<PAGE>
PROSPECTUS MAY 1, 1997
CLASS Y SHARES
DAVIS SERIES, INC.
124 EAST MARCY STREET
SANTA FE, NEW MEXICO 87501
1-800-279-0279
DAVIS SERIES, INC. (the "Company") offers a variety of investment portfolios.
See "Investment Objectives" for more information on each portfolio.
DAVIS GROWTH OPPORTUNITY FUND seeks to achieve growth of capital. It invests
primarily in common stocks and other equity securities, and may invest in both
domestic and foreign issuers.
DAVIS GOVERNMENT BOND FUND seeks to achieve current income. It invests in debt
securities which are obligations of, or which are guaranteed by, the U.S.
Government, its agencies or instrumentalities.
DAVIS GOVERNMENT MONEY MARKET FUND ("DGMMF") seeks to achieve as high a level of
current income as is consistent with the principle of preservation of capital
and maintenance of liquidity. It invests in debt securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities and
repurchase agreements involving such securities. There is no assurance that the
Fund will be able to maintain a stable net asset value of $1.00 per share.
DAVIS FINANCIAL FUND seeks to achieve growth of capital. It invests primarily
in common stocks and other equity securities, and will concentrate investments
in companies principally engaged in the banking and financial services
industries.
DAVIS CONVERTIBLE SECURITIES FUND seeks to achieve total return. The Fund
invests primarily in convertible securities, which combine fixed income with
potential for capital appreciation. It may invest in lower rated bonds commonly
known as "junk bonds" so long as no such investment would cause 35% or more of
the Fund's net assets to be so invested.
DAVIS REAL ESTATE FUND seeks to achieve total return through a combination of
growth and income. It invests primarily in securities of companies principally
engaged in or related to the real estate industry or which own significant real
estate assets or which primarily invest in real estate financial instruments.
This Prospectus concisely sets forth information about the Class Y shares of the
Funds that prospective investors should know before investing. It should be
read carefully and retained for future reference. A Statement of Additional
Information dated May 1, 1997 has been filed with the Securities and Exchange
Commission and is incorporated herein by reference. A copy of this Statement
and other information about the Fund's may be obtained without charge by writing
or calling the Company at the above address or telephone number.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<PAGE>
SUMMARY
FUND EXPENSES. The following table is intended to assist you in
understanding the various costs and expenses that an investor in the Class Y
shares of the Funds will bear directly or indirectly. Because the Class Y
shares were not offered prior to September 1, 1996, the information is based on
the expenses of the Class A shares for the Company's fiscal year ended December
31, 1996. Expenses have been restated to give effect to the elimination of 12b-1
fees for Class Y shares. The fee information for Davis Government Bond reflects
the fee reduction effective May 1, 1996.You can refer to "Adviser, Sub-Advisers
and Distributor" and "Purchase of Shares" for more information on transaction
and operating expenses of the Funds.
Shareholder Transaction Expenses Class Y
- -------------------------------- -------
Maximum sales load imposed on purchases. . . . . . . . . . . . . None
Maximum sales load imposed on reinvested dividends . . . . . . . None
Deferred sales load (a declining percentage of the
lesser of the net asset value of the shares
redeemed or the total cost of such shares)
Redeemed during first year. . . . . . . . . . . . . . . . . None
Redeemed during second or third year. . . . . . . . . . . . None
Redeemed during fourth or fifth year. . . . . . . . . . . . None
Redeemed during sixth year. . . . . . . . . . . . . . . . . None
Redeemed after sixth year . . . . . . . . . . . . . . . . . None
Exchange Fee . . . . . . . . . . . . . . . . . . . . . . . . . None
Annual Fund operating expenses (as a percentage of average
net assets) Class Y
- ---------------------------------------------------------- -------
DAVIS GROWTH OPPORTUNITY FUND:
Management fees . . . . . . . . . . . . . . . . . . . . . . 0.75%
12b-1 fees. . . . . . . . . . . . . . . . . . . . . . . . . 0.00%
Transfer Agent fees . . . . . . . . . . . . . . . . . . . . 0.00%
Other expenses. . . . . . . . . . . . . . . . . . . . . . . 0.35%
----
Total Fund operating expenses. . . . . . . . . . . . . . 1.10%
DAVIS GOVERNMENT BOND FUND:
Management fees . . . . . . . . . . . . . . . . . . . . . . 0.50%
12b-1 fees. . . . . . . . . . . . . . . . . . . . . . . . . 0.00%
Transfer Agent fees . . . . . . . . . . . . . . . . . . . . 0.00%
Other expenses. . . . . . . . . . . . . . . . . . . . . . . 0.67%
----
Total Fund operating expenses. . . . . . . . . . . . . . 1.17%
DAVIS GOVERNMENT MONEY MARKET FUND:
Management fees . . . . . . . . . . . . . . . . . . . . . . 0.48%
12b-1 fees. . . . . . . . . . . . . . . . . . . . . . . . . 0.00%
Transfer Agent fees . . . . . . . . . . . . . . . . . . . . 0.05%
Other expenses. . . . . . . . . . . . . . . . . . . . . . . 0.13%
----
Total Fund operating expenses. . . . . . . . . . . . . . 0.66%
2
<PAGE>
DAVIS FINANCIAL FUND:
Management fees . . . . . . . . . . . . . . . . . . . . . . 0.75%
12b-1 fees. . . . . . . . . . . . . . . . . . . . . . . . . 0.00%
Transfer Agent fees . . . . . . . . . . . . . . . . . . . . 0.00%
Other expenses. . . . . . . . . . . . . . . . . . . . . . . 0.25%
----
Total Fund operating expenses. . . . . . . . . . . . . . 1.00%
DAVIS CONVERTIBLE SECURITIES FUND:
Management fees . . . . . . . . . . . . . . . . . . . . . . 0.75%
12b-1 fees. . . . . . . . . . . . . . . . . . . . . . . . . 0.00%
Transfer Agent fees . . . . . . . . . . . . . . . . . . . . 0.00%
Other expenses. . . . . . . . . . . . . . . . . . . . . . . 0.23%
----
Total Fund operating expenses. . . . . . . . . . . . . . 0.98%
DAVIS REAL ESTATE FUND:
Management fees . . . . . . . . . . . . . . . . . . . . . . 0.75%
12b-1 fees. . . . . . . . . . . . . . . . . . . . . . . . . 0.00%
Transfer Agent fees . . . . . . . . . . . . . . . . . . . . 0.00%
Other expenses. . . . . . . . . . . . . . . . . . . . . . . 0.43%
----
Total Fund operating expenses. . . . . . . . . . . . . . 1.18%
EXAMPLE:
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return and redemption at the end of each time period:
1 year 3 years 5 years 10 years
------ ------- ------- --------
DAVIS GROWTH OPPORTUNITY FUND:
Class Y. . . . . . . . . . . . . . . . $11 $35 $61 $134
DAVIS GOVERNMENT BOND FUND:
Class Y. . . . . . . . . . . . . . . . $12 $37 $64 $142
DAVIS GOVERNMENT MONEY MARKET FUND:
Class Y. . . . . . . . . . . . . . . . $7 $21 $37 $82
DAVIS FINANCIAL FUND:
Class Y. . . . . . . . . . . . . . . . $10 $32 $55 $122
DAVIS CONVERTIBLE SECURITIES FUND:
Class Y. . . . . . . . . . . . . . . . $10 $31 $54 $120
DAVIS REAL ESTATE FUND:
Class Y. . . . . . . . . . . . . . . . $12 $37 $65 $143
THE 5% RATE USED IN THE EXAMPLE IS ONLY FOR ILLUSTRATION AND IS NOT INTENDED TO
BE INDICATIVE OF THE FUTURE PERFORMANCE OF THE FUNDS, WHICH MAY BE MORE OR LESS
THAN THE ASSUMED RATE. ACTUAL EXPENSES AND FUTURE EXPENSES MAY BE MORE OR LESS
THAN THOSE SHOWN.
3
<PAGE>
THE COMPANY. Davis Series, Inc. (the "Company"), was incorporated in
Maryland in 1976 and is registered under the Investment Company Act of 1940.
The Company is an open-end diversified management investment company and was
formed primarily to provide a multi-portfolio vehicle of Funds with different
investment objectives for long-term investment, including the investment of
retirement plan assets. There is no assurance that the investment objective of
any Fund will be achieved.
Each fund (other than Davis Government Money Market Fund) offers three
classes of shares Class A, B and Y shares. The Davis Government Money Market
Fund also offers Class C shares in addition to Classes A, B and Y shares. These
shares are offered by the Davis Government Money Market Fund for shareholders
who may desire in the future to exchange into Class C shares of Davis New York
Venture Fund, Inc., the only other Fund which offers Class C shares. Class A,
Class B and Class C shares are sold through a separate prospectus. Class Y
shares are offered through this Prospectus to (i) trust companies, bank trusts,
endowments, pension plans or foundations acting on behalf of their own account
or one or more clients for which such institution acts in a fiduciary capacity
and investing at least $5,000,000 at any one time ("Institutions"); (ii) any
state, county, city, department, authority or similar agency which invests at
least $5,000,000 ("Governmental Entities"); and (iii) any investor with an
account established under a "wrap account" or other fee based program, sponsored
and maintained by a registered broker-dealer approved by the Adviser ("Wrap
Program Investors").
Each share of a particular Fund represents an identical interest in the
investment portfolio of that Fund. However, shares differ by class in important
respects. See "Company Shares" for more information about the differences
between the classes. The four classes offered by Davis Government Money Market
Fund are expected to maintain a net asset value of $1 per share. The Board of
Directors may offer additional funds or classes of shares of a fund in the
future and may at any time discontinue the offering of any funds or class of
shares of a fund.
INVESTMENT OBJECTIVES.
DAVIS GROWTH OPPORTUNITY FUND. The investment objective of Davis Growth
Opportunity Fund is growth of capital. It invests primarily in common stocks
and other equity securities. These securities are subject to the risk of price
fluctuations reflecting both market evaluations of the businesses involved and
general changes in the equity markets. It may invest in foreign securities and
attempt to reduce currency fluctuation risks by engaging in related hedging
transactions. These investments involve special risk factors. See "Investment
Objectives and Policies - Davis Growth Opportunity Fund."
DAVIS GOVERNMENT BOND FUND. The investment objective of Davis Government
Bond Fund is current income. It invests in debt securities which are obligations
of or guaranteed by the U.S. Government, its agencies and instrumentalities
("U.S. Government Securities"). It also may invest in repurchase agreements
involving such securities. Investments held by Davis Government Bond Fund
generally reflect market fluctuations. In particular, the value of the Fund's
investments usually changes inversely to interest rate changes. Mortgage
related securities (including collateralized mortgage obligations), which at
times may constitute a large or the largest portion of the Fund's investments,
have special characteristics and risks. See "Investment Objectives and Policies
- - Davis Government Bond Fund."
4
<PAGE>
DAVIS GOVERNMENT MONEY MARKET FUND. The investment objective of Davis
Government Money Market Fund is to achieve as high a level of current income as
is consistent with the principle of preservation of capital and maintenance of
liquidity. It invests in U.S. Government Securities and repurchase agreements
involving such securities. It normally has a stable net asset value with yield
fluctuating with short-term interest rates. See "Investment Objectives and
Policies - Davis Government Money Market Fund."
DAVIS FINANCIAL FUND. The investment objective of Davis Financial Fund is
growth of capital. It invests primarily in common stocks and other equity
securities and will concentrate investments in companies principally engaged in
the banking and financial services industries. The banking industry includes
commercial and industrial banks, savings and loan associations and their holding
companies. The financial services industry includes consumer and industrial
finance companies, diversified financial services companies, investment banking,
securities brokerage and investment advisory companies, leasing companies, and
insurance companies. Davis Financial Fund generally will invest a minimum of
25% of its total assets in investments in each of these two industries. As a
result, its portfolio may be affected by economic or regulatory developments in
or related to the identified industries. Davis Financial Fund invests in
securities subject to the risk of price fluctuations reflecting both market
evaluations of the businesses involved and general changes in the equity
markets. See "Investment Objectives and Policies - Davis Financial Fund."
DAVIS CONVERTIBLE SECURITIES FUND. The investment objective of Davis
Convertible Securities Fund is total return. It seeks this objective through a
combination of current income and capital appreciation. It invests in a
portfolio consisting primarily of convertible debt and equity securities.
Normally it will invest at least 65% of its total assets in convertible
securities. It may also invest in other securities, including common and
preferred stock, non-convertible corporate debt securities, U.S. government
securities and short term money market instruments (including repurchase
agreements). The securities in which it invests, including high yielding
securities (commonly known as "junk bonds"), involve risks. See "Investment
Objectives and Policies - Davis Convertible Securities Fund."
DAVIS REAL ESTATE FUND. The investment objective of Davis Real Estate Fund
is total return through a combination of growth and income. It seeks to achieve
this objective by investing primarily in equity securities of companies
principally engaged in, or related to, the real estate industry or which own
significant real estate assets or which primarily invest in real estate
financial instruments. Normally, at least 65% of its total assets will be so
invested. It does not invest directly in real estate. The securities in which
it invests, including high yielding securities, involve risks. See "Investment
Objectives and Policies -Davis Real Estate Fund."
INVESTMENT ADVISER, SUB-ADVISERS AND DISTRIBUTOR. Davis Selected Advisers,
L.P. (the "Adviser") is the investment adviser and distributor for the Funds.
Tanaka Capital Management, Inc. (the "Sub-Adviser") is employed by the Adviser
to provide day to day management of the portfolio of the Davis Growth
Opportunity Fund and is paid by the Adviser from its advisory fees. The Adviser
has entered into a Sub-Advisory Agreement with its wholly-owned subsidiary,
Davis Selected Advisers-NY, Inc. ("DSA-NY"). DSA-NY performs research and other
services for the Funds on behalf of the Adviser. For more information see
"Adviser, Sub-Advisers and Distributor."
PURCHASES, EXCHANGES AND REDEMPTIONS. Class Y shares are sold at net asset
value without a sales charge. The initial minimum investment for Institutions
and Governmental Entities is $5,000,000. The initial
5
<PAGE>
minimum investment for Wrap Program Investors is set by the sponsor of the
program. Shares may be exchanged under certain circumstances at net asset value
for the same class of shares of certain other funds managed and distributed by
the Adviser. See "Purchase of Shares," "Exchange of Shares" and "Redemption of
Shares".
Class A shareholders who are eligible to purchase Class Y shares may
exchange their shares for Class Y shares of any of the Funds. There is no
charge for this service.
SHAREHOLDER SERVICES. Questions regarding the Funds or your account may be
directed to Davis Selected Advisers, L.P. at 1-800-279-0279 or to your sales
representative. Written inquiries may be directed to Davis Selected Advisers,
L.P., P.O. Box 1688, Santa Fe, NM 87504-1688. During severe market conditions,
the Adviser may experience difficulty in accepting telephone redemptions or
exchanges. If you are unable to contact the Adviser at the above telephone
number, you should call 1-505-820-3000 Monday through Friday from 8:00 a.m. to
4:00 p.m. Mountain Time.
FINANCIAL HIGHLIGHTS
The following tables provide you with information about the financial
history of the Class A and Class B shares of Davis Growth Opportunity Fund,
Davis Government Bond Fund, Davis Government Money Market Fund, Davis Financial
Fund, Davis Convertible Securities Fund and Davis Real Estate Fund and Class C
shares of Davis Government Money Market Fund. The tables express the information
in terms of a single share for the respective periods presented and are
supplementary to the Company's financial statements which are included in the
December 31, 1996 Annual Report to Shareholders. Such Report may be obtained by
writing or calling the Company. The Company's 1996 financial statements
including the financial highlights for the five years ended December 31, 1996
have been audited by the Company's independent certified public accountants,
whose opinion thereon is contained in the Annual Report.
6
<PAGE>
DAVIS GROWTH OPPORTUNITY FUND -- Class A
<TABLE>
<CAPTION>
Year One Month
ended ended
December 31, December 31,
------------ ------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net Asset Value, Beginning of Period .......... $17.25 $12.83 $13.70
------ ------ ------
Income From Investment Operations
Net Investment Income(Loss) ................... (0.13) (0.11) (0.01)
Net Gains or Losses on Securities(both realized
and unrealized) ............................... 3.37 6.08 (0.29)
---- ---- -----
Total From Investment Operations .............. 3.24 5.97 (0.30)
---- ---- -----
Less Distributions
Dividends(from net investment income) ......... -- -- --
Distributions(from capital gains) ............. (1.55) (1.55) (0.57)
Distributions(from paid-in capital) ........... (0.01) -- --
-----
Total Distributions ........................... (1.56) (1.55) (0.57)
----- ----- -----
Net Asset Value,End of Period ................. $18.93 $17.25 $12.83
====== ====== ======
Total Return (1) .............................. 18.73% 46.65% (2.21)%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) ....... $27,158 $22,890 $12,455
Ratio of Expenses to Average Net Assets ....... 1.49%(2) 1.51% 1.42%*
Ratio of Net Income to Average Net Assets ..... (0.76)% (0.71)% (0.08)%*
Portfolio Turnover Rate ....................... 30.55% 30.07% 37.31%
Average Commission Rate Per Share ............. $0.0454 -- --
</TABLE>
- ----------
(1) Sales charges are not reflected in calculation.
(2) Ratio of expenses to average net assets after the reduction of custodian
fees under a custodian agreement was 1.48% for 1996. Prior to 1996, such
reductions were reflected in the expense ratios.
* Annualized
7
<PAGE>
DAVIS GROWTH OPPORTUNITY FUND -- Class B
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------------------------------------------------
1996 1995 1994 1993(1) 1992(1) 1991(1) 1990(1) 1989(1) 1988(1) 1987(1)
---- ---- ---- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period ..................... $ 17.08 $ 12.82 $ 14.67 $ 13.25 $ 13.73 $ 9.83 $ 10.94 $ 8.74 $ 8.57 $ 9.62
Income From Investment
Operations
Net Investment Income(Loss) (0.27) (0.26) (0.12) (0.07) (0.07) (0.06) -- 0.27 (0.01) (0.04)
Net Gains or Losses on
Securities(both realized and
unrealized) .............. 3.33 6.07 (1.11) 1.54 (0.32) 4.07 (0.52) 3.19 0.90 0.48
Total From
Investment Operations .... 3.06 5.81 (1.23) 1.47 (0.39) 4.01 (0.52) 3.46 0.89 0.44
Less Distributions
Dividends(from net
investment income) ....... -- -- -- (0.05) -- -- -- (0.27) -- --
Distributions(from capital
gains) ................... (1.55) (1.55) (0.62) -- -- -- (0.45) (0.88) (0.59) (1.49)
Distributions(from paid-in
capital) ................. (0.01) -- -- -- (0.09) (0.11) (0.14) (0.11) (0.13) --
Total Distributions .......... (1.56) (1.55) (0.62) (0.05) (0.09) (0.11) (0.59) (1.26) (0.72) (1.49)
Net Asset Value, End of Period $ 18.58 $ 17.08 $ 12.82 $ 14.67 $ 13.25 $ 13.73 $ 9.83 $ 10.94 $ 8.74 $ 8.57
Total Return (2) .............. 17.86% 45.44% (8.45)% 11.16 (2.86)% 40.93 (4.72)% 40.06% 10.49% 4.61%
Ratios/Supplemental Data
Net Assets, End of Period
(000 omitted .............. $39,343 $35,326 $36,087 $51,762 $46,958 $43,419 $24,107 $25,689 $19,866 $18,436
Ratio of Expenses to Average
Net Assets ............... 2.25%(3) 2.30% 2.15% 2.39% 2.55% 2.49% 2.62% 2.58 2.57% 2.45%
Ratio of Net Income to
Average Net Assets ......... (1.52)% (1.50)% (0.81)% (0.55)% (0.54)% (0.45)% (0.04)% 2.29 (0.19)% (0.50)%
Portfolio Turnover Rate .... 30.55% 30.07% 37.31% 38.93% 39.01% 12.16% 40.50% 45.17% 82.90% 56.78
Average Commission Rate Per
Share .................... $0.0454 -- -- -- -- -- -- -- -- --
</TABLE>
- ----------
(1) Per share data has been restated to give effect to a 2 for 1 stock split to
shareholders of record as of the close of January 7, 1994.
(2) Sales charges are not reflected in calculation.
(3) Ratios of expenses to average net assets after the reduction of custodian
fees under a custodian agreement was 2.25% for 1996. Prior to 1996, such
reductions were reflected on the expenses ratios.
8
<PAGE>
DAVIS GOVERNMENT BOND FUND -- Class A
<TABLE>
<CAPTION>
Year One Month
ended ended
December 31, December 31,
------------ ------------
1996 1995 1994
<S> <C> <C> <C>
Net Asset Value, Beginning of Period ............... $6.00 $5.79 $5.78
----- ----- -----
Income From Investment Operations
Net Investment Income ............................ 0.33 0.39 0.02
Net Gains or Losses on Securities (both realized and
unrealized) ..................................... (0.14) 0.27 (0.01)
----- ---- -----
Total From Investment Operations ................... 0.19 0.66 0.01
---- ---- ----
Less Distributions
Dividends (from net investment income) ........... (0.33) (0.36) --
Distributions (from paid-in capital) ............. (0.10) (0.09) --
----- -----
Total Distributions ................................ (0.43) (0.45) --
----- -----
Net Asset Value, End of Period ..................... $5.76 $6.00 $5.79
===== ===== =====
Total Return 1 ..................................... 3.40% 11.82% (0.97)%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) .......... $18,129 $21,485 $20,035
Ratio of Expenses to Average Net Assets .......... 1.77% 1.74% 1.64%*
Ratio of Net Income to Average Net Assets ........ 5.88% 6.54% 6.22%*
Portfolio Turnover Rate .......................... 45.50% 41.04% 62.17%
</TABLE>
- ----------
(1) Sales charges are not reflected in calculation .
* Annualized
9
<PAGE>
DAVIS GOVERNMENT BOND FUND -- Class B
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994 1993(1) 1992(1) 1991(1) 1990 1989 1988 1987
---- ---- ---- ------- ------- ------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ...... $ 5.98 $ 5.79 $ 6.33 $ 6.61 $ 6.88 $ 6.64 $ 6.86 $ 6.90 $ 7.19 $ 7.96
Income From Investment
Operations
Net Investment Income .... 0.29 0.34 0.31 0.36 0.37 0.43 0.41 0.49 0.50 0.54
Net Gains or Losses on
Securities (both realized
and unrealized) ........ (0.13) 0.26 (0.37) (0.12) (0.10) 0.35 (0.02) 0.13 (0.10) (0.53)
Total From Investment
Operations ............. 0.16 0.60 (0.06) 0.24 0.27 0.78 0.39 0.62 0.40 0.01
Less Distributions
Dividends (from net
investment income) ..... (0.29) (0.33) (0.37) (0.42) (0.27) (0.43) (0.41) (0.49) (0.50) (0.53)
Distributions from capital
gains................... -- -- -- -- -- -- -- -- -- (0.03)
Distributions (from paid-in
capital)................ (0.10) (0.08) (0.11) (0.10) (0.27) (0.11) (0.20) (0.17) (0.19) (0.22)
Total Distributions ...... (0.39) (0.41) (0.48) (0.52) (0.54) (0.54) (0.61) (0.66) (0.69) (0.78)
Net Asset Value, End of
Period.................. $ 5.75 $ 5.98 $ 5.79 $ 6.33 $ 6.61 $ 6.88 $ 6.64 $ 6.86 $ 6.90 $ 7.19
Total Return (2)............ 2.78% 10.62% (0.97)% 3.69% 4.14% 12.36% 6.11% 9.45% 5.70% 0.26%
Ratios/Supplemental Data
Net Assets, End of Period
(000 omitted) ..........$12,959 $15,976 $19,241 $50,080 $54,422 $62,766 $55,489 $64,776 $69,885 $70,373
Ratio of Expenses to Average
Net Assets ............... 2.53%(3) 2.51% 2.38% 2.37% 2.51% 2.51% 2.50% 2.48% 2.48% 2.31%
Ratio of Net Income to
Average Net Assets ..... 5.13% 5.77% 5.48% 5.52% 5.83% 6.36% 6.58% 7.27% 7.04% 7.01%
Portfolio Turnover Rate .. 45.50% 41.04% 62.17% 42.82% 81.28% 28.14% 72.02% 81.86% -- 20.41%
</TABLE>
- ----------
(1) Per share calculations other than distributions were based on average
shares outstanding during the period.
(2) Sales charges are not reflected in calculation.
(3) Ratio of expenses to average net assets after the reduction of custodian
fees under a custodian agreement was 2.52% for 1996. Prior to 1996, such
reductions were reflected in the expense ratio.
10
<PAGE>
DAVIS GOVERNMENT MONEY MARKET FUND -- Class A
<TABLE>
<CAPTION>
Three
Months
Year ended ended Year ended
December 31, December September 30,
---------------------------------------------------- 31, ----------------------
1996 1995 1994 1993 1992 1991 1990 1989 1989 1988(1) 1987(1)
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period...... $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income From Investment
Operations
Net Investment Income ... .047 .051 .034 .020 .027 .047 .064 .018 .073 .055 .051
Less Distributions
Dividends (from net
investment income) ..... (.047) (.051) (.034) (.020) (.027) (.047) (.064) (.018) (.073) (.055) (.051)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net Asset Value, End of
Period .................. $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total Return .............. 4.80% 5.25% 3.48% 2.01% 2.70% 4.78% 6.58% 7.09%* 7.51% 5.74% 5.22%
Ratios/Supplemental Data
Net Assets, End of Period
(000,000 omitted) ...... $ 407 $ 357 $ 240 $ 40 $ 42 $ 51 $ 65 $ 16 $ 17 $ 21 $ 30
Ratio of Expenses to
Average Net Assets ..... 0.66% 0.73% 0.64% 1.15% 1.14% 1.25% 1.50%(2) 1.50%(2) 1.50% 1.50% 1.10%
Ratio of Net Income to
Average Net Assets ..... 4.72% 5.13% 3.43% 1.98% 2.68% 4.72% 6.28%(2) 7.01%(2) 7.25% 5.58% 5.09%
</TABLE>
- ----------
(1) From the Fund's inception through September 30, 1987, Clayton Brown
Advisors, Inc. served as investment manager of the Fund. On October 1,
1987. Venture Advisers, Inc. became the investment adviser of the Fund and
on January 1, 1988, Davis Selected Advisers, L.P. succeeded to the business
of Venture Advisers, Inc. and became investment adviser of the Fund.
Venture Advisers, Inc. is the sole general partner of Davis Selected
Advisers, L.P. Effective December 1, 1989 the Fund became a series of the
Davis Series, Inc
(2) Reflects the reimbursement of certain expenses by the Fund's investment
manager.
* Annualized
11
<PAGE>
DAVIS GOVERNMENT MONEY MARKET FUND -- Class B and C
<TABLE>
<CAPTION>
Class B Class C
-------------------------------------- --------------------------------
December 8, 1994 March 30, 1995
Year (Commencement (Commencement
ended of operations) Year of operations)
December 31, through ended through
-------------------- December 31, December 31, December 31,
1995 1996 1994 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ........ $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------
Income From Investment
Operations
Net Investment Income ........ .047 .051 .003 .047 .041
Less Distributions
Dividends (from net investment
income) ................... (.047) (.051) (.003) (.047) (.041)
Net Asset Value, End of Period $1.000 $1.000 $1.000 $1.000 $1.000
Total Return ................. 4.80% 5.25% 0.34% 4.80% 4.21%
Ratios/Supplemental Data
Net Assets, End of Period
(000 omitted) ............. $ 4,155 $ 2,697 $ 747 $ 714 $ 475
Ratio of Expenses to Average
Net Assets ................. 0.66% 0.73% 0.64%* 0.66% 0.73%*
Ratio of Net Income to Average
Net Assets ................. 4.72% 5.13% 3.43%* 4.72% 5.13%*
</TABLE>
- ----------
* Annualized
12
<PAGE>
DAVIS FINANCIAL FUND -- Class A
<TABLE>
<CAPTION>
May 1, 1991
(Commencement
Year ended December 31, of operations)
-------------------------------------------------------------- through
December 31,
1996 1995 1994 1993(3) 1992(3) 1991(3)
---- ---- ---- ---- ---- --------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period ........................ $ 14.50 $ 10.68 $ 11.70 $ 11.20 $ 8.76 $ 7.15
-------- ------- ------- ------- ------- ------
Income From Investment
Operations
Net Investment Income ....... 0.14 0.07 0.08 0.07 0.05 0.01
Net Gains or Losses on
Securities (both realized
and unrealized) ........... 4.44 5.32 (0.61) 1.59 2.79 1.65
-------- ------- ------- ------- ------- ------
Total From Investment
Operations ................ 4.58 5.39 (0.53) 1.66 2.84 1.66
-------- ------- ------- ------- ------- ------
Less Distributions
Dividends (from net
investment income) ........ (0.15) (0.07) (0.08) (0.08) (0.05) (0.02)
Distributions (from capital
gains) .................... (0.87) (1.50) (0.39) (1.08) (0.35) (0.03)
Distributions (from paid-in
capital) .................. -- -- (0.02) -- -- --
-------- ------- ------- ------- ------- ------
Total Distributions ......... (1.02) (1.57) (0.49) (1.16) (0.40) (0.05)
Net Asset Value, End of Period $ 18.06 $ 14.50 $ 10.68 $ 11.70 $ 11.20 $ 8.76
======== ======= ======= ======= ======= ======
Total Return(1) ............... 31.50% 50.51% (4.55)% 14.87% 32.67% 34.74%*(2)
Ratios/Supplemental Data
Net Assets, End of Period
(000 omitted) ............. $107,579 $79,874 $57,670 $50,778 $31,660 $9,221
Ratio of Expenses to Average
Net Assets .................. 1.15% 1.18% 1.24% 1.32% 1.68% 2.49%*(2)
Ratio of Net Income to
Average Net Assets ........ 0.92% 0.53% 0.67% 0.57% 0.43% 0.51%*(2)
Portfolio Turnover Rate ..... 25.78% 41.89% 43.95% 70.33% 49.64% 39.75%
Average Commission Rate
Per Share ................. $ 0.0518 -- -- -- -- --
</TABLE>
- ----------
(1) Sales charges are not reflected in calculation.
(2) Reflects the reimbursement of certain expenses by the Fund's investment
manager.
(3) Per share data has been restated to give effect to a 2 for 1 stock split to
shareholders of record as of the close of January 7, 1994.
* Annualized
13
<PAGE>
DAVIS FINANCIAL FUND -- Class B
<TABLE>
<CAPTION>
December 27, 1994
Year (Commencement
ended of operations)
December 31, through
-------------------- December 31,
1996 1995 1994
------- ------ ------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period ............. $ 14.41 $10.68 $11.22
------- ------ ------
Income From Investment Operations
Net Investment Income .......................... 0.01 0.01 0.03
Net Gains or Losses on Securities (both realized
and unrealized) .............................. 4.37 5.22 (0.13)
------- ------ ------
Total From Investment Operations ............... 4.38 5.23 (0.10)
------- ------ ------
Less Distributions
Dividends (from net investment income) ......... (0.01) -- (0.03)
Distributions (from capital gains) ............. (0.87) (1.50) (0.39)
Distributions (from paid-in capital) ........... -- -- (0.02)
------- ------ ------
Total Distributions ............................ (0.88) (1.50) (0.44)
------- ------ ------
Net Asset Value, End of Period ................... $ 17.91 $14.41 $10.68
======= ====== ======
Total Return(1) .................................. 30.29% 49.00% (0.90)%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) ........ $ 8,213 $1,762 $ 28
Ratio of Expenses to Average Net Assets ........ 2.04% 2.09% 2.04%*
Ratio of Net Income to Average Net Assets ...... 0.19% (0.38)% (0.13)%*
Portfolio Turnover Rate ........................ 25.78% 41.89% 43.95%
Average Commission Rate Per Share .............. $0.0518 -- --
</TABLE>
- ----------
(1) Sales charges are not reflected in calculation.
* Annualized
14
<PAGE>
DAVIS CONVERTIBLE SECURITIES FUND -- Class A and B
<TABLE>
<CAPTION>
Class A
-----------------------------------------------------------
May 1, 1992
(Commencement
of operations)
through
Year ended December 31, December 31,
-----------------------------------------------------------
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period ............................... $ 18.22 $ 15.57 $ 17.45 $ 15.73 $ 14.29
-------- -------- -------- -------- --------
Income From Investment
Operations
Net Investment Income ................ 0.71 0.67 0.67 0.67 0.40
Net Gains or Losses on
Securities (both realized and
unrealized) ........................ 4.56 3.42 (1.83) 2.02 1.44
-------- -------- -------- -------- --------
Total From Investment
Operations ......................... 5.27 4.09 (1.16) 2.69 1.84
-------- -------- -------- -------- --------
Less Distributions
Dividends (from net investment
income) ............................ (0.69) (0.66) (0.67) (0.67) (0.40)
Distributions (from capital
gains) ............................. (1.54) (0.78) (0.05) (0.30) --
Distributions (from
paid-in-capital) ................... (0.04) -- -- -- --
-------- -------- -------- -------- --------
Total Distributions .................. (2.27) (1.44) (0.72) (0.97) (0.40)
-------- -------- -------- -------- --------
Net Asset Value, End of Period ......... $ 21.22 $ 18.22 $ 15.57 $ 17.45 $ 15.73
======= ======== ======== ======== ========
Total Return (1) ....................... 29.46% 26.68% (6.72)% 17.26% 19.95%*
Ratios/Supplemental Data
Net Assets, End of Period
(000 omitted) .......................... $ 42,841 $ 59,757 $ 47,844 $ 44,730 $ 24,323
Ratio of Expenses to Average
Net Assets ............................. 1.05% 1.14% 1.20% 1.21% 1.35%*
Ratio of Net Income to
Average Net Assets ..................... 3.34% 3.87% 4.06% 3.89% 4.94%*
Portfolio Turnover Rate ................ 43.16% 53.58% 45.15% 62.17% 11.51%
Average Commission Rate Per
Share .................................. $ 0.0552 -- -- -- --
Class B Class Y Shares
--------------------------- -----------------
February 3, 1995 December 11, 1996
(Commencement (Commencement
Year of operations) of operations)
ended through through
December 31, December 31, December 31,
1996 1995 1996
<S> <C> <C> <C>
Net Asset Value, Beginning of
Period ............................... $ 18.14 $ 15.95 $ 21.39
-------- -------- -----------
Income From Investment
Operations
Net Investment Income ................ 0.59 0.54 0.07
Net Gains or Losses on
Securities (both realized and
unrealized) ........................ 4.45 2.97 1.44
-------- -------- -----------
Total From Investment
Operations ......................... 5.04 3.51 1.51
-------- -------- -----------
Less Distributions
Dividends (from net investment
income) ............................ (0.56) (0.54) (0.06)
Distributions (from capital
gains) ............................. (1.54) (0.78) (1.54)
Distributions (from
paid-in-capital) ................... (0.03) -- (0.01)
-------- -------- -----------
Total Distributions .................. (2.13) (1.32) (1.61)
-------- -------- -----------
Net Asset Value, End of Period ......... $ 21.05 $ 18.14 $ 21.29
======== ======== ===========
Total Return (1) ....................... 28.21% 25.31% 7.01%
Ratios/Supplemental Data
Net Assets, End of Period
(000 omitted) .......................... $ 2,075 $ 378 $ 33,006
Ratio of Expenses to Average
Net Assets ............................. 2.01%(2) 2.01%* 0.98%
Ratio of Net Income to
Average Net Assets ..................... 2.40% 3.00%* 3.11%*
Portfolio Turnover Rate ................ 43.16% 53.58% 43.16%
Average Commission Rate Per
Share .................................. $ 0.0552 -- $ 0.0552
</TABLE>
- ----------
(1) Sales charges are not reflected in calculation.
(2) Ratio of expenses to average net assets after the reduction of custodian
fees under a custodian agreement was 2.00% for Class B Shares for 1996.
Prior to 1996, such reductions were reflected in expenses ratios.
* Annualized
15
<PAGE>
DAVIS REAL ESTATE FUND
<TABLE>
<CAPTION>
Class A Class B Class Y Shares
-------------------------------------- ------------------------------ ------------------
January 3, 1994 December 27, 1994 December 8, 1996
Year (Commencement Year (Commencement (Commencement
ended of operations) ended of operations) of operations)
December 31, through December 31, through through
---------------------- December 31, ------------------- December 31, December 31,
1996(1) 1995 1994 1996(1) 1995 1994 1996
--------- -------- --------- ------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period ........................... $ 16.44 $ 14.72 $ 14.29 $ 16.41 $ 14.72 $ 14.73 $ 19.29
-------- -------- -------- -------- ------- ------- --------
Income From Investment
Operations
Net Investment Income ............ 0.71 0.82 0.62 0.56 0.68 0.02 0.13
Net Gains on Securities (both
realized and unrealized) ....... 5.22 1.71 0.55 5.21 1.70 0.11 2.35
-------- -------- -------- -------- ------- ------- --------
Total From Investment
Operations ..................... 5.93 2.53 1.17 5.77 2.38 0.13 2.48
-------- -------- -------- -------- ------- ------- --------
Less Distributions
Dividends (from net investment
income) ........................ (0.70) (0.81) (0.62) (0.63) (0.69) (0.02) (0.13)
Distributions (from capital gains) (0.25) -- (0.12) (0.25) -- (0.12) (0.25)
Distributions (from
paid-in-capital) ............... (0.18) -- -- (0.11) -- -- (0.02)
-------- -------- -------- -------- ------- ------- --------
Total Distributions .............. (1.13) (0.81) (0.74) (0.99) (0.69) (0.14) (0.40)
-------- -------- -------- -------- ------- ------- --------
Net Asset Value, End of Period ..... $ 21.24 $ 16.44 $ 14.72 $ 21.19 $ 16.41 $ 14.72 $ 21.37
======== ======== ======== ======== ======= ======= ========
Total Return (2) ................... 37.05% 17.70% 8.25%* 35.99% 16.59% 0.89% 12.89%
Ratios/Supplemental Data
Net Assets, End of Period
(000 omitted) .................. $ 32,507 $ 29,320 $ 25,450 $ 10,919 $ 414 $ 34 $ 18,165
Ratio of Expenses to Average
Net Assets ....................... 1.32%(3) 1.43% 1.86%* 2.22% 2.39% 2.64%* 1.18%*
Ratio of Net Income to Average
Net Assets ....................... 3.95% 5.44% 3.98%* 3.46% 4.48% 3.20%* 4.22%*
Portfolio Turnover Rate .......... 18.60% 38.82% 35.80% 18.60% 38.82% 35.80% 18.60%
Average Commission Rate Per
Share .......................... $ 0.0600 -- -- $ 0.0600 -- -- $ 0.0600
</TABLE>
- ----------
(1) Per share calculations other than distributions were based on average
shares outstanding during the period.
(2) Sales charges are not reflected in calculation.
(3) Ratio of expenses to average net assets after the reduction of custodian
fees under a custodian agreement was 1.37% for Class A Shares 1996. Prior
to 1996, such reductions were reflected in the expenses ratios.
* Annualized
16
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
DAVIS GROWTH OPPORTUNITY FUND
GENERAL. The investment objective of Davis Growth Opportunity Fund is
growth in capital. It invests primarily in common stocks and other equity
securities such as securities convertible into common stock. Generally, it
invests in equity securities of companies that are diversified across a variety
of industries and may be expected to have small and medium, as well as large
market capitalizations. Such investments will usually
17
<PAGE>
consist of issues which the Sub-Adviser believes have capital growth potential
due to factors such as rapid growth in demand in existing markets, expansion
into new markets, new product introductions, reduced competitive pressures, cost
reduction programs and other fundamental changes which may result in improved
earnings growth or increased asset values.
OTHER POLICIES. For information concerning other investment policies,
risks and considerations see "General Fund Policies and Risks" below.
DAVIS GOVERNMENT BOND FUND
GENERAL. The investment objective of Davis Government Bond Fund is current
income. It invests in debt securities which are obligations of or guaranteed by
the U.S. Government, its agencies or instrumentalities ("U.S. Government
Securities").
It is not limited as to the maturities of its portfolio investments and may
take full advantage of the entire range of maturities available in U.S.
Government Securities. The Adviser may adjust the average maturity of its
portfolio from time to time, depending on its assessment of the relative yields
available on securities of different maturities and its assessment of future
interest rate patterns and market risk. Thus, at various times the average
maturity of the portfolio may be relatively short (from one year to five years,
for example) and at other times may be relatively long (over 10 years, for
example). Fluctuations in portfolio values and therefore fluctuations in the
net asset value of its shares are more likely to be greater when the portfolio
average maturity is longer. The portfolio is likely to be primarily invested in
securities with short-term maturities in periods when the Adviser deems a more
defensive position is advisable. For temporary periods, for defensive purposes
or to accommodate inflows of cash awaiting more permanent investment, it may
also invest in short-term money market instruments, including repurchase
agreements.
There are two basic types of U.S. Government Securities: (1) direct
obligations of the U.S. Treasury, and (2) obligations issued or guaranteed by an
agency or instrumentality of the U.S. Government. Agencies and
instrumentalities include Federal Farm Credit System ("FFCS"), Student Loan
Marketing Association ("SLMA"), Federal Home Loan Mortgage Corporation
("FHLMC"), Federal Home Loan Banks ("FHLB"), Federal National Mortgage
Association ("FNMA") and Government National Mortgage Association ("GNMA").
Some obligations issued or guaranteed by agencies or instrumentalities, such as
those issued by GNMA, are fully guaranteed by the U.S. Government. Others, such
as FNMA bonds, rely on the assets and credit of the instrumentality with limited
rights to borrow from the U.S. Treasury. Still other securities, such as
obligations of the FHLB, are supported by more extensive rights to borrow from
the U.S. Treasury.
When the Adviser deems that higher yields are obtainable through
investments in mortgage related securities and that the yield advantage offsets
the uncertainties of the timing of principal payments, the Fund may be
significantly invested in mortgage related securities. GNMA Certificates are
mortgage-backed securities representing part ownership of a pool of mortgage
loans. These loans issued by lenders such as mortgage bankers, commercial banks
and savings and loan associations are either insured by the Federal Housing
Administration or guaranteed by the Veterans Administration. A "pool" or group
of such mortgages is assembled and, after being approved by GNMA, is offered to
investors through securities dealers. Once approved by GNMA, the timely payment
of interest and principal on each mortgage is guaranteed by GNMA and backed by
the full faith and credit of the U.S. Government. GNMA Certificates differ from
bonds in that principal is paid back monthly by the borrower over the term of
the loan rather than returned in a lump sum at
18
<PAGE>
maturity. GNMA Certificates are called "pass-through" securities because both
interest and principal payments (including prepayments) are passed through to
the holder of the Certificate. Upon receipt, principal payments will be used by
the Fund to purchase additional GNMA Certificates or other U.S. Government
Securities.
The Fund may also invest in pools of mortgages which are issued or
guaranteed by other agencies of the U.S. Government. The average life of pass-
through pools varies with the maturities of the underlying mortgage instruments.
In addition, a pool's term may be shortened or lengthened by unscheduled or
early payment, or by slower than expected prepayment, of principal and interest
on the underlying mortgages. The occurrence of mortgage prepayments is affected
by the level of interest rates, general economic conditions, the location and
age of the mortgage and other social and demographic conditions. As prepayment
rates of individual pools vary widely, it is not possible to accurately predict
the average life of a particular pool.
It may also invest in a collateralized mortgage obligation ("CMO"). A CMO
is a debt security issued by a corporation, trust or custodian or by a U.S.
Government agency or instrumentality, that is collateralized by a portfolio or
pool of mortgages, mortgage-backed securities, U.S. Government securities or
corporate debt obligations. The issuer's obligation to make interest and
principal payments is secured by the underlying pool or portfolio of securities.
It invests only in CMOs which are obligations of or guaranteed by the U.S.
Government, its agencies or instrumentalities such as the FNMA or the FHLMC.
CMOs are most often issued in two or more classes (each of which is a
separate security) with varying maturities and stated rates of interest.
Interest and principal payments from the underlying collateral (generally a pool
of mortgages) are not necessarily passed directly through to the holders of the
CMOs; these payments are typically used to pay interest on all CMO classes and
to retire successive class maturities in a sequence. Thus, the issuance of CMO
classes with varying maturities and interest rates may result in greater
predictability of maturity with one class and less predictability of maturity
with another class than a direct investment in a mortgage-backed pass-through
security (such as a GNMA Certificate). Classes with shorter maturities
typically have lower volatility and lower yield while those with longer
maturities typically have higher volatility and higher yield. Thus, investments
in CMOs provide greater or lesser control over the investment characteristics
than mortgage pass-through securities and offer more defensive or aggressive
investment alternatives.
Investment by Davis Government Bond Fund in mortgage-related U.S.
Government Securities, such as GNMA Certificates, and CMOs also involves other
risks. The yield on a pass-through security is typically quoted based on the
maturity of the underlying instruments and the associated average life
assumption. Actual prepayment experience may cause the yield to differ from the
assumed average life yield. Accelerated prepayments adversely impact yields for
pass-throughs purchased at a premium; the opposite is true for pass-throughs
purchased at a discount. During periods of declining interest rates, prepayment
of mortgages underlying pass-through certificates can be expected to accelerate.
When the mortgage obligations are prepaid, the Fund reinvests the prepaid
amounts in securities, the yields of which reflect interest rates prevailing at
that time. Therefore, the Fund's ability to maintain a portfolio of high-
yielding, mortgage-backed securities will be adversely affected to the extent
that prepayments of mortgages must be reinvested in securities which have lower
yields than the prepaid mortgages. Moreover, prepayments of mortgages which
underlie securities purchased at a premium could result in capital losses.
Investment in such securities could also subject the Fund to "maturity extension
risk" which is the possibility that rising interest rates may cause prepayments
to occur at a slower than expected rate. This particular risk may effectively
change a security which was considered a short or intermediate-term security at
the time of purchase into a long-term security. Long-term securities generally
fluctuate more widely in response to changes in interest rates than short or
intermediate-term
19
<PAGE>
securities.
In selecting CMOs, the Adviser seeks a favorable yield relative to risk and
considers purchase price, interest rates, total rates of return, prepayment
rates, average life, duration and volatility and compares these with other
mortgage-backed investments and U.S. Government Securities.
The guarantees of the U.S. Government, its agencies and instrumentalities
are guarantees of the timely payment of principal and interest on the
obligations purchased. The value of the shares issued by the Davis Government
Bond Fund is not guaranteed and will fluctuate with the value of the Fund's
portfolio. Generally when the level of interest rates rise, the value of the
Fund's portfolio is likely to decline and when the level of interest rates
decline, the value of the Fund's portfolio is likely to rise.
The Fund may engage in portfolio trading primarily to take advantage of
yield disparities. Such trading strategies may result in minor temporary
increases or decreases in the Fund's current income and in its holding of debt
securities which sell at substantial premiums or discounts from face value. If
expectations of changes in interest rates or the price of two securities prove
to be incorrect, the Fund's potential income and capital gain will be reduced or
its potential loss will be increased.
OTHER POLICIES. For information concerning other investment policies,
risks and considerations see "General Fund Policies and Risks" below.
DAVIS GOVERNMENT MONEY MARKET FUND.
GENERAL. The investment objective of Davis Government Money Market Fund is
to achieve as high a level of current income as is consistent with the principle
of preservation of capital and maintenance of liquidity. It seeks to achieve
its investment objective by investing exclusively in U.S. Government Securities
and repurchase agreements involving U.S. Government Securities. For a
description of these securities see "Investment Objectives and Policies - Davis
Government Bond Fund."
MATURITY. The Fund limits its investments to securities and repurchase
agreements which will mature 397 days or less from the date of purchase. Such
period is calculated pursuant to the provisions of Rule 2a-7 under the
Investment Company Act of 1940 which governs the use of amortized cost
valuation. Maturities of securities collateralizing repurchase agreements are
not so limited.
NET ASSET VALUE. It is the policy of the Fund to seek to maintain a net
asset value of $1.00 per share. However, the maintenance of a $1.00 share price
is not assured. The U.S. Government and its agencies and instrumentalities do
not guarantee the value of the shares issued by the Fund. The Fund values its
assets on the basis of amortized cost which permits it to maintain a dollar
weighted average portfolio maturity not exceeding 90 days. See "Determining the
Price of Shares."
PORTFOLIO ACTIVITY. Generally, the Fund holds its securities until
maturity. However, the Fund may attempt, from time to time, to increase its
yield by trading to take advantage of variations in the markets or yields for
short-term money market instruments. Portfolio securities in the Fund may also
be disposed of prior to maturity if, on the basis of a revised credit evaluation
of the issuer or other financial or investment
20
<PAGE>
considerations, such disposition is deemed advisable by the Adviser. The policy
of investing in securities with short maturities will result in high portfolio
turnover. However, this would not usually affect the Fund since normally
brokerage commissions are not paid in connection with the purchase or sale of
short-term instruments.
INVESTMENT RISKS. While the Fund intends to invest in high quality money
market instruments, these investments are not entirely without risk. It may
invest in obligations issued or guaranteed by the U.S. Treasury which include
bills, notes and bonds which differ from each other only in interest rates,
maturities and time of issuance: Treasury bills have maturities of one year or
less, Treasury notes have initial maturities of up to ten years and Treasury
bonds have initial maturities of greater than ten years. The Fund may also
invest in obligations issued or guaranteed by the U.S. Government, its agencies
or instrumentalities, which are supported by any of the following: (a) the full
faith and credit of the U.S. Government (such as GNMA Certificates); (b) the
right of the issuer to borrow an amount limited to a specific line of credit
from the U.S. Government (such as Federal Farm Credit Bank-FFCB); (c)
discretionary borrowing authority of the U.S. Government agency or
instrumentality (such as Student Loan Marketing Association - SLMA); or (d) the
credit of the instrumentality (such as Financing Corporation-FICO).
OTHER POLICIES. For information concerning other investment policies, risk
and considerations, see "General Fund Policies and Risks" below.
DAVIS FINANCIAL FUND
GENERAL. The investment objective of Davis Financial Fund is growth of
capital. It invests primarily in common stocks and other securities such as
securities convertible into common stock. Such investments will consist of
issuers which the Adviser believes have capital growth potential due to factors
such as undervalued assets or earnings potential, the development and demand of
new products and services, favorable operating ratios, resources for expansion,
management abilities, improved competitive positions and favorable overall
business prospects.
CONCENTRATED AREA OF INVESTMENT. Generally, the Fund will concentrate 25%
or more of its total assets in obligations of domestic and foreign companies in
each of the banking and financial services industries. For purposes of a
concentrated area, an issuer will be deemed "principally engaged" in the area of
concentration if operations in the identified areas comprise more than 50% of
the issuer's assets or revenues on a consolidated basis. Companies in the
banking industry include U.S. and foreign commercial and industrial banking and
savings institutions (including their parent holding companies). Companies in
the financial services industry include commercial and industrial finance
companies, diversified financial services companies, investment banking,
securities brokerage and investment advisory companies, leasing companies and
insurance companies (including multi-line, property, casualty and life insurance
companies) and insurance holding companies. As a result of such concentration,
the Fund's portfolio may be subject to greater risks than a portfolio without
such a concentration, especially with respect to those risks associated with
regulatory developments in or related to such industries.
The banking and financial services industries are currently experiencing
change as existing distinctions between such industries become less clear, as
new regulations may create new opportunities for companies in the area, and as
some companies may become attractive acquisition candidates. There are
congressional and executive department proposals that would make significant
changes in the federal laws governing the range of business in which federally
egulated banks can engage. These proposals would allow certain banks and their
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<PAGE>
holding companies to offer a wide range of financial products and services,
including insurance, mutual fund underwriting, and securities underwriting and
sales. These changes would eliminate many distinctions between commercial and
investment banking.
INVESTMENT CONSIDERATIONS AND RISKS CONCERNING THE BANKING INDUSTRY.
Commercial banks (including "money center," regional and community banks),
savings and loan associations, and holding companies of the foregoing are
especially subject to adverse effects of volatile interest rates, concentrations
of loans in particular industries (such as real estate or energy), and
significant competition. The profitability of these businesses is to a
significant degree dependent upon the availability and cost of capital funds.
Economic conditions in the real estate market may have a particularly strong
effect on certain banks and savings associations. Commercial banks and savings
associations are subject to extensive federal and, in many instances, state
regulation. Neither such extensive regulation nor the federal insurance of
deposits ensures the solvency or profitability of companies in this industry,
and there is no assurance against losses in securities issued by such companies.
Recent legislation has significantly altered the regulatory environment for
savings institutions. The number of such institutions with financial problems,
the unsettled economic environment and poor commercial lending performance has
prompted Congress to raise capital requirements as well as other industry
standards. Recent regulatory action has also increased capital requirements and
raised other standards applicable to banks.
Broadening bank powers including the ability to engage in multi-state
operations, while permitting diversification of operations, also could expose
banks to well-established competitors in new areas of operations. The
broadening of regional and national interstate powers and the aggressive
expansion of larger, publicly held foreign banks may result in increased
competition and a decline in the number of publicly traded regional banks.
INVESTMENT CONSIDERATIONS AND RISKS CONCERNING THE FINANCIAL SERVICES
INDUSTRY. Many of the investment considerations discussed in connection with
banks and savings associations also apply to financial services companies.
These companies are all subject to extensive regulation, rapid business changes,
volatile performance dependent upon the availability and cost of capital and
prevailing interest rates, and significant competition. General economic
conditions significantly affect these companies. Credit and other losses
resulting from the financial difficulty of borrowers or other third parties have
a potentially adverse effect on companies in this industry. Investment banking,
securities brokerage and investment advisory companies are particularly subject
to government regulation and the risks inherent in securities trading and
underwriting activities. Insurance companies are particularly subject to
government regulation and rate setting, potential anti-trust and tax law
changes, and industry-wide pricing and competition cycles. Property and
casualty insurance companies may also be affected by weather and other
catastrophes. Life and health insurance companies may be affected by mortality
and morbidity rates, including the effects of epidemics. Individual insurance
companies may be exposed to reserve inadequacies, problems in investment
portfolios (for example, due to real estate or "junk" bond holdings) and
failures of reinsurance carriers.
OTHER POLICIES. Regulations of the Securities and Exchange Commission
limit investments in the securities of companies that derive more than 15% of
their gross revenues from the securities or investment management business. The
Competitive Equality Banking Act of 1987 requires that with respect to at least
75% of the total assets of any fund investing in bank securities, no more than
5% of total assets may be invested in a single issuer. The Fund intends to
comply with these restrictions. For information concerning other
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investment policies, risks and considerations, see "General Fund Policies and
Risks."
DAVIS CONVERTIBLE SECURITIES FUND
GENERAL. The investment objective of Davis Convertible Securities Fund is
total return. It seeks this objective through a combination of current income
and capital appreciation. The Fund will, under normal circumstances, invest 65%
or more of its total assets in convertible securities. Securities received upon
conversion of a convertible security may be retained by the Fund to permit
orderly disposition or to establish long-term holdings for federal income tax
purposes. In the event that less than 65% of total assets are invested in
convertible securities due to the exercise of conversion rights, the Fund will
invest available funds in additional convertible securities as soon as
practicable. The remaining assets may be invested in other securities,
including common and preferred stock, corporate debt securities, Real Estate
Investment Trust ("REITs"), U.S. Government Securities, and money market
instruments (including repurchase agreements). For a discussion of the risks
associated with investing in REITs see "Davis Real Estate Fund".
Generally, convertible securities are bonds, debentures, notes, preferred
stocks or other securities that convert or are exchanged into shares of the
underlying common stock at a stated exchange ratio. Usually, the conversion or
exchange is solely at the option of the holder. However, some convertible
securities may be convertible or exchangeable at the option of the issuer or are
automatically converted or exchanged at a time certain, or upon the occurrence
of certain events, or have a combination of these characteristics. Usually a
convertible security provides a long term call on the issuer's common stock and
therefore tends to appreciate in value as the underlying common stock
appreciates in value. A convertible security may also be subject to redemption
by the issuer after a date certain and under certain circumstances (including a
specified price) established on issue. If a convertible security held by the
Fund is called for redemption, the Fund could be required to tender it for
redemption, convert it into the underlying common stock or sell it.
In selecting convertible securities for the Fund, the Adviser will seek to
achieve a high level of total return and will consider the following factors,
among others: (1) the Adviser's own evaluations of the basic underlying value of
assets and business of the issuers; (2) the interest or dividend income
generated by the securities; (3) the potential for capital appreciation of the
securities and the underlying common stocks; (4) the prices of the securities
relative to the underlying common stocks; (5) the prices of the securities
relative to other comparable securities; (6) whether the securities are entitled
to the benefits of sinking funds or other protective conditions; (7) the
existence of any anti-dilution protections of the security; and (8) the
diversification of the Fund's portfolio as to issuers. The Fund may convert a
convertible security which it holds (A) when necessary to permit orderly
disposition of the investment when a convertible security approaches maturity or
has been called for redemption; (B) to facilitate a sale of the position; (C) if
the dividend rate on the underlying common stock increases above the yield on
the convertible security; or (D) whenever the Adviser believes it is otherwise
in the best interests of the Fund.
INVESTMENT CONSIDERATIONS AND RISKS GENERALLY. Fixed-income securities are
generally considered to be interest rate sensitive. The market value of the
Fund's investments will change in response to changes in interest rates. During
periods of falling interest rates, the value of debt securities held by the Fund
generally rises. Conversely, during periods of rising interest rates, the value
of such securities generally declines. Changes by recognized rating services in
their ratings of debt securities and changes in the ability of an issuer to make
payments of interest and principal will also affect the value of these
investments. Due to its conversion feature, the price of a convertible security
will normally vary in some proportion to changes in the price of the
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<PAGE>
underlying common stock. A convertible security will normally also provide a
higher yield than the underlying common stock (but generally lower than
comparable non-convertible securities). Due to their higher yield, convertible
securities generally sell above their "conversion value," which is the current
market value of the stock to be received upon conversion. The difference
between this conversion value and the price of convertible securities will vary
over time depending on the value of the underlying common stocks and interest
rates. When the underlying common stocks decline in value, convertible
securities will tend not to decline to the same extent because the yield acts as
a price support. When the underlying common stocks rise in value, the value of
convertible securities may also be expected to increase but will generally not
increase to the same extent as common stocks.
HIGH YIELD, HIGH RISK DEBT SECURITIES. Convertible securities are often
viewed by the issuer as future common stock subordinated to other debt and carry
a lower rating than the issuer's non-convertible debt obligations. The debt
securities in which the Fund may invest (including convertible securities)
include high yield, high risk debt securities (including convertible securities)
rated BBB or lower by Standard & Poor's Corporation ("S&P") or Baa or lower by
Moody's Investor Services ("Moody's") or unrated securities deemed by the
Adviser to be of an equivalent rating. A brief description of the quality
ratings of these two services is contained herein under "Portfolio Composition"
and a more complete description is contained in the Appendix. Securities rated
BBB by S&P or Baa by Moody's have speculative characteristics; changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments. Securities rated BB or lower
by S&P and Ba or lower by Moody's are referred to in the financial community as
"junk bonds" and may include D rated securities of issuers in default. The Fund
intends not to purchase securities rated BB or Ba or lower if such purchase
would then cause 35% or more of the Fund's net assets to be invested in such
securities. While likely to have some quality and protective characteristics,
such securities, whether or not convertible into common stock, usually involve
increased risk as to payment of principal and interest.
The Adviser considers the ratings assigned by S&P or Moody's as one of
several factors in its independent credit analysis of issuers. Ratings assigned
by credit agencies do not evaluate market risks.
Issuers of high yield, high risk securities may be highly leveraged and may
not have available to them traditional methods of financing. Therefore, the
risks associated with acquiring the securities of such issuers generally are
greater than is the case with higher rated securities. For example, during an
economic downturn or a sustained period of rising interest rates, issuers of
high yield securities may be more likely to experience financial stress,
especially if such issuers are highly leveraged. During such periods, such
issuers may not have sufficient revenues to meet their principal and interest
payment obligations. The issuer's ability to service its debt obligations also
may be adversely affected by specific issuer developments, or the issuer's
inability to meet specific projected business forecasts, or the unavailability
of additional financing. The risk of loss due to default by the issuer is
significantly greater for the holders of high yield securities because such
securities may be unsecured and may be subordinated to other creditors of the
issuer.
Such securities are subject to greater price volatility than higher rated
securities, tend to decline in price more steeply than higher rated securities
in periods of economic difficulty or accelerating interest rates and are subject
to greater risk of payment in adverse economic times. There may be a thin
trading market for such securities. This may have an adverse impact on market
price and the ability of the Funds to dispose of particular issues and may cause
the Fund to incur special securities registration responsibilities, liabilities
and costs and liquidity and valuation difficulties. Unexpected net redemptions
may force the Fund to sell high
24
<PAGE>
yield, high risk debt securities without regard to investment merit, thereby
possibly reducing return rates. Such securities may be subject to redemptions
or call provisions which, if exercised when investment rates are declining,
could result in the replacement of such securities with lower yielding
securities, resulting in a decreased return. To the extent that the Fund
invests in bonds that are original issue discount, zero coupon, pay-in-kind or
deferred interest bonds, the Fund may have taxable interest income in excess of
the cash actually received on these issues. In order to avoid taxation to the
Fund, the Fund may have to sell portfolio securities to meet taxable
distribution requirements.
See the Statement of Additional Information for more detailed information
on high yield, high risk debt securities.
PORTFOLIO COMPOSITION. The table below reflects Davis Convertible
Securities Fund's portfolio quality rating for December 31, 1996. The table
reflects the percentage of total assets represented by fixed income securities
rated by Moody's or S&P, by unrated fixed income securities and by other assets.
The percentages shown reflect the higher of the Moody's or S&P rating. U.S.
Government Securities, whether or not rated, are reflected as Aaa and AAA
(highest quality). Other assets may include money market instruments,
repurchase agreements, equity securities, net payables and receivables and cash.
The allocations in the table are not necessarily representative of the
composition of the Fund's portfolio at other times. Portfolio quality rating
will change over time.
<TABLE>
<CAPTION>
PORTFOLIO COMPOSITION OF THE DAVIS CONVERTIBLE SECURITIES FUND PORTFOLIO BY
QUALITY RATING AS A PERCENTAGE OF TOTAL ASSETS AT DECEMBER 31, 1996
MOODY'S S&P RATING CATEGORY PERCENTAGE FUND'S ASSESSMENT GENERAL DEFINITION
- ---------------------------- ---------- OF UNRATED SECURITIES OF BOND QUALITY
--------------------- -------------------
<S> <C> <C> <C>
Aaa/AAA. . . . . . . . . . . . - - Highest quality
Aa/AA. . . . . . . . . . . . . - - High quality
A/A. . . . . . . . . . . . . . 7.76% - Upper medium grade
Baa/BBB. . . . . . . . . . . . 5.93% - Medium grade
Ba/BB. . . . . . . . . . . . . 5.49% 1.85% Some speculative elements
B/B. . . . . . . . . . . . . . 5.19% - Speculative
Caa/CCC. . . . . . . . . . . . - - More speculative
Ca,C/CC,C,D. . . . . . . . . . - - Very speculative, may be in default
Not Rated. . . . . . . . . . . 1.85% - Not rated by Moody's or S&P
Common and Convertible
Preferred Stock. . . . . . . . 71.78% -
Short-term Investments . . . . 2.00% -
----- ----
100% 1.85%
</TABLE>
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<PAGE>
The description of each bond quality category set forth in the table above
is intended to be a general guide and not a definitive statement as to how
Moody's and S&P define such rating category. A more complete description of the
rating categories is set forth in the Appendix. The ratings of Moody's and S&P
represent their opinions as to the quality of the securities that they undertake
to rate. It should be emphasized, however, that ratings are relative and
subjective and are not absolute standards of quality. There is no assurance
that a rating assigned initially will not change. The Fund may retain a
security whose rating has changed or has become unrated.
OTHER POLICIES. For information concerning other investment policies,
risks and considerations see "General Fund Policies and Risks" below.
DAVIS REAL ESTATE FUND
GENERAL. The investment objective of Davis Real Estate Fund is total
return through a combination of growth and income. It invests primarily in
securities of companies principally engaged in or related to the real estate
industry or which own significant real estate assets or which primarily invest
in real estate financial instruments. Normally at least 65% of its total assets
will be invested in securities of companies which have at least 50% of the value
of their assets, gross income or net profits attributable to ownership,
financing, construction, management or sale of real estate, or to products or
services that are related to real estate or the real estate industry. It does
not invest directly in real estate. Real estate companies include real estate
investment trusts, or other securitized real estate investments, brokers,
developers, lenders and companies with substantial real estate holdings such as
paper, lumber, hotel and entertainment companies. It invests in common stocks
and other equity securities and debt securities. In keeping with its primary
growth objective, it will normally invest primarily in equity securities
(including securities convertible into equity securities). It may also invest
in fixed income securities for income or as a defensive strategy when the
Adviser believes that adverse economic or market conditions require such
strategy.
The remaining 35% of the Fund's assets may be invested in securities of
companies in any other industries. These may include companies which are not
primarily involved in real estate operations or ownership but which have
products or services relating to the real estate industry, such as manufacturers
and distributors of building supplies, financial institutions which make or
service real estate loans or companies which have substantial real estate assets
such as some companies in the energy, retailing or railroad industries. There
is no limitation on such investments except that the Fund intends to invest less
than 25% of its total assets in the securities of any industry other than the
real estate industry.
The Fund will invest in shares of real estate investment trusts ("REITs").
REITs pool investors' funds for investment primarily in income producing real
estate or real estate related loans or interests. A REIT is not taxed on income
distributed to shareholders if it complies with various requirements relating to
its organization, ownership, assets and income and with the requirement that it
distribute to its shareholders at least 95% of its taxable income (other than
net capital gains) for each taxable year. REITs can generally be classified as
Equity REITs, Mortgage REITs and Hybrid REITs. Equity REITs invest the majority
of their assets directly in real property and derive their income primarily from
rents. Equity REITs can also realize capital gains by selling property that has
appreciated in value. Mortgage REITs invest the majority of their assets in
real estate mortgages and derive their income primarily from interest payments.
Hybrid REITs combine the characteristics of both Equity REITs and Mortgage
REITs.
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<PAGE>
INVESTMENT CONSIDERATIONS AND RISKS GENERALLY. Because the Fund invests
primarily in the real estate industry, it is subject to risks associated with
the direct ownership of real estate. The Fund could also be subject to such
risks by reason of direct ownership as a result of a default on a debt security
it may own. These risks include declines in the value of real estate, risks
related to general and local economic conditions, overbuilding and increased
competition, increases in property taxes and operating expenses, changes in
zoning laws, casualty or condemnation losses, fluctuations in rental income,
changes in neighborhood values, the appeal of properties to tenants and
increases in interest rates. If the Fund has rental income or income from the
disposition of real property, the receipt of such income may adversely affect
its ability to retain its tax status as a regulated investment company.
Equity REITs may be affected by changes in the value of the underlying
property owned by the trusts, while Mortgage REITs may be affected by the
quality of credit extended. Equity and Mortgage REITs are dependent upon
management skill, may not be diversified and are subject to project financing
risks. Such trusts are also subject to heavy cash flow dependency, defaults by
borrowers, self-liquidation and the possibility of failing to qualify for tax-
free pass-through of income under the Internal Revenue Code and failing to
maintain exemption from registration under the Investment Company Act of 1940.
Changes in interest rates may also affect the value of the debt securities in
the Fund's portfolio. By investing in REITs indirectly through the Fund, a
shareholder will bear not only his proportionate share of the expense of the
Fund, but also, indirectly, similar expenses of the REITs, including
compensation of management.
HIGH YIELD, HIGH RISK DEBT SECURITIES. The Fund may also invest in the
same types of high yield, high risk securities as Davis Convertible Securities
Fund. However, the Fund generally will not purchase securities rated BB or Ba
or lower if such purchase would then cause more than 30% of the Fund's net
assets to be invested in such securities. The Fund currently has none of its
assets invested in high yield, high risk securities and does not presently
intend to have over 5% of its assets invested in such securities in the near
future.
OTHER POLICIES. For information concerning other investment policies,
risks and considerations see "General Fund Policies and Risks" below.
GENERAL FUND POLICIES AND RISKS
With respect to this section, the Funds are referred to as follows:
Davis Growth Opportunity Fund as the "Growth Fund"
Davis Government Bond Fund as the "Bond Fund"
Davis Government Money Market Fund as the "Money Market Fund"
Davis Financial Fund as the "Financial Fund"
Davis Convertible Securities Fund as the "Convertible Fund"
Davis Real Estate Fund as the "Real Estate Fund"
DIVERSIFICATION. The Growth, Bond and Money Market Funds limit investments
in one issuer to 5% of total assets. The Financial, Convertible and Real Estate
Funds have the same limitation, but only as to 75% of their respective total
assets. The remaining 25% of each Fund's total assets may be invested without
regard to this 5% limitation. This may involve greater risk than if the 5%
limitation is applied to all assets. Note that no Fund has any limitations on
investments in U.S. Government Securities or repurchase agreements with
27
<PAGE>
respect to such securities.
CONCENTRATION. No Fund, other than the Financial Fund and Real Estate
Fund, will make any investment which would cause 25% or more of its total assets
to be invested in any one industry. This limitation does not apply to
investments in U.S. Government Securities.
TEMPORARY INVESTMENTS OF FUNDS OTHER THAN THE MONEY MARKET FUND. The Funds
may temporarily invest in high grade money market instruments, repurchase
agreements, or may hold cash or cash equivalents for defensive purposes or to
accommodate inflows of cash awaiting more permanent investment.
FOREIGN INVESTMENTS. Funds other than the Bond and Money Market Funds may
invest in securities of foreign issuers or securities which are principally
traded in foreign markets ("foreign securities"). When foreign investments are
made, the Adviser or Sub-Adviser will attempt to take advantage of differences
between economic trends and the performance of securities markets in various
countries to maximize investment performance. In most instances, foreign
investments will be made in companies principally based in developed countries.
Investments in foreign securities may be made through the purchase of
individual securities on recognized exchanges and developed over-the-counter
markets, through American Depository Receipts ("ADRs") covering such securities
and through U.S. registered investment companies investing primarily in foreign
securities. The Funds, however, may not invest in the securities of other
registered investment companies if more than 10% of a Fund's total assets would
then be so invested. Other registered investment companies usually have their
own management costs or fees and the Adviser will also earn its regular fee on
Fund assets invested in such other companies. Operating expenses of a Fund
investing in foreign securities are likely to be higher than that of one
investing exclusively in U.S. securities, since management, custodial and
certain other expenses are expected to be higher.
Investments in foreign securities may involve a higher degree of risk than
investments in domestic issuers. Foreign securities are often denominated in
foreign currencies, which means that their value will be affected by changes in
exchange rates, as well as other factors that affect securities prices. There
is generally less publicly available information about foreign securities and
securities markets, and there may be less government regulation and supervision
of foreign issuers and securities markets. Foreign securities and markets may
also be affected by political and economic instabilities, and may be more
volatile and less liquid than domestic securities and markets. Investment risks
may include expropriation or nationalization of assets, confiscatory taxation,
exchange controls and limitations on the use or transfer of assets, and
significant withholding taxes. Foreign economies may differ from the United
States favorably or unfavorably with respect to inflation rates, balance of
payments, capital reinvestment, gross national product expansion and other
relevant indicators.
To attempt to reduce exposure to currency fluctuations, the Funds may trade
in forward foreign currency exchange contracts (forward contracts), currency
futures contracts and options thereon and securities indexed to foreign
securities. These techniques may be used to lock in an exchange rate in
connection with transactions in securities denominated or traded in foreign
currencies, to hedge the currency risk in foreign securities held by the Funds
and to hedge a currency risk involved in an anticipated purchase of foreign
securities. Cross-hedging may also be utilized, that is, entering into a hedge
transaction in respect to a different foreign currency than the one in which a
trade is to be made or in which a portfolio security is principally
28
<PAGE>
traded. There is no limitation on the amount of assets that may be committed to
currency hedging. However, a Fund will not engage in a futures transaction if
it would cause the aggregate of initial margin deposits and premiums paid on
outstanding options on futures contracts to exceed 5% of the value of its total
assets (excluding in such 5% asset calculation any in-the-money amount of any
option). Currency hedging transactions may be utilized as a tool to reduce
currency fluctuation risks due to a current or anticipated position in foreign
securities. The successful use of currency hedging transactions usually depends
on the Adviser's ability to forecast interest rate and currency exchange rate
movements. Should interest or exchange rates move in an unexpected manner, the
anticipated benefits of futures contracts, options or forward contracts may not
be achieved or losses may be realized and thus a Fund could be in a worse
position than if such strategies had not been used. Unlike many exchange-traded
futures contracts, there are no daily price fluctuation limits with respect to
options on currencies and forward contracts, and adverse market movements could
therefore continue to an unlimited extent over a period of time. In addition,
the correlation between movements in the prices of such instruments and
movements in the price of the securities and currencies hedged or used for cover
will not be perfect and could produce unanticipated losses. Unanticipated
changes in currency prices may result in poorer overall performance for a Fund
than if it had not entered into such contracts. When taking a position in an
anticipatory hedge, a Fund is required to set aside cash or high grade liquid
securities to fully secure the obligation.
PORTFOLIO TRANSACTIONS. The Adviser (and Sub-Adviser with respect to
Growth Fund) is responsible for the placement of portfolio transactions, subject
to the supervision of the Board of Directors. It is the Company's policy to
seek to place portfolio transactions with brokers or dealers who will execute
transactions as efficiently as possible and at the most favorable price.
Subject to this policy, research services and placement of orders by securities
firms for shares of the Company may be taken into account as a factor in
placement of portfolio transactions. In seeking its investment objective, a
Fund predominantly investing in equity securities may trade to some degree in
securities for the short term if the Adviser (or Sub-Adviser) believes that the
growth potential of a security no longer exists, considers that other securities
have more growth potential, or otherwise believes that such trading is
advisable. As discussed above, the Bond Fund may engage in portfolio trading to
take advantage of yield disparities. Because of differences among investment
policies, portfolio turnover rate will be different for each Fund. At times it
could be high, which could require the payment of larger amounts in brokerage
commissions. However, Bond and Money Market Funds' trades are usually principal
transactions involving no commissions. The Adviser is authorized to place
portfolio transactions with Shelby Cullom Davis & Co., a member of the New York
Stock Exchange, which may be deemed to be an affiliate of the Adviser, if the
commissions are fair and reasonable and comparable to commissions charged by
non-affiliated qualified brokerage firms for similar services.
WRITING COVERED OPTIONS. For income purposes, the Funds other than the
Money Market Fund may write covered call options on its portfolio securities.
However, the Funds have not done so to any significant extent and do not
currently intend to engage in any such transaction if it would cause more than
10% of net assets to be subject to options.
REPURCHASE AGREEMENTS. The Funds may enter into repurchase agreements,
but normally do not enter into repurchase agreements maturing in more than
seven days, and may make repurchase agreement transactions through a joint
account with other funds which have the same investment adviser. A
repurchase agreement, as referred to herein, involves a sale of securities to
the Funds, with the concurrent agreement of the seller (a member bank of the
Federal Reserve System or securities dealer which the Adviser determines to
be financially sound at the time of the transaction) to repurchase the
securities at the same price plus an amount
29
<PAGE>
equal to accrued interest at an agreed-upon interest rate, within a specified
time, usually less than one week, but, on occasion, at a later time. The
repurchase obligation of the seller is, in effect, secured by the underlying
securities. In the event of a bankruptcy or other default of a seller of a
repurchase agreement, the Funds could experience both delays in liquidating the
underlying securities and losses, including (a) possible decline in the value of
the collateral during the period while the Funds seek to enforce their rights
thereto; (b) possible loss of all or a part of the income during this period;
and (c) expenses of enforcing their rights.
RESTRICTED AND ILLIQUID SECURITIES. Funds, other than the Money Market
Fund, may invest in restricted securities, i.e., securities which, if sold,
would cause the Funds to be deemed "underwriters" under the Securities Act of
1933 or which are subject to contractual restrictions on resale. The Funds'
policy is to not purchase or hold illiquid securities (which may include
restricted securities) if more than 15% of any Fund's net assets would then be
illiquid. If at any time more than 15% of a Fund's net assets are illiquid,
steps will be taken as soon as practicable to reduce the percentage of illiquid
assets to 15% or less.
The restricted securities which a Fund may purchase include securities
which have not been registered under the 1933 Act but are eligible for purchase
and sale pursuant to Rule 144A ("Rule 144A Securities"). This Rule permits
certain qualified institutional buyers, such as the Fund, to trade in privately
placed securities even though such securities are not registered under the 1933
Act. The Adviser, or the Sub-Adviser in the case of Growth Fund, under criteria
established by the Company's Board of Directors, will consider whether Rule 144A
Securities being purchased or held by the Fund are illiquid and thus subject to
the Fund's policy limiting investments in illiquid securities. In making this
determination, the Adviser or the Sub-Adviser will consider the frequency of
trades and quotes, the number of dealers and potential purchasers, dealer
undertakings to make a market, and the nature of the security and the market
place trades (for example, the time needed to dispose of the security, the
method of soliciting offers and the mechanics of transfer). The liquidity of
Rule 144A Securities will also be monitored by the Adviser or the Sub-Adviser
and, if as a result of changed conditions, it is determined that a Rule 144A
Security is no longer liquid, the Fund's holding of illiquid securities will be
reviewed to determine what, if any, action is appropriate in light of the policy
limiting investments in such securities. There is no limitation on the
percentage of the Fund's assets that can be invested in liquid Rule 144A
Securities. Investing in Rule 144A Securities could have the effect of
increasing the amount of investments in illiquid securities if qualified
institutional buyers are unwilling to purchase such securities.
BORROWING. No Fund will borrow money except from banks for temporary or
emergency purposes (usually to facilitate orderly redemption of its shares while
avoiding untimely disposition of portfolio holdings.) Except for the Money
Market Fund, a Fund may not (i) borrow money in excess of 10% of the value of
its total assets (excluding the amount borrowed) at the time of the borrowing or
(ii) mortgage, pledge or hypothecate any assets except to secure permitted
borrowings and then only in an amount not in excess of 15% of the value of its
total assets (excluding the amount borrowed) at the time of such borrowings.
The Money Market Fund may not (a) borrow in excess of 25% of the value of its
total assets (including the amounts borrowed) at the time of borrowing or (b)
pledge or hypothecate any of its assets except to secure permitted borrowing and
then in an amount not in excess of 10% of the value of its net assets (including
the amount borrowed) at the time of such borrowing. No Fund will purchase
securities while any borrowing exceeds 5% of net assets.
FUNDAMENTAL AND NON-FUNDAMENTAL POLICIES. The investment restrictions
set forth in the Statement of Additional Information including those in
respect to borrowing, concentration and diversification as discussed above
are fundamental policies. The investment objectives and policies with
respect to eligible investments are fundamental policies of Money Market Fund
and cannot be changed without a shareholder
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vote. All other investment objectives and policies of the Company's Funds are
not fundamental and may be changed without shareholder approval. In the event
that a Fund's objective should ever be changed, such change may result in an
objective different from the objective the shareholder considered appropriate at
the time of investment in such Fund. Except for the restrictions on illiquid
securities, any percentage restrictions set forth in the prospectus or in the
Statement of Additional Information apply as of the time of investment without
regard to later increases or decreases in the values of securities or total or
net assets.
ADVISER, SUB-ADVISERS AND DISTRIBUTOR
Davis Selected Advisers, L.P., (the "Adviser") whose principal office is at
124 East Marcy Street, Santa Fe, New Mexico 87501, serves as the adviser and
distributor for the Funds. Venture Advisers, Inc. is the Adviser's sole
general partner. Shelby M.C. Davis is the controlling shareholder of the
general partner. Subject to the direction and supervision of the Board of
Directors, the Adviser manages the investment and business operations of the
Davis Government Bond Fund, Davis Government Money Market Fund, Davis Financial
Fund, Davis Convertible Securities Fund and Davis Real Estate Fund, manages the
business operations of the Davis Growth Opportunity Fund and also acts as
distributor of the shares of all the Funds. As discussed below, the Adviser
has hired Tanaka Capital Management, Inc. as the Sub-adviser for the Growth
Opportunity Fund. Davis Selected Advisers-NY, Inc. ("DSA-NY"), a wholly-owned
subsidiary of the Adviser, performs research and other services for the Funds on
behalf of the Adviser under a Sub-Advisory Agreement with the Adviser. This
Agreement does not affect the services provided by Tanaka Capital Management.
The Adviser also acts as investment adviser and distributor for Davis High
Income Fund, Inc., Davis Tax-Free High Income Fund, Inc., Davis New York Venture
Fund, Inc. and Davis International Series, Inc., (collectively with the Funds,
the "Davis Funds") and Selected American Shares, Inc., Selected Special Shares,
Inc. and Selected Capital Preservation Trust (collectively the "Selected
Funds").
The Davis Governement Bond Fund pays the Adviser a fee at the annual rate
of 0.50% of total net assets. Davis Government Money Market Fund pays the
Adviser a fee at the annual rate of 0.50% on the first $250 million of average
net assets, 0.45% on the next $250 million of net assets and 0.40% on assets
over $500 million. The other Funds each pay the Adviser a fee at the annual
rate of 0.75% on the first $250 million of average net assets, 0.65% on the next
$250 million of net assets and 0.55% on assets over $500 million. The fees for
these other Funds are higher than those charged by many mutual funds with
similar objectives. The Company also reimburses the Adviser for its costs of
providing certain accounting and financial reporting, shareholder services and
compliance with state securities laws. Under the Sub-Advisory Agreement with
DSA-NY, the Adviser pays all of DSA-NY's direct and indirect costs of
operations. All the fees paid to DSA-NY are paid by the Adviser and not the
Funds.
Tanaka Capital Management, Inc. (the "Sub-Adviser"), is the sub-adviser
for the Davis Growth Opportunity Fund. The Sub-Adviser manages the day to
day investment operations for the Davis Growth Opportunity Fund. The Company
pays no fees directly to the Sub-Adviser. The Sub-Adviser receives from the
Adviser a reallowed portion of its advisory fee equal to 0.30% of the first
$100 million of the Davis Growth Opportunity Fund's annual average net assets
and 0.25% of such Fund assets over $100 million with a minimum annual fee of
$100,000. However, the Sub-Adviser's fees on Fund assets over $100 million
may not exceed one-third of the fees paid to the Adviser from the Davis
Growth Opportunity Fund. The Sub-Adviser also provides investment advisory
services to employee benefit plans, institutions, trusts and individuals.
The Sub-Adviser's offices are located at 230 Park Avenue, Suite 1432, New
York, New York 10169. Graham Y. Tanaka is the owner of the Sub-Adviser.
Since February, 1987, Mr. Tanaka has been the controlling
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shareholder, Chief Executive Officer and sole director of the Sub-Adviser.
Prior to December, 1990, he was employed by the Adviser.
PORTFOLIO MANAGEMENT. Carolyn H. Spolidoro is the primary portfolio manager
of the Davis Government Bond Fund. She has been employed by the Adviser since
August 1985. She is Vice President of the Adviser's General Partner and Vice
President of all of the Davis Funds. She is also the portfolio manager of the
Davis Government Money Market Fund, the Selected U. S. Government Income Fund
and the Selected Daily Government Fund.
Graham Y. Tanaka has been the primary portfolio manager of Davis Growth
Opportunity Fund since January, 1987.
Christopher C. Davis and Kenneth Charles Feinberg are the co-portfolio
managers of the Davis Financial Fund. Christopher C. Davis was the co-portfolio
manager of this Fund with Shelby M.C. Davis from its inception until December 1,
1994. He has been employed by the Adviser since September, 1989 as an assistant
portfolio manager and research analyst.
Kenneth Charles Feinberg has been employed by the Adviser since December of
1994 as a research analyst. He previously served as Assistant Vice President of
Investor Relations for Continental Corporation from 1988 to 1994.
Andrew A. Davis is the primary portfolio manager of the Davis Convertible
Securities Fund and the Davis Real Estate Fund. He was the co-portfolio manager
of these funds, with Shelby M.C. Davis, from their inception until December 1,
1994. Andrew A. Davis is a Vice President of the Company and President of the
Adviser's General Partner. Until February 1993, he was the Vice President and
head of convertible research at PaineWebber, Incorporated.
Shelby M.C. Davis, is the Chief Investment Officer of the Adviser. As
Chief Investment Officer, he is active in providing investment themes,
strategies, and individual stock selection to one or more of the Funds. He is
the controlling shareholder of the Adviser, was the primary portfolio manager of
the Davis Financial Fund and the co-portfolio manager of the Davis Convertible
Securities Fund and the Davis Real Estate Fund until December 1, 1994. He will
continue to consult with Andrew A. Davis and Christopher C. Davis.
Davis Selected Advisers, L.P., in its capacity as distributor, is
reimbursed by each Fund for some of its distribution expenses through
Distribution Plans which have been adopted with respect to Class A and Class B
shares of each Fund and approved by the Company's Board of Directors and the
shareholders of such classes in accordance with Rule 12b-1 under the Investment
Company Act of 1940. See "Distribution Plans" below for more details. The
Class Y shares are not subject to Rule 12b-1 fees.
PURCHASE OF SHARES
GENERAL. Class Y shares are offered through this Prospectus to (i) trust
companies, bank trusts, endowments, pension plans or foundations acting on
behalf of their own account or one or more clients for which such institution
acts in a fiduciary capacity and investing at least $5,000,000 at any one
time ("Institutions"); (ii) any state, county, city, department, authority or
similar agency which invests at least
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$5,000,000 ("Governmental Entities"); and (iii) any investor with an account
established under a "wrap account" or other similar fee-based program sponsored
and maintained by a registered broker-dealer approved by the Fund's Adviser
("Wrap Program Investors"). Wrap Program Investors may only purchase Class Y
shares through the sponsors of such programs who have entered into agreements
with Davis Selected Advisers, L.P.
Shareholders whose Davis Government Money Market Fund accounts are
established for distributions of earnings or principal from a unit investment
trust sponsored by Clayton Brown & Associates, Inc. may make initial and
subsequent investments of amounts below the stated minimum.
Wrap Program Investors should be aware that both Class A and Class Y shares
are made available by the Fund at net asset value to sponsors of wrap programs.
However, Class A shares are subject to additional expenses under the Fund's Rule
12b-1 Plan and sponsors of wrap programs utilizing Class A shares are generally
entitled to payments under the Plan. If the sponsor has selected Class A
shares, investors should discuss these charges with their program's sponsor and
weigh the benefits of any services to be provided by the sponsor against the
higher expenses paid by Class A shareholders.
Purchase by Bank Wire. Shares may be purchased at any time by wiring
federal funds directly to State Street. Prior to an initial investment by wire,
the institutional shareholder or wrap program sponsor should telephone Davis
Selected Advisers, L.P. at 1-800-279-0279 to advise them of the investment and
class of shares and to obtain an account number and instructions. To assure
proper credit, the wire instructions should be made as follows:
State Street Bank and Trust Company,
Boston MA 02210
Attn.: Mutual Fund Services
DAVIS SERIES, INC.
(Please specify Fund)
Shareholder Name,
Shareholder Account Number,
Federal Routing Number 011000028,
DDA Number 9904-606-2
After your initial investment, you can make additional investments. Simply
mail a check payable to "State Street Bank and Trust Company," c/o The Davis
Funds, P.O. Box 8406, Boston, MA 02266-8406. The check should be accompanied by
a form which State Street will provide after each purchase. If you do not have
a form, you should tell State Street that you want to invest the check in Class
Y shares of a Fund. If you know your account number, you should also give it to
State Street. All purchases made by check should be in U.S. dollars. Third
party checks will not be accepted. When purchases are made by check,
redemptions will not be allowed until the investment being redeemed has been in
the account for 15 calendar days.
The Funds do not issue certificates for Class Y shares. Each time you
add to or withdraw from your account, you will receive a statement showing
the details of the transaction and any other transactions you had during the
current year.
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TELEPHONE PRIVILEGE
Unless you have provided in your application that the telephone privilege
is not to be available, the telephone privilege is automatically available under
certain circumstances for exchanging shares and for redeeming shares. BY
EXERCISING THE TELEPHONE PRIVILEGE TO SELL OR EXCHANGE SHARES, YOU AGREE THAT
THE COMPANY SHALL NOT BE LIABLE FOR FOLLOWING TELEPHONE INSTRUCTIONS REASONABLY
BELIEVED TO BE GENUINE. Reasonable procedures will be employed to confirm that
such instructions are genuine and if not employed, the Company may be liable for
unauthorized instructions. Such procedures will include a request for personal
identification (account or social security number) and tape recording of the
instructions. You should be aware that during unusual market conditions we may
have difficulty in accepting telephone requests, in which case you should
contact us by mail. See "Exchange of Shares - By Telephone", "Redemption of
Shares - By Telephone" and "Redemption of Shares - Expedited Redemption
Privilege."
EXCHANGE OF SHARES
GENERAL. You may exchange Class Y shares of any Fund for Class Y shares of
the other Davis Funds. The Davis Funds offer a variety of investment objectives
that includes common stock funds, tax-exempt and corporate bond funds, and a
money market fund. However, each Fund, except the Davis Government Money Market
Fund is intended as a long-term investment and not for the short-term. The net
asset value of the initial shares being acquired must be at least $5,000,000 for
Institutions and Governmental Entities or minimums set by wrap program sponsors.
Class A shareholders who are eligible to purchase Class Y shares may exchange
their shares for Class Y shares of the Fund. There is no charge for this
service.
Before you decide to make an exchange, you must obtain the current
prospectus of the desired fund. Call your broker or the Adviser for information
and a prospectus for any of the other Davis Funds registered in your state.
Read the prospectus carefully. If you decide to exchange your shares, send
State Street a written unconditional request for the exchange and follow the
instructions regarding delivery of share certificates contained in the section
on "Redemption of Shares". A signature guarantee is not required for such an
exchange. However, if shares are also redeemed for cash in connection with the
exchange transaction, a signature guarantee may be required. See "Redemption of
Shares." Your dealer may charge an additional fee for handling an exercise of
the exchange privilege.
An exchange involves both a redemption and a purchase, and normally both
are done on the same day. However, in certain instances such as where a large
redemption is involved, the investment of redemption proceeds into shares of
other Davis Funds may take up to seven days. For federal income tax purposes,
exchanges between funds are treated as a sale and purchase. Therefore, there
will usually be a recognizable capital gain or loss due to an exchange. An
exchange between different classes of the same fund is not a taxable event.
BY TELEPHONE. You may exchange shares by telephone into accounts with
identical registrations. Please see the discussion of procedures in respect to
telephone instructions in the section entitled "Telephone Privilege," as such
procedures are also applicable to exchanges.
The number of times a shareholder may exchange shares among the Davis
Funds within a specified period of time may be limited at the discretion of
the Adviser. Currently, more than three exchanges out of a Fund during a
twelve month period are not permitted without the prior written approval of
the Adviser. The Company reserves the right to terminate or amend the
exchange privilege at any time upon at least 60 days'
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notice.
REDEMPTION OF SHARES
ALL FUNDS EXCEPT DAVIS GOVERNMENT MONEY MARKET FUND. You can redeem, or
sell back to the Company, all or part of your shares at any time. You can do
this by sending a written request to State Street Bank and Trust Company, c/o
The Davis Funds, P.O. Box 8406, Boston, MA 02266-8406, indicating how many of
your shares or what dollar amount you want to redeem. If more than one person
owns the shares to be redeemed, all owners must sign the request. The
signatures on the request must correspond to the account from which the shares
are being redeemed
Sometimes State Street needs more documents to verify authority to make a
redemption. This usually happens when the owner is a corporation, partnership
or fiduciary (such as a trustee or the executor of an estate) or if the person
making the request is not the registered owner of the shares.
For the protection of all shareholders, the Company also requires that
signatures appearing on stock power or redemption request where the proceeds
would be more than $25,000, must be guaranteed by a bank, credit union, savings
association, securities exchange, broker, dealer or other guarantor institution.
A signature guarantee is also required in the event that any modification to the
Company's application is made after the account is established, including the
selection of the Expedited Redemption Privilege. In some situations such as
where corporations, trust or estates are involved, additional documents may be
necessary to effect the redemption. The transfer agent may reject a request
from any of the foregoing eligible guarantors, if such guarantor does not
satisfy the transfer agent's written standards or procedures or if such
guarantor is not a member or participant of a signature guarantee program. This
provision also applies to exchanges when there is also a redemption for cash. A
signature guarantee on redemption requests where the proceeds would be $25,000
or less is not required, provided that such proceeds are being sent to the
address of record and, in order to ensure authenticity of an address change,
such address of record has not been changed within the last 30 days.
Redemption proceeds are normally paid to you within seven days after State
Street receives your proper redemption request. Payment for redemptions can be
suspended under certain emergency conditions determined by the Securities and
Exchange Commission or if the New York Stock Exchange is closed for other than
customary or holiday closings. If any of the shares redeemed were just bought
by you, payment to you may be delayed until your purchase check has cleared
(which usually takes up to 15 days from the purchase date). You can avoid any
such redemption delay by paying for your shares with a certified or cashier's
check or by bank wire or federal funds.
Your shares may also be redeemed through participating dealers. Under this
method, the Adviser repurchases the shares from your dealer, if your dealer is a
member of the Adviser's selling group. Your dealer may, but is not required to,
use this method in selling back your shares and may place any repurchase request
by telephone or wire. Your dealer may charge you a service fee or commission.
No charge is payable if you redeem your own shares through State Street rather
than having a dealer arrange for a repurchase.
DAVIS GOVERNMENT MONEY MARKET FUND. You may request redemption of part
or all of your shares in the Davis Government Money Market Fund by mail by
sending your request to State Street Bank and Trust Company, c/o Davis Funds,
P.O. Box 8406, Boston, MA 02266-8406. You may also redeem shares through
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the Check Writing Privilege or by Expedited Redemption Privilege to a pre-
designated bank account. Normally, except for payment to a pre-designated bank
account, State Street will send payment for the Davis Government Money Market
Fund shares redeemed within three business days, but in no event, later than
seven days, after receipt of a redemption request in proper form. Redemption of
the Davis Government Money Market Fund shares which were acquired by exchange
from shares subject to a contingent deferred sales charge may be subject to such
a charge.
CHECK WRITING PRIVILEGE. For Davis Government Money Market, State Street
will provide, upon request, forms of drafts to be drawn on your account that
will clear through State Street. These drafts may be made payable to the order
of any person in any amount not less than $500. When a draft is presented to
State Street for payment, State Street will redeem a sufficient number of full
and fractional shares in your account to cover the amount of the draft. This
enables you to continue earning daily income dividends until the draft has
cleared.
If you elect to use this method of redemption, please so signify on the
Check Writing Privilege Form. You will be subject to State Street's rules and
regulations governing such drafts, including the right of State Street not to
honor drafts in amounts exceeding the value of the regular account at the time
they are presented for payment. Drafts in excess of the value of the Davis
Government Money Market Fund regular account cannot be honored by redemption of
any other Fund account. The Company and State Street reserve the right to
modify or terminate this service at any time.
A shareholder may issue a "Stop Payment" on any draft by calling State
Street at (617) 847-8543. The "Stop Payment" order will become effective if it
is given on a timely basis pursuant to the "Stop Payment" rules in effect at
State Street with respect to their regular checking accounts.
DETERMINING THE PRICE OF SHARES
The net asset value per share of each class is determined daily by
dividing the total value of investments and other assets, less any
liabilities, by the total number of outstanding shares of each class.
Valuation of a Fund's portfolio securities (which comprise most of a Fund's
assets) is based upon their market valuation. Securities traded on a
national securities exchange are valued at the last published sales prices on
the principal exchange where listed, or, in the absence of recorded sales, at
the average of closing bid and asked prices on such exchange.
Over-the-counter securities are valued at the average of closing bid and
asked prices. Fixed-income securities may be valued on the basis of prices
provided by a pricing service. Investments in short-term securities
(maturing in sixty days or less) are valued at amortized cost unless the
Board of Directors determines that such cost is not a fair value. Assets for
which there are no quotations available will be valued at a fair value as
determined by or at the direction of the Board of Directors. Normally, the
share price of the Davis Government Money Market Fund does not fluctuate.
However, if there are unusually rapid changes in interest rates which in the
Board's view cause a material deviation between amortized cost and market
value, the Board will consider whether such conditions require taking any
temporary action to maintain the normal fixed price or to prevent material
dilution or other unfavorable results to shareholders. Such action could
include withholding dividends, paying dividends out of surplus, realizing
gains or losses or using market
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valuation.
The net asset value per share is normally determined as of the earlier of
the close of the New York Stock Exchange or 4:00 p.m. Eastern Time on each day
the Exchange is open. The price per share for purchases or redemptions made
directly through State Street normally is such value next computed after State
Street receives the purchase order or redemption request. If the purchase order
or redemption request is placed with your dealer, then the applicable price is
normally computed as of 4:00 p.m. Eastern Time on the day the dealer receives
the order, provided that the dealer receives the order before 4:00 p.m. Eastern
Time. Otherwise, the applicable price is the next determined net asset value.
It is the responsibility of your dealer to promptly forward purchase and
redemption orders to the Adviser. Note that in the case of redemptions and
repurchases of shares owned by corporations, trusts or estates, State Street may
require additional documents to effect the redemption and the applicable price
will be determined as of the close of the next computation following the receipt
of the required documentation. See "Redemption of Shares".
DIVIDENDS AND DISTRIBUTIONS
DAVIS GROWTH OPPORTUNITY FUND AND DAVIS FINANCIAL FUND. Income dividends
and distributions from any net realized capital gains are distributed annually.
DAVIS GOVERNMENT BOND FUND. Income dividends are paid monthly. You will
receive quarterly confirmation statements for dividends declared and shares
purchased through reinvestment of dividends. Distributions from any net realized
capital gain not offset by capital loss carryovers are distributed annually.
The Davis Government Bond Fund declares distributions based on the Adviser's
projections of estimated net investment income and net realized short-term
gains. The amount of each distribution may differ from actual net investment
income and gains determined in accordance with generally accepted accounting
principles. The Davis Government Bond Fund at times may continue to pay
distributions based on expectations of future investment results to provide
stable distributions for its shareholders even though, as a result of temporary
market conditions or other factors (including losses realized later in a fiscal
year which have the effect of affecting previously realized gains), the Davis
Government Bond Fund may have failed to achieve projected investment results for
a given period. In such cases, the Davis Government Bond Fund's distributions
may include a return of capital to shareholders. Shareholders who reinvest
their distributions are largely unaffected by such returns of capital. In the
case of shareholders who do not reinvest, a return of capital is equivalent to a
partial redemption of the shareholder's investment.
DAVIS GOVERNMENT MONEY MARKET FUND. Dividends from net income are declared
daily on shares outstanding as of the close of business the preceding day and
are paid monthly. You will receive monthly confirmation statements for
dividends declared and shares purchased through reinvestment of dividends.
Income for Saturdays, Sundays and holidays are accrued on Fridays. Dividends
declared during each calendar month are paid on the last business day of the
month. Shares earn dividends as of the first business day after the effective
purchase date up through the date of redemption.
DAVIS CONVERTIBLE SECURITIES FUND AND DAVIS REAL ESTATE FUND. Income
dividends are normally paid quarterly. Distributions from any net realized
capital gains are made annually.
ALL FUNDS. Information concerning distributions will be mailed to
shareholders annually. Shareholders have the option to receive all dividends
and distributions in cash, to have all dividends and
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distributions reinvested, or to have income dividends and short-term capital
gain distributions paid in cash and long-term capital gain distributions
reinvested. The reinvestment of dividends and distributions is made at net
asset value on the dividend payment date. Upon receipt of the second dividend
check which has been returned to State Street as undeliverable, undelivered
dividends will be invested in additional shares at the current net asset value
and the account designated as a dividend reinvestment account.
FEDERAL INCOME TAXES
This section and the additional tax information in the Statement of
Additional Information are not intended to be a full discussion of all the
aspects of the federal income tax law and its effects on shareholders.
Shareholders may be subject to state and local taxes on distributions. Each
investor should consult his or her own tax adviser regarding the effects of
federal, state and local tax laws on investments in the Funds.
Under the Internal Revenue Code (the "Code"), the Funds are treated as
separate entities. The Company intends to continue to qualify the Funds as
regulated investment companies under the Code and, if so qualified, the Funds
will not be liable for federal income tax to the extent their earnings are
distributed. If, for any calendar year, the required distribution of the Funds
exceed the amount distributed, an excise tax equal to 4% of the excess will be
imposed. The Company intends to make distributions during each calendar year
sufficient to prevent imposition of the excise tax.
Distributions of net investment income and of net realized short-term
capital gains will be taxable to shareholders as ordinary income. Distributions
of net long-term capital gains will be taxable to shareholders as long-term
capital gain regardless of how long the shares have been held. Distributions
will be treated the same for tax purposes whether received in cash or in
additional shares.
A gain or loss for tax purposes may be realized on the redemption of
shares. If the shareholder realizes a loss on the sale or exchange of any
shares held for six months or less and if the shareholder received a capital
gain distribution during such period, then such loss is treated as a long-term
capital loss to the extent of such capital gain distribution. Dividends
declared in the last three calendar months to shareholders of record in such
months and paid by the end of the following January are treated as received by
the shareholder in the year in which they are declared.
Davis Real Estate Fund may invest in real estate investment trusts
("REITs") that hold residual interests in real estate mortgage investment
conduits ("REMICs"). Under Treasury regulations that have not yet been issued,
but may apply retroactively, a portion of the Fund's income from a REIT that is
attributable to the REIT's residual interest in a REMIC (referred to in the Code
as an "excess inclusion") will be subject to Federal income tax in all events.
See "Certain Federal Tax Aspects of Mortgage REITs" in the Statement of
Additional Information.
COMPANY SHARES
The Company's capital stock is currently divided into six series of
common stock, each series representing one of the Company's funds. Each
series is divided into classes as described previously. Class A,
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Class B and Class Y shares. Class Y shares are sold with no front-end or
deferred sales charge and no Rule 12b-1 charges. With certain exceptions, Class
A shares are sold with a front-end sales charge at the time of purchase and are
not subject to a sales charge when they are redeemed. Class B shares are sold
without a sales charge at the time of purchase, but are subject to a deferred
sales charge if they are redeemed within six years after purchase. Class A and
Class B shares are subject to Rule 12b-1 charges. Class B shares will
automatically convert to Class A shares at the end of eight years after the end
of the calendar month in which the shareholder's order to purchase was accepted.
Davis Government Money Market Fund is the only series of the Company that offers
Class C shares. Due to the differing expenses of the classes, dividends of
Class B are likely to be lower than for Class A shares, and are likely to be
higher for Class Y shares than for any other class of shares. For more
information regarding the Class A, B and C shares please call 1-800-279-0279 to
request a prospectus for those shares.
The Board of Directors may offer additional Funds and classes in the future
and may at any time discontinue the offering of any Fund or class. Each share,
when issued and paid for in accordance with the terms of the offering, is fully
paid and non-assessable. Shares have no preemptive or subscription rights and
are freely transferable. Each share of each Fund represents an interest in the
assets of that Fund and has identical voting, dividend, liquidation and other
rights and the same terms and conditions as any other shares of that Fund except
that (i) each dollar of net asset value per share is entitled to one vote, (ii)
the expenses related to a particular class, such as those related to the
distribution of each class and the transfer agency expenses of each class are
borne solely by each such class and (iii) each class of shares votes separately
with respect to provisions of the Rule 12b-1 Distribution Plan which pertains to
a particular class and other matters for which separate class voting is
appropriate under applicable law. Each fractional share has the same rights, in
proportion, as a full share. Shares do not have cumulative voting rights;
therefore, the holders of more than 50% of the voting power of the Company can
elect all of the directors of the Company.
In accordance with Maryland law and its Articles of Incorporation, the
Company does not hold regular annual shareholder meetings. Shareholder meetings
are held when they are required under the Investment Company Act of 1940 or
otherwise called for special purposes. Special meetings may be called upon the
written request of holders of at least 10% of the votes that could be cast at
the meeting.
MAJOR SHAREHOLDERS. Shelby Cullom Davis & Co., which may be deemed to be an
affiliate of the Adviser, may be deemed to control the Company due to its
beneficial ownership of more than 25% of the Company's outstanding shares.
PERFORMANCE DATA
From time to time, quotations of each Funds' performance may be included in
advertisements, sales literature or shareholder reports. All performance
figures are historical, show the performance of a hypothetical investment and
are not intended to indicate future performance. Performance will consist of
quotations of total return and, in the case of funds with income as the primary
objective, yield quotations.
Total return is the average annual compounded rate of return of an
initial investment for periods of one, five and ten years and may include
such return for shorter or longer periods up to and including the life of the
Fund. Total return is calculated separately for each class. This
calculation assumes reinvestment of all dividends and distributions and
deduction of all charges and expenses, including the maximum front-end or
applicable contingent deferred sales charge. In addition, a table showing the
performance of an assumed
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investment of $10,000 may be used from time to time. Each may also quote total
return and aggregate total return performance data for various specified time
periods. Such data will be calculated substantially as described above, except
that (1) the rates of return calculated will not be average annual rates, but
rather, actual annual, annualized or aggregate rates of return and (2) sales
charges will not be included with respect to annual or annualized rates of
return calculations. Aside from the impact on the performance data calculations
of including or excluding the sales charges, actual annual or annualized total
return data generally will be lower than average annual total return data since
the average annual rates of return reflect compounding; aggregate total return
data generally will be higher than average annual total return data since the
aggregate rates of return reflect compounding over a longer period of time.
"Yield" when quoted is computed by dividing the net investment income per
share (as defined in applicable SEC regulations) earned during a 30-day period
(or a 7-day period for Davis Government Money Market Fund) by the maximum
offering price per share on the last day of the period. Yield is an annualized
figure, in that it assumes that the same level of net investment income is
generated over a one year period. "Effective yield" is determined similarly
but, when annualized, the income earned by an investment is assumed to be
reinvested. Thus, the effective yield figure will be slightly higher than the
yield figure due to the compounding effect of the assumed reinvestment.
In reports or in other communications to shareholders and in advertising
material, the performance of each Fund may be compared to recognized unmanaged
indices or averages of the performance of similar securities. Also, the
performance of each Fund may be compared to that of other funds of similar size
and objectives as listed in the rankings prepared by Lipper Analytical Services,
Inc. or similar independent mutual fund rating services, and each Fund may use
evaluations published by nationally recognized independent ranking services and
publications.
The Fund's 1996 Annual Report contains additional performance information
and will be made available upon request and without charge.
SHAREHOLDER INQUIRIES
Shareholder inquiries should be directed to Davis Selected Advisers, L.P.,
by writing to P.O. Box 1688, Santa Fe, NM 87504-1688 or by calling a
Shareholder Services Representative or Davis Direct Access at 1-800-279-0279.
Davis Direct Access is the Davis Funds' automated telephone system that enables
Shareholders to perform a number of account transactions automatically by using
a touch-tone phone. Shareholders may obtain fund and account specific
information and make purchases, exchanges and redemptions.
APPENDIX
QUALITY RATINGS OF DEBT SECURITIES
MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATINGS
Aaa - Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk. Interest payments are
protected by a large or by an exceptionally stable margin and principal is
secure. While the various protective elements are likely to change, such
changes as can be
40
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visualized are unlikely to impair the fundamentally strong position of such
issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than Aaa
securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e. they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any longer period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca - Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
STANDARD & POOR'S CORPORATION CORPORATE BOND RATINGS
AAA - Debt rated 'AAA' has the highest rating assigned by Standard and
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A - Debt rated 'A' has a strong capacity to pay interest and repay
principal although it is somewhat
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<PAGE>
more susceptible to the adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB - Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB - Debt rated 'BB' has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
B - Debt rated 'B' has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The 'B' rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied 'BB' or 'BB-' rating.
CCC - Debt rated 'CCC' has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial, or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The 'CCC'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'B' or 'B-' rating.
CC - The rating 'CC' is typically applied to debt subordinated to senior
debt that is assigned an actual or implied 'CCC' rating.
C - The rating 'C' is typically applied to debt subordinated to senior debt
which is assigned an actual or implied 'CCC-' debt rating. The 'C' rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
CI - The rating 'CI' is reserved for income bonds on which no interest is
being paid.
D - Debt rated 'D' is in payment default. The 'D' rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The 'D' rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
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<PAGE>
DAVIS GOVERNMENT MONEY MARKET FUND
CHECK WRITING PRIVILEGE
[ ] If you wish the check writing privilege please check the box to the left
and complete the signature card below.
INFORMATION CONCERNING THE DRAFTS USED FOR THE DAVIS GOVERNMENT MONEY MARKET
FUND CHECK WRITING PRIVILEGE:
1. Your Davis Series, Inc. Davis Government Money Market Fund drafts are paid
from an account of Davis Series, Inc. at State Street Bank and Trust
Company ("State Street").
2. In connection with this account, you will have the same rights and duties
with respect to stop payment orders, "stale" drafts, unauthorized
signatures, alterations, and unauthorized endorsements as bank checking
account customers do under the Massachusetts Uniform Commercial Code. All
notices with regard to those rights and duties must be given to State
Street.
3. Stop payment instructions must be given to State Street, by calling State
Street's service telephone number for Davis Series, Inc. shareholders:
(617) 847-8543. State Street's address is State Street Bank and Trust
Company, c/o The Davis Funds, P. O. Box 8406, Boston, MA. 02266-8406.
4. These rules may be amended from time to time.
- --------------------------------------------------------------------------------
CHECK WRITING PRIVILEGE SIGNATURE CARD (TYPE OR PRINT)
BY SIGNING THIS SIGNATURE CARD THE UNDERSIGNED AGREE(S) TO BE SUBJECT TO THE
INSTRUCTIONS AND RULES, AS NOW IN EFFECT AND AS AMENDED FROM TIME TO TIME,
OF DAVIS SERIES, INC., THAT PERTAIN TO THE USE OF REDEMPTION CHECKS. (SOME OF
THE CURRENT RULES APPEAR ABOVE.) EACH SIGNATORY GUARANTEES THE OTHER'S
SIGNATURE.
Account Number ________________________
______________________________________ _______________________________________
Shareholder Name Co-Shareholder Name
[ ] Check here if both signatures are [ ] Check here if only one signature
required on checks. is required on checks.
If neither box is checked, all checks will require both signatures.
______________________________________ _______________________________________
Signature Signature
43
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
PAGE
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . 5
Investment Objective and Policies. . . . . . . . . . . . . . . . . . . 12
Adviser, Sub-Adviser and Distributor . . . . . . . . . . . . . . . . . 24
Purchase of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Telephone Privilege. . . . . . . . . . . . . . . . . . . . . . . . . . 26
Exchange of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Redemption of Shares . . . . . . . . . . . . . . . . . . . . . . . . . 27
Determining the Price of Shares. . . . . . . . . . . . . . . . . . . . 28
Dividends and Distributions. . . . . . . . . . . . . . . . . . . . . . 29
Federal Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . 30
Company Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Performance Data . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Shareholder Inquiries. . . . . . . . . . . . . . . . . . . . . . . . . 32
Appendix - Quality Ratings of Debt Securities. . . . . . . . . . . . . 32
44
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45
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1997
Davis Series, Inc.
124 East Marcy Street
Santa Fe, New Mexico 87501
1-800-279-0279
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Topic Page
<S> <C> <C>
Investment Restrictions ................................................................ 2
High Yield, High Risk Debt Securities................................................... 4
Additional Information Concerning Davis Government Bond Fund............................ 6
Hedging of Foreign Currency Risks ...................................................... 6
Repurchase Agreements................................................................... 8
Writing Covered Call Options............................................................ 8
Federal Tax Aspects of Certain Mortgage Reits for Davis Real Estate Fund................ 8
Portfolio Transactions................................................................. 9
Directors and Officers ................................................................. 10
Directors' Compensation Schedule........................................................ 12
Certain Shareholders of the Funds....................................................... 13
Investment Advisory Services............................................................ 15
Custodian ............................................................................. 17
Auditors................................................................................ 17
Determining the Price of Shares ...................................................... 18
Reduction of Class A Sales Charge....................................................... 18
Distribution of Fund Shares............................................................. 19
Performance Data........................................................................ 20
</TABLE>
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the Class A, Class B and Class C Prospectus dated
May 1, 1997, and the Class Y Prospectus dated May 1, 1997. The Prospectuses may
be obtained from the Company.
The Company's December 31, 1996 Annual Report to Shareholders
accompanies this Statement of Additional Information. The Financial Statements
appearing in these reports are incorporated herein by reference. All interim
financial information reflects all adjustments which are, in the opinion of
management, necessary to a fair statement of the results for such interim
period.
<PAGE>
INVESTMENT RESTRICTIONS
The investment restrictions set forth below may not be changed with
respect to any Fund without the approval of the holders of the lesser of (i) 67%
of the eligible votes, if the holders of more than 50% of the eligible votes are
represented or (ii) more than 50% of the eligible votes. All percentage
limitations set forth in these restrictions apply as of the time of an
investment without regard to later increases or decreases in the value of
securities or total or net assets.
Restrictions In General
1. The Funds may not purchase or sell commodities or commodity contracts,
except that the Funds other than the Davis Government Bond Fund and
Davis Government Money Market Fund may invest in contracts in respect
to foreign currencies for hedging (risk reduction) purposes.
2. The Funds other than the Davis Government Money Market Fund may invest
in securities secured by real estate or interests therein or securities
issued by companies which invest in real estate or interests therein,
but will not otherwise invest in real estate. (This does not prevent a
Fund from owning and liquidating real estate or real estate interests
incident to a default on portfolio securities.) The Davis Government
Money Market Fund may not invest in real estate, interests therein or
real estate investment trusts.
3. The Funds other than the Davis Government Money Market Fund may not
purchase more than 10% of any one class of an issuer's securities,
other than securities issued or guaranteed by the U.S. Government, its
agencies and instrumentalities ("U.S. Government Securities"),
repurchase agreements relating thereto, certificates of deposit or the
like, bankers' acceptances or bank repurchase agreements. For purposes
of this restriction, all debt securities of an issuer are deemed to
comprise a single class. The Davis Government Money Market Fund, may
not purchase more than 10% of the outstanding debt securities (other
than U.S. Government Securities and repurchase agreements related
thereto) of any one issuer.
4. The Funds may not purchase the securities (other than U.S. Government
Securities or repurchase agreements related thereto) of any issuer if
immediately after such purchase more than 5% of the value of a Fund's
total assets would be invested in such issuer; except that up to 25% of
the value of the total assets of Davis Financial Fund, Convertible
Securities Fund and Davis Real Estate Fund may be invested without
regard to this 5% limitation. This restriction does not apply to the
Davis Government Money Market Fund.
5. The Funds may not invest in or write puts, calls or combinations
thereof ("option transactions"), except that a Fund other than the
Davis Government Money Market Fund may (a) write calls so long as at
the time of so doing the security underlying the call is listed on a
national securities exchange, the call is issued by The Options
Clearing Corporation and is traded on a registered securities exchange,
such calls do not exceed 10% of that Fund's total assets and are
covered calls, (b) make closing purchase transactions in order to close
out outstanding call options previously written by a Fund and (c)
engage in option transactions in respect of foreign currencies for
hedging purposes. (The convertible feature of convertible securities
are not deemed to be puts, calls or combinations thereof.) With respect
to the Davis Government Money Market Fund, it may not invest in puts,
calls, straddles, spreads or any combination thereof.
6. The Funds may not buy the securities of companies in continuous
operation for less than three years (including predecessors) if more
than 5% of a Fund's total assets would then be invested in such
securities. This does not apply to the Davis Government Bond Fund or
the Davis Government Money Market Fund which both invest in U.S.
Government Securities or to investments made by the Davis Real Estate
Fund in real estate investment trusts ("REITs").
2
<PAGE>
7. The Funds may not buy securities of other registered investment
companies, except that Funds other than Davis Government Bond Fund and
Davis Government Money Market Fund may invest in (i) shares of
investment companies investing primarily in foreign securities provided
that such purchase does not cause a Fund to (a) have more than 5% of
the value of its total assets invested in any one such company, (b)
have more than 10% of the value of its total assets invested in the
aggregate of all such companies, or (c) own more than 3% of the total
outstanding voting stock of any such company. All Funds may acquire
securities of other registered companies as a part of a merger,
consolidation, reorganization or acquisition of assets.
8. The Funds may not purchase securities on margin, make short sales of
securities or maintain a short position, except that (i) all Funds
except the Davis Growth Opportunity Fund and Davis Government Money
Market Fund may engage in such investments when at the time of sale a
Fund has, by reason of its ownership of other securities, the right to
obtain securities equivalent in kind and amount to the securities sold
without payment of additional consideration and such other securities
are retained so long as the Fund is in a short position and (ii) all
Funds except the Davis Government Bond Fund and Davis Government Money
Market Fund may engage in such transactions where they are in respect
to foreign currencies for hedging purposes. These restrictions do not
apply to transactions in respect to foreign currencies for hedging
purposes.
9. The Funds may not invest for the purpose of exercising control or
management of other companies.
10. The Funds, other than the Davis Government Money Market Fund, may not
borrow money except from banks for extraordinary or emergency purposes
in amounts not exceeding 10% of the value of a Fund's total assets
(excluding the amount borrowed) at the time of such borrowing. The
Funds may not pledge or hypothecate any of their assets, except in
connection with permitted borrowing in amounts not exceeding 15% of the
value of a Fund's total assets (excluding the amount borrowed) at the
time of such borrowing. These restrictions do not apply to the use of
margin deposits in connection with transactions in foreign currencies
for hedging purposes. The Davis Government Money Market Fund may not
borrow except from banks for extraordinary emergency purposes in
amounts not exceeding 25% of the value of its total assets (including
the amount borrowed) and may pledge or hypothecate assets not exceeding
10% of the value of its net assets (including any amount borrowed) in
connection with such borrowing. Both limits are calculated as of the
time of such borrowing.
11. The Funds may not buy or continue to hold securities if any officers or
directors of the Company, the Adviser or the Adviser's General Partner
own too many of the same securities. This would happen if any of these
individuals own 1/2 of 1% or more of the securities and all such
individuals who own that much or more own 5% of such securities.
12. The Funds do not engage in the underwriting of securities; however, the
Funds may technically be considered "underwriters" if they sell
restricted securities.
13. The Funds may not make loans except through the purchase of debt
obligations (including entering into repurchase agreements) in
accordance with the Fund's investment objectives and policies.
Securities received upon conversion or exercise of warrants or
subscription rights and securities remaining upon the breakup of units or
detachment of warrants may be retained to permit advantageous disposition.
Special Restriction as to Davis Growth Opportunity Fund and Davis Government
Bond Fund
1. Neither Fund may purchase the securities of issuers conducting their
principal business activities in the same industry if immediately after
such purchase the value of a Fund's investments in such industry would
exceed 25% of the value of its total assets, provided that (a) as to
utility companies, the gas, electric, water and telephone businesses
will be considered separate industries and, as to finance companies,
personal credit and business credit will be considered separate
industries, and (b) there is no limitation with respect
3
<PAGE>
to or arising out of investments in U.S. Government Securities and
repurchase agreements with respect thereto, certificates of deposit or
the like, bankers' acceptances and bank repurchase agreements.
2. Neither Fund may engage in arbitrage transactions.
Special Restrictions as to Davis Government Money Market Fund
1. The Fund may not purchase any security which has a maturity date
exceeding that prescribed in Rule 2a-7 under the Investment Company Act
of 1940
2. The Fund may not invest in restricted securities; provided, however,
that this restriction shall not apply to repurchase agreements.
3. The Fund may not invest in oil, gas or other mineral exportations or
development programs.
Special Restrictions as to Davis Financial Fund
1. The Fund may not invest less than 25% of its total assets (except
investments for temporary defensive periods) in companies principally
engaged in each of the banking and financial services industries.
Companies in the banking industry include U.S. and foreign commercial
and industrial banking and savings institutions (including their parent
holding companies). Companies in the financial services industry
include commercial and industrial finance companies, diversified
financial services companies, investment banking, securities brokerage
and investment advisory companies, leasing companies and insurance and
insurance holding companies.
2. Except for companies in the industries identified above, the Fund may
not purchase the securities of issues conducting their principal
business activities in the same industry if immediately after such
purchase the value of the Fund's investments in such industry would
constitute 25% or more of the value of the Fund's total assets,
provided that (a) as to utility companies, the gas, electric, water and
telephone businesses will be considered separate industries, and (b)
there is no limitation with respect to or arising out of investments in
U.S. Government Securities and repurchase agreements fully
collateralized by such Government Securities.
Special Restrictions as to Davis Convertible Securities Fund
1. Convertible Securities Fund may not purchase the securities of issuers
conducting their principal business activities in the same industry if
immediately after such purchase the value of the Fund's investments in
such industry would constitute 25% or more of the value of the Fund's
total assets, provided that (a) as to utility companies, the gas,
electric, water and telephone businesses will be considered separate
industries, and (b) there is no limitation with respect to or arising
out of investments in U.S. Government Securities and repurchase
agreements fully collateralized by such government securities.
Special Restrictions as to Davis Real Estate Fund
1. Real Estate Securities Fund may not purchase the securities of issuers
conducting their principal business activities in the same industry if
immediately after such purchase the value of the Fund's investments in
such industry would constitute 25% or more of the value of the Fund's
total assets, provided that (a) as to utility companies, the gas,
electric, water and telephone businesses will be considered separate
industries, and (b) there is no limitation with respect to or arising
out of investments in U.S. Government Securities and repurchase
agreements fully collateralized by such government securities or
investments in securities of companies in the real estate industry or
which own significant amounts of real estate or have products or
services relating to the real estate industry.
4
<PAGE>
HIGH YIELD, HIGH RISK DEBT SECURITIES
As discussed in the prospectus, Davis Convertible Securities Fund and Davis
Real Estate Fund may invest in certain high yield, high risk securities,
commonly referred to as "junk bonds." These lower rated securities are
considered speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation and generally will
involve more credit risk than securities in the higher rating categories.
Accordingly, an investment in the Funds may not constitute a complete investment
program and may not be appropriate for all investors, or for short term
investing.
The market values of such securities tend to reflect individual corporate
developments to a greater extent than do higher rated securities, which react
primarily to fluctuations in the general level of interest rates. Such lower
rated securities also tend to be more sensitive to economic and industry
conditions than are higher rated securities. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis regarding individual
lower rated bonds and the high yield, high risk market may depress the prices
for such securities. If the negative factors such as the aforementioned
adversely impact the market value of high yield, high risk securities, net asset
value will be adversely affected.
The high yield, high risk bond market comprised a small piece of the
general bond market until the middle 1980's when issuance increased
dramatically. Since that time the high yield, high risk bond market has
experienced only one recessionary environment but never has been exposed to a
significant increase in interest rates. During the economic downturn that was
experienced, prices of high yield, high risk bonds declined and defaults rose.
Future economic downturns and/or significant increases in interest rates are
likely to have a negative effect on the high yield, high risk bond market and
consequently on the value of these bonds, as well as increase the incidence of
defaults on such bonds.
High yield, high risk bonds may be issued in a variety of circumstances.
Some of the more common circumstances are issuance by corporations in the growth
stage of their development, in connection with a corporate reorganization or as
part of a corporate takeover. Companies that issue such high yielding, high risk
bonds often are highly leveraged and may not have available to them more
traditional methods of financing. Therefore, the risk associated with acquiring
the bonds of such issuers generally is greater than is the case with higher
rated bonds. For example, during an economic downturn or recession, highly
leveraged issuers of high yield, high risk bonds may experience financial
stress. During such periods, such issuers may not have sufficient revenues to
meet their principal and interest payment obligations. The issuer's ability to
service its debt obligations may also be adversely affected by specific
corporate developments, or the issuer's inability to meet specific projected
business forecasts, or the unavailability of additional financing. The risk of
loss due to default by the issuer is significantly greater for the holders of
high yielding bonds because such bonds are generally unsecured and are often
subordinated to other creditors of the issuer. The costs associated with
recovering principal and interest once a security has defaulted may impact the
return to holders of the security. If a Fund experiences unexpectedly large net
redemptions, it may be forced to sell high yield, high risk bonds out of the
portfolio without regard to the investment merits of such sales. This could
decrease the Fund's net assets. Since some of a Fund's expenses are fixed, this
could also reduce the Fund's rate of return.
The Funds may have difficulty disposing of certain high yield, high risk
bonds because there may be a thin trading market for such bonds. Because not all
dealers maintain markets in all high yield, high risk bonds, the Company
anticipates that such bonds could be sold only to a limited number of dealers or
institutional investors. The lack of a liquid secondary market may have an
adverse impact on market price and the ability to dispose of particular issues
and may also make it more difficult to obtain accurate market quotations or
valuations for purposes of valuing a Fund's assets. Market quotations generally
are available on many high yield issues only from a limited number of dealers
and may not necessarily represent firm bid prices of such dealers or prices for
actual sales. In addition, adverse publicity and investor perceptions may
decrease the values and liquidity of high yield, high risk bonds regardless of a
fundamental analysis of the investment merits of such bonds. To the extent that
a Fund purchases illiquid or restricted bonds, it may incur special securities
registration responsibilities, liabilities and costs, and liquidity and
valuation difficulties relating to such bonds.
5
<PAGE>
Bonds may be subject to redemption or call provisions. If an issuer
exercises these provisions when investment rates are declining, the Company will
be likely to replace such bonds with lower yielding bonds resulting in a
decreased return. Zero coupon, pay-in-kind and deferred interest bonds involve
additional special considerations. Zero coupon bonds are debt obligations that
do not entitle the holder to any periodic payments of interest prior to maturity
or a specified cash payment date when the securities begin paying current
interest (the "cash payment date") and therefore are issued and traded at a
discount from their face amount or par value. The market prices of zero coupon
securities are generally more volatile than the market prices of securities that
pay interest periodically and are likely to respond to changes in interest rates
to a greater degree than do securities paying interest currently having similar
maturities and credit quality. Pay-in-kind bonds pay interest in the form of
other securities rather than cash. Deferred interest bonds defer the payment of
interest to a later date. Zero coupon, pay-in-kind or deferred interest bonds
carry additional risk in that, unlike bonds which pay interest in cash
throughout the period to maturity, a Fund will realize no cash until the cash
payment date unless a portion of such securities are sold. There is no assurance
of the value or the liquidity of securities received from pay-in-kind bonds. If
the issuer defaults, a Fund may obtain no return at all on its investment. To
the extent that a Fund invests in bonds that are original issue discount, zero
coupon, pay-in-kind or deferred interest bonds, the Fund may have taxable
interest income in excess of the cash actually received on these issues. In
order to distribute such income to avoid taxation to a Fund, the Fund may have
to sell portfolio securities to meet its taxable distribution requirements under
circumstances that could be adverse.
Federal tax legislation limits the tax advantages of issuing certain high
yield, high risk bonds. This could have a materially adverse effect on the
market for high yield, high risk bonds.
ADDITIONAL INFORMATION CONCERNING DAVIS GOVERNMENT BOND FUND
Davis Government Bond Fund will invest in debt securities which are issued
or guaranteed by the U.S. Government, its agencies or instrumentalities. For
temporary periods, to accommodate inflows of cash awaiting more permanent
investment, it may also invest in short-term investments eligible for purchase
by Davis Government Money Market Fund. U.S. Government securities include (1)
U.S. Treasury obligations, which differ only in their interest rates, maturities
and times of issuance, U.S. Treasury bills (maturities of one year or less),
U.S. Treasury notes (maturities of one to ten years) and U.S. Treasury bonds
(generally maturities of greater than ten years); and (2) obligations issued or
guaranteed by U.S. Government agencies and instrumentalities which are supported
by any of the following: (a) the full faith and credit of the U.S. Government
(such as GNMA Certificates), (b) the right of the issuer to borrow an amount
limited to a specific line of credit from the U.S. Government (such as Federal
Farm Credit Bank - FFCB), (c) discretionary borrowing authority of the U.S.
Government agency or instrumentality (such as Student Loan Marketing Association
- - SLMA), or (d) the credit of the instrumentality (such as Financing Corporation
- - FICO).
The Fund may engage in portfolio trading primarily to take advantage of
yield disparities. Examples of some circumstances in which it may employ trading
are: (1) shortening the average maturity of the portfolio; (2) lengthening the
average maturity of the portfolio; and (3) changing from one bond to an
essentially similar bond when their respective prices are distorted due to
market factors. However, due to the fact that it is primarily invested in U.S.
Government Securities, trading is not an emphasis of the Fund and portfolio
turnover is expected to continue to be low.
HEDGING OF FOREIGN CURRENCY RISKS
Davis Growth Opportunity Fund, Davis Financial Fund, Davis Convertible
Securities Fund and Davis Real Estate Fund may purchase or sell forward foreign
currency exchange contracts ("forward contracts") to attempt to minimize the
risk to the Funds from adverse changes in the relationship between the U.S.
dollar and foreign currencies. A forward contract is an obligation to purchase
or sell a specific currency for an agreed price at a future date which is
individually negotiated and privately traded by currency traders and their
customers. Such a contract gives the Funds a futures position in a negotiated
currently non-regulated market. The Funds may enter into a forward contract, for
example, when it enters into a contract for the purchase or sale of a security
denominated in a
6
<PAGE>
foreign currency in order to "lock in" the U.S. dollar price of the security
("transaction hedge"). Additionally, for example, when the Adviser or
Sub-Adviser believes that a foreign currency may suffer a substantial decline
against the U.S. dollar, the Funds may enter into a forward sale contract to
sell an amount of that foreign currency approximating the value of some or all
of its portfolio securities denominated in such foreign currency, or when the
Adviser or Sub-Adviser believes that the U.S. dollar may suffer a substantial
decline against a foreign currency, the Funds may enter into a forward purchase
contract to buy that foreign currency for a fixed dollar amount in anticipation
of purchasing foreign traded securities ("position hedge"). In this situation
the Funds may, in the alternative, enter into a forward contract in respect to a
different foreign currency for a fixed U.S. dollar amount ("cross hedge"). This
may be done, for example, where the Adviser or Sub-Adviser believes that the
U.S. dollar value of the currency to be sold pursuant to the forward contract
will fall whenever there is a decline in the U.S. dollar value of the currency
in which portfolio securities of the Funds are denominated.
Davis Growth Opportunity Fund, Davis Financial Fund, Davis Convertible
Securities Fund and Davis Real Estate Fund may purchase and write put and call
options on foreign currencies for the purpose of protecting against declines in
the U.S. dollar value of foreign currency-denominated portfolio securities and
against increases in the U.S. dollar cost of such securities to be acquired. As
in the case of other kinds of options, however, the writing of an option on a
foreign currency constitutes only a partial hedge, up to the amount of the
premium received, and the Funds could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on a foreign currency may constitute an effective hedge
against fluctuations in exchange rates although, in the event of rate movements
adverse to the Fund's position, the Funds may forfeit the entire amount of the
premium plus related transaction costs. Options on foreign currencies to be
written or purchased by the Funds are traded on U.S. and foreign exchanges or
over-the-counter. Currently, a significant portion or all of the value of an
over-the-counter option may be treated as an illiquid investment and subject to
the restriction on such investments as long as the SEC requires that
over-the-counter options be treated as illiquid. Generally, the Funds would
utilize options traded on exchanges where the options are standardized.
Davis Growth Opportunity Fund, Davis Financial Fund, Davis Convertible
Securities Fund and Davis Real Estate Fund may enter into contracts for the
purchase or sale for future delivery of foreign currencies ("currency futures
contracts") and may purchase and write put and call options to buy or sell
currency futures contracts. A "sale" of a currency futures contract means the
acquisition of a contractual obligation to deliver the foreign currencies called
for by the contract at a specified price on a specified date. A "purchase" of a
currency futures contract means the incurring of a contractual obligation to
acquire the foreign currencies called for by the contract at a specified price
on a specified date. Options on currency futures contracts to be purchased by
the Funds will be traded on U.S. or foreign exchanges or over-the-counter. The
Funds will not enter into any futures contracts or options on currency futures
contracts if immediately thereafter the aggregate of initial margin deposits on
all the outstanding currency futures contracts and premiums paid on outstanding
options on currency futures contracts would exceed 5% of the market value of
total assets (excluding in such market value any in-the-money amount of any
option).
Davis Growth Opportunity Fund, Davis Financial Fund, Davis Convertible
Securities Fund and Davis Real Estate Fund may also purchase securities (debt
securities or deposits) which have their coupon rate or value at maturity
determined by reference to the value of one or more foreign currencies. The
Funds will not use leverage. These strategies will be used for hedging purposes
only. The Funds will hold securities or other options or futures positions whose
values are expected to offset its obligations under the hedge strategies. The
Funds will not enter into a currency hedging position that exposes it to an
obligation to another party unless it owns either (i) an offsetting position in
securities, options or futures positions or (ii) cash, receivables and
short-term debt securities with a value sufficient to cover its potential
obligations. The Funds will comply with requirements established by the SEC with
respect to coverage of options and futures strategies by mutual funds, and, if
so required, will set aside cash and high grade liquid debt securities in a
segregated account with its custodian bank in the amount prescribed. The Fund's
custodian will maintain the value of such segregated account equal to the
prescribed amount by adding or removing additional cash or liquid securities to
account for fluctuations in the value of securities held in such account.
Securities held in a segregated account cannot be sold while the futures or
option strategy is outstanding, unless they are replaced with similar
securities.
7
<PAGE>
The ability of Davis Growth Opportunity Fund, Davis Financial Fund, Davis
Convertible Securities Fund and Davis Real Estate Fund to dispose of their
positions in futures contracts, options and forward contracts will depend on the
availability of liquid markets in such instruments. Markets in options and
futures with respect to currencies are still developing. It is impossible to
predict the amount of trading interest that may exist in various types of
futures contracts, options and forward contracts. If a secondary market does not
exist with respect to an option purchased or written by the Funds
over-the-counter, it might not be possible to effect a closing transaction in
the option (i.e., dispose of the option) with the result that (i) an option
purchased by the Funds would have to be exercised in order to realize any profit
and (ii) the Funds may not be able to sell currencies covering an option written
by it until the option expires or it delivers the underlying futures currency
upon exercise. Therefore, no assurance can be given that the Funds will be able
to utilize these instruments effectively for the purposes set forth above.
Transactions in forward contracts, options on foreign currencies and
currency futures contracts will be subject to special tax rules under the
Internal Revenue Code that, among other things, may affect the character of any
gains or losses of the Funds as ordinary or capital and the timing and amount of
any income or loss to the Funds. This, in turn, could affect the character,
timing and amount of distributions by the Funds to shareholders. The Funds may
be limited in its foreign currency transactions by tax considerations.
REPURCHASE AGREEMENTS
All of the Funds may engage in repurchase agreement transactions. A
repurchase agreement involves a sale of securities to a Fund, with the
concurrent agreement of the seller (a member bank of the Federal Reserve System
or securities dealer which the Adviser or Sub-Adviser believes to be financially
sound) to repurchase the securities at the same price plus an amount equal to
accrued interest at an agreed-upon interest rate, within a specified time,
usually less than one week, but, on occasion, at a later time. The repurchase
obligation of the seller is, in effect, secured by the underlying securities,
which are securities issued or guaranteed by the U.S. Government, its agencies
or instrumentalities. In the event of a bankruptcy or other default of a seller
of a repurchase agreement, the Funds could experience both delays in liquidating
the underlying securities and losses, including (a) possible decline in the
value of the collateral during the period while the Funds seek to enforce their
rights thereto; (b) possible loss of all or a part of the income during this
period; and (c) expenses of enforcing their rights. The Funds will enter into
repurchase agreements only when the seller agrees that the value of the
underlying securities, including accrued interest (if any), will at all times be
equal to or exceed the value of the repurchase agreement. The Funds will not
enter into a repurchase agreement maturing in more than seven days if it would
cause more than 10% of the value of their total assets to be invested in such
transactions. Repurchase agreements are not deemed illiquid securities for the
purpose of the 10% limitation on illiquid securities.
WRITING COVERED CALL OPTIONS
The Funds other than the Davis Government Money Market Fund may each write
covered call options on a portion of their portfolio securities and purchase
call options in closing transactions. The investment restrictions provide that
such an option may not be written if thereafter the market value of a Fund's
portfolio securities subject to options would exceed 10% of the value of such
Fund's net assets. The Funds would only write options on securities in their
portfolios and would not write options on loaned securities. The Funds will
limit income derived from the writing of options that expire in less than three
months so as to continue to meet the requirements for qualification as a
regulated investment company under the Internal Revenue Code. As a matter of
non-fundamental policy, none of the Funds intend to write calls if the market
value of portfolio securities subject to such calls would exceed 5% of the value
of a Fund's total assets.
A covered call option gives the purchaser of the option the right to buy
the underlying security at the price specified in the option (the "exercise
price") at any time until the option expires, generally within three to nine
months, in return for the payment to the writer upon the issuance of the option
of an amount called the "premium."
8
<PAGE>
A commission may be charged in connection with the writing of the option. The
premium received for writing a call option is determined by the option markets.
The premium paid plus the exercise price will always be greater than the market
price of the underlying securities at the time the option is written. By writing
a covered call option, a Fund foregoes, in exchange for the premium, the
opportunity to profit from an increase in the market value of the underlying
security above the exercise price, if the option is exercised.
The obligation is terminated upon exercise of the call option, its
expiration or when a Fund effects a closing purchase transaction. A closing
purchase transaction is one in which the writer purchases another call option in
the same underlying security (identical as to exercise price, expiration date
and number of shares). The writer thereby terminates its obligation and
substitutes the second writer as the obligor to the original option purchaser. A
closing purchase transaction would normally involve payment of a brokerage
commission. During the remaining term of the option, if a Fund cannot enter into
a closing purchase transaction, the Fund would lose the opportunity for
realizing any gain over and above the premium through sale of the underlying
security and if the security is declining in price the Fund would continue to
experience such decline.
FEDERAL TAX ASPECTS OF CERTAIN MORTGAGE REITs FOR DAVIS REAL ESTATE FUND
Davis Real Estate Fund may invest in real estate investment trusts
("REITs") that hold residual interests in real estate mortgage investment
conduits ("REMICs"). Under Treasury regulations that have not yet been issued,
but may apply retroactively, a portion of the Fund's income from a REIT that is
attributable to the REIT's residual interest in a REMIC (referred to in the Code
as an "excess inclusion") will be subject to Federal income tax. These
regulations are also expected to provide that excess inclusion income of a
regulated investment company, such as the Fund, will be allocated to
shareholders of the regulated investment company in proportion to the dividends
received by such shareholders, with the same consequences as if the shareholders
held the related REMIC residual interest directly. In general, excess inclusion
income allocated to shareholders (i) cannot be offset by net operating losses
(subject to a limited exception for certain thrift institutions), (ii) will
constitute unrelated business taxable income to entities (including a qualified
pension plan, an individual retirement account, a 401(k) plan, a Keogh plan or
other tax-exempt entity) subject to tax on unrelated business income, thereby
potentially requiring such an entity that is allocated excess inclusion income,
and otherwise might not be required to file a tax return, to file a tax return
and pay tax on such income, and (iii) in the case of a foreign shareholder, will
not qualify for any reduction in U.S. federal withholding tax. In addition, if
at any time during any taxable year a "disqualified organization" (as defined in
the Code) is a record holder of a share in a regulated investment company, then
the regulated investment company will be subject to a tax equal to that portion
of its excess inclusion income for the taxable year that is allocable to the
disqualified organization, multiplied by the highest federal income tax rate
imposed on corporations.
PORTFOLIO TRANSACTIONS
Davis Selected Advisers, L.P (the "Adviser"), Davis Selected Advisers-New
York ("DSA-NY") and Tanaka Capital Management, Inc. ("Tanaka"), the Sub-Adviser
for Davis Growth Opportunity Fund, make investment decisions and arrange for the
placement of buy and sell orders and the execution of portfolio transactions for
the Company subject to review by the Board of Directors. In this regard, the
Adviser, DSA-NY and Tanaka will seek to obtain the most favorable price and
execution for the transaction given the size and risk involved. In placing
executions and paying brokerage commissions, the Adviser, DSA-NY and Tanaka
consider the financial responsibility and reputation of the broker or dealer,
the range and quality of the services made available to the Company and the
broker's or dealer's professional services, including execution, clearance
procedures, wire service quotations and ability to provide supplemental
performance, statistical and other research information for consideration,
analysis and evaluation by the Adviser's, DSA-NY's and Tanaka's staff. In
accordance with this policy, brokerage transactions may not be executed solely
on the basis of the lowest commission rate available for a particular
transaction. Research services provided to the Adviser, DSA-NY and Tanaka by or
through brokers who effect portfolio transactions may be used in servicing other
accounts managed by the Adviser, DSA-NY and Tanaka and likewise research
services provided by brokers used for transactions of other accounts may be
utilized by the Adviser, DSA-NY and Tanaka in performing services for the Funds.
Subject to the requirements of best execution,
9
<PAGE>
the placement of orders by securities firms for shares of the Funds may be taken
into account as a factor in the placement of portfolio brokerage.
On occasions when the Adviser, DSA-NY or Tanaka deem the purchase or sale
of a security to be in the best interests of a Fund as well as other fiduciary
accounts, the Adviser, DSA-NY or Tanaka may aggregate the securities to be sold
or purchased for the Fund with those to be sold or purchased for other accounts
in order to obtain the best net price and most favorable execution. In such
event, the allocation will be made by the Adviser, DSA-NY or Tanaka in the
manner considered to be most equitable and consistent with its fiduciary
obligations to all such fiduciary accounts, including the Fund. In some
instances, this procedure could adversely affect a Fund but the Company deems
that any disadvantage in the procedure would be outweighed by the increased
selection available and the increased opportunity to engage in volume
transactions.
The Adviser, DSA-NY and Tanaka believe that research from brokers and
dealers is desirable, although not essential, in carrying out its functions, in
that such outside research supplements the efforts of the Adviser, DSA-NY and
Tanaka by corroborating data and enabling them to consider the views,
information and analyses of other research staffs. Such views, information and
analyses include such matters as communicating with persons having special
expertise on certain companies, industries, areas of the economy and/or
securities prices, obtaining written materials on these or other areas which
might affect the economy and/or securities prices, obtaining quotations on
securities prices and obtaining information on the activities of other
institutional investors. The Adviser, DSA-NY and Tanaka research, at their own
expense, each security included in, or being considered for inclusion in, a
Fund's portfolio. As any particular research obtained by the Adviser, DSA-NY or
Tanaka may be useful to a Fund, the Board of Directors or its Committee on
brokerage, in considering the reasonableness of the commissions paid by a Fund,
will not attempt to allocate, or require the Adviser, DSA-NY or Tanaka to
allocate, the relative costs or benefits of research.
The Adviser is authorized to place portfolio transactions with Shelby
Cullom Davis & Co., ("SCD") , a member of the New York Stock Exchange, which may
be deemed to be an affiliate of the Adviser, if the commissions are fair and
reasonable and comparable to commissions charged by non-affiliated qualified
brokerage firms for similar services. The total brokerage commissions paid to
SCD during the year ended December 31, 1996 were $1,200 and 372 for Davis
Financial Fund and Davis Convertible Securities Fund, respectively.
With respect to Davis Growth Opportunity Fund, for the years ended December
31, 1996, 1995 and 1994 brokerage commissions amounted to $14,490, $40,769, and
$64,495, respectively.
With respect to Davis Financial Fund, for the year ended December 31, 1996,
brokerage commissions amounted to $58,435 of which $46,501 was paid to brokers
who provided research as well as execution and $11,934 was paid to brokers who
sold shares of the Fund as well as provided research and execution. With respect
to the year ended December 31, 1995, brokerage commissions amounted to $76,406,
of which $73,706 was paid to brokers who provided research as well as execution
and $2,700 was paid to brokers who sold shares of the Fund as well as provided
research and execution. During the year ended December 31, 1994, brokerage
commissions amounted to $109,654 of which $100,264 was paid to brokers who
provided research as well as execution and $9,390 was paid to brokers who sold
shares of the Fund as well as provided research and execution.
With respect to Davis Convertible Securities Fund, for the year ended
December 31, 1996, brokerage commissions amounted to $58,057, of which $49,571,
was paid to brokers who provided research as well as execution and $8,486 was
paid to brokers who sold shares of the Fund as well as provided research and
execution. During the year ended December 31, 1995, brokerage commissions
amounted to $71,218, of which $66,436, was paid to brokers who provided research
as well as execution and $4,782 was paid to brokers who sold shares of the Fund,
as well as provided research and execution. During the year ended December 31,
1994, brokerage commissions amounted to $43,886, of which $36,251, was paid to
brokers who provided research as well as execution and $7,635 was paid to
brokers who sold shares of the Fund, as well as provided research and execution.
10
<PAGE>
With respect to Davis Real Estate Fund, for the one year ended December 31,
1996, brokerage commissions amounted to $49,848, of which $41,208, was paid to
brokers who provided research as well as execution and $8,640 was paid to
brokers who sold shares of the Fund as well as provided research and execution.
During the year ended December 31, 1995, brokerage commissions amounted to
$54,514, of which $51,394, was paid to brokers who provided research as well as
execution and $3,120 was paid to brokers who sold shares of the Fund as well as
provided research and execution. During the year ended December 31, 1994,
brokerage commissions amounted to $40,471, of which $15,100 was paid to brokers
who provided research as well as execution and $25,371 was paid to brokers who
sold shares of the Fund as well as provided research and execution.
Davis Government Bond Fund and Davis Government Money Market Fund have not
paid brokerage commissions during any of these fiscal years. Generally,
securities for these Funds are purchased from and sold to securities dealers on
a principal basis without commissions. Such transactions may involve profit to
the dealer involved.
DIRECTORS AND OFFICERS
The names and addresses of the directors and officers of the Company are
set forth below, together with their principal business affiliations and
occupations for the last five years. The asterisk following the names of Shelby
M.C. Davis and Jeremy H. Biggs indicates that they are considered to be
"interested persons" of the Company, as defined in the Investment Company Act.
As indicated below, certain directors and officers of the Fund hold similar
positions with the following funds that are managed by the Adviser: Davis New
York Venture Fund, Inc., Davis High Income Fund, Inc., Davis Tax-Free High
Income Fund, Inc. and Davis International Series, Inc. (collectively the "Davis
Funds").
Wesley E. Bass, Jr. (8/21/31), 710 Walden Road, Winnetka, IL 60093. Director of
the Company and each of the Davis Funds except Davis International Series, Inc.;
President, Bass & Associates (a financial consulting firm); formerly, First
Deputy City Treasurer, City of Chicago, and Executive Vice President, Chicago
Title and Trust Company.
Jeremy H. Biggs (8/16/35),* Two World Trade Center, 94th Floor, New York, NY
10048. Director and Chairman of the Company and each of the Davis Funds;
Director of the Van Eck Funds; Consultant to the Adviser. Vice Chairman, Head of
Equity Research Department, Chairman of the U.S. Investment Policy Committee and
member of the International Investment Committee of Fiduciary Trust Company
International.
Marc P. Blum (9/9/42), 233 East Redwood Street, Baltimore, MD 21202. Director of
the Company and each of the Davis Funds except Davis International Series, Inc.;
Chief Executive Officer, World Total Return Fund, L.P.; Member, Gordon,
Feinblatt, Rothman, Hoffberger and Hollander, LLC (attorneys); Director,
Mid-Atlantic Realty Trust.
Shelby M.C. Davis (3/20/37),* P.O. Box 205, Hobe Sound, FL 33455. Director and
President of the Company and each of the Davis Funds; Director/Trustee and
Executive Vice President of Selected American Shares, Inc., Selected Special
Shares, Inc. and Selected Capital Preservation Trust; Director, Chairman and
Chief Executive Officer, Venture Advisers, Inc. effective August 15, 1995;
Employee of Capital Ideas, Inc. (financial consulting firm); Consultant to
Fiduciary Trust Company International; Director, Shelby Cullom Davis Financial
Consultants, Inc.; formerly, Chairman, Venture Pension Advisers, Inc.
Eugene M. Feinblatt (10/28/19), 233 East Redwood Street, Baltimore, MD 21202.
Director of the Company and each of the Davis Funds except Davis International
Series, Inc.; of Counsel, Gordon, Feinblatt, Rothman, Hoffberger and Hollander,
LLC (attorneys).
Jerry D. Geist (5/23/34), 931 San Pedro Dr. S.E., Albuquerque, NM 87108.
Director of the Company and each of the Davis Funds except Davis International
Series, Inc.; Chairman, Santa Fe Center Enterprises; President and Chief
Executive Officer, Howard Energy International Utilities; Director, CH2M-Hill,
Inc.; Retired Chairman and President, Public Service Company of New Mexico.
11
<PAGE>
D. James Guzy (3/7/36), 508 Tasman Drive, Sunnyvale, CA 94089. Director of the
Company and each of the Davis Funds except Davis International Series, Inc.;
Chairman, PLX Technology, Inc. (a manufacturer of semi-conductor circuits);
Director, Intel Corp. (a manufacturer semi-conductor circuits), Cirrus Logic
Corp. (a manufacturer of semi-conductor circuits) and Alliance Technology Fund
(a mutual fund).
G. Bernard Hamilton (3/18/37), Avanti Partners, P.O. Box 1119, Richmond, VA
23218. Director of the Company and each of the Davis Funds except Davis
International Series, Inc.; Managing General Partner, Avanti Partners, L.P.
LeRoy E. Hoffberger (6/8/25), The Exchange - Suite 215, 1112 Kenilworth Drive,
Towson, MD 21204. Director of the Company and each of the Davis Funds except
Davis International Series, Inc.; of Counsel to Gordon, Feinblatt, Rothman,
Hoffberger and Hollander, LLC (attorneys); Chairman, Mid-Atlantic Realty Trust;
Director and President, CPC, Inc. (a real estate company); Director and Vice
President, Merchant Terminal Corporation; formerly, Director of Equitable
Bancorporation, Equitable Bank and Maryland National Bank, and formerly,
Director and President, O-W Fund, Inc. (a private investment fund).
Laurence W. Levine (4/9/31), c/o Bigham Englar Jones & Houston, 14 Wall Street,
21st, Floor, New York, NY 10005-2140. Director of the Company and each of the
Davis Funds except Davis International Series, Inc.; Partner, Bigham, Englar,
Jones and Houston (attorneys); United States Counsel to Aerolineas Argentina;
Director, various private companies.
Christian R. Sonne (5/6/30), P.O. Box 777, Tuxedo Park, NY 10987. Director of
the Company and each of the Davis Funds except Davis International Series, Inc.;
General Partner of Tuxedo Park Associates (a land holding and development firm);
President and Chief Executive Officer of Mulford Securities Corporation (a
private investment fund) until 1990; formerly, Vice President of Goldman Sachs &
Company (investment banker).
Edwin R. Werner (4/1/22), 207 Gosling Hill Drive, Manhasset, NY 11030. Director
of the Company and each of the Davis Funds except Davis International Series,
Inc.; President, The Estates of North Hills New York; formerly, Chairman and
CEO, Empire Blue Cross and Blue Shield of New York.
Samuel P. Ynzunza (8/13/62), 124 East Marcy Street, Santa Fe, NM 87501. Vice
President and Secretary of the Company and each of the Davis Funds except Davis
International Series, Inc. Former Corporate Counsel for INVESCO Funds Group,
Inc. and Franklin Resources.
Carolyn H. Spolidoro (11/19/52), 124 East Marcy Street, Santa Fe, NM 87501. Vice
President of the Company and each of the Davis Funds; Vice President, Venture
Advisers, Inc.
Andrew A. Davis (6/25/63), 124 East Marcy Street, Santa Fe, NM 87501. Vice
President of the Company and each of the Davis Funds; Director and Co-President,
Venture Advisers, Inc. effective August 15, 1995; formerly, Vice President and
head of convertible security research, PaineWebber, Incorporated.
Christopher C. Davis (7/13/65), 70 Pine Street, 43rd Floor, New York, NY
10270-0108. Vice President of the Company and each of the Davis Funds except
Davis International Series, Inc.; Director, Venture Advisers, Inc.
Eileen R. Street (3/11/62), 124 East Marcy Street, Santa Fe, NM 87501. Assistant
Treasurer and Assistant Secretary of the Company and each of the Davis Funds,
Selected American Shares, Inc., Selected Special Shares, Inc. and Selected
Capital Preservation Trust; Senior Vice President and Secretary Venture
Advisers, Inc.
Sheldon R. Stein (11/29/28), 30 North LaSalle Street, Suite 2900, Chicago, IL
60602, Assistant Secretary of the Company and each of the Davis Funds, Selected
American Shares, Inc., Selected Special Shares, Inc. and Selected Capital
Preservation Trust; Partner D'Ancona & Pflaum, the Company's legal counsel.
12
<PAGE>
Arthur Don (9/24/53), 30 North LaSalle Street, Suite 2900, Chicago, IL 60602,
Assistant Secretary of the Company and each of the Davis Funds, Selected
American Shares, Inc., Selected Special Shares, Inc. and Selected Capital
Preservation Trust; Partner D'Ancona & Pflaum, the Company's legal counsel.
The Company does not pay salaries to any of its officers. The Adviser
performs certain services on behalf of the Company and is reimbursed by the
Company for the costs of providing these services. See "Investment Advisory
Services."
DIRECTORS' COMPENSATION SCHEDULE
During the fiscal year ended December 31, 1996, the compensation paid to
the directors who are not considered to be interested persons of the Company was
as follows:
Davis Series, Inc.
<TABLE>
<CAPTION>
Aggregate Company Total
Name Compensation Complex Compensation*
---- ------------ ---------------------
<S> <C> <C>
Wesley E. Bass 10,250 26,750
Marc P. Blum 10,100 26,050
Eugene M. Feinblatt 9,050 23,300
Jerry D. Geist 9,000 23,050
D. James Guzy 10,150 26,200
G. Bernard Hamilton 9,050 23,200
LeRoy E. Hoffberger 10,100 26,000
Laurence W. Levine 9,100 23,500
Christian R. Sonne 10,100 26,050
Edwin R. Werner 10,050 25,700
</TABLE>
* Complex compensation is the aggregate compensation paid, for services as a
Director, by all mutual funds with the same investment adviser.
13
<PAGE>
CERTAIN SHAREHOLDERS OF THE FUNDS
The following information sets forth as of April 21, 1997 the name
and holdings of each person known by the Company to be a record owner of 5%
or more of the Class A and Class B shares of Davis Growth Opportunity Fund,
Davis Government Bond Fund, Davis Government Money Market Fund, Davis
Financial Fund, Davis Convertible Securities Fund and Davis Real Estate Fund
and Class C shares of Davis Government Money Market Fund and the shares of
the Funds beneficially owned by the directors and officers of the Company as
a group. As of such date there were 1,572,999,503, 2,997,854,237,
400,308,287,061, 6,605,040,994, 2,169,852,446 and 2,387,466,123 Class A
shares, respectively, of Davis Growth Opportunity Fund, Davis Government Bond
Fund, Davis Government Money Market Fund, Davis Financial Fund, Davis
Convertible Securities Fund and Davis Real Estate Fund, outstanding. As of
such date, there were 2,041,319,460, 2,193,962,698, 6,187,695,460,
1,280,630,752, 181,720,33 and 1,523,067,291 Class B shares, respectively of
Davis Growth Opportunity Fund, Davis Government Bond Fund, Davis Government
Money Market Fund, Davis Financial Fund, Davis Convertible Securities Fund
and Davis Real Estate Fund, outstanding and 967,243,430 Class C shares of
Davis Government Money Market Fund outstanding. On that date, the directors
and officers of the Company, as a group owned 54,979,198 shares or 3.495% of
Davis Growth Opportunity Fund's outstanding Class A shares, 22,540,518 shares
or 0.752% of Davis Government Bond Fund's outstanding Class A shares
25,662,290,710 shares or 6.411% of Davis Government Money Market Fund's
outstanding Class A shares, owned 643,610,657 shares or 9.744% of Davis
Financial Fund's outstanding Class A shares, 162,631,873 shares or 7.495% of
Davis Convertible Securities Fund's Class A shares and 227,049,144 shares or
9.510% of Davis Real Estate Fund's Class A shares. The directors and officers
of the Funds do not presently own any Class B or Class C shares of these
funds.
Class A Shares
<TABLE>
<CAPTION>
Number of Percent of Class
Name and Address Shares Owned Outstanding
- ---------------- ------------ -----------
<S> <C> <C>
Davis Government Money Market Fund
The Bank of New York TRS FOR 300,000,000 73.63%
Shelby Cullom Davis
FBO the Bank of New York as Pledgee
One Wall Street
New York, NY 10286-0001
Shelby Cullom Davis & Co. 27,459,875 6.74%
Investment #3
609 5th Avenue, 11th Floor
New York, NY 10017-1021
Davis Financial Fund
Shelby Cullom Davis & Co. 2,670,735 42.78%
Investment #3
70 Pine Street
New York, NY 10270-0002
Christopher C. Davis 393,136 5.86%
609 5th Avenue, 11th Floor
New York, NY 10012-1019
14
<PAGE>
Davis Convertible Securities Fund
Shelby Cullom Davis & Co. 1,119,494 50.87%
Investment #3
609 5th Avenue, 11th Floor
New York, NY 10017-1021
Davis Real Estate Fund
Shelby Cullom Davis & Co. 218,367 8.58%
Investment #3
609 5th Avenue, 11th Floor
New York, NY 10017-1021
Merrill Lynch Pierce Fenner & Smith 149,417 5.87%
Mutual Fund Operations
4800 Deerlake Dr. East, 3rd Floor
Jacksonvill, FL 32264-6484
Christopher C. Davis 193,898 7.62%
C/O Shelby Cullom Davis & Co.
609 5th Avenue, 11th Floor
New York, NY 10012-1021
Class B Shares
Davis Financial Fund
Merrill Lynch Pierce Fenner & Smith 665,951 46.88%
Mutual Fund Operations
4800 Deerlake Drive East, 3rd Floor
Jacksonville, FL 32246-6484
Davis Government Bond Fund
Merrill Lynch Pierce Fenner & Smith 139,337 6.54%
Mutual Fund Operations
4800 Deerlake Drive East, 3rd Floor
Jacksonville, FL 32246-6484
Davis Convertible Securities Fund
Merrill Lynch Pierce Fenner & Smith 29,835 15.58%
Mutual Fund Operations
4800 Deerlake Drive East, 3rd Floor
Jacksonville, FL 32246-6484
Prudential Securities FBO 9.761 5.10%
Phyllis A. Bach TTEE
Phyllis A. Bach Rev. Trust
UA DTD 06/29/93
Traverse City, MI 49686
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Davis Real Estate Fund
Merrill Lynch Pierce Fenner & Smith 353,757 21.01%
Mutual Fund Operations
4800 Deerlake Drive East, 3rd Floor
Jacksonville, FL 32246-6484
Class C Shares
Davis Government Money Market Fund
State Street Bank & Trust Co. 614,998 10.73%
Cust for the 403 (B) Plan
FBO Gladys C Hill
344 Twining Road
Oreland, PA 19075-1130
</TABLE>
INVESTMENT ADVISORY SERVICES
Davis Selected Advisers, L.P. serves as investment adviser for each of the
Funds pursuant to an Advisory Agreement adopted in accordance with the
requirements of the Investment Company Act. Pursuant to the Advisory Agreement,
the Adviser, subject to the general supervision of the Company's Board of
Directors, provides management and investment advice, and furnishes statistical,
executive and clerical personnel, bookkeeping, office space, and equipment
necessary to carry out its investment advisory functions and such corporate
managerial duties as are requested by the Board of Directors. The Funds bear all
expenses other than those specifically assumed by the Adviser under the Advisory
Agreement, including preparation of tax returns, financial reports to regulatory
authorities, dividend determinations and transaction and accounting matters
related to its custodian bank, transfer agency, custodial and shareholder
services, and qualification of its shares under federal and state laws. Expenses
not specifically allocable to a particular Fund are allocated among the
Company's Funds in proportion to their respective net assets.
Tanaka Capital Management, Inc. serves as the Sub-Adviser of Davis Growth
Opportunity Fund under the Sub-Advisory Agreement. The Company pays no fees
directly to the Sub-Adviser. The Sub-Adviser receives from the Adviser a
reallowed portion of its advisory fee equal to 0.30% of the first $100 million
of the Davis Growth Opportunity Fund's annual average net asset and 0.25% of
such Fund assets over $100 million with a minimum annual fee of $100,000.
However, the Sub-Adviser's fees on Fund assets over $100 million may not exceed
one-third of the fees paid to the Adviser from the Davis Growth Opportunity
Fund.
The Manager has entered into a Sub-Advisory Agreement with its wholly-owned
subsidiary, Davis Selected Advisers-NY, Inc. ("DSA-NY"). DSA-NY performs
research and other services for the funds on behalf of the Manager. Under the
Sub-Advisory Agreement with DSA-NY, the Manager pays all of DSA-NY's direct and
indirect costs of operations. All the fees paid to DSA-NY are paid by the
Manager and not the funds.
Effective May 1, 1996, the Davis Government Bond Fund pays the Adviser
a fee at the annual rate of 0.50% of total net assets. Prior to May 1, 1996 it
paid 0.75% on the first $250 million of average net assets; 0.65% on the next
$250 million of average net assets; and 0.55% on average net assets in excess of
$500 million. For the Adviser's services, the Funds each pay the Adviser a
monthly fee at an annual rate based on average net assets, as follows: 0.75% on
the first $250 million of average net assets; 0.65% on the next $250 million of
average net assets; and 0.55% on average net assets in excess of $500 million.
Davis Government Money Market Fund pays the
16
<PAGE>
Adviser 0.50% on the first $250 million of average net assets; 0.45% on the next
$250 million of average net assets; and 0.40% on average net assets in excess of
$500 million. The aggregate advisory fees paid by Davis Growth Opportunity Fund
to the Adviser for the years ended December 31, 1996, 1995 and 1994 were
$465,709, $413,012, and $448,502, respectively. The aggregate advisory fees paid
by Davis Government Bond Fund to the Adviser for the years ended December 31,
1996, 1995 and 1994 were $200,005, $283,797, and $321,705, respectively. The
aggregate advisory fees paid by Davis Government Money Market Fund to the
Adviser for the years ended December 31, 1996, 1995 and 1994 were $1,825,917,
$1,480,642, and $858,8210 respectively. The aggregate advisory fees paid by
Davis Financial Fund to the Adviser for the years ended December 31, 1996, 1995
and 1994 were $700,862, $516,765, and $405,600, respectively. The aggregate
advisory fees paid by Davis Convertible Securities Fund to the Adviser the years
ended December 31, 1996, 1995 and 1994 were $494,195, $399,922, and $349,226,
respectively. The aggregate amount of advisory fees paid by Davis Real Estate
Fund to the Adviser for the years ended December 31, 1996, 1995 and 1994 were
$286,302, $197,296 and $121,236, respectively.
For Davis Growth Opportunity Fund, the reimbursable costs for certain
accounting and administrative services for the years ended December 31, 1996,
1995 and 1994 were $15,996, $15,498, and $14,004, respectively. The reimbursable
costs for qualifying the Fund's shares for sale with state agencies for years
ended December 31, 1996, 1995 and 1994 were $9,000, $8,250, and $6,000,
respectively. The reimbursable costs for providing shareholder services for the
years ended December 31, 1996, 1995 and 1994 were $6,058, $8,713, and $7,756,
respectively.
For Davis Government Bond Fund, the reimbursable costs for certain
accounting and administrative services for years ended December 31, 1996, 1995
and 1994 were $17,004, $17,004, and $17,004, respectively. The reimbursable
costs for qualifying the Fund's shares for sale with state agencies for the
years ended December 31, 1996, 1995 and 1994 were $9,000, $8,250, and $6,000,
respectively. The reimbursable costs for providing shareholder services for the
years ended December 31, 1996, 1995 and 1994 were $4,291, $7,567, and $6,769,
respectively.
For Davis Government Money Market Fund, the reimbursable costs for certain
accounting and administrative services for the years ended December 31, 1996,
1995 and 1994 were $12,000, $11,499, and $9,996, respectively. The reimbursable
costs for qualifying the Fund's shares for sale with state agencies for the
years ended December 31, 1996, 1995 and 1994 were $9,000, $8,250, and $6,000,
respectively. The reimbursable costs for providing shareholder services for the
years ended December 31, 1996, 1995 and 1994 were $12,905, $11,580, and $10,252,
respectively.
For Davis Financial Fund, the reimbursable costs for certain accounting and
administrative services for the years ended December 31, 1996, 1995 and 1994
were $15,996, $13,998, and $8,004, respectively. The reimbursable costs for
qualifying such Fund's shares for sales with state agencies for the years ended
December 31, 1996, 1995 and 1994 were $9,000, $8,250, and $6,000, respectively.
The reimbursable costs for providing shareholder services for the years ended
December 31, 1996, 1995 and 1994 were $4,328, $3,276, and $3,488, respectively.
For Davis Convertible Securities Fund, the reimbursable costs for certain
accounting and administrative services for the years ended December 31, 1996,
1995 and 1994 were $15,996, $13,998, and $8,004, respectively. The reimbursable
costs for qualifying such Fund's shares for sale with state agencies for the
years ended December 31, 1996, 1995 and 1994 were $9,000, $8,250, and $6,000,
respectively. The reimbursable costs for providing shareholder services for the
years ended December 31, 1996, 1995 and 1994 were $1,421, $1,284 and $1,288,
respectively.
For Davis Real Estate Fund, the reimbursable costs for certain accounting
and administrative services for the years ended December 31, 1996, 1995 and 1994
were $12,000, $11,001 and $8,004, respectively. The reimbursable costs for
qualifying such Fund's shares for sale with state agencies for the years ended
December 31, 1996, 1995 and 1994 were $9,000, $8,250 and $6,000, respectively
and the reimbursable costs for providing shareholder services for such period
were $2,702, $1,992 and $2,668, respectively.
17
<PAGE>
The Advisory Agreement also make provisions for portfolio transactions and
brokerage policies of the Funds which are discussed above under "Portfolio
Transactions."
In accordance with the provisions of the Investment Company Act, the
Advisory Agreement will terminate automatically upon assignment and is subject
to cancellation upon 60 days written notice by the Company's Board of Directors
or by vote of the Funds' shareholders or by the Adviser. The continuance of the
Agreement with respect to any Fund must be approved at least annually by the
Company's Board of Directors or by the vote of holders of a majority of the
outstanding shares of that Fund. In addition, any new agreement or the
continuation of the existing agreement must be approved by a majority of
directors who are not parties to the agreement or interested persons of any such
party.
The Adviser and the Sub-Adviser for the Davis Growth Opportunity Fund have
each adopted a Code of Ethics which regulate the personal securities
transactions of the Adviser's and the Sub-Adviser's investment personnel and
other employees and affiliates with access to information regarding securities
transactions of the Funds. Both Codes of Ethics require investment personnel to
disclose personal securities holdings upon commencement of employment and all
subsequent trading activity to the firm's Compliance Officer. Investment
personnel are prohibited from engaging in any securities transactions, including
the purchase of securities in a private offering, without the prior consent of
the Compliance Officer. Additionally, such personnel are prohibited from
purchasing securities in an initial public offering and are prohibited from
trading in any securities (i) for which a Fund has a pending buy or sell order,
(ii) which a Fund is considering buying or selling, or (iii) which a Fund
purchased or sold within seven calendar days. DSA-NY has adopted a code of
ethics that is identical to the Adviser's Code of Ethics.
CUSTODIAN
The Custodian of the Company's assets is State Street Bank and Trust
Company, Two Heritage Drive, North Quincy, Massachusetts 02171. The Custodian
maintains all of the instruments representing the investments of the Company and
all cash. The Custodian delivers securities against payment upon sale and pays
for securities against delivery upon purchase. The Custodian also remits Company
assets in payment of Company expenses, pursuant to instructions of officers or
resolutions of the Board of Directors.
AUDITORS
The Company's auditors are Tait, Weller & Baker, Two Penn Center, Suite
700, Philadelphia, Pennsylvania 19102-1707. The audit includes examination of
annual financial statements furnished to shareholders and filed with the
Securities and Exchange Commission, consultation on financial accounting and
reporting matters, and meeting with the Audit Committee of the Board of
Directors. In addition, the auditors review federal and state income tax returns
and related forms.
DETERMINING THE PRICE OF SHARES
The Company does not price its shares or accept orders for purchases or
redemptions on days when the New York Stock Exchange is closed. Such days
currently include New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
REDUCTION OF CLASS A SALES CHARGE
There are a number of ways to reduce the sales charge imposed on the
purchase of the Fund's Class A shares, as described below. These reductions are
based upon the fact that there is less sales effort and expense involved in
respect to purchases by affiliated persons and purchases made in large
quantities.
Family or Group Purchases. Certain purchases made by or for more than one
person may be considered to constitute a single purchase, including (i)
purchases for family members, including spouses and children under
18
<PAGE>
21, (ii) purchases by trust or other fiduciary accounts and purchases by
Individual Retirement Accounts for employees of a single employer and (iii)
purchases made by an organized group of persons, whether incorporated or not, if
the group has a purpose other than buying shares of mutual funds. For further
information on group purchase reductions, contact the Adviser or your dealer.
Statements of Intention. Another way to reduce the sales charge is by
signing a Statement of Intention. A Statement is included in the Application
Form included in the Prospectus. Please read it carefully before completing it.
If you enter into a Statement of Intention you (or any "single purchaser")
may state that you intend to invest at least $100,000 in a Fund's Class A shares
over a 13-month period. The amount you say you intend to invest may include
Class A shares which you already own, valued at the offering price, at the end
of the period covered by the Statement. A Statement may be backdated up to 90
days to include purchases made during that period, but the total period covered
by the Statement may not exceed 13 months.
Shares having a value of 5% of the amount you state you intend to invest
will be held "in escrow" to make sure that any additional sales charges are
paid. If any Fund's Class A shares are in escrow pursuant to a Statement and
such shares are exchanged for shares of another Davis Fund, the escrow will
continue with respect to the acquired shares.
No additional sales charge will be payable if you invest the amount you
have indicated. Each purchase under a Statement will be made as if you were
buying at one time the total amount indicated. For example, if you indicate that
you intend to invest $100,000, you will pay a sales charge of 3-1/2% on each
purchase.
If you buy additional amounts during the period to qualify for an even
lower sales charge, you will be charged such lower charge. For example, if you
indicate that intend to invest $100,000 and actually invest $250,000, you will,
by retroactive adjustment, pay a sales charge of 2-1/2%.
If during the 13-month period you invest less than the amount you have
indicated, you will pay an additional sales charge. For example, if you state
that you intend to invest $250,000 and actually invest only $100,000, you will,
by retroactive adjustment, pay a sales charge of 3-1/2%. The sales charge you
actually pay will be the same as if you had purchased the shares in a single
purchase.
A Statement does not bind you to buy, nor does it bind the Adviser to sell,
the shares covered by the Statement.
Rights of Accumulation. Another way to reduce the sales charge is under a
right of accumulation. This means that the larger purchase entitled to a lower
sales charge need not be in dollars invested at one time. The larger purchases
that you (or any "single purchaser") make at any one time can be determined by
adding to the amount of a current purchase the value of a Fund's shares (at
offering price) already owned by you.
For example, if you owned $100,000 worth (at offering price) of Davis
Growth Opportunity Fund's Class A shares and invest $5,000 in new shares, the
sales charge on that $5,000 investment would be 3-1/2%, not 4-3/4%.
If you claim this right of accumulation, you or your dealer must so notify
the Adviser (or State Street, if the investment is mailed to State Street) when
the purchase is made. Enough information must be given to verify that you are
entitled to such right.
Combined Purchases with other Davis Funds. Your ownership or purchase of
Class A shares of other Funds advised and distributed by the Adviser, including
Davis New York Venture Fund, Inc., Davis High Income Fund, Inc., Davis Tax-Free
High Income Fund, Inc. and Davis International Series, Inc. may also reduce your
sales charges in connection with the purchase of a Fund's Class A shares. This
applies to all three situations for reduction of sales charges discussed above.
19
<PAGE>
If a "single purchaser" decides to buy Class A shares of Davis Growth
Opportunity Fund or Davis Government Bond Fund as well as Class A shares of any
of the other Davis Funds (other than shares of the Company's Davis Government
Money Market Fund) at the same time, these purchases will be considered a single
purchase for the purpose of calculating the sales charge. For example, a single
purchaser can invest at the same time $100,000 in Davis Growth Opportunity
Fund's Class A shares and $150,000 in the Class A shares of Davis High Income
Fund, Inc. and pay a sales charge of 2-1/2%, not 3-1/2%.
Similarly, a Statement of Intention for a Fund's Class A shares and for the
Class A shares of the other Davis Funds (other than the Company's Davis
Government Money Market Fund) may be aggregated. In this connection, a Fund's
Class A shares and the Class A shares of the other Davis Funds which you already
own, valued at the current offering price at the end of the period covered by
your Statement of Intention, may be included in the amount you have stated you
intend to invest pursuant to your Statement.
Lastly, the right of accumulation applies also to the Class A shares of the
other Davis Funds (other than the Company's Davis Government Money Market Fund)
which you own. Thus, the amount of current purchases of Class A shares of a Fund
which you make may be added to the value of the Class A shares of the other
Davis Funds (valued at their current offering price) already owned by you in
determining the applicable sales charge. For example, if you owned $100,000
worth of shares of Davis High Income Fund, Inc. and the Company's Davis
Financial Fund and Davis Convertible Securities Fund (valued at the applicable
current offering price) and invest $5,000 in Class A shares of Davis Growth
Opportunity Fund, the sales charge on your investment would be 3-1/2%, not
4-3/4%.
In all the above instances where you wish to claim this right of combining
the Fund's shares you own of the other Davis Funds you or your dealer must
notify the Adviser (or State Street, if the investment is mailed to State
Street) of the pertinent facts. Enough information must be given to permit
verification as to whether you are entitled to a reduction in sales charges.
Issuance of Shares at Net Asset Value. There are many situations where the
sales charge will not apply to the purchase of Class A shares, as discussed in
the Prospectus. In addition, the Company occasionally may be provided with an
opportunity to purchase substantially all the assets of a public or private
investment company or to merge another such company into the Company. This
offers the Company the opportunity to obtain significant assets. No dealer
concession is involved. It is industry practice to effect such transactions at
net asset value as it would adversely affect the Company's ability to do such
transactions if the Company had to impose a sales charge.
DISTRIBUTION OF FUND SHARES
The Adviser acts as principal underwriter of the shares of each of the
Funds on a continuing basis Pursuant to a Distributing Agreement. Pursuant to
such Agreement, the Adviser, in its capacity as Distributor, pays for all
expenses in connection with the preparation, printing and distribution of
advertising and sales literature for use in offering the Funds' shares to the
public, including reports to shareholders to the extent they are used as sales
literature. The Distributor also pays for prospectuses in excess of those which
the Company must file with the Securities and Exchange Commission or those
forwarded to existing shareholders. The continuation and assignment provisions
of the Distributing Agreement are the same as those of the Advisory Agreement.
The following sales charges (which the Funds do not pay) were paid to the
Adviser, in its capacity as distributor, with respect to Class A shares. With
respect to Davis Financial Fund, for the years ended December 31, 1996, 1995 and
1994, the Distributor received total sales charges of $167,334, $81,236, and
$89,932, respectively, of which $134,887, $68,404, and $72,247, respectively,
were reallowed to investment dealers. With respect to Davis Convertible
Securities Fund, for the years ended December 31, 1996, 1995, and 1994, the
Distributor received total sales charges of $52,343, $41,669, and $120,053,
respectively, of which $41,837, $32,782, and $97,691, respectively, were
reallowed to investment dealers. With respect to Davis Real Estate Fund, for the
years ended December 31, 1996, 1995 and 1994, the Distributor received total
sales charges of $317,436, $16,112 and $234,956, respectively, of which
$262,083, $13,561 and $234,956 were reallowed to investment dealers. For the
year ended December 31, 1996, the Distributor received $47,530 and $18,190,
respectively, from commissions
20
<PAGE>
earned on sales of Class A shares of Davis Growth Opportunity Fund and Davis
Government Bond Funds of which $57,376 and $14,870, respectively, were reallowed
to investment dealers.
In addition, each of the Funds have Distribution Plans adopted pursuant to
Rule 12b-1 under the Investment Company Act as described in the prospectus. See
"Distribution Plans."
The Distribution Plans continue annually so long as they are approved in
the manner provided by Rule 12b-1 or unless earlier terminated by vote of the
majority of the Fund's Independent Directors or a majority of the Fund's
outstanding shares. The Distributor is required to furnish quarterly written
reports to the Board of Directors detailing the amounts expended under the
Distribution Plans. The Distribution Plans may be amended provided that all such
amendments comply with the applicable requirements then in effect under Rule
12b-1. Presently, Rule 12b-1 requires, among other procedures, that it be
continued only if a majority of the Independent Directors approve continuation
at least annually and that amendments materially increasing the amount to be
spent for distribution be approved by the Independent Directors and the
shareholders. As long as the Distribution Plans are in effect, the Fund must
commit the selection and nomination of candidates for new Independent Directors
to the sole discretion of the existing Independent Directors.
The following commissions were paid to the Distributor, with respect to
Davis Growth Opportunity Fund and Davis Government Bond Fund under the Class B
Distribution Plans. With respect to Davis Growth Opportunity Fund, for the years
ended December 31, 1996 1995 and 1994, the Distributor received commissions of
$190,981, $270,982, and $575,959, respectively, of which $165,409, $134,428, and
$532,815, respectively, was paid to dealers. With respect to Davis Government
Bond Fund, for years ended December 31, 1996, 1995 and 1994, respectively, the
Distributor received commissions of $57,311, $126,585, and $406,784,
respectively, of which $56,774, $50,420, and $128,415, respectively, was
reallowed to dealers. As stated in the Prospectus, as of the years ended
December 31, 1996, 1995 and 1994, the Distributor paid $180,986, $295,361 and
$425,391 and $408,923, $439,891 and $469,666, respectively, in commissions with
respect to the sale of shares of Davis Growth Opportunity Fund and Davis
Government Bond Fund, respectively, for which the Distributor had not yet
received reimbursement under the applicable Class B Distribution Plan.
Also, during the year ended December 31, 1996, Class B shares of the Davis
Financial Fund, Davis Convertible Securities Fund and Davis Real Estate Fund
made distribution plan payments which included commissions of $32,304, $8,209
and $20,407, respectively.
The Distributor intends to seek payment from Class B shares of the Davis
Financial Fund, Davis Convertible Securities Fund and Davis Real Estate Fund in
the amounts of $242,356, $46,038 and $339,925, respectively, representing the
cumulative commissions earned by the Distributor on the sale of the Funds' Class
B shares reduced by cumulative commissions paid by the Funds and cumulative
contingent deferred sales charges paid by redeeming shareholders.
With respect to shares of Davis Government Money Market Fund, for the years
ended December 31, 1996, 1995 and 1994, the Adviser paid $3,507, $11,871 and
$12,331, respectively, to qualified dealers out of its own resources, as
provided in the current Distribution Plan.
It is contemplated that, pursuant to the Plans, payments will be made to a
registered investment adviser to be owned and managed, in part, by members of
the immediate family of LeRoy E. Hoffberger, an independent director of the
company. These payments will be made in connection with shareholder services
provided by that investment adviser to its clients that are shareholders of the
fund (which include, among others, Mr. Hoffberger and members of his immediate
family and trusts of which they are beneficiaries or trustees), the cost of
which had previously been borne by the clients. Mr. Hoffberger will not have any
ownership interest in or control the investment adviser.
PERFORMANCE DATA
[ADD CLASS Y SHARE PERFORMANCE DATA WHERE APPLICABLE]
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<PAGE>
Average annual total return measures both the net investment income
generated by, and the effect of any realized or unrealized appreciation or
depreciation of, the underlying investments in the Funds' portfolio. Average
annual total return is calculated separately for each class in accordance with
the standardized method prescribed by the Securities and Exchange Commission by
determining the average annual compounded rates of return over the periods
indicated, that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
P(1+T)(n) = ERV
Where: P = hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of initial payment
This calculation (i) assumes all dividends and distributions are reinvested at
net asset value on the appropriate reinvestment dates and (ii) deducts (a) the
maximum front-end or applicable contingent deferred sales charge from the
hypothetical initial $1,000 investment, and (b) all recurring fees, such as
advisory fees, charged as expenses to all shareholder accounts.
Davis Growth Opportunity Fund's average annual total return with respect to
Class A shares for the year ended December 31, 1996 and the period from December
1, 1994 through December 31, 1996 (life of the Class) were 13.09% and 25.74%,
respectively. Davis Growth Opportunity Fund's average annual total return with
respect to its Class B shares for the one, five and ten year periods ended
December 31, 1996 is 14.86%, 10.98% and 13.91%, respectively.
Davis Financial Fund's average annual total return with respect to Class A
shares for the one year and five years ended December 31, 1996 and for the
period from May 1, 1991 through December 31, 1996 (life of the Class) were
25.28%, 22.31% and 23.93%, respectively. Davis Financial Fund's average annual
total return with respect to Class B shares for the year ended December 31, 1996
and the period from December 27, 1994 through December 31, 1996 (life of the
Class) were 27.29% and 37.32%, respectively
Davis Convertible Securities Fund's average annual total return with
respect to Class A shares for the year ended December 31, 1996 and the period
from May 1, 1992 through December 31, 1996 (life of the Class) were 23.30%, and
15.12%, respectively. Davis Convertible Securities Fund's average annual total
return with respect to Class B shares for the year ended December 31, 1996 and
the period from February 3, 1995 through December 31, 1996 (life of the Class)
were 25.21% and 25.30%, respectively.
Davis Real Estate Fund's average annual total return with respect to Class
A shares for the one year ended December 31, 1996 and for the period January 3,
1994 through December 31, 1996 (life of the Class) were 30.54% and 18.50%,
respectively. Davis Real Estate Fund's average annual total return with respect
to Class B shares for the year ended December 31, 1996 and the period from
December 27, 1994 through December 31, 1996 (life of the Class) were 33.00% and
25.10%, respectively.
Total return is the cumulative rate of investment growth which assumes that
income dividends and capital gains are reinvested. It is determined by assuming
a hypothetical investment at the net asset value at the beginning of the period,
adding in the reinvestment of all income dividends and capital gains,
calculating the ending value of the investment at the net asset value as of the
end of the specified time period and subtracting the amount of the original
investment, and by dividing the original investment. This calculated amount is
then expressed as a percentage by multiplying by 100.
Davis Growth Opportunity Fund's total return with respect to its Class A
shares for the one year ended December 31, 1996 and the period from December 1,
1994 through December 31, 1996 (life of the Class) were
22
<PAGE>
13.09% and 61.21%, respectively. Davis Growth Opportunity Fund's total return
with respect to its Class B shares for the one, five, and ten year periods ended
December 31, 1996 is 14.86%, 68.43%, and 268.32%, respectively.
Davis Financial Fund's total return with respect to Class A shares for the
one year and five years ended December 31, 1996 and for the period from May 1,
1991 through December 31, 1996 (life of the Class) were 25.28%, 173.98% and
237.80%, respectively. Davis Financial Fund's total return with respect to Class
B shares for the one year ended December 31, 1996 and the period from December
27, 1994 through December 31, 1996 (life of the Class) were 27.29% and 89.38%,
respectively.
Davis Convertible Securities Fund's total return with respect to Class A
shares for the year ended December 31, 1996 and the period from May 1, 1992
through December 31, 1996 (life of the Class) were 23.30% and 93.08%,
respectively. Davis Convertible Securities Fund's total return with respect to
Class B shares for the year ended December 31, 1996 and the period from February
3, 1995 through December 31, 1996 (life of the Class) were 25.21% and 53.84%,
respectively.
Davis Real Estate Fund's total return with respect to Class A shares for
the one year ended December 31, 1996 and for the period January 3, 1994 through
December 31, 1996 (life of the Class) were 30.54% and 66.25%, respectively.
Davis Real Estate Fund's total return with respect to Class B shares for the
year ended December 31, 1996 and for the period from December 27, 1994 through
December 31, 1996 (life of the Class) were 33.00% and 56.97%, respectively.
In reports or other communications to shareholders and in advertising
material, Davis Growth Opportunity Fund may compare its performance to various
economic and securities indices or averages such as the Consumer Price Index,
the Dow Jones Industrial Average, the Standard & Poor's 500 Stock Index and to
the performance of mutual fund indices as reported by Lipper Analytical
Services, Inc. ("Lipper") or CDA Investment Technologies, Inc. ("CDA"), or other
widely recognized independent mutual fund reporting services. Lipper and CDA
performance calculations include reinvestment of all capital gain and income
dividends for the periods covered by the calculations. The Consumer Price Index
is generally considered to be a measure of inflation. Averages and indices like
The Dow Jones Industrial Average and the Standard & Poor's 500 Stock Index are
unmanaged indices of common stocks which are considered to be generally
representative of the United States stock market. The market prices and yields
of these stocks will fluctuate.
In reports or other communications to shareholders and in advertising
material, the Company may also include evaluations of Funds published by
nationally recognized ranking services and by financial publications that are
nationally recognized, such as Business Week, Forbes, Kiplinger's, Institutional
Investor and Money Magazine. Any given performance comparison should not be
considered representative of the Fund's performance for any future period.
Davis Government Money Market Fund. The current and effective yields for
Davis Government Money Market Fund's Class A shares for the seven day period
ended December 31, 1996 was 4.75% and 4.86% respectively.
Yield quotations are calculated in accordance with the following
formulas:
Yield = [(C-D) - BV] x (365/7)
Effective Yield = [ [ [ (C-D) - BV] + 1]365/7] - 1
C = Net change (excluding capital change in value
of hypothetical account with balance of one share
at beginning of seven-day period).
D = Deductions charged to hypothetical account.
BV = Value of hypothetical account at beginning of
seven-day period for which yield is quoted.
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The yields of Davis Government Money Market Fund and Davis Government
Bond Fund will fluctuate depending upon prevailing interest rates, quality,
maturities, types of instruments held, and operating expenses. Thus, any yield
quotation should not be considered representative of future results. If a
broker-dealer charges investors for services related to the purchase or
redemption of Fund shares, the yield will effectively be reduced.
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