<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501
===============================================================================
Dear Shareholder:
PERFORMANCE REVIEW
The Davis International Total Return Fund offers investors a professionally
managed and convenient way to diversify beyond U.S. borders by investing in a
carefully selected portfolio of high-quality, non-U.S. companies that offer
above-average growth potential. We continue to find attractive values in many
international stock markets today, with your fund currently holding investments
in 18 different countries.
Your fund is back on track and strategically positioned for good returns ahead
after posting disappointing returns during 1997 and restructuring its
portfolio. For the six months ended March 31, 1998, the fund's Class A shares
provided a total return on net asset value of 3.25% versus a total return of
5.87% for the Morgan Stanley Capital International EAFE Index. During the first
quarter of 1998, the fund's Class A shares generated a total return on net
asset value of 13.64% compared to a return of 14.79% for the EAFE Index.1
A RESEARCH-DRIVEN, VALUE-ORIENTED PROCESS
In line with the long-term Davis investment philosophy, we manage the Davis
International Total Return Fund according to a disciplined process that
emphasizes firsthand fundamental research and maintaining close contact with
company management. Our bottom-up, value-oriented investment approach
concentrates on identifying individual stocks with outstanding performance
prospects that have not yet been generally recognized in the market. We look
for first-class 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 multiple
for its industry.
EUROPE
Europe remains our preferred area of investment, with some 75% of net assets
invested in Europe as of March 31, 1998. Corporate profits there are robust,
with double-digit growth rates recorded on average in 1997 and more of the same
expected in most European countries for 1998.
Management confidence is reflected in the sizable dividend increases announced
by many European companies. For example, Lloyds TSB Group and Standard
Chartered raised their final half-yearly dividend payments by 32% and 29%,
respectively, while Nokia increased its yearly payout rate by 114%, Raisio
Group PLC by 50%, Skandia Forsakrings by 36% and Novartis by 25%. Many
companies have also declared stock dividends or stock splits, and a number of
stock buybacks have been announced in countries where such transactions are
legally allowed. Furthermore, restructurings, mergers and takeovers, often
across borders, are very much a part of today's business picture in Western
Europe and the Nordic countries.
Gross domestic product (GDP) growth for the European Union is estimated at 2.8%
to 3.0% for 1998, versus an estimated 2.5% for 1997. Moreover, several
peripheral countries should grow faster, including Ireland where 1998 GDP
growth is estimated to exceed 7%; Norway, Portugal and Spain with projected
growth of 4% or higher; and Finland and Sweden with estimated growth of more
than 3%.
European countries added to your fund's portfolio since September 30, 1997
include the Netherlands, Norway and Spain. In the Netherlands, we have
purchased positions in: Heineken, an international brewery group; ING Group, an
international financial services concern; Numico, which manufactures infant
milk formula and cereal
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501
===============================================================================
products, drinks, juices and other baby food; and Unilever, the worldwide food,
detergent and personal-care products group.2
In Norway, the fund made initial investments in April, 1998 in two companies:
Elkjop Norge, a leading retailer of consumer electronics equipment and kitchen
appliances that is also expanding in Sweden; and Tomra Systems, the world's
largest manufacturer of machines for handling the return of beverage
containers.
Also in April, the fund made an initial investment in Spain with the purchase
of shares in Banco Santander, the country's largest and foremost commercial
bank. Spain is the European country that stands to gain the most from the
Economic Monetary Union (EMU), which will launch the new Euro currency on
January 1, 1999.
In addition, we made a new investment in the United Kingdom, replacing the
fund's position in GKN PLC with Charter PLC, a specialized engineering group
involved in manufacturing welding products, cutting systems and other
equipment.2
SOUTH AND EAST ASIA
Your fund's exposure to South and East Asia, which stood at nearly 16% of net
assets on September 30, 1997, was substantially reduced during the last quarter
of 1997, ending the year at less than 3%. All holdings in Indonesia and South
Korea were eliminated from the portfolio, leaving minimal exposure to two
markets: Hong Kong/China and the Philippines.
It will take time for South and East Asia to recover from the currency and
economic collapse of the past year, not to mention the cloudy political outlook
in some countries. Real GDP figures in 1998 are expected to be only a fraction
of the levels posted in 1996-97 in several countries and are likely to be
negative in Indonesia, Malaysia, South Korea and Thailand. In addition, Asian
companies will report poor earnings this year.
However, the Asian miracle is not over and business conditions could improve in
a few countries as early as 1999. Good values have already begun to emerge in
several countries, notably in Hong Kong and Singapore, which continue to report
budget surpluses and where companies offer investors much more reliable
financial data than companies in most neighboring countries. As a result, we
increased investments in selected Asian countries during the first quarter,
raising the fund's exposure to Asia to some 13% of net assets on March 31,
1998.
During the quarter, we made initial investments in Liu Chong Hing Bank and in
Union Bank of Hong Kong, two smaller Hong Kong banks with close connections to
mainland China, and in China Telecommunications, which offers cellular
telecommunications services in two of China's most affluent provinces.2
Your fund also invested in Keppel Bank, Singapore's fifth largest bank. Unlike
Singapore's four larger banks, Keppel Bank's shares are still open to foreign
investors and, therefore, do not sell at a premium to local shares. In
Malaysia, a position was taken in Malaysian Assurance Alliance, the country's
sixth largest general insurance group and third largest life insurer.2
2
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501
===============================================================================
LATIN AMERICA
Latin American stock markets, which initially appeared safer than the emerging
markets of Southeast Asia, started to correct sharply in the final months of
1997 and in January 1998. The reason: Investors watching the collapse of Asian
currencies became concerned that Latin American currencies would soon catch the
Asian flu, particularly if there were renewed financial and political
difficulties in the Far East.
As a result, we decreased the fund's exposure to Latin America from nearly 24%
of net assets on September 30, 1997 to 11% on March 31, 1998. We believe this
defensive posture is warranted in order to minimize potential volatility, even
though the region is experiencing fairly good economic conditions. Investments
in Argentina have been eliminated altogether, with the fund still maintaining
reduced positions in Mexico, Brazil and Chile at the end of the first quarter.
THE BENEFITS OF INTERNATIONAL DIVERSIFICATION
Non-U.S. markets account for a substantial share of the world's investment
opportunities and many of the world's leading companies are located outside the
United States. Of course, it is important to maintain a long-term perspective,
especially when investing internationally. While stock markets will fluctuate
in the short term, they provide one of the best opportunities for growth in the
long run. By accumulating core holdings in first-class companies around the
world, we believe your fund is well-positioned to provide a relatively
conservative approach for investors seeking to diversify U.S. portfolios and
build wealth over time.
Sincerely,
Shelby M.C. Davis Edouard F. Iselin
Chief Investment Officer Portfolio Manager
May 15, 1998
1 All performance figures cited in this letter are calculated without
considering sales commissions. The total returns for the Fund's Class A shares,
including the maximum front-end sales charge of 4.75%, for the three month and
six month periods ending March 31, 1998 were 8.20% and -1.67%, respectively.
The average annual total return, including the maximum front-end sales charge
of 4.75%, for the one-year period ended March 31, 1998 and for the period from
February 1, 1995 through March 31, 1998 (life of the Class) were 4.72% and
8.42%, respectively. Past performance is no guarantee of future results.
The Morgan Stanley Capital International EAFE Index is a recognized
international index that 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 calculated in U.S. dollars, with gross dividends
reinvested. It would be difficult to invest directly in the index.
2 The Fund's portfolio securities as of March 31, 1998, including the
securities discussed in this letter, are listed in the Schedule of Investments.
3
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
DAVIS INTERNATIONAL TOTAL RETURN FUND
At March 31, 1998 (Unaudited)
===============================================================================
TOP 10 HOLDINGS SECTOR % OF FUND ASSETS
- -------------------------------------------------------------------------------
Novartis Ltd., Registered Pharmaceuticals 12.79%
Xeikon NV, ADR Diversified 5.29%
Swiss Reinsurance Co., Registered Insurance 5.12%
ENI SpA Utilities 4.76%
Lloyds TSB Group PLC Finance 3.99%
CRH PLC Diversified 3.88%
Standard Chartered PLC Banking 3.72%
Raisio Group PLC Food & Beverage 3.68%
Telecom Italia SpA Telecommunications 3.67%
ABB Ltd., Bearer Diversified 3.48%
===============================================================================
INDUSTRY DIVERSIFICATION
Pharmaceuticals....................................................... 17.55%
Banking............................................................... 12.03
Telecommunications.................................................... 11.08
Insurance............................................................. 10.67
Diversified........................................................... 10.31
Manufacturing......................................................... 6.85
Energy................................................................ 6.49
Food & Beverage....................................................... 6.45
Consumer Products..................................................... 5.31
Finance............................................................... 4.03
Utilities............................................................. 3.43
Holding Company....................................................... 2.31
Real Estate........................................................... 1.30
Retail................................................................ 1.28
Building Materials.................................................... 0.59
Aviation.............................................................. 0.32
------
100.00%
4
<PAGE>
<TABLE>
DAVIS INTERNATIONAL SERIES, INC.
DAVIS INTERNATIONAL TOTAL RETURN FUND
SCHEDULE OF INVESTMENTS
At March 31, 1998 (Unaudited)
==============================================================================================================
<CAPTION>
VALUE
SHARES (NOTE 1)
COMMON STOCKS - (94.89%)
<S> <C> <C>
BELGIUM - (5.29%)
100,000 Xeikon NV, ADR *........................................................... $ 2,271,875
---------------
BRAZIL - (2.67%)
20,000 Centrais Eletricas Brasileiras SA, ADR (ELETROBRAS) Preference B........... 495,000
5,000 Telecomunicacoes Brasileiras SA, ADR (TELEBRAS)............................ 649,063
---------------
1,144,063
CHILE - (3.51%)
50,000 Empresa Nacional de Electricidad SA, ADR (ENDESA).......................... 962,500
30,000 Santa Isabel SA, ADR....................................................... 545,625
---------------
1,508,125
FINLAND - (5.09%)
33,000 Asko Oyj................................................................... 604,812
11,000 Raisio Group PLC *......................................................... 1,579,140
---------------
2,183,952
HONG KONG - (6.46%)
500,000 China Telecom (Hong Kong) Ltd *............................................ 1,013,060
800,000 HKR International Ltd...................................................... 552,344
500,000 Liu Chong Hing Bank Ltd.................................................... 806,577
300,000 Union Bank of Hong Kong.................................................... 398,771
---------------
2,770,752
IRELAND - (4.20%)
110,000 CRH PLC................................................................... 1,666,466
18,000 Ryanair Holdings PLC *..................................................... 134,501
---------------
1,800,967
ITALY - (8.44%)
300,000 ENI SpA................................................................... 2,043,884
200,000 Telecom Italia SpA......................................................... 1,575,974
---------------
3,619,858
MALAYSIA - (2.41%)
500,000 Malaysian Assurance Alliance Bhd........................................... 1,034,247
---------------
MEXICO - (3.30%)
20,000 DESC SA, ADR............................................................... 615,000
20,000 Panamerican Beverages Inc.-A............................................... 802,500
---------------
1,417,500
---------------
</TABLE>
5
<PAGE>
<TABLE>
DAVIS INTERNATIONAL SERIES, INC.
DAVIS INTERNATIONAL TOTAL RETURN FUND
SCHEDULE OF INVESTMENTS - CONTINUED
At March 31, 1998 (Unaudited)
==============================================================================================================
<CAPTION>
VALUE
SHARES (NOTE 1)
COMMON STOCKS - CONTINUED
<S> <C> <C>
NETHERLANDS - (8.74%)
4,000 Heineken NV................................................................ $ 909,374
20,000 ING Groep NV............................................................... 1,134,799
10,000 Numico NV.................................................................. 359,241
20,000 Unilever NV................................................................ 1,348,713
---------------
3,752,127
PHILIPPINES - (0.84%)
4,948,000 Davao Union Cement Corp. - B............................................... 252,608
37,500 Far East Bank & Trust Co................................................... 49,342
1,813,000 Republic Glass Holdings Corp. ............................................. 60,115
---------------
362,065
SINGAPORE - (3.36%)
1,000,000 Keppel Bank Ltd............................................................ 1,442,948
---------------
SWEDEN - (5.33%)
10,000 Incentive AB - B .......................................................... 981,802
20,000 Skandia Forsakrings AB .................................................... 1,303,233
---------------
2,285,035
SWITZERLAND - (24.65%)
1,000 ABB Ltd., Bearer........................................................... 1,494,260
4,600 Ciba Specialty Chemicals Ltd., Registered ................................. 588,390
3,100 Novartis Ltd., Registered.................................................. 5,486,258
75 Roche Holding Ltd., Non-voting equity...................................... 811,742
1,000 Swiss Reinsurance Co., Registered *........................................ 2,196,786
---------------
10,577,436
UNITED KINGDOM - (10.60%)
500,000 British Biotech PLC *...................................................... 573,345
50,000 Charter PLC................................................................ 580,041
110,000 Lloyds TSB Group PLC....................................................... 1,712,501
5,573 Royal Bank of Scotland PLC................................................. 86,388
110,000 Standard Chartered PLC..................................................... 1,594,651
---------------
4,546,926
TOTAL COMMON STOCKS (identified cost $34,901,007)................... 40,717,876
---------------
</TABLE>
6
<PAGE>
<TABLE>
DAVIS INTERNATIONAL SERIES, INC.
DAVIS INTERNATIONAL TOTAL RETURN FUND
SCHEDULE OF INVESTMENTS - CONTINUED
At March 31, 1998 (Unaudited)
==============================================================================================================
<CAPTION>
VALUE
SHARES (NOTE 1)
<S> <C> <C>
PREFERRED - (4.17%)
10,000 Nokia Oyj - A.............................................................. $ 1,073,124
3,000,000 Petroleo Brasileiro SA, Pfd................................................ 715,040
---------------
TOTAL PREFERRED (identified cost $1,799,614) 1,788,164
---------------
TOTAL INVESTMENTS (identified cost $36,700,621) -
(99.06%) (a).................................................. $ 42,506,040
OTHER ASSETS LESS LIABILITIES - (0.94%)........................... 403,987
---------------
NET ASSETS - 100%................................................. $ 42,910,027
===============
(a) Aggregate cost for Federal income tax purposes is $36,700,621.
* Non income-producing security.
At March 31, 1998, unrealized appreciation (depreciation) of securities for
Federal income tax purposes was as follows:
Unrealized appreciation............................................... $ 10,234,445
Unrealized depreciation............................................... (4,429,026)
---------------
Net unrealized appreciation......................................... $ 5,805,419
===============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE>
<TABLE>
DAVIS INTERNATIONAL SERIES, INC.
STATEMENT OF ASSETS AND LIABILITIES - At March 31, 1998 (Unaudited)
INTERNATIONAL TOTAL RETURN FUND
==============================================================================================================
<S> <C>
ASSETS:
Investments in securities, at value (identified cost - $36,700,621) (See accompanying
Schedule of Investments)......................................................... $ 42,506,040
Cash................................................................................. 87,598
Receivables:
Dividends........................................................................ 115,324
Capital stock sold............................................................... 104,991
Prepaid expenses..................................................................... 53,980
Due from adviser..................................................................... 117,549
Other assets......................................................................... 23,903
-----------------
Total assets................................................................ 43,009,385
-----------------
LIABILITIES:
Payables:
Capital stock reacquired......................................................... 9,618
Accrued expenses................................................................. 79,119
Other liabilities.................................................................... 10,621
-----------------
Total liabilities........................................................... 99,358
-----------------
NET ASSETS ............................................................................... $ 42,910,027
=================
CLASS A SHARES
Net assets....................................................................... $ 35,429,036
Shares outstanding............................................................... 3,014,550
Net asset value and redemption price per share (net assets/shares outstanding)... $11.75
======
Maximum offering price per share (100/95.25 of $11.75)........................... $12.34
======
CLASS B SHARES
Net assets....................................................................... $ 7,201,584
Shares outstanding............................................................... 628,528
Net asset value and redemption price per share (net assets/shares outstanding)... $11.46
======
CLASS C SHARES
Net assets....................................................................... $ 278,878
Shares outstanding............................................................... 23,846
Net asset value and redemption price per share (net assets/shares outstanding)... $11.69
======
CLASS Y SHARES
Net assets....................................................................... $ 529
Shares outstanding............................................................... 45
Net asset value and redemption price per share (net assets/shares outstanding)... $11.75
======
NET ASSETS CONSIST OF:
Deficit in undistributed net investment income....................................... $ (69,303)
Net unrealized appreciation on investments and translation of assets and
liabilities in foreign currencies................................................ 5,805,419
Accumulated net realized losses from investments and foreign currency transactions... (5,593,500)
Paid-in capital...................................................................... 42,767,411
-----------------
Net assets.................................................................. $ 42,910,027
=================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
<TABLE>
DAVIS INTERNATIONAL SERIES, INC.
STATEMENT OF OPERATIONS - For the six months ended March 31, 1998 (Unaudited)
INTERNATIONAL TOTAL RETURN FUND
==============================================================================================================
<S> <C> <C>
INVESTMENT INCOME:
Income:
Dividends (net of foreign taxes withheld of $22,374)............................. $ 210,069
Interest......................................................................... 62,752
-----------------
Total Income................................................................ 272,821
-----------------
Expenses:
Management fees (Note 3)...................................... $ 199,773
Custodian fees................................................ 33,263
Transfer agent fees
Class A..................................................... 14,039
Class B..................................................... 11,223
Class C..................................................... 272
Class Y..................................................... 0
Audit fees.................................................... 10,013
Legal fees.................................................... 7,525
Accounting fees (Note 3)...................................... 4,002
Reports to shareholders....................................... 15,122
Directors fees and expenses................................... 20,502
Registration and filing fees ................................. 36,578
Miscellaneous................................................. 679
Payments under distribution plan (Note 3)
Class A..................................................... 20,089
Class B..................................................... 33,736
Class C..................................................... 644
---------------
Total expenses.............................................................. 407,460
Reimbursement of expenses by adviser (Note 3).................................... (74,358)
Fee reduction (Note 6)........................................................... (3,462)
-----------------
Net expenses................................................................ 329,640
-----------------
Net investment loss..................................................... (56,819)
-----------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY:
Net realized loss from:
Investment transactions.......................................................... (336,485)
Foreign currency transactions.................................................... (750,400)
Net increase in unrealized appreciation on investments............................... 1,708,926
-----------------
Net realized and unrealized gain on investments and foreign currency........ 622,041
-----------------
Net increase in net assets resulting from operations.................... $ 565,222
=================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
<TABLE>
DAVIS INTERNATIONAL SERIES, INC.
STATEMENT OF CHANGES IN NET ASSETS
INTERNATIONAL TOTAL RETURN FUND
===============================================================================================================
<CAPTION>
SIX
MONTHS ENDED
MARCH 31, YEAR ENDED
1998 SEPTEMBER 30,
(UNAUDITED) 1997
------------- --------------
<S> <C> <C>
OPERATIONS:
Net investment loss............................................ $ (56,819) $ (52,467)
Net realized loss from investments and foreign currency
transactions............................................... (1,086,885) (4,421,463)
Increase in unrealized appreciation on investments and
translation of assets and liabilities in foreign currencies 1,708,926 5,415,882
------------- -------------
Net increase in net assets resulting from
operations............................................ 565,222 941,952
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Realized gains from investment transactions
Class A .................................................. - (3,209,934)
Class B .................................................. - (681,216)
CAPITAL SHARE TRANSACTIONS (NOTE 5)................................. (5,686,201) 1,151,873
------------- -------------
Total decrease in net assets............................... (5,120,979) (1,797,325)
NET ASSETS:
Beginning of period............................................ 48,031,006 49,828,331
------------- -------------
End of period (including deficit in undistributed net investment
income of $69,303 and $12,484, respectively)......... $ 42,910,027 $ 48,031,006
============= =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
NOTES TO FINANCIAL STATEMENTS
At March 31, 1998 (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").
Its primary objective is to achieve total return through capital growth or
income or both. The Fund invests principally in foreign securities. The Fund
offers shares in four classes, Class A, Class B, Class C and Class Y. The Class
A shares are sold with a front-end sales charge, the Class B shares are sold at
net asset value and may be subject to a contingent deferred sales charge upon
redemption and Class C shares are sold at net asset value and may be subject to
a contingent deferred sales charge upon redemption. Class Y shares are sold at
net asset value and are not subject to any contingent deferred sales charge.
Class Y shares are only available to certain qualified investors. Income,
expenses (other than those attributable to a specific class) and gains and
losses are allocated daily to each class of shares based upon the relative
proportion of net assets represented by each class. Operating expenses directly
attributable to a specific class are charged against the operations of that
class. All classes have identical rights with respect to voting (exclusive of
each Class' distribution arrangement), liquidation and distributions. The
following is a summary of significant accounting policies followed by the Fund
in the preparation of its financial statements.
SECURITY VALUATION - Portfolio securities 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 or broker. 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
11
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
At March 31, 1998 (Unaudited)
===============================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
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 the 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.
FEDERAL INCOME TAXES - It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and
to distribute substantially all of its taxable income to shareholders.
Therefore, no provision for federal income or excise tax is required. At March
31, 1998, the Fund had approximately $4,421,000 of capital loss carryovers
available to offset future capital gains, if any, which expire in 2005.
SECURITIES TRANSACTIONS AND RELATED INVESTMENT INCOME - Securities transactions
are accounted for on the trade date (date the order to buy or sell is executed)
with realized gain or loss on the sale of securities being determined based
upon identified cost. Dividend income is recorded on the ex-dividend date and
interest income is recorded on the accrual basis.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS - Dividends and distributions to
shareholders are recorded on the ex-dividend date. The character of the
distributions made during the year from net investment income may differ from
its ultimate characterization for federal income tax purposes. Also, due to the
timing of distributions, the fiscal year in which amounts are distributed may
differ from the fiscal year in which income or gain was recorded by the Fund.
The Fund adjusts the classification of distributions to shareholders to reflect
the differences between financial statement amounts and distributions
determined in accordance with income tax regulations.
USE OF ESTIMATES IN FINANCIAL STATEMENTS - In preparing financial statements in
conformity with generally accepted accounting principles, management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, as well as the reported amounts of income and
expenses during the reporting period. Actual results may differ from these
estimates.
NOTE 2 - PURCHASES AND SALES OF SECURITIES
Purchases and sales of investment securities (excluding short-term
securities) during the six months ended March 31, 1998 were $13,797,043 and
$17,803,849, 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. (the "Adviser"), 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.
The Adviser is paid for registering Fund shares for sale in various
states. The fee for the six months ended March 31, 1998 amounted to $6,000.
Boston Financial Data Services is the Fund's primary transfer
12
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
At March 31, 1998 (Unaudited)
===============================================================================
NOTE 3 - INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES -
(CONTINUED)
agent. The Adviser is also paid for certain transfer agent services. The fee
for these services for the six months ended March 31, 1998 amounted to $4,617.
State Street Bank & Trust Co. is the Fund's primary accounting provider. The
Adviser is also paid for certain accounting services. The fee amounted to
$4,002 for the six months ended March 31, 1998. Certain directors and the
officers of the Fund are also directors and officers of the general partner of
the Adviser.
Davis Selected Advisers-NY, Inc. ("DSA-NY"), a wholly-owned subsidiary
of the Adviser, acts as sub-adviser to the Fund. The Fund pays no fees directly
to DSA-NY.
Atlantic Advisers Limited (the "Sub-Adviser") also 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.
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, 1998, Davis Distributors, LLC, the
Fund's Underwriter (the "Underwriter" or "Distributor") received $77,506 from
commissions earned on sales of Class A shares of the Fund, of which $27,227 was
retained by the underwriter and the remaining $50,279 was reallowed to
investment dealers. The Underwriter paid the costs of prospectuses in excess of
those required to be filed as part of the Fund's registration statement, sales
literature and other expenses assumed or incurred by it in connection with such
sales.
The Underwriter is reimbursed for amounts paid to dealers as a service
fee with respect to Class A shares sold by dealers which remain outstanding
during the period. The service fee is paid at the annual rate of 1/4 of 1% of
the average net assets maintained by the responsible dealers. The Underwriter
is not reimbursed for accounts for which the Underwriter pays no service fees
to other firms. The service fee for Class A shares of the Fund for the six
months ended March 31, 1998 was $20,089.
CLASS B SHARES
Class B shares of the Fund are sold at net asset value and are redeemed
at net asset value less a contingent deferred sales charge if redeemed within
six years of purchase.
The Fund pays a distribution fee to reimburse the Distributor for
commission advances on the sale of the Fund's Class B shares. The National
Association of Securities Dealers, Inc., ("NASD") limits the percentage of the
Fund's average annual net assets attributable to Class B shares which may be
used to reimburse the
13
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
At March 31, 1998 (Unaudited)
===============================================================================
NOTE 4 - DISTRIBUTION AND UNDERWRITING FEES - (CONTINUED)
CLASS B SHARES - (CONTINUED)
Distributor. The limit is1%, 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, 1998, Class B shares of the Fund
made distribution plan payments which included distribution fees of $25,292 and
service fees of $8,444.
Commission advances by the Distributor during the six months ended March
31, 1998 on the sale of Class B shares of the Fund amounted to $10,520, of
which $9,452 was reallowed to qualified selling dealers.
The Distributor intends to seek payment from Class B shares of the Fund
in the amount of $268,565, representing the cumulative commission advances by
the Distributor on the sale of the Fund's Class B shares, plus interest,
reduced by cumulative distribution fees paid by the Fund and cumulative
contingent deferred sales charges paid by redeeming shareholders. The Fund has
no contractual obligation to pay any such distribution charges and the amount,
if any, timing and condition of such payment are solely within the discretion
of the Directors who are not interested persons of the Fund or the Distributor.
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, 1998, the Distributor received contingent deferred sales
charges of $6,900 from redemptions of Class B shares of the Fund.
CLASS C SHARES
Class C shares of the Fund are sold at net asset value and are redeemed
at net asset value less a contingent deferred sales charge of 1% if redeemed
within one year of purchase. The Fund pays the Distributor 1% of the Fund's
average annual net assets attributable to Class C shares, of which 0.75% may be
used to pay distribution expenses and 0.25% may be used to pay shareholder
service fees.
During the six months ended March 31, 1998, Class C shares of the Fund
made distribution payments of $644. During the six months ended March 31, 1998,
the Distributor received $718 in contingent deferred sales charges from Class C
shares of the Fund.
14
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
At March 31, 1998 (Unaudited)
===============================================================================
NOTE 5 - CAPITAL STOCK
At March 31, 1998, there were 5 billion shares of capital stock ($0.001
par value per share) authorized. Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
CLASS A MARCH 31, 1998
(UNAUDITED)
SHARES AMOUNT
-------- ------------
<S> <C> <C>
Shares subscribed.......................................................... 288,036 $ 3,061,471
Shares issued in reinvestment of distributions............................. - -
-------- ------------
288,036 3,061,471
Shares reacquired.......................................................... (766,271) (7,875,646)
Net decrease.......................................................... (478,235) $ (4,814,175)
======== ============
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30, 1997
SHARES AMOUNT
------ ------------
<S> <C> <C>
Shares subscribed.......................................................... 589,427 $ 6,637,805
Shares issued in reinvestment of distributions............................. 296,888 3,129,204
------ ------------
886,315 9,767,009
Shares reacquired.......................................................... (820,492) (9,160,277)
------ ------------
Net increase.......................................................... 65,823 $ 606,732
====== ============
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31, 1998
CLASS B (UNAUDITED)
SHARES AMOUNT
-------- ------------
<S> <C> <C>
Shares subscribed.......................................................... 41,759 $ 444,833
Shares issued in reinvestment of distributions............................. - -
-------- ------------
41,759 444,833
Shares reacquired.......................................................... (151,328) (1,519,749)
-------- ------------
Net decrease.......................................................... (109,569) $(1,074,916)
======== ============
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30, 1997
SHARES AMOUNT
------ -----------
<S> <C> <C>
Shares subscribed.......................................................... 186,153 $ 2,044,442
Shares issued in reinvestment of distributions............................. 62,835 652,856
------ -----------
248,988 2,697,298
Shares reacquired.......................................................... (201,315) (2,213,546)
------- ------------
Net increase.......................................................... 47,673 $ 483,752
======= ============
</TABLE>
15
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
At March 31, 1998 (Unaudited)
===============================================================================
NOTE 5 - CAPITAL STOCK - (CONTINUED)
<TABLE>
<CAPTION>
CLASS C
SIX MONTHS ENDED
MARCH 31, 1998
(UNAUDITED)
SHARES AMOUNT
------ -----------
<S> <C> <C>
Shares subscribed.......................................................... 25,929 $ 282,912
Shares issued in reinvestment of distributions............................. - -
------ -----------
25,929 282,912
Shares reacquired.......................................................... (7,449) (80,522)
------ -----------
Net increase.......................................................... 18,480 $ 202,390
====== ===========
</TABLE>
<TABLE>
<CAPTION>
AUGUST 19, 1997
(COMMENCEMENT
OF OPERATIONS)
THROUGH
SEPTEMBER 30, 1997
SHARES AMOUNT
------ ---------
<S> <C> <C>
Shares subscribed.......................................................... 5,366 $ 61,389
Shares issued in reinvestment of distributions............................. - -
----- ---------
5,366 61,389
Shares reacquired.......................................................... - -
----- ---------
Net increase.......................................................... 5,366 $ 61,389
===== =========
</TABLE>
<TABLE>
<CAPTION>
CLASS Y MARCH 6, 1998
(COMMENCEMENT
OF OPERATIONS)
THROUGH
MARCH 31, 1998
(UNAUDITED)
SHARES AMOUNT
------ -------
<S> <C> <C>
Shares subscribed.......................................................... 45 $ 500
Shares issued in reinvestment of distributions............................. - -
-- -------
45 500
Shares reacquired.......................................................... - -
-- -------
Net increase.......................................................... 45 $ 500
== =======
</TABLE>
NOTE 6 - CUSTODY FEES
Under an agreement with the custodian bank, custody fees are reduced
by credits for cash balances. Such reductions amounted to $3,462 during the six
months ended March 31, 1998.
16
<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, MONTHS ENDED
1998 YEAR ENDED SEPTEMBER 30, SEPTEMBER 30,
(UNAUDITED) 1997 1996 1995
----------- ------- --------- ---------
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.................. $ 11.38 $ 12.12 $ 11.85 $ 10.00
------- ------- --------- ---------
Income From Investment Operations
Net Investment Income .............. - - .03 .05
Net Gains on Securities
(both realized and unrealized)..... .37 .25 .85 1.80
------- ------- --------- ---------
Total From Investment Operations... .37 .25 .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.......... $ 11.75 $ 11.38 $ 12.12 $ 11.85
======= ======= ========= =========
Total Return (1)......................... 3.25% 2.71% 7.87% 18.50%
Ratios/Supplemental Data
Net Assets, End of
Period (000 omitted)............... $ 35,429 $ 39,740 $ 41,545 $ 13,427
Ratio of Expenses
to Average Net Assets............ 1.47%2,3* 1.67%2,3 1.70%2,3 1.72%2*
Ratio of Net Income
to Average Net Assets............. (0.09)%* 0.03% .23% .95%*
Portfolio Turnover Rate(4).......... 35% 97% 78% 85%
Average commission rate per share(5) $ .0121 $ .0066 $ .0050 -
</TABLE>
1 Assumes hypothetical initial investment on the business day before the
first day of the fiscal period (or inception of offering), with all
dividends and distributions reinvested in additional shares on the
reinvestment date, and redemption at the net asset value calculated on the
last business day of the fiscal period. Sales charges are not reflected in
the total returns. Total returns are not annualized for periods of less
than one full year.
2 Had the Adviser not absorbed certain expenses, the ratio of expenses to
average net assets for the six months ended March 31, 1998, the year ended
September 30, 1997, the year ended September 30, 1996 and the eight months
ended September 30, 1995 would have been 1.84%, 1.93%, 2.24% and 2.88%,
respectively.
3 The ratio of expenses to average net assets after the reduction of
custodian fees under a custodian agreement were 1.45%, 1.66% and 1.69% for
the six months ended March 31, 1998, the year ended September 30, 1997 and
the year ended September 30, 1996, respectively. Prior to 1996, such
reductions were reflected in the expense ratios.
4 The lesser of purchases or sales of portfolio securities for a period,
divided by the monthly average of the market value of portfolio securities
owned during the period. Securities with a maturity or expiration date at
the time of acquisition of one year or less are excluded from the
calculation.
5 Total brokerage commissions paid on applicable purchases and sales of
portfolio securities for the period, divided by the total number of
related shares purchased and sold.
* Annualized
17
<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, MONTHS ENDED
1998 YEAR ENDED SEPTEMBER 30, SEPTEMBER 30,
(UNAUDITED) 1997 1996 1995
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.................. $ 11.15 $ 12.00 $ 11.79 $ 10.00
-------- -------- -------- ---------
Income From Investment Operations
Net Investment Income (Loss)......... (.08) (.10) (.03) (.01)
Net Gains on Securities
(both realized and unrealized)..... .39 .24 .82 1.80
-------- -------- -------- ---------
Total From Investment Operations... .31 .14 .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.......... $ 11.46 $ 11.15 $ 12.00 $ 11.79
======== ======== ======== =========
Total Return (1)......................... 2.78% 1.77% 7.10% 17.90%
Ratios/Supplemental Data
Net Assets, End of
Period (000 omitted)............... $ 7,202 $ 8,230 $ 8,283 $ 2,002
Ratio of Expenses
to Average Net Assets............ 2.60%2,3* 2.51%2,3 2.47%2,3 2.46%2*
Ratio of Net Income
to Average Net Assets............. (1.22)%* (0.80)% (.54)% (.09)%*
Portfolio Turnover Rate(4)........... 35% 97% 78% 85%
Average commission rate per share(5). $ .0121 $ .0066 $ .0050 -
</TABLE>
1 Assumes hypothetical initial investment on the business day before the
first day of the fiscal period (or inception of offering), with all
dividends and distributions reinvested in additional shares on the
reinvestment date, and redemption at the net asset value calculated on the
last business day of the fiscal period. Sales charges are not reflected in
the total returns. Total returns are not annualized for periods of less
than one full year.
2 Had the Adviser not absorbed certain expenses, the ratio of expenses to
average net assets for the six months ended March 31, 1998, the year ended
September 30, 1997, the year ended September 30, 1996 and the eight months
ended September 30, 1995 would have been 2.96%, 2.98%, 3.01% and 3.62%,
respectively.
3 The ratio of expenses to average net assets after the reduction of
custodian fees under a custodian agreement were 2.58%, 2.50% and 2.46% for
the six months ended March 31, 1998, the year ended September 30, 1997 and
the year ended September 30, 1996, respectively. Prior to 1996, such
reductions were reflected in the expense ratios.
4 The lesser of purchases or sales of portfolio securities for a period,
divided by the monthly average of the market value of portfolio securities
owned during the period. Securities with a maturity or expiration date at
the time of acquisition of one year or less are excluded from the
calculation.
5 Total brokerage commissions paid on applicable purchases and sales of
portfolio securities for the period, divided by the total number of
related shares purchased and sold.
* Annualized
18
<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 C CLASS Y
AUGUST 19, 1997 MARCH 6, 1998
SIX MONTHS (COMMENCEMENT (COMMENCEMENT ENDEDOF OPERATIONS)
OF OPERATIONS) MARCH 31, THROUGH THROUGH
1998 SEPTEMBER 30, MARCH 31, 1998
(UNAUDITED) 1997 UNAUDITED
----------- -------- ---------
<S> <C> <C> <C>
Net Asset Value,
Beginning of Period..................... $ 11.37 $ 11.50 $ 11.17
-------- -------- --------
Income From Investment Operations
Net Investment Income (Loss)............ - (.02) -
Net Gains (Losses) on Securities
(both realized and unrealized)........ .32 (.11) .58
-------- -------- --------
Total From Investment Operations...... .32 (.13) .58
-------- -------- --------
Less Distributions
Dividends (from net
investment income)................... - - -
Distributions From
Realized Capital Gains............... - - -
-------- -------- --------
Total Distributions.................. - - -
-------- -------- --------
Net Asset Value, End of Period............. $ 11.69 $ 11.37 $ 11.75
======== ======== ========
Total Return (1)............................ 2.81% (1.13)% 5.19%
- -------------
Ratios/Supplemental Data
Net Assets, End of
Period (000 omitted).................. $ 279 $ 61 $ 1
Ratio of Expenses
to Average Net Assets............... 2.69%2,3* 2.62%2,3* 1.25%*
Ratio of Net Income
to Average Net Assets................ (1.31)%* (2.27)%* 0.12%*
Portfolio Turnover Rate(4)............. 35% 97% 35%
Average commission rate per share(5)... $ .0121 $ .0066 $ .0121
</TABLE>
1 Assumes hypothetical initial investment on the business day before the
first day of the fiscal period (or inception of offering), with all
dividends and distributions reinvested in additional shares on the
reinvestment date, and redemption at the net asset value calculated on the
last business day of the fiscal period. Sales charges are not reflected in
the total returns. Total returns are not annualized for periods of less
than one full year.
2 Had the Adviser not absorbed certain expenses, the ratio of expenses to
average net assets for Class C shares for the six months ended March 31,
1998 and the period ended September 30, 1997 would have been 3.06% and
3.14%, respectively.
3 The ratio of expenses to average net assets after the reduction of
custodian fees under a custodian agreement were 2.67% for Class C shares
for the six months ended March 31, 1998.
4 The lesser of purchases or sales of portfolio securities for a period,
divided by the monthly average of the market value of portfolio securities
owned during the period. Securities with a maturity or expiration date at
the time of acquisition of one year or less are excluded from the
calculation.
5 Total brokerage commissions paid on applicable purchases and sales of
portfolio securities for the period, divided by the total number of
related shares purchased and sold.
* Annualized
19
<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
Andrew A. Davis Chairman
Christopher C. Davis Shelby M.C. Davis
G. Bernard Hamilton President
Keith R. Kroeger Kenneth C. Eich
The Very Reverend Vice President
James R. Leo Eileen R. Street
Richard M. Murray Vice President, Treasurer
Theodore B. Smith Jr. & Assistant Secretary
Thomas D. Tays
Vice President & Secretary
Andrew A. Davis
Vice President
Christopher C. Davis
Vice President
Vice President
Sharra L. Reed
Assistant Secretary
& Assistant Treasurer
INVESTMENT ADVISER
Davis Selected Advisers, L.P.
Carolyn H. Spolidoro
124 East Marcy Street
Santa Fe, New Mexico 87501
DISTRIBUTOR
Davis Distributors, LLC
124 East Marcy Street
Santa Fe, New Mexico 87501
TRANSFER AGENT & CUSTODIAN
State Street Bank 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
AUDITORS
KPMG Peat Marwick LLP
707 Seventeenth Street
Suite 2300
Denver, Colorado 80202
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.
20
