DAVIS INTERNATIONAL SERIES, INC.
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501
- --------------------------------------------------------------------------------
Dear Shareholder:
The Davis International Total Return Fund offers investors a professionally
managed and convenient way to expand their horizons beyond U.S. borders and take
advantage of the greater diversification and above-average growth potential
offered by many non-U.S. companies. The Fund has outperformed major
international indexes since the beginning of 1997, despite posting disappointing
returns for the most recent six-month period.
YOUR FUND MANAGER'S INVESTMENT PHILOSOPHY IN BRIEF
Your Fund's portfolio manager, Edouard F. Iselin, draws on 30 years of
experience in international investing. He strongly believes there is no
substitute for first-hand research and spends more than three months of the year
traveling around the world to meet with company management, attend conferences
and review investment opportunities.
Mr. Iselin employs a "bottom-up" investment approach that concentrates on
identifying individual stocks with outstanding performance potential. His major
criteria for the Fund's investments are very much in line with the strategy for
the other Davis equity funds. He seeks out high-quality companies with top-notch
management, predictable earnings and solid growth prospects whose shares are
preferably selling at a price/earnings (P/E) ratio well below the company's
growth rate and the average P/E ratio for its industry.
His emphasis on in-depth fundamental research is crucial to selecting companies
with good potential to meet your Fund's objectives. His price discipline focuses
the Fund on investments that represent good values. Both are important elements
in managing risk and building long-term wealth in today's volatile global
markets.
THE POSITIVE IMPACT OF STRATEGIC REALIGNMENT
Afterachieving good results in 1995, the Davis International Total Return Fund
underperformed in 1996, producing a decline of 3.51% (on Class A shares at
net asset value) for the six months ended March 31, 1997,(1) compared to a
total return of (0.79)% for the Morgan Stanley Capital International EAFE
Index.(2) Fund performance lagged because the strong gains we achieved last
year in Switzerland and the United Kingdom as well as in Hong Kong and the
Philippines were more than offset by sharply correcting markets in Thailand
and South Korea.
However, for the first quarter of 1997, your Fund once again outdistanced
leading international indexes. The net asset value of the Fund's Class A shares
rose by 1.23% for the quarter ending March 31, 1997, while the Morgan Stanley
Capital International EAFE Index declined by 1.96%.(2)
This turnaround was the result of a deliberate strategic realignment intended to
create a better portfolio equilibrium for the Fund and strengthen its
participation in attractive markets. As part of this portfolio repositioning, by
the end of March, we had entirely eliminated our Thai holdings and reduced South
Korean exposure by one-half.
Overall, we have decreased your Fund's investments in Southeast Asia from 76.8%
of net assets at the end of September, 1996 to 52.8% at the end of March, 1997.
During that same period, we almost doubled the Fund's
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501
- --------------------------------------------------------------------------------
exposure to Europe from 21.2% to 39.9% of net assets. We also began seriously
building positions in Latin America essentially for the first time-with Latin
American shares accounting for 6.5% of the Fund's net assets at the end of the
quarter.
SOUTHEAST ASIA: STILL THE WORLD'S FASTEST GROWING REGION
We have long been among the greatest believers in Southeast Asia. While we have
substantially decreased our current investment in the region, our enthusiasm for
these markets over the long term remains undimmed.
For Southeast Asia, the story is growth, as economies there continue to expand
at a faster pace than anywhere else in the world. Gross domestic product (GDP)
for the five Southeast Asian countries in which your Fund was invested on March
31, 1997 is estimated to grow at an average rate of 6.5% to 7% for both 1997 and
1998. That is 2.5 times or more the growth rates projected for Europe and the
United States. Corporate earnings are also rising rapidly, and price/earnings
ratios are still quite attractive because many of these stock markets have been
laggards over the past two years.
One area of Southeast Asia where we are maintaining significant exposure is Hong
Kong, which represented 16.3% of the Fund's total net assets at the end of
March, 1997. One Hong Kong investment that exemplifies our approach is Hutchison
Whampoa, which ranks as the Fund's fourth largest holding when our stock and
warrant positions are considered. Hutchison Whampoa is a powerful group with
first-class management that is involved in many aspects of Hong Kong's and
China's economies-particularly port operations, property and infrastructure
development in China.
In the Philippines, which accounted for 17.1% of the Fund's net assets at the
end of the quarter, we are currently reducing our overall participation.
However, we continue to favor two banks-Far East Bank & Trust, the Fund's second
largest holding, and Bank of the Philippine Islands. Both banks have
high-quality management and a very limited exposure to property loans-a
potential problem area for many Philippine banks.
Indonesia is another attractive market where we have more than doubled the
Fund's holdings-from 3.0% of net assets at the end of September, 1996 to 8.8% of
net assets at the end of March. While Indonesia is not an easy market, corporate
profits are growing very rapidly, and we have accumulated positions in three
companies that we regard as core portfolio stocks. These companies are: Astra
International, the automotive producer; Unilever Indonesia, a consumer products
company and subsidiary of the Anglo-Dutch Unilever group; and Hero Supermarket,
a supermarket chain.
Although there remain many areas of opportunity in Southeast Asia, recent events
in Thailand and South Korea illustrate the complications of investing in rapidly
emerging markets, which lack the political, economic and social stability of
larger developed countries. Because situations can change dramatically in a
short time, investors must be much more mobile. Thailand, which had been the
darling of international investors since the mid-1980s, was beset by a host of
economic ills over the past year, while South Korea suffered from both political
and financial woes. As a result, the Fund has totally eliminated its Thai shares
and halved its Korean holdings.
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501
- --------------------------------------------------------------------------------
OPPORTUNITIES FROM RESTRUCTURING IN EUROPE
In Europe, overall business conditions are improving a little, with GDP growth
for the European Union estimated at 2.5% for 1997 and slightly higher for 1998.
Still, growth rates are very low and unemployment rates are extremely high.
The major investment themes for Europe-and the reasons we have almost doubled
your Fund's investments in the region-are restructuring, mergers and
privatizations. The restructuring phenomenon that has been underway in the
United States for many years is only beginning in Europe as companies shed lines
of business, cut costs or merge with others in order to become more efficient
and competitive. We also expect a further wave of privatizations as European
governments continue to turn over ownership of key industries to the private
sector.
We continue to favor markets in both Switzerland and the United Kingdom, which
accounted for 15.6% and 10.5%, respectively, of your Fund's total net assets at
the end of the first quarter.
Four Swiss holdings particularly typify our philosophy of investing in leading
companies with superior management, strong growth rates and attractive
valuations. They are: Novartis, one of the two largest pharmaceutical companies
in the world, formed by the 1996 merger of Ciba-Geigy and Sandoz; Roche Holding,
another major drug company; Swiss Reinsurance, one of the world's leading
reinsurance companies; and the Swiss-Swedish group ABB Ltd., one of the world's
largest heavy electrical equipment manufacturers.
Over the last six months, we have also broadened the geographical distribution
of your Fund's portfolio to include investments in Sweden and Italy. In Italy,
we acquired an initial position in the shares of ENI, the major Italian
oil-and-gas group that is in the process of being privatized. We subsequently
purchased more shares of ENI, and ENI is now the Fund's fifth largest holding.
ACCELERATING GROWTH IN LATIN AMERICA
Our strategy in Latin America is to build your Fund's holdings from their
current level of 6.5% of net assets to 10%. A number of positive developments
have lead to our growing enthusiasm for the region. All South American countries
have democratic governments now. Inflation has come down dramatically in recent
years. There is an expanding affluent middle class. The currently favorable U.S.
economic environment is further bolstering strong business conditions there.
In addition, GDP growth is accelerating. Average GDP growth for the three
countries in which the Fund currently has investments-Brazil, Chile and
Mexico-is estimated at 4.5% for 1997 and 5.5% for 1998.
Key holdings in Latin America added in the last six months include Telebras, the
Brazilian telephone company; Eletrobras, the Brazilian electricity holding
company; Grupo Casa Autrey, a drug and cosmetics distribution company in Mexico;
and Santa Isabel, a supermarket chain in Chile.
LOOKING AHEAD
Forecasting the outlook for the balance of 1997 is, of course, extremely
difficult. Should U.S. markets undergo a sustained correction, that would, in
theory, be bullish for international markets. That is because the flow of funds
could increase to other regions-to Southeast Asia where a number of stock
markets have underperformed in the past two years; to Europe where
restructurings, mergers and privatizations offer opportunities; and to Latin
America where several countries are growing faster and catching up with mature
economies elsewhere.
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501
- --------------------------------------------------------------------------------
As always, we believe in maintaining a long-term perspective when investing
internationally, and we encourage our shareholders to do the same. While stock
markets will fluctuate over the short-term, stocks provide one of the best
opportunities for growth in the long run. By accumulating solid core holdings in
markets around the world, we believe your Fund is well-positioned to provide a
relatively conservative, long-term approach to diversifying U.S. portfolios with
the potential to build wealth over time.
Sincerely,
/s/Shelby M.C. Davis /s/ Edouard F. Iselin
- -------------------- ---------------------
Shelby M.C. Davis Edouard F. Iselin
Chief Investment Officer Portfolio Manager
May 12, 1997
1 Excluding the maximum sales charge of 4.75%. Average annual total returns for
the Fund's Class A shares, including the maximum front-end sales charge of
4.75%, for the one-year period ended March 31, 1997 and for the period of
February 1, 1995 through March 31, 1997 (life of Class A shares) were (9.98)%
and 7.73%, respectively. Average annual total returns for the Fund's Class B
shares, after subtracting applicable contingent deferred sales charges (see
prospectus), for the year ended March 31, 1997 and for the period of February 1,
1995 through March 31, 1997 (life of Class B shares) were (8.73)% and 8.11%,
respectively.
2 A recognized international index which includes approximately 1,000 companies
representing the stock markets of 18 countries in Europe, Australia, New
Zealand, and the Far East. The average company has a market capitalization of
over $3 billion. This is a total return index in U.S. dollars, with gross
dividends reinvested. Direct investments in the index are not permitted.
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
DAVIS INTERNATIONAL TOTAL RETURN FUND
At March 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
TOP 10 HOLDINGS SECTOR % OF FUND ASSETS
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Novartis Ltd., Registered Pharmaceuticals 8.40%
Far East Bank & Trust Co. Banking 8.13%
British Biotech PLC Pharmaceuticals 5.41%
Hutchison Whampoa Ltd. Diversified 4.68%
ENI SpA Oil & Gas 4.53%
Incentive AB - B Holding Company 4.43%
HSBC Holdings PLC Banking 4.17%
Swire Pacific Ltd. - A Aviation 3.44%
PT Astra International Automotive 3.19%
Davao Union Cement Corp. - B Building Materials 3.19%
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDUSTRY DIVERSIFICATION
<S> <C>
Automotive................................................................................... 3.22%
Aviation..................................................................................... 3.47
Banks........................................................................................ 23.20
Building Materials........................................................................... 5.63
Chemicals.................................................................................... 2.39
Consumer Products............................................................................ 6.08
Diversified.................................................................................. 7.36
Electronics.................................................................................. 1.95
Financial.................................................................................... 2.57
Holding Company.............................................................................. 4.47
Insurance.................................................................................... 2.81
Manufacturing................................................................................ 3.20
Oil & Gas.................................................................................... 4.57
Pharmaceuticals.............................................................................. 16.19
Property Development......................................................................... 1.70
Real Estate.................................................................................. 1.44
Retail....................................................................................... 4.48
Telecommunications........................................................................... 2.25
Utilities.................................................................................... 3.02
------------
100.00%
<PAGE>
</TABLE>
DAVIS INTERNATIONAL SERIES, INC.
DAVIS INTERNATIONAL TOTAL RETURN FUND
SCHEDULE OF INVESTMENTS
At March 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
VALUE
SHARES (NOTE 1)
------ ------
COMMON STOCKS - (92.79%)
<S> <C> <C>
BELGIUM - (1.88%)
100,000 Xeikon NV, ADR <F3>....................................................... $ 862,500
---------------
BRAZIL - (4.60%)
50,000 Centrais Eletricas Brasileiras SA, ADR (ELETROBRAS) Preference B........... 1,081,250
10,000 Telecomunicacoes Brasileiras SA, ADR (TELEBRAS)............................ 1,023,750
---------------
2,105,000
---------------
CHILE - (1.13%)
20,000 Santa Isabel SA, ADR....................................................... 517,500
---------------
FRANCE - (3.00%)
10,000 Clarins SA................................................................. 1,371,449
---------------
HONG KONG - (10.72%)
300,000 Dah Sing Financial Group Ltd............................................... 1,169,228
200,000 Hutchison Whampoa Ltd...................................................... 1,503,478
200,000 Swire Pacific Ltd. - A..................................................... 1,574,458
300,000 Wheelock & Co. Ltd......................................................... 656,239
---------------
4,903,40
---------------
INDONESIA - (8.75%)
450,000 PT Astra International <F4>................................................ 1,461,891
1,200,000 PT Hero Supermarket........................................................ 1,149,521
70,000 PT Unilever Indonesia <F4>................................................. 1,392,128
---------------
4,003,540
---------------
ITALY - (4.53%)
400,000 ENI SpA................................................................... 2,074,074
---------------
MALAYSIA - (6.33%)
100,000 AMMB Holdings Bhd.......................................................... 831,215
300,000 Chemical Company of Malaysia Bhd........................................... 968,406
200,000 Kumpulan Jetson Bhd........................................................ 1,097,527
---------------
2,897,148
---------------
MEXICO - (0.81%)
20,000 Grupo Casa Autrey SA de CV, ADR............................................ 370,000
---------------
PHILIPPINES - (16.68%)
100,000 Bank of the Philippine Islands Corp. <F2>.................................. 678,930
7,000,000 Centennial City Inc........................................................ 769,960
6,999,998 Davao Union Cement Corp. - B............................................... 1,460,269
135,000 Equitable Banking Corp. <F2> <F3>.......................................... 580,144
800,000 Far East Bank & Trust Co................................................... 3,550,161
3,000,000 Republic Glass Holdings Corp. ............................................. 591,694
---------------
7,631,158
---------------
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
DAVIS INTERNATIONAL TOTAL RETURN FUND
SCHEDULE OF INVESTMENTS
At March 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------------------------------------
VALUE
SHARES/UNITS (NOTE 1)
------------- ------
COMMON STOCKS - CONTINUED
SOUTH KOREA - (3.85%)
72,930 Cho Hung Bank Co. Ltd. .................................................... $ 374,626
10,000 Korea Electric Power Corp. ................................................ 290,341
30,000 LG Electronics Inc. ....................................................... 348,409
2,680 Samsung Electronics Co. Ltd................................................ 179,265
7,842 Samsung Electronics Co. Ltd., GDR.......................................... 355,831
610 Samsung Fire & Marine Insurance Inc........................................ 214,573
---------------
1,763,045
---------------
SWEDEN - (4.44%)
30,000 Incentive AB - B .......................................................... 2,030,255
---------------
SWITZERLAND - (15.60%)
1,000 ABB Ltd., Bearer........................................................... 1,202,224
4,600 Ciba Specialty Chemicals Ltd., Registered <F2> <F3>.......................... 380,403
3,100 Novartis Ltd., Registered.................................................. 3,845,613
75 Roche Holding Ltd., Non-voting equity...................................... 648,627
1,000 Swiss Reinsurance Ltd., Registered......................................... 1,063,238
---------------
7,140,105
---------------
UNITED KINGDOM - (10.47%)
600,000 British Biotech PLC <F3>................................................... 2,477,789
102,504 Royal Bank of Scotland PLC................................................. 905,637
100,000 Standard Chartered PLC..................................................... 1,405,067
---------------
4,788,493
---------------
TOTAL COMMON STOCKS (identified cost $40,342,508)................... 42,457,670
---------------
WARRANTS - (6.10%)
200,000 AMMB Holdings Bhd. (Robert Fleming expiring 01/19/98) <F3>................. 125,086
100,000 Chemical Company of Malaysia Bhd. (expiring 11/07/00) <F3>.................. 117,016
2,000,000 HSBC Holdings PLC (Robert Fleming expiring 06/27/97) <F3>................... 1,909,998
3,000,000 Hutchinson Whampoa Ltd. (Robert Fleming expiring 09/26/97) <F3>............. 638,817
---------------
TOTAL WARRANTS (identified cost $2,329,506).......................... 2,790,917
---------------
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
DAVIS INTERNATIONAL TOTAL RETURN FUND
SCHEDULE OF INVESTMENTS
At March 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
VALUE
UNITS (NOTE 1)
----- ------
RIGHTS - (0.37%)
37,500 Far East Bank & Trust Co., (expiring 07/01/97) <F3>.........................$ 85,625
37,500 Far East Bank & Trust Co., (expiring 12/01/97) <F3>......................... 85,625
---------------
TOTAL RIGHTS (identified cost $98,088)............................... 171,250
---------------
TOTAL INVESTMENTS (identified cost $42,770,102) -
(99.26%) <F1>.................................................. 45,419,837
OTHER ASSETS LESS LIABILITIES - (0.74%)........................... 336,790
---------------
NET ASSETS - 100%................................................. $ 45,756,627
===============
<FN>
<F1> Aggregate cost for Federal income tax purposes is $42,770,102.
<F2> This security is subject to Rule 144A. The Board of Directors of the Fund
has determined that there is sufficient liquidity in this security to
realize its current valuation.
<F3> Non income-producing security.
<F4> Foreign registry.
</FN>
At March 31, 1997, unrealized appreciation (depreciation) of securities for
Federal income tax purposes was as follows:
Unrealized appreciation............................................... $ 7,141,622
Unrealized depreciation............................................... (4,491,887)
-------------
Net unrealized appreciation........................................ $ 2,649,735
=============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
STATEMENT OF ASSETS AND LIABILITIES - At March 31, 1997 (Unaudited)
INTERNATIONAL TOTAL RETURN FUND
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value (identified cost - $ 42,770,102) (Note 1)........ $ 45,419,837
Cash................................................................................. 191,293
Receivables:
Dividends........................................................................ 56,503
Capital stock sold............................................................... 9,751
Prepaid expenses..................................................................... 73,514
Due from Advisor..................................................................... 164,602
Other assets......................................................................... 14,370
----------------
Total assets................................................................ 45,929,870
----------------
LIABILITIES:
Payable for capital stock reacquired................................................. 29,922
Accrued expenses..................................................................... 113,900
Other payables....................................................................... 29,421
----------------
Total liabilities........................................................... 173,243
----------------
NET ASSETS ............................................................................... $ 45,756,627
================
CLASS A SHARES
Net assets....................................................................... $ 37,820,256
Shares outstanding............................................................... 3,536,452
Net asset value and redemption price per share (net assets/shares outstanding)... $10.69
======
Maximum offering price per share (100/95.25 of $10.69)........................... $11.22
======
CLASS B SHARES
Net assets....................................................................... $ 7,936,371
Shares outstanding............................................................... 753,856
Net asset value, offering and redemption price per share (net assets/
shares outstanding)......................................................... $10.53
======
NET ASSETS CONSIST OF:
Deficit in undistributed net investment income....................................... $ (122,088)
Unrealized appreciation on investments and translation of assets and liabilities in
foreign currencies............................................................... 2,649,735
Accumulated net realized losses from investments and foreign currency transactions... (5,687,151)
Paid-in capital...................................................................... 48,916,131
----------------
Net assets.................................................................. $ 45,756,627
================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
STATEMENT OF OPERATIONS - For the six months ended March 31, 1997 (Unaudited)
INTERNATIONAL TOTAL RETURN FUND
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Income:
Dividends (net of foreign taxes withheld of $33,969)............................. $ 218,346
Interest......................................................................... 41,290
-----------------
Total Income................................................................ 259,636
-----------------
Expenses:
Management fees (Note 3)...................................... $ 230,555
Custodian fees................................................ 66,530
Transfer agent fees........................................... 26,662
Audit fees.................................................... 10,350
Legal fees.................................................... 7,808
Accounting fees (Note 3)...................................... 4,002
Reports to shareholders....................................... 12,104
Directors fees and expenses................................... 37,354
Registration and filing fees ................................. 38,249
Miscellaneous............................................ 15,238
Distribution plan payments (Note 3)
Class A..................................................... 35,167
Class B..................................................... 38,899
---------------
Total expenses.............................................................. 522,918
Reimbursement of expenses by adviser (Note 3).................................... (99,908)
Fee Reduction (Note 7)........................................................... (1,302)
-----------------
Net expenses................................................................ 421,708
-----------------
Net investment income (loss)............................................ (162,072)
-----------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN CURRENCY:
Net realized gain (loss) from:
Investment transactions.......................................................... (5,235,862)
Foreign currency transactions.................................................... (381,067)
Net increase (decrease) in unrealized appreciation/depreciation on:
Investments...................................................................... 3,971,039
Translation of assets and liabilities in foreign currencies...................... (1,914)
Foreign taxes on gains on investments ............................................... 14,930
-----------------
Net realized and unrealized loss on investments and foreign currency........ (1,632,874)
-----------------
Net decrease in net assets resulting from operations.................... $ (1,794,946)
=================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
STATEMENT OF CHANGES IN NET ASSETS
INTERNATIONAL TOTAL RETURN FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX
MONTHS ENDED EIGHT
MARCH 31, MONTHS ENDED
1997 SEPTEMBER 30,
(UNAUDITED) 1996
----------- ------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss)................................... $ (162,072) $ 48,882
Net realized gain (loss) from investments and foreign currency
transactions............................................... (5,616,929) 3,932,599
Increase (decrease) in unrealized appreciation on investments and
translation of assets and liabilities in foreign currencies 3,969,125 (1,434,473)
Foreign taxes on gains on investments.......................... 14,930 (16,733)
------------ ------------
Net increase (decrease)in net assets resulting from
operations............................................ (1,794,946) 2,530,275
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A ($0.03 per share).................................. - (67,993)
Realized gains from investment transactions
Class A ($0.99 and $0.58 per share, respectively).......... (3,209,934) (1,314,536)
Class B ($0.99 and $0.58 per share, respectively).......... (681,216) (115,147)
CAPITAL SHARE TRANSACTIONS (NOTE 5)................................. 1,614,392 33,366,163
------------ ------------
Total increase(decrease) in net assets..................... (4,071,704) 34,398,762
NET ASSETS:
Beginning of period............................................ 49,828,331 15,429,569
------------ ------------
End of period (including undistributed net investment
income (deficit) of ($122,088) and $39,983 respectively) $ 45,756,627 $ 49,828,331
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
NOTES TO FINANCIAL STATEMENTS
At March 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company is registered under the Investment Company Act of 1940, as
amended, as a diversified, open-end management investment company. The Company
currently offers one series, Davis International Total Return Fund ("Fund"). The
Fund offers shares in two classes, Class A and Class B. The Class A shares are
sold with a front-end sales charge and the Class B shares are sold at net asset
value and may be subject to a contingent deferred sales charge upon redemption.
Both classes have identical rights with respect to voting (exclusive of each
Class' distribution arrangement), liquidation and distributions. The following
is a summary of significant accounting policies followed by the Fund in the
preparation of its financial statements.
SECURITY VALUATION - Portfolio securities are normally valued using current
market valuations: either the last reported sales price, or in the case of
securities for which there is no reported last sale, the closing bid price. Debt
securities maturing in 60 days or less are usually valued at amortized cost and
longer term debt securities may be valued by an independent pricing service.
Securities for which market quotations are not readily available and other
assets are appraised at fair value as determined in good faith in accordance
with methods that are authorized by the Board of Directors. Because of the
difference in times of closing of markets in which the Fund's securities are
traded, events affecting portfolio values that occur between the time their
prices are determined and the time the Fund's shares are priced will generally
not be reflected in the Fund's share price.
FOREIGN CURRENCY - Amounts denominated in or expected to settle in foreign
currencies (FC) are translated into United States dollars (US$) at current
exchange rates computed by State Street Bank & Trust Company, the Fund's
custodian bank. Investment securities, other assets, and liabilities are valued
at the closing rate of exchange at the balance sheet date. Purchases and sales
of investment securities, income and expenses are valued at the rate of exchange
prevailing on the respective dates of such transactions (or at an average rate
if significant rate fluctuations have not occurred). The Fund does not isolate
that portion of the results of operations resulting from changes in foreign
exchange rates on investments from the fluctuations arising from changes in
market prices of securities held. Such fluctuations are included with the net
realized and unrealized gain or loss from investments.
Reported net realized foreign exchange gains or losses arise from sales
and maturities of short-term securities, sales of FCs, currency gains or losses
realized between the trade and settlement dates on securities transactions, the
difference between the amounts of dividends, interest, and foreign withholding
taxes recorded on the Fund's books, and the U.S. dollar equivalent of the
amounts actually received or paid. Net unrealized foreign exchange gains and
losses arise from changes in the value of assets and liabilities other than
investments in securities at fiscal year end, resulting from changes in the
exchange rate.
FORWARD CURRENCY CONTRACTS - The Fund may enter into forward purchases or sales
of foreign currencies to hedge certain foreign currency denominated assets and
liabilities against declines in market value relative to the U.S. dollar.
Forward currency contracts are marked-to-market daily and the change in market
value is recorded as an unrealized gain or loss equal to the difference between
the value of the forward currency contract at the time it was opened and value
at the time it was closed. Investments in forward currency contracts may expose
the company to risks resulting from unanticipated movements in foreign currency
exchange rates or failure of the counterparty to the agreement to perform in
accordance with the terms of the contract.
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
At March 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
FEDERAL INCOME TAXES - It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to shareholders. Therefore,
no provision for federal income tax is required.
SECURITIES TRANSACTIONS AND RELATED INVESTMENT INCOME - Securities transactions
are accounted for on the trade date (date the order to buy or sell is executed)
with gain or loss on the sale of securities being determined based upon
identified cost. Dividend income is recorded on the ex-dividend date and
interest income is recorded on the accrual basis.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS - Dividends and distributions to
shareholders are recorded on the ex-dividend date.
NOTE 2 - PURCHASES AND SALES OF SECURITIES
Purchases and sales of investment securities (excluding short-term
securities) during the six months ended March 31, 1997, were $20,727,703 and
$22,734,912 respectively.
NOTE 3 - INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Advisory fees are paid monthly to the investment adviser, Davis Selected
Advisers, L.P., at the annual rate of 1.00% of the first $250 million of average
net assets, 0.90% on the next $250 million of average net assets, and 0.80% of
average net assets in excess of $500 million. Pursuant to applicable state Blue
Sky requirements, the adviser will reimburse expenses (including the advisory
fee but excluding interest, taxes, brokerage fees and fees paid under any Rule
12b-1 Distribution Plan) in excess of the most restrictive applicable expense
limitation prescribed by any statute or regulatory authority of any jurisdiction
in which the Fund's shares are qualified for offer and sale. The Adviser
believes that the most restrictive expense limitations presently applicable are
2 1/2% for the first $30 million of average net assets, 2% for the next $70
million of average net assets and 1 1/2% for any additional average net assets.
The Adviser is paid for registering Fund shares for sale in various states. The
fee for the six months ended March 31, 1997 amounted to $12,000. The Adviser is
paid for certain transfer agent services. The fee for the six months ended March
31, 1997 amounted to $1,600. The Adviser is also paid for certain accounting
services. The fee amounted to $4,002 for the six months ended March 31, 1997.
Certain directors and the officers of the Fund are also directors and officers
of the general partner of the Adviser.
Atlantic Advisers Limited (the "Sub-Adviser") acts as the Sub-Adviser of
the Fund. The Sub-Adviser manages the day-to-day investment operations for the
Fund. The Fund pays no fees directly to the Sub-Adviser. The Sub-Adviser
receives from the Adviser 50% of the total annual investment advisory fees paid
by the Fund to the Adviser.
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
At March 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
NOTE 4 - DISTRIBUTION AND UNDERWRITING FEES
CLASS A SHARES
Class A shares of the Fund are sold at net asset value plus a sales
charge and are redeemed at net asset value (without a contingent deferred sales
charge).
During the six months ended March 31, 1997, the Fund's Underwriter, Davis
Selected Advisers, L.P., received $37,799 from commissions earned on sales of
Class A shares of the Fund of which $5,742 was retained by the underwriter and
the remaining $32,057 was reallowed to investment dealers. Davis Selected
Advisers, L.P. paid the costs of prospectuses in excess of those required to be
filed as part of the Fund's registration statement, sales literature and other
expenses assumed or incurred by it in connection with such sales.
The Underwriter is reimbursed for amounts paid to dealers as a
maintenance fee with respect to Class A shares sold by dealers and remaining
outstanding during the period. The maintenance fee is paid at the annual rate of
1/4 of 1% of the average net assets maintained by the responsible dealers. The
Underwriter is not reimbursed for accounts in which the Underwriter pays no
service fees to other firms. The maintenance fee for Class A shares of the Fund
for the six months ended March 31, 1997 was $35,167.
CLASS B SHARES
Class B shares of the Fund are sold at net asset value and are redeemed
at net asset value less a contingent deferred sales charge if redeemed within
six years of purchase.
The Fund compensates the Distributor with a 4% commission on the proceeds
from the sale of the Fund's Class B shares (subject to the limits described
below) and the Distributor pays 4% to the qualified dealer responsible for the
sale of the shares. A rule implemented by the National Association of Securities
Dealers, Inc., ("NASD") limits the percentage of the Fund's annual average net
assets attributable to Class B shares which may be paid to the Distributor in
connection with the distribution of its shares. The limit is 1%, of which 0.75%
may be used to pay distribution expenses and 0.25% may be used to pay
shareholder service fees. The NASD rule also limits the aggregate amount the
Fund may pay for distribution-related services to 6.25% of gross Fund sales
since inception of the Rule 12b-1 plan plus interest at 1% over the prime rate
on unpaid amounts. The Distributor intends to seek full payment (plus interest
at prime plus 1%) of distribution charges that exceed the 1% annual limit in
some future period or periods when the plan limits have not been reached.
During the six months ended March 31, 1997, Class B shares of the Fund
made distribution plan payments which included commissions of $29,794 and
maintenance fees of $9,105.
Commissions earned by the Distributor during the six months ended March
31, 1997 on the sale of Class B shares of the Fund amounted to $30,997 all of
which $29,822 was reallowed to qualified selling dealers.
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
At March 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
NOTE 4 - DISTRIBUTION AND UNDERWRITING FEES - (CONTINUED)
The Distributor intends to seek payment from Class B shares of the Fund
in the amount of $280,820, representing the cumulative commissions earned by the
Distributor on the sale of the Fund's Class B shares, plus interest, reduced by
cumulative commissions paid by the Fund and cumulative contingent deferred sales
charges paid by redeeming shareholders. The Fund has no contractual obligation
to pay any such distribution charges and the amount, if any, timing and
condition of such payment are solely within the discretion of the Directors who
are not interested persons of the Fund or the Distributor.
A contingent deferred sales charge is imposed upon redemption of
certain Class B shares of the Fund within six years of the original purchase.
The charge is a declining percentage starting at 4% of the lesser of net asset
value of the shares redeemed or the total cost of such shares. During the six
months ended March 31, 1997 the Distributor received contingent deferred sales
charges from Class B shares of the Fund of $2,768.
NOTE 5 - CAPITAL STOCK
At March 31, 1997, there were 5 billion shares of capital stock ($0.001
par value per share) authorized. Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
CLASS A SIX MONTHS ENDED
MARCH 31, 1997
(UNAUDITED)
---------
SHARES AMOUNT
------ -----
<S> <C> <C>
Shares subscribed.......................................................... 298,678 $ 3,266,124
Shares issued in reinvestment of distributions............................. 296,888 3,129,204
------------- --------------
595,566 6,395,328
Shares reacquired.......................................................... (486,076) (5,436,309)
-------------- --------------
Net increase.......................................................... 109,490 $ 959,019
============= ==============
YEAR ENDED
SEPTEMBER 30, 1996
------------------
SHARES AMOUNT
------ ------
Shares subscribed.......................................................... 2,552,141 $ 30,265,971
Shares issued in reinvestment of distributions............................. 121,746 1,357,471
------------- --------------
2,673,887 31,623,442
Shares reacquired.......................................................... (379,953) (4,608,330)
------------- --------------
Net increase.......................................................... 2,293,934 $ 27,015,112
============= ==============
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
At March 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
NOTE 5 - CAPITAL STOCK - (CONTINUED)
CLASS B SIX MONTHS ENDED
MARCH 31, 1997
(UNAUDITED)
---------
SHARES AMOUNT
------ ------
Shares subscribed.......................................................... 102,748 $ 1,124,166
Shares issued in reinvestment of distributions............................. 62,835 652,855
------------- --------------
165,583 1,777,021
Shares reacquired.......................................................... (102,151) (1,121,648)
------------- --------------
Net increase.......................................................... 63,432 $ 655,373
============= ==============
YEAR ENDED
SEPTEMBER 30, 1996
------------------
SHARES AMOUNT
------ ------
Shares subscribed.......................................................... 540,809 $ 6,608,287
Shares issued in reinvestment of distributions............................. 10,289 114,212
------------- --------------
551,098 6,722,499
Shares reacquired.......................................................... (30,461) (371,448)
------------- --------------
Net increase.......................................................... 520,637 $ 6,351,051
============= ==============
</TABLE>
NOTE 6 - MATTERS SUBMITTED TO A VOTE OF SHAREHOLDERS
An annual meeting of shareholders was held on March 25, 1997. Matters
submitted for approval included consideration of a Sub-Advisory Agreement
between Davis Selected Advisers, L.P., the Investment Adviser of the Fund, and
Davis Selected Advisers-NY, Inc., an affiliate of the Adviser and election of G.
Bernard Hamilton as director of the Fund. With respect to consideration of the
Sub-Advisory Agreement, 3,391,448 votes were cast in favor, 24,638 votes were
cast against and 13,627 votes abstained. With respect to the election of Mr.
Hamilton, 3,406,610 votes were cast in favor and 23,107 votes were withheld. The
terms of office of Jeremy H. Biggs, Shelby M.C. Davis, Keith R. Kroeger, The
Very Reverend James R. Leo, Richard M. Murray and Theodore B. Smith Jr. also
continued after the meeting.
NOTE 7 - CUSTODY FEES
Under an agreement with the custodian bank, custody fees are reduced
by credits for cash balances. Such reductions amounted to $1,302 during the six
months ended March 31, 1997.
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
At March 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
NOTE 8 - FINANCIAL STATEMENTS WITH OFF-BALANCE-SHEET RISK
During the six months ended March 31, 1997, the Fund has been a party
to a forward foreign currency contract to attempt to minimize the risk to the
Fund, in respect of its portfolio transactions, from adverse changes in the
relationship between the U.S. dollar and foreign currencies. When entering a
forward currency contract, the Fund agrees to receive or deliver a fixed
quantity of foreign currency for an agreed upon price on an agreed future date.
These instruments involve market risk in excess of the amount recognized in the
Statement of Assets and Liabilities. Risks arise from the possible inability of
counterparties to meet the terms of their contracts and from movement in
currency values and interest rates. The contract amount indicates the extent of
the Fund's involvement in the forward contracts. The Fund maintains cash, cash
equivalents or debt securities, in a segregated account, sufficient to cover the
commitments to consummate such forward contracts.
At March 31, 1997, the Fund had entered into forward contracts for
the sale of currency as set out below. The contract is reported in the financial
statements of the Fund's net equity, as measured by the difference between the
forward foreign exchange rates at the reporting date and the forward rate of the
date of entry into the contract.
<TABLE>
<CAPTION>
FORWARD FOREIGN CONTRACTS SOLD
<S> <C>
26,000,000 Thai Bahts
@ .038197, 06/24/97.............. $ 993,124
Cost to purchase currencies at
current forward foreign exchange
rate............................. 993,200
---------------
Net deficit in equity in forward
foreign currency contracts....... $ (76)
==============
</TABLE>
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
FINANCIAL HIGHLIGHTS
INTERNATIONAL TOTAL RETURN FUND
- --------------------------------------------------------------------------------
The following represents financial highlights for a share of capital stock
outstanding throughout each period.
<TABLE>
<CAPTION>
CLASS A
SIX MONTHS
ENDED EIGHT
MARCH 31, YEAR ENDED MONTHS ENDED
1997 SEPTEMBER 30, SEPTEMBER 30,
(UNAUDITED) 1996 1995
----------- ---- ----
<S> <C> <C> <C>
Net Asset Value,
Beginning of Period.................. $ 12.12 $ 11.85 $ 10.00
------- --------- ---------
Income From Investment Operations
Net Investment Income (Loss)........ (.03) .03 .05
Net Gains/(Loss) on Securities
(both realized and unrealized)..... (.41) .85 1.80
------- --------- ---------
Total From Investment Operations... (.44) .88 1.85
------- --------- ---------
Less Distributions
Dividends (from net
investment income)................ - (.03) -
Distributions From
Realized Capital Gains............ (.99) (.58) -
Total Distributions................ (.99) (.61) -
------- --------- ---------
Net Asset Value, End of Period.......... $ 10.69 $ 12.12 $ 11.85
======= ========= =========
Total Return<F1>......................... (3.51)% 7.87% 18.50%
Ratios/Supplemental Data
- ------------------------
Net Assets, End of
Period (000 omitted)............... $ 37,820 $ 41,545 $ 13,427
Ratio of Expenses
to Average Net Assets............ 1.70%<F2><F4> 1.70%<F2>,<F3><F4> 2.46%<F2>,<F3><F4>
Ratio of Net Income
to Average Net Assets............. (0.57)%<F4> .23%<F4> .09%<F4>
Portfolio Turnover Rate............. 45% 78% 85%
Average commission rate per share... $ .0077 $ .0050 -
<FN>
<F1>
Sales charges are not reflected in calculation.
<F2>
Had the Adviser not absorbed certain expenses, the ratio of expenses for
the six months ended March 31, 1997, the year ended September 30, 1996 and
the eight months ended September 30, 1995 would have been 2.08%, 2.24% and
2.88%, respectively.
<F3>
Ratio of expenses to average net assets after the reduction of custodian
fees under a custodian agreement were 1.69% for 1996. Prior to 1996, such
reductions were reflected in the expense ratios.
<F4> Annualized.
</FN>
</TABLE>
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
FINANCIAL HIGHLIGHTS
INTERNATIONAL TOTAL RETURN FUND
- --------------------------------------------------------------------------------
The following represents financial highlights for a share of capital stock
outstanding throughout each period.
<TABLE>
<CAPTION>
CLASS B
SIX MONTHS
ENDED EIGHT
MARCH 31, YEAR ENDED MONTHS ENDED
1997 SEPTEMBER 30, SEPTEMBER 30,
(UNAUDITED) 1996 1995
----------- ----
<S> <C> <C> <C>
Net Asset Value,
Beginning of Period.................. $ 12.00 $ 11.79 $ 10.00
Income From Investment Operations
- ---------------------------------
Net Investment Income (Loss)......... (.07) (.03) (.01)
Net Gains/(Loss) on Securities
(both realized and unrealized)..... (.41) .82 1.80
------- -------- ---------
Total From Investment Operations... (.48) .79 1.79
------- -------- ---------
Less Distributions
- ------------------
Dividends (from net
investment income)................ - - -
Distributions From
Realized Capital Gains............ (.99) (.58) -
Total Distributions............... (.99) (.58) -
------- -------- ---------
Net Asset Value, End of Period.......... $ 10.53 $ 12.00 $ 11.79
======= ======== =========
Total Return <F1>........................... (3.89)% 7.10% 17.90%
- -------------
Ratios/Supplemental Data
- ------------------------
Net Assets, End of
Period (000 omitted)............... $ 7,936 $ 8,283 $ 2,002
Ratio of Expenses
to Average Net Assets............ 2.51%<F2><F4> 2.47%<F2>,<F3> 2.46%<F2>,<F3><F4>
Ratio of Net Income
to Average Net Assets............. (1.38)%<F4> (.54)% (.09)%<F4>
Portfolio Turnover Rate.............. 45% 78% 85%
Average commission rate per share.... $ .0077 $ .0050 -
<FN>
<F1>
Sales charges are not reflected in calculation.
<F2>
Had the Adviser not absorbed certain expenses, the ratio of expenses for the
six months ended March 31, 1997, the year ended September 30, 1996 and the
eight months ended September 30, 1995 would have been 2.97%, 3.01% and 3.62%,
respectively.
<F3>
Ratio of expenses to average net assets after the reduction of custodian fees
under a custodian agreement were 2.46% for 1996. Prior to 1996, such
reductions were reflected in the expense ratios.
<F4> Annualized.
</FN>
</TABLE>
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
DAVIS INTERNATIONAL TOTAL
RETURN FUND
124 East Marcy Street Santa Fe, New Mexico 87501
DIRECTORS OFFICERS
Jeremy H. Biggs Jeremy H. Biggs
Shelby M.C. Davis Chairman
G. Bernard Hamilton Shelby M.C. Davis
Keith R. Kroeger President
The Very Reverend Carl R. Luff
James R. Leo Vice President, Treasurer
Richard M. Murray & Assistant Secretary
Theodore B. Smith Jr. Eileen R. Street
Vice President, Secretary
& Assistant Treasurer
Carolyn H. Spolidoro
Vice President
Andrew A. Davis
Vice President
Samuel P. Ynzunza
Assistant Secretary
INVESTMENT ADVISER & DISTRIBUTOR
Davis Selected Advisers, L.P.
124 East Marcy Street
Santa Fe, New Mexico 87501
TRANSFER AGENT & CUSTODIAN
State Street Bank and Trust Company
c/o The Davis Funds
P.O. Box 8406
Boston, Massachusetts 02266-8406
COUNSEL
D'Ancona & Pflaum
30 North LaSalle Street
Chicago, Illinois 60602
FOR MORE INFORMATION ABOUT DAVIS INTERNATIONAL SERIES, INC., DAVIS
INTERNATIONAL TOTAL RETURN FUND, INC. INCLUDING MANAGEMENT FEE, CHARGES AND
EXPENSES, SEE THE CURRENT PROSPECTUS WHICH MUST PRECEDE OR ACCOMPANY THIS
REPORT.
9605-05 DISI70
