DAVIS INTERNATIONAL SERIES, INC.
DAVIS INTERNATIONAL TOTAL RETURN FUND
ANNUAL REPORT
SEPTEMBER 30, 1998
[PICTURE]
[DAVIS FUND LOGO]
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
DAVIS INTERNATIONAL TOTAL RETURN FUND
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501
================================================================================
Dear Shareholder:
The Davis International Total Return Fund is designed for investors seeking a
professionally managed, convenient way to expand their horizons beyond U.S.
borders and take advantage of the greater diversification and growth potential
offered by many non-U.S. companies. Despite a challenging investment environment
over the past year, we are finding attractive values in a number of
international stock markets now.
A New Manager for the Davis International Total Return Fund
Effective October 1, 1998, Jeffrey W. Singer has been appointed portfolio
manager of the Davis International Total Return Fund. From 1992 until joining
the Davis Funds in September, 1998, he worked at Sanford C. Bernstein & Co. as a
senior research analyst and principal responsible for global investment research
covering such industries as food and beverages, pharmaceuticals, broadcasting
and publishing, and health and household products.
Investment Review
For the fiscal year ended September 30, 1998, the Fund generated a decline of
18.63% (on Class A shares at net asset value).(1) This compares with a decline
of 8.08% for the Morgan Stanley Capital International EAFE index over the same
time frame.(2)
During this period, financial markets and currencies have been rocked by turmoil
and lack of confidence, particularly in developing countries. Global risk has
increased markedly, with the financial crisis that began in Asia more than a
year ago spreading to Russia, Eastern Europe and Latin America--leaving Western
Europe and the United States as the only investment arenas that appear to
represent relatively safe havens.
As the Asian flu worsened, the Fund's small exposure to Asia--which accounted
for some 13% of net assets at the end of the first quarter of 1998 --was
eliminated altogether, except for a token position in the Philippines. Holdings
in South America--a major exporter of commodities, including oil--were also
drastically reduced from 8% of net assets at the end of March. By September
30th, all but one position south of the U.S. border had been eliminated--a 1%
stake in Panamerican Beverages Inc. Class A, a Mexico City-based company that
distributes soft drinks in Latin America.(3)
As a result of these changes, at the end of September, more than 96% of your
Fund's net assets were invested in Europe, where the risks appeared meaningfully
lower than in other parts of the world and where valuations seemed less
stretched than in the United States. During the period from the end of March
through September, five European countries were added to the portfolio:(4)
o In Denmark, the Fund made a small investment in Vestas Wind Systems A/S, the
largest wind turbine manufacturer in the world.
o In France, two initial positions were purchased in Cap Gemini SA, which
provides services relating to information technology systems, and in Zodiac SA,
a world leader in manufacturing aeronautical, airline and marine-leisure
equipment.
o In Germany, the Fund made three purchases--in the shares of Bayerische
Vereinsbank (which merged with Bayerische Hypo-Bank to form Bayerische Hypo- und
Vereinsbank), of BHF Bank AG and of Mannesmann AG, a company strongly positioned
to participate in cellular telephone and data transmission growth in Europe.
o In Norway, initial investments were made in Elkjop Norge, a leading retailer
of consumer electronics equipment and kitchen appliances, and Tomra Systems, the
world's largest manufacturer of machines for handling the return of beverage
containers.
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
DAVIS INTERNATIONAL TOTAL RETURN FUND
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501
================================================================================
o In Spain, a position was acquired in Union Electrica Fenosa SA, a coal,
nuclear and hydroelectric power producer.
Investment Outlook
Dramatic shifts in the global financial and economic outlook have resulted in
significant revisions of gross domestic product (GDP) estimates for most parts
of the world. In South and East Asia, where the current financial crisis started
with the devaluation of the Thai baht on July 2, 1997, real GDP growth is likely
to be sharply lower this year and also down again next year in most countries.
China is perhaps the major exception, with estimated growth of some 7%
anticipated in both 1998 and 1999. Latin America also faces significantly slower
growth this year and next. Even in Western Europe, GDP growth figures are likely
to be revised slightly downwards.
Moreover, corporate profit estimates around the world will have to be reduced
further if powerful deflationary forces gain momentum, as many expect. However,
significant declines in interest rates would alleviate deflationary pressures to
some extent and bring some relief to recent financial excesses.
Following the steep correction of European stock exchanges in late September and
early October, we believe European equities should offer attractive investment
opportunities as confidence returns to the markets. The story of consolidations,
divestitures, takeovers and restructurings in Europe is not over yet.
Currencies remain an area of uncertainty. In the Far East, the big question mark
is whether the Chinese currency--the renminbi--will be devalued and, if it is,
whether that will produce a chain reaction resulting in the devaluation of the
Hong Kong dollar and renewed pressure on other currencies in that part of the
world.
In Europe, a key question is whether the Euro is likely to be strong or weak
relative to the U.S. dollar. We believe the Euro will be launched as scheduled
on January 1, 1999--although it is remotely possible that significant currency
turmoil could postpone that event--and we think the Euro initially will be
strong vis-a-vis the U.S. dollar. Over time, however, we expect the pendulum to
swing back and forth between the Euro and the dollar because Europe is an
economic power bloc of about the same size as the United States. In other words,
the U.S. dollar will face real competition from another western world currency
of roughly commensurate economic might. While Europe is a bit less rich in gross
domestic product, its standard of living is slightly behind that of the United
States, which means it will probably have slightly better growth over the coming
decade.
As always, we believe in maintaining a long-term perspective when investing
internationally. While stock prices will fluctuate over the short-term, stocks
have historically provided one of the best opportunities for growth over
time.(5) By investing in high-quality companies around the world, we believe the
Fund provides a sound alternative for investors seeking to diversify portfolios
otherwise concentrated in U.S. equities and build wealth over the long term.
Sincerely,
/s/ Shelby M.C. Davis /s/ Jeffrey Singer
Shelby M.C. Davis Jeffrey Singer
Chief Investment Officer Portfolio Manager
November 4, 1998
2
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
DAVIS INTERNATIONAL TOTAL RETURN FUND
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501
================================================================================
This Annual Report is furnished to you by Davis Distributors, LLC, which acts as
the distributor for Davis International Total Return Fund. This Annual Report is
authorized for distribution only when accompanied or preceded by a current
prospectus of Davis International Total Return Fund which contains more
information about fees and expenses. Please read the prospectus carefully before
investing or sending money.
(1) Average annual total return assumes reinvestment of dividends and capital
gain distributions. Past performance is not a guarantee of future results.
Investment return and principal value will vary so that, when redeemed, an
investor's shares may be worth more or less than when purchased.
* (Without a 4.75% sales charge taken into consideration for the period ended
September 30, 1998)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
FUND NAME 1 YEAR 3 YEAR 5 YEAR 10 YEAR INCEPTION
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Davis International Total Return A (18.63%) (3.39%) N/A N/A 1.82% - 02/01/95
- ------------------------------------------------------------------------------------------------
Davis International Total Return B (19.46%) (4.25%) N/A N/A 0.94% - 02/01/95
- ------------------------------------------------------------------------------------------------
Davis International Total Return C (19.35%) N/A N/A N/A (18.38%) - 08/19/97
- ------------------------------------------------------------------------------------------------
</TABLE>
** (With a 4.75% sales charge or any applicable contingent deferred sales
charge taken into consideration for the period ended September 30, 1998)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
FUND NAME 1 YEAR 3 YEAR 5 YEAR 10 YEAR INCEPTION
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Davis International Total Return A (22.51%) (4.94%) N/A N/A 0.48% - 02/01/95
- ------------------------------------------------------------------------------------------------
Davis International Total Return B (22.68%) (5.08%) N/A N/A 0.46% - 02/01/95
- ------------------------------------------------------------------------------------------------
Davis International Total Return C (20.16%) N/A N/A N/A (18.38%) - 08/19/97
- ------------------------------------------------------------------------------------------------
</TABLE>
(2) 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 a portfolio comprised of
securities included in the index.
(3) The Fund's portfolio securities as of September 30, 1998, including the
securities discussed in this letter, are listed in the Schedule of Investments.
(4) Portfolio holdings are subject to change.
(5) Past performance is not a guarantee of future results.
An investment in the Fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
3
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
DAVIS INTERNATIONAL TOTAL RETURN FUND
Davis International Total Return Fund - Class A shares
Comparison of Davis International Total Return Fund and Europe Australia Far
East Index
================================================================================
Average Annual Total Return For the Periods ended September 30, 1998.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CLASS A SHARES
(This calculation includes an initial sales charge of 4 3/4%).
<S> <C>
One Year ....................................................... (22.51%)
Life of Class (February 1, 1995 through September 30, 1998)..... 0.48%
- --------------------------------------------------------------------------------
</TABLE>
$10,000 invested at inception. Let's say you invested $10,000 in Class A shares
of Davis International Total Return Fund on February 1, 1995 (inception of Fund)
and paid a 4 3/4% sales charge. As the chart shows, by September 30, 1998 the
value of your investment would have grown to $10,175 - a 1.75% increase on your
initial investment. For comparison, the Europe Australia Far East Index is also
presented on the chart below.
[The following table was depicted as a line chart in the printed material.]
<TABLE>
<CAPTION>
Davis International Europe Australia
Total Return Fund Far East
Class A Index
<S> <C> <C>
2/1/95 9,525 10,000
9/30/95 11,286 11,138
9/30/96 12,174 12,134
9/30/97 12,505 13,649
9/30/98 10,175 12,546
</TABLE>
Europe Australia Far East Index is an unmanaged index and has no specific
investment objective. The index used does not take into account any sales
charges and has no expenses.
The performance data for Davis International Total Return Fund contained in this
report represents past performance and assumes that all distributions were
reinvested, and should not be considered as an indication of future performance
from an investment in the Fund today. The investment return and principal value
will fluctuate so that shares may be worth more or less than their original cost
when redeemed.
4
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
DAVIS INTERNATIONAL TOTAL RETURN FUND
Davis International Total Return Fund - Class B shares
Comparison of Davis International Total Return Fund and Europe Australia Far
East Index
================================================================================
Average Annual Total Return For the Periods ended September 30, 1998.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CLASS B SHARES
(This calculation includes any applicable contingent deferred sales charge.)
<S> <C>
One Year......................................................... (22.68%)
Life of Class (February 1, 1995 through September 30, 1998) ..... 0.46%
- --------------------------------------------------------------------------------
</TABLE>
$10,000 invested at inception. Let's say you invested $10,000 in Class B shares
of Davis International Total Return Fund on February 1, 1995 (inception of
Fund). As the chart shows, by September 30, 1998 the value of your investment,
after deducting any applicable contingent deferred sales charge, would have
grown to $10,170 - a 1.70% increase on your initial investment. For comparison,
the Europe Australia Far East Index is also presented on the chart below.
[The following table was depicted as a line chart in the printed material.]
<TABLE>
<CAPTION>
Davis International Europe Australia
Total Return Fund Far East
Class B Index
<S> <C> <C>
2/1/95 10,000 10,000
9/30/95 11,790 11,138
9/30/96 12,627 12,134
9/30/97 12,551 13,649
9/30/98 10,170 12,546
</TABLE>
Europe Australia Far East Index is an unmanaged index and has no specific
investment objective. The index used does not take into account any sales
charges and has no expenses.
The performance data for Davis International Total Return Fund contained in this
report represents past performance and assumes that all distributions were
reinvested, and should not be considered as an indication of future performance
from an investment in the Fund today. The investment return and principal value
will fluctuate so that shares may be worth more or less than their original cost
when redeemed.
5
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
DAVIS INTERNATIONAL TOTAL RETURN FUND
Davis International Total Return Fund- Class C Shares
Comparison of Davis International Total Return Fund and Europe Australia Far
East Index
================================================================================
Average Annual Total Return For the Periods ended September 30, 1998.
- -----------------------------------------------------------------------------
CLASS C SHARES
(This calculation includes any applicable contingent deferred sales charge.)
One Year.......................................................... (20.16%)
Life of Class (August 19, 1997 through September 30, 1998) ....... (18.38%)
- -----------------------------------------------------------------------------
$10,000 invested at inception. Let's say you invested $10,000 in Class C shares
of Davis International Total Return Fund on August 19, 1997 (inception of
class). As the chart shows, by September 30, 1998 the value of your investment
would have been $7,974 - a 20.26% decrease on your initial investment. For
comparison, the Europe Australia Far East Index is also presented on the chart
below.
[The following table was depicted as a line chart in the printed material.]
<TABLE>
<CAPTION>
Davis International Europe Australia
Total Return Fund Far East
Class C Index
<S> <C> <C>
8/19/97 10,000 10,000
9/30/97 9,887 11,249
9/30/98 7,974 10,340
</TABLE>
Europe Australia Far East Index is an unmanaged index and has no specific
investment objective. The index used does not take into account any sales
charges and has no expenses.
The performance data for Davis International Total Return Fund contained in this
report represents past performance and assumes that all distributions were
reinvested, and should not be considered as an indication of future performance
from an investment in the Fund today. The investment return and principal value
will fluctuate so that shares may be worth more or less than their original cost
when redeemed.
6
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
DAVIS INTERNATIONAL TOTAL RETURN FUND
Portfolio Holdings as of September 30, 1998
================================================================================
[The following table was depicted as a pie chart in the printed material.]
<TABLE>
<CAPTION>
Portfolio Makeup % of Fund Net Assets
- --------------------------------------------------------------------------------
<S> <C>
Cash Equivalents, Other Assets & Liabilities 1.3%
Common Stocks 98.7%
</TABLE>
[The following table was depicted as a pie chart in the printed material.]
<TABLE>
<CAPTION>
Sector Weightings % of Portfolio
- --------------------------------------------------------------------------------
<S> <C>
Pharmaceuticals 13.7%
Food/Beverage 6.1%
Consumer Products 8.3%
Insurance 10.2%
Banking 15.4%
Utilities 8.2%
Diversified 8.9%
Industrial Products 1.2%
Telecommunications 17.5%
Other 1.7%
Manufacturing 8.8%
</TABLE>
<TABLE>
<CAPTION>
Top 10 Holdings Sector % of Fund Net Assets
- --------------------------------------------------------------------------------
<S> <C> <C>
Novartis Ltd., Registered Pharmaceuticals 12.32%
Swiss Reinsurance Co., Registered Insurance 6.09%
ENI SpA Utilities 5.64%
Raisio Group PLC Food & Beverage 4.91%
Nokia Oyj - A Telecommunications 4.87%
Xeikon NV, ADR (144A) Manufacturing 4.67%
CRH PLC Diversified 4.31%
Telecom Italia SpA Telecommunications 4.22%
Skandia Forsakrings AB Insurance 3.99%
Unilever NV Consumer Products 3.86%
</TABLE>
8
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
DAVIS INTERNATIONAL TOTAL RETURN FUND
Portfolio Activity -- October 1, 1997 through September 30, 1998
================================================================================
New Positions Added (10/1/97-9/30/98)
(Highlighted positions are those greater than 0.99% of 9/30/98 total net
assets.)
<TABLE>
<CAPTION>
Date of 1st % of 9/30/98
Security Sector Purchase Fund Net Assets
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Advanced Info Service Public Company Ltd. Telecommunications 2/6/98 --
Advanced Info Service Public Company Ltd. Telecommunications 2/6/98 --
Arab Malaysian Corporation Diversified 2/3/98 --
Banco Santander SA Banking 4/20/98 --
Bank of Bermuda Ltd. Banking 7/1/98 1.36%
Bayerische Hyop - und Vereinsbank AG Banking 5/4/98 2.26%
Befesa Medio Ambiente, SA Waste Disposal 6/29/98 --
Benpres Holdings Corp. Multimedia 4/23/98 --
BHF Bank AG Banking 5/4/98 0.99%
Cap Gemini SA Computer Products 9/2/98 0.47%
Castellum AB Real Estate 6/3/98 --
Charter PLC Diversified 3/19/98 --
Cheung Kong (Holdings) Ltd. Real Estate 2/3/98 --
China Telecom (Hong Kong) Ltd. Telecommunications 2/3/98 --
Electrolux AB Manufacturing 8/12/98 1.21%
Elkjop Norge ASA Electronics 4/8/98 0.46%
Empresa Nacional de Electricidad SA, ADR (ENDESA) Utilities 10/24/97 --
Global TeleSystems Group, Inc. Telecommunications 7/21/98 1.03%
Heineken NV Consumer Products 3/23/98 3.70%
ING Groep NV Banking 12/4/97 2.79%
Keppel Bank Ltd. Banking 2/3/98 --
Liu Chong Hing Bank Ltd. Banking 2/9/98 --
Malaysian Assurance Alliance Bhd Insurance 2/6/98 --
Mannesmann AG Manufacturing 6/24/98 2.81%
Merita PLC-A Banking 4/21/98 1.56%
Numico NV Food & Beverage 3/24/98 --
Orange PLC Telecommunications 6/24/98 2.89%
SKF AB Industrial Products 8/24/98 1.14%
Telecom Italia MOB Telecommunications 624/98 3.57%
Tomra Systems ASA Waste Management 4/16/98 0.32%
Unilever NV Consumer Products 11/21/97 3.86%
Union Bank of Hong Kong Banking 3/25/98 --
Union Electrica Fenosa, SA Utilities 7/16/98 1.84%
Vestas Wind Systems A/S Utilities 4/29/98 0.60%
Vodafone Group PLC Telecommunications 9/2/98 0.71%
Winkler & Duennebier AG Machinery 5/13/98 --
Zodiac SA Consumer Products 8/26/98 0.65%
</TABLE>
9
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
DAVIS INTERNATIONAL TOTAL RETURN FUND
Portfolio Activity -- October 1, 1997 through September 30, 1998
================================================================================
Positions Closed (10/1/97-9/30/98) (Gains or losses greater than $250,000 are
highlighted.)
<TABLE>
<CAPTION>
Date of Final
Security Sector Sale Gain/(Loss)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Advanced Info Service Public Company Ltd. Telecommunications 2/13/98 (99,552)
Advanced Info Service Public Company Ltd. Telecommunications 2/13/98 (43,202)
Arab Malaysian Corporation Diversified 2/6/98 288,343
Banco Santander SA Banking 8/26/98 (117,605)
Banco Santander SA Rights (expiring 8/11/98) Banking 8/11/98 6,250
Befesa Medio Ambiente, SA Waste Disposal 7/16/98 7,412
Benpres Holdings Corp. Multimedia 7/23/98 (114,551)
British Biotech PLC Pharmaceuticals 7/14/98 (2,017,219)
Castellum AB Real Estate 7/16/98 4,290
Centrais Electricas Brasileiras SA, ADR Utilities 6/23/98 (69,463)
(ELETROBRAS) Preference B
Centrais Geradoras do Sul do Brasil SA Utilities 7/16/98 (9,105)
Charter PLC Diversified 7/22/98 (104,657)
Cheung Kong (Holdings) Ltd. Real Estate 2/13/98 7,340
China Telecom (Hong Kong) Ltd. Telecommunications 4/23/98 154,817
Davao Union Cement Corp. Building Materials 9/9/98 (1,080,267)
Disco SA, ADR Food & Beverage 12/5/97 124,100
Empresa Nacional de Electricidad SA, ADR (ENDESA) Utilities 4/21/98 (144,172)
Far East Bank & Trust Co., (rights expiring 12/01/97) Banking 12/1/97 (17,299)
Gambro AB Medical Products 8/5/98 50,760
GKN PLC Automotive 2/11/98 29,623
Grupo Casa Autrey SA de CV, ADR Retail 1/7/98 58,266
HKR International Ltd. Real Estate 7/16/98 (823,853)
HSBC Holdings PLC Banking 10/7/97 467,462
Hutchison Whampoa Ltd. Diversified 2/13/98 (234,326)
Incentive AB - A Holding Company 3/11/98 15,570
Incentive AB - B Holding Company 7/1/98 364,894
Keppel Bank Ltd. Banking 7/23/98 (602,439)
LG Electronics Inc. Electronics 10/18/97 (699,852)
Liu Chong Hing Bank Ltd. Banking 5/8/98 34,235
Malaysian Assurance Alliance Bhd Insurance 7/16/98 (659,132)
Numico NV Food & Beverage 7/22/98 (34,027)
Peregrine Derivatives Utilities (warrants expiring Diversified 3/30/98 (674,110)
3/30/98)
Petroleo Brasileiro SA, (Petrobras) Pfd Utilities 8/26/98 (685,459)
PT Unilever Indonesia Consumer Products 11/7/97 (323,070)
Republic Glass Holdings Corp. Manufacturing 8/13/98 (315,866)
Robert Fleming Wrts. Arab Malaysmer (expiring 1/23/98) Banking 1/23/98 (56,922)
Roche Holding Ltd., Non-voting equity Pharmaceuticals 6/24/98 80,330
Royal Bank of Scotland PLC Banking 4/30/98 654,223
Samsung Electronics Co. Ltd. Electronics 10/24/97 (218,090)
Samsung Electronics Co. Ltd., GDR Electronics 10/22/97 (359,394)
Santa Isabel SA, ADR Retail 5/7/98 (460,536)
Sociedad de Fomento Industrial SA de CV, ADR (DESC) Diversified 5/1/98 (310,873)
Telecomunicacoes Brasileiras SA, ADR (TELEBRAS) Telecommunications 6/23/98 58,385
Telefonica de Argentina SA, ADR Telecommunications 2/11/98 53,059
Union Bank of Hong Kong Banking 6/24/98 (222,902)
Winkler & Duennebier AG Machinery 7/15/98 (42,979)
</TABLE>
10
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
DAVIS INTERNATIONAL TOTAL RETURN FUND
Schedule of Investments
At September 30, 1998
================================================================================
<TABLE>
<CAPTION>
Value
Shares (Note 1)
------ --------
<S> <C> <C>
COMMON STOCKS - (98.72%)
BELGIUM - (4.67%)
90,000 Xeikon NV, ADR (144A)(b)*................... $ 1,524,375
---------------
BERMUDA - (1.36%)
15,000 Bank of Bermuda Ltd......................... 442,500
---------------
DENMARK - (0.60%)
5,000 Vestas Wind Systems A/S*.................... 196,835
---------------
FINLAND - (12.73%)
33,000 Asko Oyj.................................... 454,322
100,000 Merita PLC - Class A........................ 509,391
20,000 Nokia Oyj - Class A......................... 1,589,144
110,000 Raisio Group PLC............................ 1,600,944
---------------
4,153,801
FRANCE - (1.12%) ---------------
1,000 Cap Gemini SA............................... 153,220
1,000 Zodiac SA................................... 212,508
---------------
365,728
GERMANY - (6.06%) ---------------
10,000 Bayerische Hypo- und Vereinsbank AG......... 736,549
10,000 BHF-Bank AG................................. 323,363
10,000 Mannesmann AG............................... 916,195
---------------
1,976,107
IRELAND - (4.67%) ---------------
110,909 CRH PLC.................................... 1,404,744
18,000 Ryanair Holdings PLC *...................... 118,364
---------------
1,523,108
ITALY - (13.43%) ---------------
300,000 ENI SpA.................................... 1,839,275
200,000 Telecom Italia MOB.......................... 1,165,601
200,000 Telecom Italia SpA.......................... 1,378,245
---------------
4,383,121
MEXICO - (1.09%) ---------------
20,000 Panamerican Beverages Inc.- Class A......... 356,250
---------------
NETHERLANDS - (10.35%)
25,000 Heineken NV................................. 1,207,954
20,198 ING Groep NV................................ 910,511
20,000 Unilever NV................................. 1,259,458
---------------
3,377,923
---------------
</TABLE>
11
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
DAVIS INTERNATIONAL TOTAL RETURN FUND
Schedule of Investments - Continued
At September 30, 1998
================================================================================
<TABLE>
<CAPTION>
Value
Shares (Note 1)
------ --------
<S> <C> <C>
COMMON STOCKS - CONTINUED
NORWAY - (0.79%)
4,000 Elkjop Norge ASA............................ $ 151,474
5,000 Tomra Systems ASA........................... 105,153
---------------
256,627
PHILIPPINES - (0.09%) ---------------
37,500 Far East Bank & Trust Co.................... 29,571
---------------
SPAIN - (1.84%)
40,000 Union Electrica Fenosa, SA.................. 600,275
---------------
SWEDEN - (5.19%)
30,000 Electrolux AB............................... 394,258
100,000 Skandia Forsakrings AB ..................... 1,301,435
---------------
1,695,693
SWITZERLAND - (23.85%) ---------------
1,000 ABB Ltd., Bearer............................ 1,017,821
4,600 Ciba Specialty Chemicals Ltd., Registered .. 383,222
2,500 Novartis Ltd., Registered................... 4,019,081
30,000 SKF AB Series B............................. 371,292
1,000 Swiss Reinsurance Co., Registered .......... 1,988,554
---------------
7,779,970
UNITED KINGDOM - (9.85%) ---------------
111,439 Lloyds TSB Group PLC........................ 1,248,524
100,000 Orange PLC*................................. 943,555
111,648 Standard Chartered PLC...................... 787,723
20,000 Vodafone Group PLC.......................... 232,233
---------------
3,212,035
UNITED STATES OF AMERICA - (1.03%) ---------------
10,000 Global TeleSystems Group, Inc.*............. 336,875
---------------
TOTAL COMMON STOCKS (identified cost
$28,652,155)........................ 32,210,794
---------------
</TABLE>
12
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
DAVIS INTERNATIONAL TOTAL RETURN FUND
Schedule of Investments - Continued
At September 30, 1998
================================================================================
<TABLE>
<CAPTION>
Value
Principal (Note 1)
- --------- --------
<S> <C> <C>
SHORT TERM - (1.55%)
$ 506,000 State Street Corporation Repurchase
Agreement, 5.35%, 10/02/98 dated 09/30/98,
repurchase value of $506,150
(collateralized by $505,000 par value U.S.
Treasury Notes, 7.025%, 10/22/07, market
value $521,197) - (identified cost $506,000).. $ 506,000
-----------
TOTAL INVESTMENTS (identified cost
$29,158,155) - (100.27%) (a)........... 32,716,794
LIABILITIES LESS OTHER ASSETS - (0.27%)..... (89,732)
-----------
NET ASSETS - 100%........................... $32,627,062
===========
</TABLE>
(a) Aggregate cost for Federal income tax purposes is $29,158,155.
(b) 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 current valuations. This security amounted to $1,524,375 and 4.67%
of the Fund's net assets as of September 30, 1998.
* Non income-producing security.
At September 30, 1998, unrealized appreciation (depreciation) of securities for
Federal income tax purposes was as follows:
<TABLE>
<S> <C>
Unrealized appreciation......................... $ 5,504,093
Unrealized depreciation......................... (1,945,454)
-----------
Net unrealized appreciation................... $ 3,558,639
===========
</TABLE>
See Notes to Financial Statements
13
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
DAVIS INTERNATIONAL TOTAL RETURN FUND
STATEMENT OF ASSETS AND LIABILITIES - At September 30, 1998
================================================================================
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments in securities, at value (identified cost - $29,158,155)
(See accompanying Schedule of Investments) ........................................ $ 32,716,794
Cash .................................................................................. 54,529
Receivables:
Dividends and interest ............................................................ 55,737
Capital stock sold ................................................................ 7,427
From adviser ...................................................................... 209,054
Prepaid expenses ...................................................................... 31,234
Other assets .......................................................................... 30,579
------------
Total assets ................................................................. 33,105,354
------------
LIABILITIES:
Payables:
Investment securities purchased ................................................... 378,721
Capital stock redeemed ............................................................ 16,074
Accrued expenses ...................................................................... 79,077
Other liabilities ..................................................................... 4,420
------------
Total liabilities ............................................................ 478,292
------------
NET ASSETS ................................................................................. $ 32,627,062
============
CLASS A SHARES
Net assets ........................................................................ $ 26,921,170
Shares outstanding ................................................................ 2,908,278
Net asset value and redemption price per share .................................... $ 9.26
============
Maximum offering price per share (100/95.25 of $9.26) ............................. $ 9.72
============
CLASS B SHARES
Net assets ........................................................................ $ 5,449,820
Shares outstanding ................................................................ 607,107
Net asset value and redemption price per share .................................... $ 8.98
============
CLASS C SHARES
Net assets ........................................................................ $ 256,072
Shares outstanding ................................................................ 27,913
Net asset value and redemption price per share .................................... $ 9.17
============
Net assets consist of:
Par value of shares of capital stock .................................................. $ 3,543
Additional paid-in capital ............................................................ 41,460,315
Net unrealized appreciation on investments and translation of assets and
liabilities in foreign currencies ................................................. 3,558,639
Accumulated net realized losses from investments and foreign currency transactions .... (12,395,435)
------------
Net assets ................................................................... $ 32,627,062
============
</TABLE>
See Notes to Financial Statements.
14
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
DAVIS INTERNATIONAL TOTAL RETURN FUND
STATEMENT OF OPERATIONS - For the year ended September 30, 1998
================================================================================
<TABLE>
<S> <C> <C>
Investment Income (Loss):
Income:
Dividends (net of foreign taxes withheld of $81,612) ....................... $ 590,454
Interest ................................................................... 45,346
-----------
Total income .......................................................... 635,800
-----------
Expenses:
Management fees (Note 3) ..................................... $ 401,648
Custodian fees ............................................... 67,124
Transfer agent fees
Class A .................................................... 30,821
Class B .................................................... 25,801
Class C .................................................... 1,007
Audit fees ................................................... 20,013
Legal fees ................................................... 13,956
Accounting fees (Note 3) ..................................... 8,004
Reports to shareholders ...................................... 39,381
Directors' fees and expenses ................................. 40,740
Registration and filing fees ................................. 62,679
Miscellaneous ................................................ 1,858
Payments under distribution plan (Note 3)
Class A .................................................... 46,112
Class B .................................................... 67,266
Class C .................................................... 1,804
-----------
Total expenses ........................................................ 828,214
Reimbursement of expenses by adviser (Note 3) .............................. (165,863)
Expenses paid indirectly (Note 6) .......................................... (1,009)
-----------
Net expenses .......................................................... 661,342
-----------
Net investment loss ............................................... (25,542)
-----------
Realized and Unrealized Loss on Investments and Foreign Currency:
Net realized loss from:
Investment transactions .................................................... (6,302,911)
Foreign currency transactions .............................................. (1,585,908)
Net decrease in unrealized appreciation of investments ......................... (537,854)
-----------
Net realized and unrealized loss on investments and foreign currency .. (8,426,673)
-----------
Net decrease in net assets resulting from operations .............. $(8,452,215)
===========
</TABLE>
See Notes to Financial Statements.
15
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
DAVIS INTERNATIONAL TOTAL RETURN FUND
STATEMENT OF CHANGES IN NET ASSETS
================================================================================
<TABLE>
<CAPTION>
Year Ended Year Ended
September 30, September 30,
1998 1997
------------ ------------
<S> <C> <C>
OPERATIONS:
Net investment loss ................................................ $ (25,542) $ (52,467)
Net realized loss from investments and foreign currency
transactions ................................................... (7,888,819) (4,421,463)
Increase (decrease) in unrealized appreciation on investments and
translation of assets and liabilities in foreign currencies .... (537,854) 5,415,882
------------ ------------
Net increase (decrease) in net assets resulting from
operations ................................................ (8,452,215) 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) ..................................... (6,951,729) 1,151,873
------------ ------------
Total decrease in net assets ................................... (15,403,944) (1,797,325)
NET ASSETS:
Beginning of period ................................................ 48,031,006 49,828,331
------------ ------------
End of period ...................................................... $ 32,627,062 $ 48,031,006
============ ============
</TABLE>
See Notes to Financial Statements
16
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
DAVIS INTERNATIONAL TOTAL RETURN FUND
NOTES TO FINANCIAL STATEMENTS
At September 30, 1998
================================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Davis International Series, Inc. (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 fund, Davis
International Total Return Fund (the "Fund") whose 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 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 at current exchange
rates computed by State Street Bank & Trust Company ("State Street Bank"), 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
17
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
DAVIS INTERNATIONAL TOTAL RETURN FUND
NOTES TO FINANCIAL STATEMENTS - (Continued)
At September 30, 1998
================================================================================
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 counter-party 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 September 30,
1998, the Fund had approximately $4,230,000 of capital loss carryovers available
to offset future capital gains, if any, of which $2,867,000 and $1,363,000
expire in 2005 and 2006, respectively.
Securities Transactions and Related Investment Income - Securities transactions
are accounted for on the trade date (date the order to buy or sell is executed)
with realized gain or loss on the sale of securities being determined based upon
identified cost. Dividend income is recorded on the ex-dividend date and
interest income is recorded on the accrual basis.
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 or net realized
gains may differ from its ultimate characterization for federal income tax
purposes. Also, due to the timing of distributions, the fiscal year in which
amounts are distributed may differ from the fiscal year in which income or gain
was recorded by the Fund. The Fund adjusts the classification of distributions
to shareholders to reflect the differences between financial statement amounts
and distributions determined in accordance with income tax regulations.
Accordingly, during the year ended September 30, 1998, amounts have been
reclassified to reflect a decrease in accumulated net investment loss of $38,026
and a corresponding decrease in additional paid-in capital.
Use of Estimates in Financial Statements - In preparing financial statements in
conformity with generally accepted accounting principles, management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, as well as the reported amounts of income and expenses
during the reporting period. Actual results may differ from these estimates.
NOTE 2 - PURCHASES AND SALES OF SECURITIES
Purchases and sales of investment securities (excluding short-term
securities) during the year ended September 30, 1998 were $24,691,860 and
$30,027,670, respectively.
NOTE 3 - INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Advisory fees are paid monthly to 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 annual net assets, and 0.80%
of average annual net assets in excess of $500 million.
18
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
DAVIS INTERNATIONAL TOTAL RETURN FUND
NOTES TO FINANCIAL STATEMENTS - (Continued)
At September 30, 1998
================================================================================
NOTE 3 - INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES -
(Continued)
The Adviser is paid for registering Fund shares for sale in various
states. The fee for the year ended September 30, 1998 amounted to $12,000.
Boston Financial Data Services is the Fund's primary transfer agent. The Adviser
is also paid for certain transfer agent services. The fee for these services
paid to the Adviser for the year ended September 30, 1998 amounted to $7,890.
State Street Bank is the Fund's primary accounting provider, fees for such
services are included in the custodian fee. The Adviser is also paid for certain
accounting services. Such fee amounted to $8,004 for the year ended September
30, 1998. The Adviser has agreed to reimburse the Fund for certain expenses
which amounted to $165,863. 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.
NOTE 4 - DISTRIBUTION AND UNDERWRITING FEES
CLASS A SHARES
Class A shares of the Fund are sold at net asset value plus a sales charge
and are redeemed at net asset value (without a contingent deferred sales
charge).
During the year ended September 30, 1998, Davis Distributors, LLC, the
Fund's Underwriter (the "Underwriter" or "Distributor") received $50,573 from
commissions earned on sales of Class A shares of the Fund, of which $8,102 was
retained by the underwriter and the remaining $42,471 was re-allowed to
investment dealers. The Underwriter paid the costs of prospectuses in excess of
those required to be filed as part of the Fund's registration statement, sales
literature and other expenses assumed or incurred by it in connection with such
sales.
The Underwriter is reimbursed for amounts paid to dealers as a service fee
with respect to Class A shares sold by dealers which remain outstanding during
the period. The service fee is paid at the annual rate of 1/4 of 1% of the
average net assets maintained by the responsible dealers. The Underwriter is not
reimbursed for accounts for which the Underwriter pays no service fees to other
firms. The service fee for Class A shares of the Fund for the year ended
September 30, 1998 was $46,112.
CLASS B SHARES
Class B shares of the Fund are sold at net asset value and are redeemed at
net asset value less a contingent deferred sales charge if redeemed within six
years of purchase.
The Fund pays a distribution fee to reimburse the Distributor for
commission advances on the sale of the Fund's Class B shares. The National
Association of Securities Dealers, Inc., ("NASD") limits the percentage of the
Fund's average annual net assets attributable to Class B shares which may be
used to reimburse the Distributor. The limit 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.
19
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
DAVIS INTERNATIONAL TOTAL RETURN FUND
NOTES TO FINANCIAL STATEMENTS - (Continued)
At September 30, 1998
================================================================================
NOTE 4 - DISTRIBUTION AND UNDERWRITING FEES - (Continued)
CLASS B SHARES - (Continued)
During the year ended September 30, 1998, Class B shares of the Fund made
distribution plan payments which included distribution fees of $50,502 and
service fees of $16,764.
Commission advances by the Distributor during the year ended September 30,
1998 on the sale of Class B shares of the Fund amounted to $25,950, of which
$24,930 was re-allowed to qualified selling dealers.
The Distributor intends to seek payment from Class B shares of the Fund in
the amount of $268,739, 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 year ended
September 30, 1998, the Distributor received contingent deferred sales charges
of $9,969 from redemptions of Class B shares of the Fund.
CLASS C SHARES
Class C shares of the Fund are sold at net asset value and are redeemed at
net asset value less a contingent deferred sales charge of 1% if redeemed within
one year of purchase. The Fund pays the Distributor 1% of the Fund's average
annual net assets attributable to Class C shares, of which 0.75% may be used to
pay distribution expenses and 0.25% may be used to pay shareholder service fees.
During the year ended September 30, 1998, Class C shares of the Fund made
distribution payments of $1,804. During the year ended September 30, 1998, the
Distributor received $1,044 in contingent deferred sales charges from Class C
shares of the Fund.
20
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
DAVIS INTERNATIONAL TOTAL RETURN FUND
NOTES TO FINANCIAL STATEMENTS - (Continued)
At September 30, 1998
================================================================================
NOTE 5 - CAPITAL STOCK
At September 30, 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>
Class A Year Ended
September 30, 1998
------------------
Shares Amount
------ ------
<S> <C> <C>
Shares subscribed ........................... 506,499 $ 5,578,928
Shares redeemed ............................. (1,091,006) (11,481,063)
------------ ------------
Net decrease ........................... (584,507) $ (5,902,135)
============ ============
<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 redeemed ............................. (820,492) (9,160,277)
------------ ------------
Net increase ........................... 65,823 $ 606,732
============ ============
<CAPTION>
Year Ended
Class B September 30, 1998
------------------
Shares Amount
------ ------
<S> <C> <C>
Shares subscribed ........................... 107,968 $ 1,158,196
Shares redeemed ............................. (238,958) (2,439,854)
------------ ------------
Net decrease ........................... (130,990) $ (1,281,658)
============ ============
<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 redeemed ............................. (201,315) (2,213,546)
------------ ------------
Net increase ........................... 47,673 $ 483,752
============ ============
</TABLE>
21
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
DAVIS INTERNATIONAL TOTAL RETURN FUND
NOTES TO FINANCIAL STATEMENTS - (Continued)
At September 30, 1998
================================================================================
NOTE 5 - CAPITAL STOCK - (Continued)
<TABLE>
<CAPTION>
Class C
Year Ended
September 30, 1998
------------------
Shares Amount
------ ------
<S> <C> <C>
Shares subscribed ........................... 41,210 $ 439,030
Shares redeemed ............................. (18,663) (206,966)
------------ ------------
Net increase ........................... 22,547 $ 232,064
============ ============
<CAPTION>
August 19, 1997
(Inception of Class)
through
September 30, 1997
------------------
Shares Amount
------ ------
Shares subscribed ........................... 5,366 $ 61,389
Shares redeemed ............................. -- --
------------ ------------
Net increase ........................... 5,366 $ 61,389
============ ============
</TABLE>
NOTE 6 - CUSTODIAN FEES
Under an agreement with the custodian bank, custody fees are reduced for
earnings on cash balances maintained at the custodian by the Fund. Such
reductions amounted to $1,009 during the year ended September 30, 1998.
22
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
DAVIS INTERNATIONAL TOTAL RETURN FUND
FINANCIAL HIGHLIGHTS
================================================================================
The following represents financial highlights for a share of capital stock
outstanding throughout each period.
CLASS A
<TABLE>
<CAPTION>
Eight
Year Ended September 30, Months ended
------------------------------------------- September 30,
1998 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 ................. -- -- 0.03 0.05
Net Realized and Unrealized
Gains and Losses ..................... (2.12) 0.25 0.85 1.80
---------- ---------- ---------- ----------
Total From Investment Operations ..... (2.12) 0.25 0.88 1.85
---------- ---------- ---------- ----------
Dividends and Distributions
Dividends from Net
Investment Income ................... -- -- (0.03) --
Distributions from Realized Gains ...... -- (0.99) (0.58) --
---------- ---------- ---------- ----------
Total Dividends and Distributions .... -- (0.99) (0.61) --
---------- ---------- ---------- ----------
Net Asset Value, End of Period ............ $ 9.26 $ 11.38 $ 12.12 $ 11.85
========== ========== ========== ==========
Total Return(1)............................. (18.63)% 2.71% 7.87% 18.50%
Ratios/Supplemental Data
Net Assets, End of
Period (000 omitted) ................. $ 26,921 $ 39,740 $ 41,545 $ 13,427
Ratio of Expenses
to Average Net Assets .............. 1.45%(2) 1.67%(2,3) 1.70%(2,3) 1.72%(2)*
Ratio of Net Investment Income
to Average Net Assets ............... 0.13% 0.03% 0.23% 0.95%*
Portfolio Turnover Rate(4) ............. 63% 97% 78% 85%
</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 years ended September 30, 1998, September 30,
1997, September 30, 1996 and the eight months ended September 30, 1995
would have been 1.86%, 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 1.66% and 1.69% for the
years ended September 30, 1997 and 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.
* Annualized
23
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
DAVIS INTERNATIONAL TOTAL RETURN FUND
FINANCIAL HIGHLIGHTS
================================================================================
The following represents financial highlights for a share of capital stock
outstanding throughout each period.
CLASS B
<TABLE>
<CAPTION>
Eight
Year Ended September 30, Months ended
--------------------------------------------- September 30,
1998 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 Loss ................. -- (0.10) (0.03) (0.01)
Net Realized and Unrealized
Gains and Losses .................. (2.17) 0.24 0.82 1.80
--------- --------- --------- ---------
Total From Investment Operations .. (2.17) 0.14 0.79 1.79
--------- --------- --------- ---------
Dividends and Distributions
Dividends from Net
Investment Income ................ -- -- -- --
Distributions from Realized Gains ... -- (0.99) (0.58) --
--------- --------- --------- ---------
Total Dividends and Distributions -- (0.99) (0.58) --
--------- --------- --------- ---------
Net Asset Value, End of Period ......... $ 8.98 $ 11.15 $ 12.00 $ 11.79
========= ========= ========= =========
Total Return(1) ......................... (19.46)% 1.77% 7.10% 17.90%
Ratios/Supplemental Data
Net Assets, End of
Period (000 omitted) .............. $ 5,450 $ 8,230 $ 8,283 $ 2,002
Ratio of Expenses
to Average Net Assets ........... 2.60%(2) 2.51%(2,3) 2.47%(2,3) 2.46%(2)*
Ratio of Net Investment Income
to Average Net Assets ............ (1.02)% (0.80)% (0.54)% (0.09)%*
Portfolio Turnover Rate(4) .......... 63% 97% 78% 85%
</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 years ended September 30, 1998, September 30,
1997, September 30, 1996 and the eight months ended September 30, 1995
would have been 3.01%, 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 2.50% and 2.46% for the
years ended September 30, 1997 and 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.
* Annualized
24
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
DAVIS INTERNATIONAL TOTAL RETURN FUND
FINANCIAL HIGHLIGHTS
================================================================================
The following represents financial highlights for a share of capital stock
outstanding throughout each period.
<TABLE>
<CAPTION>
CLASS C
August 19, 1997
(Inception
Year of Class)
ended through
September 30, September 30,
1998 1997
---- ----
<S> <C> <C>
Net Asset Value,
Beginning of Period ................. $ 11.37 $ 11.50
------- -------
Income From Investment Operations
Net Investment Loss ................. -- (0.02)
Net Realized and Unrealized Losses .. (2.20) (0.11)
------- -------
Total From Investment Operations .. (2.20) (0.13)
------- -------
Net Asset Value, End of Period ......... $ 9.17 $ 11.37
======= =======
Total Return(1) ......................... (19.35)% (1.13)%
Ratios/Supplemental Data
Net Assets, End of
Period (000 omitted) .............. $ 256 $ 61
Ratio of Expenses
to Average Net Assets ........... 2.78%(2)(3) 2.62%(2)*
Ratio of Net Investment Income
to Average Net Assets ............ (1.19)% (2.27)%*
Portfolio Turnover Rate(4) ......... 63% 97%
</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 year ended September 30, 1998 and the period
ended September 30, 1997 would have been 3.19% and 3.14%, respectively.
(3) The ratio of expenses to average net assets after the reduction of
custodian fees under a custodian agreement were 2.77% for the year ended
September 30, 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.
* Annualized
25
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
DAVIS INTERNATIONAL TOTAL RETURN FUND
Independent Auditors' Report
================================================================================
To the Shareholders and Board of Directors
of Davis International Total Return Fund
We have audited the accompanying statement of assets and liabilities of
Davis International Total Return Fund (a fund of Davis International Series,
Inc.) including the schedule of investments, as of September 30, 1998, and the
related statement of operations, the statement of changes in net assets, and the
financial highlights for the year then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audit. The statement of changes in net assets
for the year ended September 30, 1997 and the financial highlights for each of
the years in the two-year period ended September 30, 1997 and for the eight
months ended September 30, 1995, were audited by other auditors whose report,
dated November 11, 1997, expressed an unqualified opinion on this information.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
September 30, 1998, by correspondence with the custodian and brokers; and where
confirmations were not received from brokers, we performed other auditing
procedures. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Davis International Total Return Fund as of September 30, 1998, and the results
of its operations, the changes in its net assets, and the financial highlights
for the year then ended, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Denver, Colorado
November 4, 1998
26
<PAGE>
DAVIS INTERNATIONAL SERIES, INC.
DAVIS INTERNATIONAL TOTAL RETURN FUND
124 East Marcy Street, P.O. Box 1688, Santa Fe, New Mexico 87501
================================================================================
Directors Officers
Jeremy H. Biggs Jeremy H. Biggs
Christopher C. Davis Chairman
G. Bernard Hamilton Shelby M.C. Davis
Keith R. Kroeger President
The Very Reverend Kenneth C. Eich
James R. Leo Vice President
Richard M. Murray Sharra L. Reed
Theodore B. Smith Jr. Vice President, Treasurer
& Assistant Secretary
Thomas D. Tays
Vice President & Secretary
Andrew A. Davis
Investment Adviser Vice President
Christopher C. Davis
Davis Selected Advisers, L.P. Vice President
124 East Marcy Street Carolyn H. Spolidoro
Santa Fe, New Mexico 87501 Vice President
1-800-279-0279
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.
- --------------------------------------------------------------------------------
27
