mtg. Series B, Sonyma Prg.
Insurance, 8.875%, 08/15/14................................................ 476,784
318,137 Polk Cnty., FL, HFA REMIC Collateralized Mtg. Bds., Series 1, CL 2-A,
9.55%, 01/15/11............................................................ 327,490
807,000 The Southeast TX Hsg. Fin. Corp. Securitized Multi Fam. Hsg. Rev. Bds
Series '86A, 8.60%, 09/01/96+.............................................. 8,070
1,625,000 Texas St., Dept. Hsg. & Comm. Taxable Mtg. Rev. Ref. Bds., Jr. Lien,
Ser. B, 9.50%, 03/01/16.................................................... 1,685,775
-------------
4,067,841
-------------
TRANSPORTATION EQUIPMENT - (0.81%)
500,000 Simula Inc., Sr. Conv. Sub. Notes, Series C, 10.00%, 09/15/99 (c)............ 400,000
-------------
WATER TRANSPORTATION - (0.17%)
85,000 Galveston Cnty., TX, Wtr. Auth., Canal Sys. Contract Wtr. Rev. Bds.,
AMBAC Insured, 9.60%, 07/01/99............................................. 85,305
-------------
TOTAL CORPORATE AND TAXABLE MUNICIPAL BONDS
AND NOTES - (identified cost $45,867,895).................... 41,428,747
-------------
GOVERNMENT SECURITIES - (7.74%)
2,000,000 Federal Home Loan Bank, 5.54%, 10/15/08...................................... 1,907,900
2,000,000 Freddie Mac, 5.54%, 10/27/08................................................ 1,915,920
-------------
TOTAL GOVERNMENT SECURITIES - (identified cost $4,000,000)........... 3,823,820
-------------
MORTGAGE BACKED SECURITIES - (2.25%)
142,643 Chase Mortgage Finance Corp., Series '93-G-A1, REMIC, 7.00%, 04/25/01........ 143,663
24,044 CTS Home Equity Loan Trust, Asset Backed Certificates, Series `91-1-A,
8.80%, 01/15/06............................................................ 24,013
55,377 Fannie Mae, REMIC, Series `91-38, CL SA, Inverse Support Tranche,
10.1862%, 04/25/21......................................................... 59,428
</TABLE>
13
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At March 31, 1999
================================================================================
<TABLE>
<CAPTION>
VALUE
PRINCIPAL/SHARES/UNITS (NOTE 1)
- ---------------------- --------
MORTGAGE BACKED SECURITIES - CONTINUED
<S> <C> <C>
$ 134,395 First Nationwide Trust, Series '89-AR4-1, 9.50%, 09/25/19.................... $ 133,998
178,758 Freddie Mac, CL 1567 A, 5.40%, 08/15/23...................................... 165,654
293,852 Freddie Mac, REMIC, CL 1668 F, 7.5875%, 02/15/14............................. 303,486
102,694 Manufacturers Hanover Mortgage Corporation, Mtg. Pass-Through
Certificates, Series A, 11.50%, 04/20/15................................... 106,324
179,000 The Prudential Mortgage Securities Company, Mtg. Pass-Through
Certificates, Series '92-038, CL A-8, Fixed Rate, 6.95%, 11/25/22.......... 177,211
-------------
TOTAL MORTGAGE BACKED SECURITIES
- (identified cost $1,047,926)............................... 1,113,777
-------------
PREFERRED STOCKS - (0.07%)
2,100 Westmoreland Coal Co., Dep. Shares Conv. Pfd., Series A, 8.50%++ ......... 37,013
-------------
TOTAL PREFERRED STOCKS - (identified cost $27,405)................... 37,013
-------------
COMMON STOCKS - (0.15%)
135,951 Canyon Resources Corporation*................................................ 29,739
260,252 Crown Packaging Enterprises Ltd.*............................................ 2,603
1,161 Nextel Communications Inc., Class A*......................................... 42,522
-------------
TOTAL COMMON STOCKS - (identified cost $391,436)..................... 74,864
-------------
WARRANTS - (0.12%)
869 Empire Gas Corp., expire 07/15/04 (c)........................................ 1,629
500 Primus Telecommunications, expire 08/01/04 (c)............................... 7,500
100 Spanish Broadcasting Systems Inc., expire 06/30/99 (c)....................... 49,000
-------------
TOTAL WARRANTS - (identified cost $18,291)............................ 58,129
-------------
SHORT TERM - (4.17%)
$ 2,060,000 State Street Bank and Trust Co. Repurchase Agreement, 4.95%, 04/01/99,
dated 03/31/99, repurchase value of $2,060,283 (collateralized by
$2,115,000 par value Federal Home Loan Bank, 5.14%, 01/29/01,
market value $2,126,188) - (identified cost $2,060,000).................... 2,060,000
-------------
TOTAL INVESTMENTS (identified cost $53,412,953) - (98.32%)(a)................ 48,596,350
OTHER ASSETS LESS LIABILITIES - (1.68%)....................................... 832,537
-------------
NET ASSETS - (100%)............................................................ $ 49,428,887
=============
</TABLE>
+ These securities are in default but have made partial payments.
++ These securities are in default and are not currently paying interest or
dividends. These securities amounted to $430,485 or 0.87% of the Fund's net
assets as of March 31, 1999.
*Non-income producing security.
14
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At March 31, 1999
================================================================================
(a) Aggregate cost for Federal income tax purposes is $53,412,953.
(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 $2,344,971 or 4.74% of
the Fund's net assets as of March 31, 1999.(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.
(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.
(e) As of March 31, 1999, zero coupon bonds represented $2,660,518 or 5.38% of
the Fund's net assets. Because zero coupon bonds pay no interest and compound
semi-annually at the fixed rate at the time of reissuance, their value is
generally more volatile than the value of other debt securities.
At March 31, 1999, unrealized appreciation (depreciation) of securities for
Federal income tax purposes was as follows:
Unrealized appreciation......................................... $ 915,610
Unrealized depreciation......................................... (5,732,213)
--------------
Net unrealized depreciation..................................... $ (4,816,603)
==============
SEE NOTES TO FINANCIAL STATEMENTS
15
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
At March 31, 1999
================================================================================
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investments in securities, at value (including repurchase agreements of $2,060,000)
(identified cost $53,412,953) (See accompanying Schedule of Investments)............ $ 48,596,350
Cash ................................................................................... 39,905
Interest receivable..................................................................... 860,986
Prepaid expenses........................................................................ 31,740
---------------
Total assets................................................................... 49,528,981
---------------
LIABILITIES:
Payable for capital stock reacquired.................................................... 7,572
Accrued expenses........................................................................ 92,522
---------------
Total liabilities.............................................................. 100,094
---------------
NET ASSETS (NOTE 7).......................................................................... $ 49,428,887
===============
CLASS A SHARES
Net assets.............................................................................. $ 20,028,904
Shares outstanding...................................................................... 5,068,240
Net asset value and redemption price per share.......................................... $ 3.95
=========
Maximum offering price per share (100/95.25 of $3.95)*.................................. $ 4.15
=========
CLASS B SHARES
Net assets.............................................................................. $ 21,522,145
Shares outstanding...................................................................... 5,491,330
Net asset value, offering and redemption price per share................................ $ 3.92
=========
CLASS C SHARES
Net assets.............................................................................. $ 4,055,058
Shares outstanding...................................................................... 1,027,900
Net asset value, offering and redemption price per share................................ $ 3.94
=========
CLASS Y SHARES
Net assets.............................................................................. $ 3,822,780
Shares outstanding...................................................................... 962,492
Net asset value, offering and redemption price per share................................ $ 3.97
=========
NET ASSETS CONSIST OF:
Par value of shares of capital stock.................................................... $ 627,498
Additional paid-in capital.............................................................. 71,993,155
Net unrealized depreciation of investments.............................................. (4,816,603)
Accumulated net realized loss on investments............................................ (18,375,163)
---------------
Net assets.......................................................................... $ 49,428,887
===============
* On purchases of $100,000 or more, the offering price is reduced.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
16
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
STATEMENT OF OPERATIONS
For the year ended March 31, 1999
================================================================================
<TABLE>
<CAPTION>
INVESTMENT INCOME:
<S> <C> <C>
Income:
Interest............................................................ $ 5,370,356
-----------
Expenses:
Management fees (Note 3)............................ 416,822
Custodian fees...................................... 30,012
Transfer agent fees
Class A........................................ 69,270
Class B........................................ 56,089
Class C........................................ 8,894
Class Y........................................ 1,525
Audit fees.......................................... 17,850
Legal fees.......................................... 15,601
Accounting fees (Note 3)............................ 6,000
Reports to shareholders............................. 57,320
Directors' fees and expenses........................ 21,124
Registration and filing fees (Note 3)............... 62,788
Miscellaneous....................................... 1,056
Payments under distribution plan (Note 4):
Class A........................................ 59,974
Class B........................................ 242,223
Class C........................................ 40,965
-------------
Total expenses............................................. 1,107,513
Expenses paid indirectly (Note 5) ........................ (1,175)
-----------
Net expenses............................................... 1,106,338
-----------
Net investment income.................................. 4,264,018
-----------
REALIZED AND UNREALIZED LOSS ON I NVESTMENTS:
Net realized loss from investment transactions.......................... (8,546,263)
Net increase in unrealized depreciation of investments.................. (3,486,498)
-----------
Net realized and unrealized loss on investments................ (12,032,761)
-----------
Net decrease in net assets resulting from operations........... (7,768,743)
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
17
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
================================================================================
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED MARCH 31,
OPERATIONS: ------------------------------------
1999 1998
---- ----
<S> <C> <C>
Net investment income................................................ $ 4,264,018 $ 4,442,825
Net realized gain (loss) from investment transactions................ (8,546,263) 1,600,540
Net change in unrealized appreciation (depreciation) of investment.. (3,486,498) 66,318
--------------- ---------------
Net increase (decrease) in net assets resulting from
operations............................................ (7,768,743) 6,109,683
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A........................................................ (2,252,956) (3,217,912)
Class B........................................................ (1,473,461) (913,850)
Class C........................................................ (249,000) (60,594)
Class Y........................................................ (288,601) (250,469)
Return of capital
Class A........................................................ (412,926) (760,545)
Class B........................................................ (206,334) (214,746)
Class C........................................................ (19,154) (19,800)
Class Y........................................................ (34,481) (60,064)
CAPITAL SHARE TRANSACTIONS:
Net increase (decrease) in net assets resulting from capital share
transactions (Note 7)
Class A........................................................ (17,677,428) (4,269,303)
Class B........................................................ 4,670,052 11,270,788
Class C........................................................ 2,959,671 1,948,959
Class Y........................................................ 385,554 4,120,479
---------------- ---------------
Total increase (decrease) in net assets.............................. (22,367,807) 13,682,626
NET ASSETS:
Beginning of year.................................................... 71,796,694 58,114,068
--------------- ---------------
End of year.......................................................... $ 49,428,887 $ 71,796,694
=============== ===============
SEE NOTES TO FINANCIAL STATEMENTS
</TABLE>
18
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
NOTES TO FINANCIAL STATEMENTS
For the year ended March 31, 1999
================================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
Davis Intermediate Investment Grade Bond Fund, Inc. (formerly Davis High
Income Fund, Inc.) (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 March 31, 1999, the Fund had
approximately $18,375,000 of capital loss carryovers available to offset future
capital gains, if any, which expire between 2000 and 2008.
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.
19
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For the year ended March 31, 1999
================================================================================
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. Accordingly, during the year ended March 31, 1999, amounts have
been reclassified to reflect a decrease in accumulated net realized loss on
securities sold of $7,606,269 and a decrease in additional paid-in capital of
$7,606,269.
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 year ended March 31, 1999, were $50,335,286 and
$54,451,145, 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 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 year ended March 31, 1999, amounted to $12,996. 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 year ended March 31, 1999, amounted to $10,947. 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 year ended March 31, 1999, amounted to $6,000. 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.
20
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For the year ended March 31, 1999
================================================================================
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 year ended March 31, 1999, Davis Distributors, LLC, the Fund's
Underwriter (the "Underwriter" or "Distributor") received $145,966 from
commissions earned on sales of Class A shares of the Fund of which $24,468 was
retained by the Underwriter and the remaining $121,498 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 year end
March 31, 1999, was $59,974.
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 year ended March 31, 1999, Class B shares of the Fund made
distribution plan payments which included distribution fees of $181,666 and
service fees of $60,557.
Commission advances by the Distributor for the year ended March 31, 1999,
on the sale of Class B shares of the Fund amounted to $410,838, of which
$406,042 was reallowed to qualified selling dealers.
The Distributor intends to seek payment from Class B shares of the Fund
in the amount of $769,713, 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.
21
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For the year ended March 31, 1999
- --------------------------------------------------------------------------------
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 year ended March 31,
1999 the Distributor received contingent deferred sales charges of $112,821 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 year ended March 31, 1999, Class C shares of the Fund made
distribution payments of $40,965. During the year ended March 31, 1999, the
Distributor received $4,897 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 $1,175 during the year ended March 31, 1999.
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 $1,161,314, or 2.35% of the Fund's net assets as of March
31, 1999. Information concerning restricted securities is as follows:
<TABLE>
<CAPTION>
ACQUISITION COST VALUATION PER UNIT
SECURITY DATE PER UNIT AS OF MARCH 31, 1999
- -------- ----------- -------- --------------------
<S> <C> <C> <C>
Simula Inc., Sr. Conv. Sub. Notes,
Series C, 10.00%, 09/15/99 09/17/96 $ 100.00 $ 80.00
Technical Equipment Leasing Corp.,
Jr. Sub. Deb., Series A,
18.375%, 04/01/96 06/15/84 100.00 3.00
</TABLE>
22
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For the year ended March 31, 1999
================================================================================
NOTE 7 - CAPITAL STOCK
At March 31, 1999, 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
YEAR ENDED
MARCH 31, 1999
----------------------------
SHARES AMOUNT
------ ------
<S> <C> <C>
Shares subscribed............................................................. 2,005,727 $ 8,951,909
Shares issued in reinvestment of distributions................................ 323,428 1,432,650
------------- -------------
2,329,155 10,384,559
Shares redeemed............................................................... (6,508,378) (28,061,987)
------------- -------------
Net decrease.......................................................... (4,179,223) $ (17,677,428)
============= =============
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
YEAR ENDED
MARCH 31, 1999
----------------------------
SHARES AMOUNT
------ ------
Shares subscribed............................................................. 4,921,797 $ 21,526,190
Shares issued in reinvestment of distributions................................ 169,369 735,895
------------- -------------
5,091,166 22,262,085
Shares redeemed............................................................... (4,172,871) (17,592,033)
------------- -------------
Net increase.......................................................... 918,295 $ 4,670,052
============= =============
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
============= =============
</TABLE>
23
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For the year ended March 31, 1999
================================================================================
NOTE 7 - CAPITAL STOCK - (CONTINUED)
<TABLE>
<CAPTION>
CLASS C
YEAR ENDED
MARCH 31, 1999
----------------------------
SHARES AMOUNT
------ ------
<S> <C> <C>
Shares subscribed............................................................. 1,508,715 $ 6,727,226
Shares issued in reinvestment of distributions................................ 29,525 126,622
------------- -------------
1,538,240 6,853,848
Shares redeemed............................................................... (915,471) (3,894,177)
------------- -------------
Net increase.......................................................... 622,769 $ 2,959,671
============= =============
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
YEAR ENDED
MARCH 31, 1999
----------------------------
SHARES AMOUNT
------ ------
Shares subscribed............................................................. 21,392 $ 92,938
Shares issued in reinvestment of distributions................................ 72,773 318,206
------------- -------------
94,165 411,144
Shares redeemed............................................................... (5,628) (25,590)
------------- -------------
Net increase.......................................................... 88,537 $ 385,554
============= =============
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>
24
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
FINANCIAL HIGHLIGHTS
================================================================================
The following represents selected data for a share of capital stock outstanding
throughout each period.
<TABLE>
<CAPTION>
CLASS A
YEAR ENDED MARCH 31,
---------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period........................... $ 4.76 $ 4.71 $ 4.84 $ 4.86 $ 5.14
------- -------- ------- ------- ------
Income (Loss) From Investment Operations
Net Investment Income........................ 0.28 0.34 0.39 0.43 0.46
Net Realized and Unrealized Gains or
Losses...................................... (0.75) 0.13 (0.06) 0.03 (0.24)
------- ------- ------- ------- -------
Total From Investment Operations.......... (0.47) 0.47 0.33 0.46 0.22
------- ------- ------- ------- -------
Dividends and Distributions
Dividends from Net Investment Income.......... (0.28) (0.34) (0.39) (0.43) (0.46)
Returns of Capital............................ (0.06) (0.08) (0.07) (0.05) (0.04)
------- ------- ------- ------- -------
Total Dividends and Distributions......... (0.34) (0.42) (0.46) (0.48) (0.50)
------- ------- ------- ------- -------
Net Asset Value, End of Period................... $ 3.95 $ 4.76 $ 4.71 $ 4.84 $ 4.86
======= ======= ======= ======= =======
Total Return (1)................................. (10.41)% 10.40% 7.08% 9.93% 4.69%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted)...... $20,029 $44,058 $47,890 $53,816 $56,405
Ratio of Expenses to Average Net Assets....... 1.36% 1.40%(2) 1.48%(2) 1.51% 1.53%
Ratio of Net Investment Income to
Average Net Assets.......................... 6.88% 7.11% 8.13% 8.92% 9.49%
Portfolio Turnover Rate (3)................... 87.21% 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, 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.
(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.
25
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
FINANCIAL HIGHLIGHTS
================================================================================
The following represents selected data for a share of capital stock outstanding
throughout each period.
<TABLE>
<CAPTION>
CLASS B
DECEMBER 5, 1994
(INCEPTION
YEAR ENDED OF CLASS)
MARCH 31, THROUGH
------------------------------------- MARCH 31,
1999 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 (Loss) From Investment Operations
Net Investment Income........................... 0.24 0.33 0.36 0.40 0.11
Net Realized and Unrealized Gains or Losses..... (0.75) 0.10 (0.07) -- 0.05
-------- --------- -------- -------- --------
Total From Investment Operations............ (0.51) 0.43 0.29 0.40 0.16
-------- --------- -------- -------- --------
Dividends and Distributions
Dividends from Net Investment Income............ (0.24) (0.33) (0.36) (0.40) (0.11)
Returns of Capital.............................. (0.06) (0.05) (0.06) (0.04) --
-------- --------- -------- -------- --------
Total Dividends and Distributions........... (0.30) (0.38) (0.42) (0.44) (0.11)
-------- --------- -------- -------- --------
Net Asset Value, End of Period..................... $ 3.92 $ 4.73 $ 4.68 $ 4.81 $ 4.85
======== ========= ======== ======== ========
Total Return (1).................................. . (11.20)% 9.53% 6.26% 8.68% 3.39%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted)........ $21,522 $21,624 $10,217 $6,599 $1,900
Ratio of Expenses to Average Net Assets......... 2.20%(2) 2.16%(2) 2.30%(2) 2.32% 2.36%*
Ratio of Net Investment Income to
Average Net Assets........................... 6.05% 6.35% 7.28% 8.11% 8.66%*
Portfolio Turnover Rate (3)..................... 87.21% 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 2.19%, 2.15%, and 2.29% for the years
ended March 31, 1999, 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
26
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
FINANCIAL HIGHLIGHTS
================================================================================
The following represents selected data for a share of capital stock outstanding
throughout each period.
<TABLE>
<CAPTION>
CLASS C
AUGUST 12, 1997
(INCEPTION
OF CLASS)
YEAR ENDED THROUGH
MARCH 31, MARCH 31,
1999 1998
---- ----
<S> <C> <C>
Net Asset Value,
Beginning of Period............................. $ 4.76 $ 4.71
------ -------
Income (Loss) From Investment Operations
Net Investment Income.......................... 0.24 0.16
Net Realized and Unrealized Gains or Losses..... (0.76) 0.10
------- -------
Total From Investment Operations............ (0.52) 0.26
------- -------
Dividends and Distributions
Dividends from Net Investment Income............ (0.24) (0.16)
Returns of Capital.............................. (0.06) (0.05)
------- -------
Total Dividends and Distributions........... (0.30) (0.21)
------- -------
Net Asset Value, End of Period..................... $ 3.94 $ 4.76
======= =======
Total Return (1)................................... (11.34)% 5.61%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted)........ $4,055 $1,928
Ratio of Expenses to Average Net Assets......... 2.18% 2.09%(2)*
Ratio of Net Investment Income to
Average Net Assets............................ 6.06% 6.42%*
Portfolio Turnover Rate (3)..................... 87.21% 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
27
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
FINANCIAL HIGHLIGHTS
================================================================================
The following represents selected data for a share of capital stock outstanding
throughout each period.
<TABLE>
<CAPTION>
CLASS Y
MARCH 20, 1997
(INCEPTION
YEAR ENDED OF CLASS)
MARCH 31, THROUGH
------------------------ MARCH 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net Asset Value,
Beginning of Period............................. $ 4.79 $ 4.72 $ 4.74
------ ------ -------
Income (Loss) From Investment Operations
Net Investment Income.......................... 0.29 0.34 --
Net Realized and Unrealized Gains or Losses..... (0.76) 0.14 (0.02)
------- ------- -------
Total From Investment Operations............ (0.47) 0.48 (0.02)
------- ------- -------
Dividends and Distributions
Dividends from Net Investment Income............ (0.29) (0.34) --
Returns of Capital.............................. (0.06) (0.07) --
------- ------- -------
Total Dividends and Distributions........... (0.35) (0.41) --
------- ------- -------
Net Asset Value, End of Period..................... $ 3.97 $ 4.79 $ 4.72
======= ======= =======
Total Return (1)................................... (10.16)% 10.64% (0.42)%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted)........ $3,823 $4,187 $7
Ratio of Expenses to Average Net Assets......... 1.00% 1.05%(2) 1.21%(2)*
Ratio of Net Investment Income to
Average Net Assets............................ 7.24% 7.46% 8.89%*
Portfolio Turnover Rate (3)..................... 87.21% 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
28
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
FOR THE YEAR ENDED MARCH 31, 1999
================================================================================
In early 2000, shareholders will receive information regarding all
dividends and distributions paid to them by the Fund during calendar year 1999.
Regulations of the U.S. Treasury Department require the Fund to report this
information to the Internal Revenue Service.
None of the dividends paid by the Fund during the year ended March 31,
1999 are eligible for the corporate dividend-received deduction.
The foregoing information is presented to assist shareholders in
reporting distributions received from the Fund to the Internal Revenue Service.
Because of the complexity of the federal regulations which may affect your
individual tax return and the many variations in state and local tax
regulations, we recommend that you consult your tax adviser for specific
guidance.
29
<PAGE>
DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
INDEPENDENT AUDITORS' REPORT
================================================================================
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
OF DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.
We have audited the accompanying statement of assets and liabilities of
Davis Intermediate Investment Grade Bond Fund, Inc. (formerly named the Davis
High Income Fund, Inc.), including the schedule of investments, as of March 31,
1999, and the related statement of operations for the year then ended and the
statement of changes in net assets and the financial highlights for each of the
years in the two-year period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. The financial highlights for the three
years ended March 31, 1997 were audited by other auditors whose report, dated
May 2, 1997, expressed an unqualified opinion on this information.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of March
31, 1999, by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Davis Intermediate Investment Grade Bond Fund, Inc. as of March 31,
1999, the results of its operations, the changes in its net assets, and the
financial highlights for the year then ended, in conformity with generally
accepted accounting principles.
KPMG LLP
Denver, Colorado
May 7, 1999
30
<PAGE>
DAVIS INTERMEDIATE INVESTMENT
GRADE BOND FUND, INC.
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
Marsha Williams 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 LLP
707 Seventeenth Street, Suite 2300
Denver, CO 80202
COUNSEL
D'Ancona & Pflaum
111 E. Wacker Drive, Suite 2800
Chicago, Illinois 60601-4205
================================================================================
FOR MORE INFORMATION ABOUT DAVIS INTERMEDIATE INVESTMENT GRADE BOND FUND, INC.,
INCLUDING MANAGEMENT FEE, CHARGES AND EXPENSES, SEE THE CURRENT PROSPECTUS WHICH
MUST PRECEDE OR ACCOMPANY THIS REPORT.
<PAGE>
DAVIS SELECTED ADVISERS, L.P.
124 EAST MARCY STREET
SANTA FE, NEW MEXICO 87501
1-800-279-0279
[DAVIS FUNDS LOGO]
