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March 12, 1996
File No. 33-23184
File No. 811-5580
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. __ [_]
Post-Effective Amendment No. 8 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 10 [X]
DODGE & COX INCOME FUND
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(exact name of registrant as specified in charter)
ONE SANSOME STREET, 35TH FLOOR, SAN FRANCISCO, CA 94104
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(Address of Principal Executive Offices) (Zip Code)
(415) 981-1710
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(Registrant's Telephone Number, including Area Code)
MITCHELL E. NICHTER, ESQ.,
HELLER, EHRMAN, WHITE AND MCAULIFFE,
333 BUSH STREET
SAN FRANCISCO, CA 94104
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(Name and Address of Agent for Service)
Approximate date of proposed public offering: March 13, 1996
--------------
It is proposed that this filing will become effective:
___ immediately upon filing pursuant to paragraph (b)
x on March 13, 1996 pursuant to paragraph (b)
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___ 60 days after filing pursuant to paragraph (a)(1)
___ on ________ pursuant to paragraph (a)(1)
___ 75 days after filing pursuant to paragraph(a)(2)
___ on _______________ pursuant to paragraph (a)(2) of Rule 485
CALCULATION OF REGISTRATION OF FEES UNDER THE SECURITIES ACT OF 1933
====================================================================
An indefinite number of shares are being registered by this registration
statement pursuant to Rule 24f-2 of the Investment Company Act of 1940.
The registrant filed its required 24f-2 Notice for the fiscal year ended
December 31, 1995 on February 27, 1996. A Rule 24f-2 Notice for the fiscal
year ending December 31, 1996 will be filed on or before February 28, 1997.
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DODGE & COX INCOME FUND
CROSS REFERENCE SHEET
PART A
(Prepared as part of Form N-1A)
<TABLE>
<CAPTION>
Item Number in Form N-1A Prospectus
Registration Statement Caption in Prospectus Page
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<S> <C> <C>
1 (Cover Page) Cover
2 Expense Information 1
3 Financial Highlights 2
4 Capital Stock and
Organization 13
Investment Objectives and Policies 2
Investment Restrictions 4
Investment Risks 4
5 Management and Investment
Adviser 12
Custodian and Transfer
Agent 14
Management Fee and
Other Expenses 13
6 Capital Stock and
Organization 13
Shareholder Inquiries 14
Income Dividends and
Capital Gains Distributions 7
Reinvestment Plan 11
Federal Income Taxes 13
7 How to Purchase Shares 8
Pricing of Shares 11
Shareholder Services 11
8 How to Redeem Shares 9
9 (None-Not Applicable)
</TABLE>
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DODGE & COX INCOME FUND
CROSS REFERENCE SHEET
PART B
(Prepared as part of Form N-1A)
<TABLE>
<CAPTION>
Additional
Item Number in Form N-1A Caption in Statement of Information
Registration Statement Additional Information Page
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<S> <C> <C>
10 (Cover Page) 1
11 Table of Contents 1
12 (None-Not Applicable)
13 Investment Objectives and Policies 2
Investment Restrictions 2
Investments and Investment Techniques 4
14 Officers and Directors 7
15 Officers and Directors 8
16 Investment Adviser 8
Custodian (Page 14 of Prospectus)
Independent Accountants 9
17 Portfolio Transactions 9
18 (None-See Prospectus)
19 Purchase, Redemption and
Pricing of Shares 7
20 Additional Tax Considerations 9
21 (None-Not Applicable)
22 Performance Information 6
23 (See Cover Page)
(Annual Report incorporated by
reference. See Part C)
</TABLE>
<PAGE>
DODGE & COX INCOME FUND
PART A
Prospectus
<PAGE>
DODGE & COX
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Income Fund
PROSPECTUS
MARCH 13, 1996
DODGE & COX INCOME FUND
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Dodge & Cox Income Fund (the "Fund") is a no-load mutual fund with the primary
objective of providing shareholders with a high and stable rate of current
income, consistent with long-term preservation of capital. A secondary objective
is to take advantage of opportunities to realize capital appreciation. The Fund
seeks to achieve these objectives by investing in a diversified portfolio
consisting primarily of high-quality bonds and other fixed-income securities.
Shares of the Fund are purchased and redeemed at net asset value. There are no
sales, redemption or Rule 12b-1 plan distribution charges.
This prospectus sets forth concisely the information a prospective investor
should know about the Fund before investing. It should be retained for future
reference. A Statement of Additional Information about the Fund, which is
incorporated by reference in this prospectus, has been filed with the Securities
and Exchange Commission. It is available at no charge by writing or calling the
Fund. The date of the Statement of Additional Information is the same as the
date of this prospectus.
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TABLE OF CONTENTS
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<TABLE>
<S> <C> <C> <C>
Introduction...........................1 Telephone Transactions.................10
Expense Information....................1 Transfer of Shares.....................11
Financial Highlights...................2 Pricing of Shares......................11
Investment Objectives and Policies.....2 Shareholder Services...................11
Investment Restrictions................4 Performance Information................12
Investment Risks.......................4 Management and Investment Adviser......12
Additional Information on Investments..5 Management Fee and Other Expenses......13
Income Dividends and Capital Capital Stock and Organization.........13
Gains Distributions................7 Federal Income Taxes...................13
How to Purchase Shares.................8 Custodian and Transfer Agent...........14
How to Redeem Shares...................9 Reports to Shareholders................14
Exchanging Shares.....................10 Shareholder Inquiries..................14
</TABLE>
DODGE & COX INCOME FUND
c/o Firstar Trust Company
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
Telephone (800) 621-3979
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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DODGE & COX
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Income Fund
INTRODUCTION
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Dodge & Cox Income Fund operates as an open-end diversified management
investment company which continuously offers its shares to the public. A unique
feature of the Dodge & Cox Income Fund and other "no-load" funds is that shares
are sold without sales charge, while many investment companies sell their shares
with a varying sales charge. Shares may be redeemed at net asset value at no
charge.
Dodge & Cox Income Fund enables investors to obtain the benefits of experienced
and continuous investment supervision. Investors in the Fund acquire a
diversified bond portfolio ordinarily limited to large investment accounts. The
Fund is designed to meet the needs of retirement plans, charities, endowments,
individuals, trustees, guardians and others who have funds available for long-
term investment in fixed-income securities.
In using the Fund, shareholders avoid the time-consuming details involved in
buying and selling individual securities. Use of the Fund also reduces the
amount of record keeping for tax purposes and simplifies the collection of
investment income and the safe-keeping of individual securities.
Dodge & Cox (a corporation) acts as the Fund's manager (the "Manager"). Dodge &
Cox is a well-known investment management firm which has furnished investment
management services since 1930.
EXPENSE INFORMATION
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SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases........................................ None
Sales Load Imposed on Reinvested Distributions......................... None
Deferred Sales Load.................................................... None
Redemption Fees........................................................ None
Exchange Fee........................................................... None
ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets)
Management Fees........................................................ .44%
12b-1 Fees............................................................. None
Other Expenses......................................................... .10%
----
Total Fund Operating Expenses.......................................... .54%
EXAMPLE: A shareholder would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2) redemption at the end of
each time period:
Time period 1 Year 3 Years 5 Years 10 Years
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Expenses $6 $17 $30 $68
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of the above expense information is to assist an investor in
understanding the various costs and expenses that an investor in the Fund will
bear directly or indirectly. Expense figures are based on amounts incurred
during the year 1995 (See "Management Fee and Other Expenses", page 13). Wire
redemptions are subject to a $10 charge which is not reflected in the above
example.
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DODGE & COX
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Income Fund
FINANCIAL HIGHLIGHTS
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SELECTED DATA AND RATIOS (for a share outstanding throughout each year)
The following table of financial highlights, insofar as it relates to each of
the five years in the period ended December 31, 1995, has been audited by Price
Waterhouse LLP, independent accountants, whose report thereon appears in the
Fund's Annual Report to Shareholders for the year ended December 31, 1995.
<TABLE>
<CAPTION>
Year Ended December 31,
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1995 1994 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR......................... $10.74 $11.89 $11.55 $11.59 $10.61 $10.68 $10.00
Income from investment operations:
Net investment income...................................... .78 .77 .78 .82 .81 .82 .69
Net realized and unrealized gain (loss) on investments..... 1.34 (1.11) .51 .05 1.02 (.07) .69
------ ------ ------ ------ ------ ------ ------
Total income (loss) from investment operations............. 2.12 (.34) 1.29 .87 1.83 .75 1.38
------ ------ ------ ------ ------ ------ ------
Distributions:
Dividends from net investment income....................... (.78) (.76) (.78) (.82) (.82) (.81) (.69)
Distributions from net realized gain on investments........ (.06) (.05) (.17) (.09) (.03) (.01) (.01)
------ ------ ------ ------ ------ ------ ------
Total distributions........................................ (.84) (.81) (.95) (.91) (.85) (.82) (.70)
------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF YEAR............................... $12.02 $10.74 $11.89 $11.55 $11.59 $10.61 $10.68
====== ====== ====== ====== ====== ====== ======
TOTAL RETURN...............................................% 20.21 (2.89) 11.34 7.80 17.94 7.41 14.09
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (millions)......................... $ 303 $ 195 $ 180 $ 136 $ 96 $ 52 $ 33
Ratio of expenses to average net assets....................% .54 .54 .60 .62 .64 .69 .66
Ratio of net investment income to average net assets.......% 6.85 6.90 6.50 7.14 7.63 7.99 7.85
Portfolio turnover rate....................................% 53 55 26 12 15 13 3
</TABLE>
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INVESTMENT OBJECTIVES AND POLICIES
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The Dodge & Cox Income Fund is a no-load mutual fund with the primary objective
of providing shareholders with a high and stable rate of current income
consistent with long-term preservation of capital. A secondary objective is to
take advantage of opportunities to realize capital appreciation. These
objectives may not be changed without the approval of the holders of a majority
of the Fund's outstanding shares (as defined in the Investment Company Act of
1940).
The Fund seeks to achieve its objectives by investing in a diversified portfolio
of fixed-income securities. It is the policy of the Fund to invest at least 80%
of the market value of its total assets in the following: (1) debt obligations
issued or guaranteed by the U.S. Government, its agencies or instrumen-
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DODGE & COX
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Income Fund
talities; (2) investment-grade debt securities, including U.S. dollar-
denominated foreign issues, rated in the top four rating groups by either
Moody's Investors Service ("Moody's") (Aaa, Aa, A, Baa) or Standard & Poor's
Corporation ("S & P") (AAA, AA, A, BBB); (3) unrated securities if deemed to be
of investment-grade quality by the Manager; and (4) bankers' acceptances, bank
certificates of deposit, repurchase agreements and commercial paper. At least
65% of the market value of the portfolio will be invested in category (1)
securities and in category (2) securities rated in the top three rating groups.
Under normal market conditions, no more than 5% of the Fund's total assets will
be invested in the types of securities listed in category (4). Further
information about specific investments is provided under "Additional Information
on Investments."
No more than 20% of the Fund may be invested in other fixed-income instruments
including: debt obligations rated below investment grade if, in the opinion of
the Manager, they are of suitable quality, provide attractive investment
opportunities and have a minimum rating of B by Moody's and/or S & P at the time
of investment; preferred stock; corporate bonds convertible into common stocks
or carrying warrants to purchase common stock. The Fund will invest in unrated
securities only if deemed to be of investment-grade quality by the Manager. It
should be noted that securities rated in the lowest of the top four rating
groups (Baa or BBB) and those securities rated below investment grade have
speculative characteristics. Securities rated B by the major rating services may
yield a higher level of current income than higher quality securities but
generally have less liquidity, greater market risk and more price fluctuation.
An explanation of Moody's and S & P's rating groups is included in the Appendix
to the Statement of Additional Information.
The percentages referred to in the preceding two paragraphs are determined at
the time of investment and apply under normal market conditions.
The proportions held in the various financial instruments will be revised as
appropriate in light of the Manager's appraisal of the economy, the relative
yields of securities in the various market sectors, the investment prospects for
issuers and other factors. In making investment decisions, the Manager will take
many factors into consideration including yield to maturity, quality, liquidity,
current yield and capital appreciation potential.
The Fund attempts to achieve its secondary objective of capital appreciation
through such techniques as fundamental research (i.e., seeking a security or
group of securities which the Manager believes to be undervalued), purchasing
securities at a discount from their maturity or call value and making gradual
adjustments in the average maturity of the Fund's portfolio.
The average maturity of the Fund's portfolio at any given time depends, in part,
on the Manager's assessment of economic and market conditions, the future level
of inflation and interest rates, and on the relative yields of securities in the
marketplace. The Manager normally invests in an array of securities with short,
intermediate and long maturities in varying proportions, with greater emphasis
on longer maturities.
Purchases and sales of securities are generally made for long-term fundamental
investment reasons rather than for short-term trading purposes. Nevertheless,
the Manager may sell any of the securities in the Fund, regardless of the length
of time held, in seeking to achieve the objectives of the Fund.
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DODGE & COX
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Income Fund
The Manager maintains a long-term investment orientation and therefore
anticipates a relatively low turnover rate. However, during rapidly changing
economic, political and market environments, there may be more portfolio changes
than in a more stable period. A higher turnover rate might result in increased
transaction expenses and the realization of capital gains and losses (see
"Federal Income Taxes," page 13).
In seeking to achieve the objectives of the Fund, the Manager may purchase
securities on a when-issued basis, purchase or sell securities for delayed
delivery and lend portfolio securities.
The Fund's investment policies as set forth above may be changed without
shareholder approval; such policies will not be changed without notice to
shareholders.
- --------------------------------------------------------------------------------
INVESTMENT RESTRICTIONS
- -----------------------
The Fund has adopted certain restrictions which may not be changed without
shareholder approval. These restrictions are designed to ensure diversification
of investment and to reduce investment risk. The Fund may not: (a) Invest more
than 5% of the value of its total assets in the securities of any one issuer,
except obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, or issues backed or collateralized by such obligations, nor
acquire more than 10% of the voting securities of any one issuer; (b)
Concentrate investment of more than 25% of the value of its total assets in any
one industry, provided that the various types of public utility companies
(electric, telephone and gas) are considered separate industries for this
purpose; (c) Borrow money, except as a temporary measure for extraordinary or
emergency purposes and not to exceed 5% of the Fund's total assets at the time
of borrowing; (d) Make loans to other persons except this shall not exclude (1)
purchasing debt securities as permitted by the Fund's other investment policies
and restrictions (2) entering into repurchase agreements and (3) lending of
portfolio securities, provided that the Fund may not loan securities if the
aggregate value of all securities loaned would exceed 20% of the total market
value of the Fund at the time of lending; or (e) Invest more than 10% of the
value of its total assets in the securities of other investment companies. See
the Statement of Additional Information for additional restrictions that the
Fund has adopted.
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INVESTMENT RISKS
- ----------------
It should be recognized that there are market risks inherent in investment and
that there is no guarantee that the investment objectives of the Fund will be
achieved.
Prices of the securities in the Fund are sensitive to changes in the market
level of interest rates. In general, as interest rates rise, the prices of
fixed-income securities fall and conversely, as interest rates fall, the prices
of these securities rise. The value of the securities may also be affected by
changes in the financial condition of, and other events affecting, specific
issuers. Therefore, the net asset value of the Fund may be higher or lower at
the time of sale than the value at the time of purchase. Due to potential
fluctuations in the net asset value, the Fund may not be an appropriate
investment for investors with a short-term investment horizon. Furthermore,
because yield levels on securities vary with changing interest rates, no
specific yield on shares of the Fund can be guaranteed.
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DODGE & COX
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Income Fund
Since the Fund will be invested predominantly in higher quality debt securities,
the Fund may not yield as high a level of current income as funds that invest
primarily in lower quality debt securities which generally have less liquidity,
greater market risk and greater price fluctuation.
Investors should recognize that the Fund's purchase of the securities of certain
types of investment companies results in the layering of expenses such that
investors indirectly bear a proportionate share of the expenses of such
investment companies including operating costs and investment advisory and
administrative fees. Since the Fund does not presently intend to invest more
than 2% of the value of its total assets in the securities of these types of
investment companies, the adverse affect on the yield of the Fund from such
layering of expenses is expected to be insignificant.
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ADDITIONAL INFORMATION ON INVESTMENTS
- -------------------------------------
U.S. GOVERNMENT OBLIGATIONS: A portion of the Fund may be invested in
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. Some of the obligations purchased by the Fund are backed by
the full faith and credit of the U.S. Government and are guaranteed as to both
principal and interest by the U.S. Treasury. Examples of these include direct
obligations of the U.S. Treasury, such as U.S. Treasury bills, notes and bonds,
or indirect obligations of the U.S. Treasury, such as obligations of the
Government National Mortgage Association, the Maritime Administration and the
Farmers Home Administration.
While the obligations of many of the agencies and instrumentalities of the U.S.
Government are not direct obligations of the U.S. Treasury, they are generally
backed indirectly by the U.S. Government. Some of the agencies are indirectly
backed by their right to borrow from the U.S. Government, such as the Federal
Financing Bank, the Federal Home Loan Bank and the U.S. Postal Service. Others
are supported solely by the credit of the agency or instrumentality itself, but
are given additional support due to the U.S. Treasury's authority to purchase
their outstanding debt obligations. These agencies include the Federal Farm
Credit Banks and the Federal National Mortgage Association. No assurance can be
given that the U.S. Government would provide financial support to U.S.
Government established or sponsored agencies. Furthermore, with respect to the
U.S. Government securities purchased by the Fund, guarantees as to the timely
payment of principal and interest do not extend to the value or yield of these
securities nor do they extend to the value of the Fund's shares. The Manager
will invest in these securities if it believes they offer an expected return
commensurate with the risks assumed.
MORTGAGE PASS-THROUGH SECURITIES: The Fund may invest a portion of its assets in
mortgage pass-through securities which are guaranteed by an agency of the U.S.
Government or are issued by a private entity. These securities represent
ownership in "pools" of mortgage loans and are called "pass-throughs" because
principal and interest payments are passed through to security holders monthly.
The security holder may also receive unscheduled principal payments representing
prepayments of the underlying mortgage loans. When the Fund reinvests the
principal and interest payments, it may receive a rate of interest which is
either higher or lower than the rate on the existing mortgage.
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DODGE & COX
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Income Fund
During periods of declining interest rates there is increased likelihood that
mortgage securities may be prepaid. Consequently, if a premium had been paid for
the mortgage pass-through securities, then such prepayment would most likely be
reinvested at lower rates. On the other hand, if the pass-through securities had
been purchased at a discount, then such prepayment of principal would increase
total returns.
COLLATERALIZED MORTGAGE OBLIGATIONS: Collateralized Mortgage Obligations
("CMOs") are private entity or U.S. Government agency-issued multi-class bonds
that are collateralized by U.S. agency-guaranteed mortgage pass-through
securities. A CMO is created when the issuer purchases a collection of mortgage
pass-through securities ("the collateral") and places these securities in a
trust, which is administered by an independent trustee. Next, the issuer
typically issues several classes, or "tranches" of bonds, the debt service of
which is provided by the principal and interest payments from the mortgage pass-
through securities in the trust. Each of these tranches is valued and traded
separately based on its distinct cash flow characteristics.
Although the mortgage pass-through collateral typically has monthly payments of
principal and interest, CMO bonds will generally have semiannual or quarterly
payments of principal and interest. Payments received from the collateral are
reinvested in short-term debt securities by the trustee between payment dates on
the CMO. On the CMO payment dates, the principal and interest payments received
from the collateral, plus reinvestment income, are applied first to pay interest
on the bonds and then to repay principal. Generally, the bonds are retired
sequentially; the first payments of principal are applied to retire the first
tranche, while all other tranches receive interest only. Only after the first
tranche is retired do principal payments commence on the second tranche. The
process continues in this sequence until all tranches are retired.
At issuance, each CMO tranche has a stated final maturity date. The stated final
maturity date is the date by which the bonds would be completely retired
assuming standard amortization of principal but no prepayments of principal on
the underlying collateral. However, since it is likely that the collateral will
have principal prepayments, the CMO bonds are actually valued on the basis of an
assumed prepayment rate. The assumed prepayment rate is used in the calculation
of the securities' weighted-average life, a measure of the securities' cash flow
characteristics. The Manager will purchase the tranche with the weighted-average
life and cash flow characteristics that it believes will contribute to achieving
the objectives of the Fund.
All CMOs purchased by the Fund will have a AAA rating by either S & P or
Moody's, the major rating services. To qualify for this rating, a CMO is
structured so that even under the most conservative prepayment and reinvestment
assumptions, the principal and interest payments from the collateral are
expected to meet or exceed the cash flow obligations of all the tranches of the
CMO. However, there are risks associated with CMOs which relate to the risks of
the underlying mortgage pass-through securities. In a falling interest rate
environment, the mortgage securities may be prepaid faster than the assumed
rate. In this scenario, the prepayments of principal will generally be
reinvested at a rate which is lower than the rate that the security holder is
currently receiving. The later
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DODGE & COX
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Income Fund
tranches of a CMO (the tranches which are not currently receiving principal
payments) provide some degree of protection from reinvestment risk. The Fund
typically purchases the later tranches of a CMO. Conversely, in a rising
interest rate environment, the mortgage collateral may be prepaid at a rate
which is slower than the assumed rate. In this case, the cash flow of the bond
decreases. A reduced prepayment rate effectively lengthens the time period the
security will be outstanding and may adversely affect the value of the security.
The Fund has been advised by the staff of the Securities and Exchange Commission
("SEC") that it is the staff's position that under the Investment Company Act of
1940 ("1940 Act"), the Fund may invest no more than 10% of its total assets in
certain CMOs which, under the guidelines formulated by the SEC staff, are
considered to be investment companies which issue their securities pursuant to
an exemptive order from the SEC under the 1940 Act. The Fund also may invest no
more than 5% of its total assets in any single issue of such CMOs. The Fund's
investment in such CMOs is also subject to the restriction on the Fund's
investment in securities of investment companies set forth in the Statement of
Additional Information. The Fund will limit its investments in accordance with
the SEC staff's position unless and until the staff changes such position or
grants an exemption therefrom.
FOREIGN SECURITIES: The Fund may invest in foreign securities denominated in
U.S. dollars. Investment in these securities may entail certain risks, including
adverse political and economic developments, possible imposition of withholding
or confiscatory taxes, currency blockage, expropriation, nationalization and the
difficulty of enforcing obligations in foreign countries. Moreover, special
consideration must be given to the reduced availability of public information
concerning issuers, the differences in accounting, auditing and financial
reporting standards and requirements, and the possibility of a less liquid
trading market.
Securities of some foreign issuers are less liquid and are more price volatile
than securities of U.S. companies. Foreign brokerage commissions and custodian
fees are generally higher than in the United States and may be non-negotiable.
In general, there is less overall governmental supervision and regulation of
securities exchanges, brokers and listed companies than in the United States.
Under normal market conditions, the Fund will invest no more than 25% of its
total assets in foreign securities denominated in U.S. dollars.
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INCOME DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
- ------------------------------------------------
It is the practice to pay quarterly dividends from net income, when available,
on or about the 20th day of March, June, September and December. Any capital
gains distribution of net gain on sales of securities will be paid in
conjunction with the December and, if necessary, March quarterly payments. The
term "distributions" includes both income dividends and capital gains
distributions. After the year-end, each shareholder will be advised for Federal
income tax purposes of the amount of distributions to be reported as ordinary
dividends and as capital gains distributions.
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HOW TO PURCHASE SHARES
- ----------------------
BY MAIL: Subscriptions for shares should be addressed to the Fund c/o the Fund's
transfer agent:
REGULAR MAIL EXPRESS OR REGISTERED MAIL
Dodge & Cox Income Fund Dodge & Cox Income Fund
c/o Firstar Trust Company c/o Firstar Trust Company
P.O. Box 701 615 East Michigan Street, Third Floor
Milwaukee, WI 53201-0701 Milwaukee, WI 53202
BY WIRE: To purchase shares in the Fund by Federal wire transfer, investors
should request their bank to transmit funds to:
Firstar Bank, ABA#0750-00022
For Credit to: Mutual Fund Services, Account #112-952-137
For Further Credit: Dodge & Cox Income Fund,
[shareholder account number], [name of account]
Prior to having the funds wired, the shareholder should call Firstar Trust
Company at 1-800-621-3979 and advise the bank that the funds are being wired.
Investors making initial investments by wire must promptly complete an Account
Application Form and mail it to the Fund, c/o Firstar Trust Company, at either
of the addresses listed above. No account services will be established until the
completed application has been received by the Fund. IRA accounts cannot be
opened by wire.
All subscriptions are subject to acceptance by the Fund, and the price of the
shares will be the net asset value per share which is next computed after
receipt by the Fund's transfer agent, or other authorized agent or sub-agent, of
the subscription in proper form (see "Pricing of Shares", page 11). Payment for
the subscription is to be made to Dodge & Cox Income Fund. The minimum initial
subscription is $2,500 ($1,000 for an IRA account) and must be accompanied by a
completed and signed Account Application Form (Adoption Agreement for an IRA).
The minimum for each subsequent subscription is $100. No cash or third-party
checks will be accepted and checks must be drawn on U.S. banks. If a check or
Automatic Investment Plan transaction does not clear, the purchase will be
canceled and the purchaser will be liable for any losses incurred and a $20 fee,
which is subject to change without notice. All subscriptions will be invested in
full and fractional shares and the shareholder will receive a confirmation of
all transactions. Certificates are not issued unless requested by the
shareholder or ordered by the Fund and will be issued for full shares only.
A Social Security or Taxpayer Identification Number must be supplied and
certified on the Account Application Form before an account can be established.
The Fund may be required to withhold Federal income tax at a rate of 31%
("backup withholding") from dividend payments and redemption proceeds if a
shareholder fails to furnish the Fund with the shareholder's correct Social
Security or Taxpayer Identification Number.
The purchase or redemption of shares through broker-dealers or other financial
institutions may be subject to a service fee by those entities. The Fund
reserves the right to reject any purchase order. It is the policy of the Fund
not to accept subscriptions under circumstances or in amounts believed to be
disadvantageous to existing shareholders. It is also the policy of the Fund not
to apply or continue to use any shareholder plan under conditions believed
disadvantageous to existing shareholders.
=======================================---======================================
8
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DODGE & COX
=======================================---======================================
Income Fund
- --------------------------------------------------------------------------------
HOW TO REDEEM SHARES
- --------------------
BY MAIL: Written redemption requests should be submitted to the Fund:
REGULAR MAIL EXPRESS OR REGISTERED MAIL
Dodge & Cox Income Fund Dodge & Cox Income Fund
c/o Firstar Trust Company c/o Firstar Trust Company
P.O. Box 701 615 East Michigan Street, Third Floor
Milwaukee, WI 53201-0701 Milwaukee, WI 53202
The request must specify the shareholder's name, account number, and dollar
amount or number of shares redeemed, and be properly signed. Requests for joint
accounts require signatures of all owners.
BY TELEPHONE: Telephone redemption requests can be initiated by calling Firstar
Trust Company at 1-800-621-3979. (See "Telephone Transactions", page 10.)
REDEMPTION PAYMENTS MAY BE MADE BY CHECK OR WIRE:
BY CHECK: Checks will be made payable to the shareholder and will be sent to the
address of record. If the proceeds of the redemption are requested to be sent to
other than the address of record or to an address that has been changed within
15 days of the redemption request, the request must be in writing with
signature(s) guaranteed.
BY WIRE: The Fund will wire redemption proceeds only to the bank account
designated on the initial Account Application Form or in written instructions --
with signature guarantee -- received in advance of the redemption order. Wire
redemption requests are subject to a $10 charge, which is subject to change
without notice.
SIGNATURE GUARANTEES: Certain redemption requests must include a signature
guarantee for each person in whose name the account is registered to protect
shareholders and the Fund from fraud. Signature guarantees may be obtained from
a commercial bank or trust company, a member firm of the New York Stock Exchange
or by another eligible guarantor institution. A notary public is not an
acceptable guarantor.
IRA ACCOUNTS: Redemption requests for IRA accounts must be in writing and must
include instructions regarding income tax withholding. Such requests which do
not indicate an election not to have Federal income tax withheld will be subject
to withholding.
Under certain circumstances, the Fund's transfer agent may require additional
documents such as, but not restricted to, stock powers with signatures
guaranteed, trust instruments, death certificates, appointments as executor and
certificates of corporate authority. If certificates have been issued for any of
the shares to be redeemed, such certificates must be endorsed with signatures
guaranteed and delivered to the Fund's transfer agent. For any questions
regarding documentation or signature requirements for trusts, estates,
corporations, etc., please telephone Firstar Trust Company (1-800-621-3979).
The redemption price will be the net asset value per share which is next
computed after receipt in proper form of the redemption order by the Fund's
transfer agent, or other authorized agent or sub-agent (see "Pricing of Shares",
page 11). The redemption price may be more or less than the shareholder's cost,
depending upon the market value of the Fund's investments at the time of
redemption. Redemption
=======================================---======================================
9
<PAGE>
DODGE & COX
=======================================---======================================
Income Fund
payments are made as soon as practicable, generally within two business days,
but no later than the seventh day after the effective date for redemption, or
within such shorter period as may legally be required. If shares are redeemed
within two weeks of purchase, the Fund may delay payment of the redemption
proceeds until the purchase check has cleared, which may take up to 12 days or
more. There is no such delay when shares being redeemed were purchased by wiring
Federal Funds.
Under the Investment Company Act of 1940, the Fund may suspend the right of
redemption or postpone the date of payment when: (a) trading on the New York
Stock Exchange is restricted as determined by the Securities and Exchange
Commission or such Exchange is closed for other than weekends and holidays; (b)
the Securities and Exchange Commission has by order permitted such suspension;
or (c) an emergency, as defined by the rules of the Securities and Exchange
Commission, exists making disposal of portfolio securities or valuation of net
assets of the Fund not reasonably practicable.
- --------------------------------------------------------------------------------
EXCHANGING SHARES
- -----------------
Shareholders may exchange their shares for shares of another Dodge & Cox Fund,
provided that the registration and Taxpayer Identification Number of both
accounts are identical. An exchange may be initiated by contacting the Fund's
transfer agent in writing or by telephone. (See "Telephone Transactions",
below.) An exchange is treated as a redemption and a purchase and, therefore,
the shareholder may realize a taxable gain or loss. The shareholder should
obtain and read a current prospectus of the fund into which the exchange is
being made.
There is a $1,000 minimum for all exchanges. If a new account is being opened by
exchange, the minimum investment requirements must be met. After the exchange,
the account from which the exchange is made must have a remaining balance of at
least $2,500 ($1,000 for an IRA account) in order to remain open. The Fund
reserves the right to terminate or materially modify the exchange privilege upon
60 days advance notice to shareholders.
- --------------------------------------------------------------------------------
TELEPHONE TRANSACTIONS
- ----------------------
The ability to initiate redemptions and exchanges by telephone is automatically
established for the shareholder's account unless the option is specifically
declined on the account application or in writing by the shareholder. Neither
the Fund nor its transfer agent will be responsible for the authenticity of
transaction instructions received by telephone, provided that reasonable
security procedures have been followed. Security procedures currently include
recording conversations, requesting verification of account information,
restricting transmittal of proceeds to preauthorized designations, and supplying
transaction verification information. If the Fund fails to follow reasonable
procedures, it may be liable for any losses resulting from unauthorized or
fraudulent telephone transactions in the account. If an account has multiple
owners, the Fund may rely on the instructions of any one account owner. Any
shareholder wishing to remove telephone privileges should contact the Fund's
transfer agent.
Shareholders should note that purchase and sales orders will not be canceled or
modified once received in good form. If shareholders are unable to reach the
Fund by telephone (for example, during periods of unusual market activity), they
should consider sending written instructions. The Fund
=======================================---======================================
10
<PAGE>
DODGE & COX
=======================================---======================================
Income Fund
reserves the right to modify or suspend telephone privileges upon reasonable
notice. The Fund may also temporarily suspend telephone options without notice
when economic or market changes make them impracticable to implement.
Purchases and sales should be made for long-term investment purposes only.
Because excessive trading may be disadvantageous to the Fund, the Fund reserves
the right to limit purchase and sale transactions, including exchanges, when a
pattern of frequent trading appears evident.
- --------------------------------------------------------------------------------
TRANSFER OF SHARES
- ------------------
Changes in account registrations -- such as changing the name(s) on an account,
or transferring shares to another person or legal entity -- must be submitted in
writing. Please telephone Firstar Trust Company (1-800-621-3979) for full
instructions.
- --------------------------------------------------------------------------------
PRICING OF SHARES
- -----------------
The price of Fund shares is the net asset value per share determined by dividing
the total net asset value of the Fund by the total number of shares then
outstanding. The price is computed only as of the close of the New York Stock
Exchange on each regular business day on which the New York Stock Exchange is
open and is in effect only for properly completed subscription and redemption
orders received by the transfer agent or other authorized agent or sub-agent
prior to the close of such Exchange, presently 4:00 p.m. Eastern Time. On orders
received after the close of the New York Stock Exchange, the price will be the
net asset value per share as of the close of the New York Stock Exchange on the
next succeeding regular business day on which such Exchange is open. The New
York Stock Exchange is not open on New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Portfolio securities are priced at fair value based on dealer-supplied
valuations and a pricing service. Portfolio securities for which there are no
such quotations or valuations are valued at fair value as determined in good
faith by or at the direction of the Board of Directors.
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICES
- --------------------
The Fund provides the following services to shareholders. Please telephone or
write the Fund (1-800-621-3979) for applications and additional information.
Reinvestment Plan: Shareholders may direct that dividend and capital gains
distributions be reinvested in additional Fund shares.
Automatic Investment Plan: Shareholders may make regular monthly or quarterly
investments of $100 or more through automatic deductions from the shareholder's
bank account.
Withdrawal Plan: A shareholder owning $10,000 or more of the Fund's shares may
receive regular monthly or quarterly payments of $50 or more. Shares will
automatically be redeemed at net asset value per share to make the withdrawal
payments.
Individual Retirement Account (IRA): Individuals who have earned income or who
are entitled to certain distributions from eligible retirement plans may make or
authorize contributions to their own Individual Retirement Accounts. The Fund
has an IRA Plan available for shareholders of the Fund.
=======================================---======================================
11
<PAGE>
DODGE & COX
=======================================---======================================
Income Fund
- --------------------------------------------------------------------------------
PERFORMANCE INFORMATION
- -----------------------
The Fund may, from time to time, include figures indicating its yield or total
return in advertisements or reports to shareholders or prospective investors.
Quotations of yield, as defined by the SEC, will be based on net investment
income per share earned during a given thirty-day period and will be computed by
dividing this net investment income by the net asset value per share on the last
day of the period and annualizing the results. Yield does not directly reflect
changes in net asset value per share which occurred during the period.
Quotations of the Fund's average annual total rate of return will be expressed
in terms of the average annual compounded rate of return on a hypothetical
investment in the Fund over a specified period, will reflect the deduction of a
proportional share of Fund expenses (on an annual basis) and will assume that
all dividends and capital gains distributions are reinvested when paid. Total
return indicates the positive or negative rate of return that an investor would
have earned from reinvested dividends and distributions and changes in net asset
value per share during the period.
Performance information for the Fund may be compared, in reports and promotional
literature, to: (i) the Lehman Brothers Aggregate Bond Index, the Salomon
Brothers Broad Investment-Grade Bond Index, or other managed and unmanaged
indices of the performance of various types of investments, so that investors
may compare the Fund's results with those of indices widely regarded by
investors as representative of the security markets in general, and (ii) the
performance of other mutual funds. Unmanaged indices may assume the reinvestment
of income distributions, but generally do not reflect deductions for
administrative and management costs and expenses; managed indices do reflect
such deductions.
Performance information for the Fund reflects only the performance of
hypothetical investments in the Fund during the particular time periods on which
the calculations are based. Such information should not be considered as
representative of the performance of the Fund in the future because, unlike some
bank deposits or other investments which pay a fixed yield for a stated period
of time for a fixed principal amount, the performance of the Fund will vary
based not only on the current market value of the securities held in its
portfolio, but also on changes in the Fund's expenses and in the asset size of
the Fund. Performance information should be considered in light of the Fund's
investment objectives and policies, the types and quality of the Fund's
portfolio investments, market conditions during the particular time period and
operating expenses. For a description of the methods used to determine the
Fund's total return and yield, see "Performance Information" in the Statement of
Additional Information. Further information about the performance of the Fund is
contained in the Fund's Annual Report which may be obtained without charge from
the Fund.
- --------------------------------------------------------------------------------
MANAGEMENT AND INVESTMENT ADVISER
- ---------------------------------
The Board of Directors has overall management responsibility for the Fund under
the laws of California. Since 1989, Dodge & Cox, One Sansome Street, San
Francisco, California 94104, has been employed by the Fund as manager and
investment adviser, subject to the direction of the Board of Directors. Dodge &
Cox is a registered investment adviser and is one of the oldest professional
investment management firms in the United States, having acted continuously as
investment managers since 1930. The Fund's investments are managed by Dodge &
Cox's Bond Policy Committee, and no one person is primarily responsible for
making investment recommendations to the Committee. The
=======================================---======================================
12
<PAGE>
DODGE & COX
=======================================---======================================
Income Fund
revenues of the Manager are derived from fees for investment management
services. Its activities are devoted to investment research and the supervision
of investment accounts for individuals and institutions. In addition, the
Manager has managed two other registered mutual funds, the Dodge & Cox Balanced
Fund since 1931 and the Dodge & Cox Stock Fund since 1965.
- --------------------------------------------------------------------------------
MANAGEMENT FEE AND OTHER EXPENSES
- ---------------------------------
The Fund pays the Manager a quarterly management fee of 1/8 of 1% (equivalent to
5/10 of 1% annually) of the average weekly net asset value of the Fund up to
$100 million and 1/10 of 1% (equivalent to 4/10 of 1% annually) of the average
weekly net asset value of the Fund in excess of $100 million. However, the
investment management agreement provides that the Manager will waive its fee for
any calendar year to the extent that such fee plus all other ordinary operating
expenses paid by the Fund exceeds 1% of the average net asset value of the Fund.
No waiver of management fee was required for 1995 under this agreement. In
addition to the Manager's fee, the Fund pays other ordinary operating expenses,
primarily for bank custody of assets, stock transfer agent, printing of reports
and prospectuses, registration fees, and legal and auditing services. In 1995,
the ratio of total operating expenses to average net assets of the Fund was
.54%. The Manager furnishes personnel and other facilities necessary for the
administration of the Fund for which it receives no additional compensation.
- --------------------------------------------------------------------------------
CAPITAL STOCK AND ORGANIZATION
- ------------------------------
The Fund is a corporation organized under the laws of California on July 8, 1988
and is registered as an open-end diversified management investment company under
the Investment Company Act of 1940. The Fund's authorized capital consists of
100,000,000 shares of common stock with a par value of $0.01 per share. All
shares have the same rights as to voting, redemption, dividends and in
liquidation. Shares have cumulative voting rights for election of directors,
which means that each share is entitled to as many votes as there are directors
to be elected, all of which may be cast for one nominee or distributed as the
shareholder sees fit. All shares issued are fully paid and non-assessable, are
transferable and are redeemable at net asset value upon demand of the
shareholder. Shares have no preemptive or conversion rights. The Fund is not
required to hold annual shareholder meetings and will do so only when required
by law or when specially called in accordance with the Fund's bylaws.
Shareholders holding at least 10% of the Fund's shares may, in accordance with
the Fund's bylaws and articles of incorporation, cause a meeting of shareholders
to be held for the purpose of considering such matters as are permitted under
California law and under the Investment Company Act of 1940, including the
election or removal of directors and such shareholders will be assisted in
shareholder communication in that regard.
- --------------------------------------------------------------------------------
FEDERAL INCOME TAXES
- --------------------
The Fund intends to qualify each year as a regulated investment company under
the Internal Revenue Code of 1986. Under applicable sections thereof, a
regulated investment company that distributes for the year all of its ordinary
income and capital gains pays no tax on its ordinary income or capital gains. A
regulated investment company that fails to distribute all of its ordinary income
and capital gains must pay tax on the undistributed amounts at a maximum rate of
35%. If the company does not distribute at least 98% of its ordinary income and
capital gains, it must pay an additional 4% excise tax on the amount by which
the 98% requirements exceed actual distributions.
=======================================---======================================
13
<PAGE>
DODGE & COX
=======================================---======================================
Income Fund
Distributions designated as capital gains distributions are taxed to a
shareholder as though they were long-term capital gains realized by the
shareholder whether received in cash or shares of the Fund and regardless of the
period of time shares of the Fund have been held. All taxable distributions,
except for capital gains distributions, are taxed to a shareholder as ordinary
income dividends whether received in cash or in shares of the Fund. State
taxation of distributions varies from state to state. Investors should consult
their own tax advisers about the Federal, state and local tax consequences of an
investment in the Fund.
- --------------------------------------------------------------------------------
CUSTODIAN AND TRANSFER AGENT
- ----------------------------
Firstar Trust Company, P.O. Box 701, Milwaukee, Wisconsin 53201-0701, (Telephone
1-800-621-3979), acts as custodian of all cash and securities of the Fund and
receives and disburses cash and securities for the account of the Fund. The
Trust Company also acts as transfer and dividend disbursing agent for the Fund.
- --------------------------------------------------------------------------------
REPORTS TO SHAREHOLDERS
- -----------------------
A copy of the annual report is sent to each shareholder and is supplemented
throughout the year by a semi-annual and quarterly reports prepared by the Fund.
All reports contain financial information and a schedule showing the Fund's
investments.
- --------------------------------------------------------------------------------
SHAREHOLDER INQUIRIES
- ---------------------
For Fund literature and information, or if you have any questions concerning
your account, please telephone Firstar Trust Company (1-800-621-3979).
=======================================---======================================
14
<PAGE>
DODGE & COX
- --------------------------------------------------------------------------------
Income Fund
Established 1989
Prospectus
March 13, 1996
- --------------------------------------------------------------------------------
DODGE & COX
Income Fund
- --------------------------------------------------------------------------------
Officers and Directors
A. Horton Shapiro, President and Director
Senior Vice-President, Dodge & Cox
John A. Gunn, Vice President and Director
President, Dodge & Cox
W. Timothy Ryan, Secretary-Treasurer
and Director
Senior Vice-President, Dodge & Cox
Dana M. Emery, Assistant
Secretary-Treasurer and Director
Vice-President, Dodge & Cox
Max Gutierrez, Jr., Director
Partner, Brobeck, Phleger & Harrison, Attorneys
Frank H. Roberts, Director
Retired Partner, Pillsbury, Madison & Sutro, Attorneys
John B. Taylor, Director
Professor of Economics, Stanford University
Will C. Wood, Director
Principal, Kentwood Associates, Financial Advisers
MANAGERS
Dodge & Cox
One Samsome Street
San Francisco, California 94104
Telephone (415) 981-1710
CUSTODIAN & TRANSFER AGENT
Firstar Trust Company
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
Telephone (800) 621-3979
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
San Francisco, California
LEGAL COUNSEL
Heller, Ehrman, White & McAuliffe
San Francisco, California
- --------------------------------------------------------------------------------
<PAGE>
DODGE & COX INCOME FUND
PART B
Statement of Additional Information
<PAGE>
DODGE & COX INCOME FUND
c/o Firstar Trust Company
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
(800) 621-3979
STATEMENT OF ADDITIONAL INFORMATION
Dated March 13, 1996
This Statement of Additional Information is not the Fund's Prospectus,
but provides additional information which should be read in conjunction with the
Fund's Prospectus dated March 13, 1996. The Fund's Prospectus and most recent
annual financial statements may be obtained from the Fund at no charge by
writing or telephoning the Fund at the address or telephone number shown above.
___________________________________
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Investment Objectives and Policies............... 2
Investment Restrictions.......................... 2
Investments and Investment Techniques............ 4
U.S. Government Obligations................. 4
Mortgage Pass-Through Securities............ 4
Collateralized Mortgage Obligations......... 4
Foreign Securities.......................... 5
Restricted Securities....................... 5
Repurchase Agreements....................... 5
When-issued or Delayed-Delivery Securities.. 6
Lending of Portfolio Securities............. 6
Performance Information.......................... 6
Purchase, Redemption, and Pricing of Shares...... 7
Officers and Directors........................... 7
Investment Adviser............................... 8
Portfolio Transactions........................... 9
Additional Tax Considerations.................... 9
Independent Accountants.......................... 9
Legal Counsel.................................... 9
Appendix: Ratings................................ 10
</TABLE>
___________________________________
Please refer to the Fund's Financial Statements consisting of the financial
statements of the Fund and the notes thereto, and the report of independent
accountants contained in the Fund's 1995 Annual Report to Shareholders. The
Financial Statements and the report (but no other material from that Annual
Report) are incorporated herein by reference. Additional copies of the Annual
Report may be obtained from the Fund at no charge by writing or telephoning the
Fund at the address or telephone number shown above.
-1-
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
- ----------------------------------
The Dodge & Cox Income Fund is a no-load mutual fund with the primary
objective of providing shareholders with a high and stable rate of current
income consistent with long-term preservation of capital. A secondary objective
is to take advantage of opportunities to realize capital appreciation. These
objectives may not be changed without the approval of the holders of a majority
of the Fund's outstanding shares (as defined in the Investment Company Act of
1940).
The Fund seeks to achieve these objectives by investing in a diversified
portfolio of fixed-income securities. It is the policy of the Fund to invest at
least 80% of the market value of its total assets in the following: (1) debt
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities; (2) investment-grade debt securities, including U.S. dollar-
denominated foreign issues, rated in the top four rating groups by either
Moody's Investors Service, ("Moody's") (Aaa, Aa, A, Baa) or Standard & Poor's
Corporation ("S & P") (AAA, AA, A, BBB); (3) unrated securities if deemed to be
of investment-grade quality by the Manager; and (4) cash equivalents, bankers'
acceptances, bank certificates of deposit, repurchase agreements and commercial
paper. At least 65% of the market value of the portfolio will be invested in
category (1) securities and in category (2) securities rated in the top three
rating groups. Under normal market conditions, no more than 5% of the Fund's
total assets will be invested in the types of securities listed in category (4).
Further information about specific investments is provided under "Investments
and Investment Techniques."
No more than 20% of the Fund may be invested in other fixed-income
instruments including: debt obligations rated below investment grade, if, in
the opinion of the Manager, they are of suitable quality, provide attractive
investment opportunities and have a minimum rating of B by Moody's and/or S & P
at the time of investment; preferred stock; and corporate bonds convertible into
common stocks or carrying warrants to purchase common stock. The Fund will
invest in unrated securities only if deemed to be of investment-grade quality by
the Manager. It should be noted that securities rated in the lowest of the top
four rating groups (Baa or BBB) and those securities rated below investment
grade have speculative characteristics. Securities rated B by the major rating
agencies may yield a higher level of current income than higher quality
securities but generally have less liquidity, greater market risk and more price
fluctuation. An explanation of the Moody's and S & P rating groups is included
in the Appendix.
The percentages referred to in the preceding two paragraphs are determined
at the time of investment and apply under normal market conditions.
The proportions held in the various financial instruments will be revised
as appropriate in light of the Manager's appraisal of the economy, the relative
yields of securities in the various market sectors, the investment prospects for
issuers, and other factors. In making investment decisions, the Manager will
take many factors into consideration including yield to maturity, quality,
liquidity, current yield, and capital appreciation potential.
The Fund attempts to achieve its secondary objective of capital
appreciation through such techniques as fundamental research (i.e., seeking a
security or group of securities which the Manager believes to be undervalued),
purchasing securities at a discount to their maturity or call value and making
gradual adjustments in the average maturity of the Fund's portfolio.
The average maturity of the Fund's portfolio at any given time depends, in
part, on the Manager's assessment of economic and market conditions, the future
level of inflation and interest rates, and on the relative yields of securities
in the marketplace. The Manager normally invests in an array of securities with
short, intermediate and long maturities in varying proportions, with greater
emphasis on longer maturities.
Purchases and sales of securities in the Fund are generally made for long-
term fundamental investment reasons rather than for short-term trading purposes.
Nevertheless, the Manager may sell any of the securities in the Fund, regardless
of the length of time held, in seeking to achieve the objectives of the Fund.
The Manager maintains a long-term investment orientation and therefore
anticipates a relatively low turnover rate, which, under normal circumstances,
will not exceed 50% on an annual basis. However, during rapidly changing
economic, political, and market environments, there may be more portfolio
changes than in a more stable period. The increased portfolio turnover rates in
1994 and 1995 were the result of purchases and sales made to adjust the average
maturity of the Fund and the structure of the portfolio. A higher turnover rate
might result in increased transaction expenses and the realization of capital
gains and losses. See "Financial Highlights" in the Fund's Prospectus for
portfolio turnover rates.
In seeking to achieve the objectives of the Fund, the Manager may purchase
securities on a when-issued basis, purchase or sell securities for delayed
delivery and lend portfolio securities.
The Fund's investment policies as set forth above may be changed without
shareholder approval; however, such policies will not be changed without notice
to shareholders.
INVESTMENT RESTRICTIONS
- -----------------------
The Fund has adopted the following investment restrictions. These
restrictions, as well as the Fund's investment objectives, cannot be changed
without the approval of the holders of a majority of the Fund's outstanding
shares. Such majority is defined by the Investment Company Act of 1940 as the
lesser of (1) 67% or more of the voting shares present at a meeting if the
holders of
-2-
<PAGE>
more than 50% of the outstanding voting shares are present or represented by
proxy, or (2) more than 50% of the outstanding voting shares of the Fund. Except
with regard to the 300% limitation mentioned in restriction No. 3 below, all
percentage limitations set forth below must apply immediately after a purchase
or initial investment, and any subsequent change in any applicable percentage
resulting from market fluctuations will not require elimination of any security
from the Fund's portfolio. The Fund may not:
1. Invest more than 5% of the value of its total assets in the securities of
any one issuer, except the obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, or issues backed or
collateralized by such obligations, nor acquire more than 10% of the voting
securities of any one issuer.
2. Concentrate investment of more than 25% of the value of its total assets
in any one industry, provided that the various types of public utility companies
(electric, telephone and gas) are considered separate industries for this
purpose.
3. Borrow money, except the Fund may borrow money from banks as a temporary
measure for extraordinary or emergency purposes. Such temporary borrowing may
not exceed 5% of the value of the Fund's total assets at the time the loan is
made. The Fund may pledge up to 10% of the lesser of the cost or market value
of its total assets to secure temporary borrowings. The Fund will not borrow
for investment purposes. Immediately after any borrowing, the Fund will
maintain an asset coverage of not less than 300% with respect to all borrowings.
4. Make loans of money, except by the purchase of debt securities or by
entering into repurchase agreements, as permitted by the Fund's other investment
policies and restrictions. Although there is no present intention of doing so
in the foreseeable future, the Fund reserves the authority to make loans of its
portfolio securities in an aggregate amount not exceeding 20% of its total
assets. Such loans will only be made upon approval of, and subject to any
conditions imposed by, the Fund's Board of Directors.
5. Purchase securities of another investment company ("acquired company")
except in connection with a merger, consolidation, acquisition or reorganization
and except as otherwise permitted by Section 12(d) of the Investment Company Act
of 1940, if after such purchase more than 5% of the value of the Fund's total
assets would be invested in securities issued by the acquired company, or the
Fund would own more than 3% of the total outstanding voting stock of the
acquired company, or more than 10% of the value of the Fund's total assets would
be invested in securities of investment companies.
6. Invest in any company for the purpose of exercising control or
management.
7. Issue senior securities, as defined in the Investment Company Act of
1940, or mortgage, pledge, hypothecate or in any manner transfer, as security
for indebtedness, any securities owned or held by the Fund except as may be
necessary in connection with borrowing mentioned in restriction No. 3 above, and
then such mortgaging, pledging or hypothecating may not exceed 10% of the Fund's
total assets, taken at the lesser of cost or market value.
8. Underwrite securities of other issuers, except insofar as the Fund may be
deemed an underwriter under the Securities Act of 1933, as amended, in selling
portfolio securities.
9. Purchase or sell commodities or commodity contracts.
10. Purchase securities on margin or sell short.
11. Purchase or sell real estate including limited partnerships that invest
therein, provided that the Fund may invest in marketable securities secured by
real estate or interests therein or issued by companies which invest in real
estate or interests therein.
12. Purchase interests in oil, gas and mineral leases or other mineral
exploration or development programs, although the Fund may invest in preferred
stocks or debt instruments of companies which invest in or sponsor such
programs.
13. Purchase warrants if as a result the Fund would then have more than 5%
of its net assets invested in warrants (valued at the lower of cost or market),
or more than 2% of its net assets invested in warrants which are not listed on
the New York or American Stock Exchanges.
14. Purchase any security if as a result the Fund would then have more than
10% of its total assets invested in securities which are illiquid, including
repurchase agreements not maturing in seven days or less and securities
restricted as to disposition under the federal securities laws.
15. Purchase securities of any issuer if, to the knowledge of the Fund, any
officer or director of the Fund or the Fund's manager, owns more than 1/2 of 1%
of the outstanding securities of such issuer or if such officers or directors in
the aggregate own more than 5% of the outstanding securities of such issuer.
16. Write put or call options.
17. Purchase any security if as a result the Fund would then have more than
10% of its total assets invested in preferred stock or debt securities
principally traded in foreign markets. The Fund may purchase Eurodollar
certificates of deposit without regard to such 10% limit.
-3-
<PAGE>
INVESTMENTS AND INVESTMENT TECHNIQUES
- -------------------------------------
U.S. GOVERNMENT OBLIGATIONS
A portion of the Fund may be invested in obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities. Some of the obligations
purchased by the Fund are backed by the full faith and credit of the U.S.
Government and are guaranteed as to both principal and interest by the U.S.
Treasury. Examples of these include direct obligations of the U.S. Treasury,
such as U.S. Treasury bills, notes and bonds, or indirect obligations of the
U.S. Treasury, such as obligations of the Government National Mortgage
Association, the Maritime Administration, the Farmers Home Administration, the
Veterans Administration, the Federal Housing Administration and the Export-
Import Bank.
While the obligations of many of the agencies and instrumentalities of the
U.S. Government are not direct obligations of the U.S. Treasury, they are
generally backed indirectly by the U.S. Government. Some of the agencies are
indirectly backed by their right to borrow from the U.S. Government, such as the
Federal Financing Bank, the Federal Home Loan Bank and the U.S. Postal Service.
Others are supported solely by the credit of the agency or instrumentality
itself, but are given additional support due to the U.S. Treasury's authority to
purchase their outstanding debt obligations. These agencies include the Federal
Farm Credit Banks, the Federal National Mortgage Association and the Student
Loan Marketing Association. No assurance can be given that the U.S. Government
would provide financial support to U.S. Government established or sponsored
agencies. Furthermore, with respect to the U.S. Government securities purchased
by the Fund, guarantees as to the timely payment of principal and interest do
not extend to the value or yield of these securities nor do they extend to the
value of the Fund's shares. The Manager will invest in these securities if it
believes they offer an expected return commensurate with the risks assumed.
MORTGAGE PASS-THROUGH SECURITIES
In addition, the Fund may invest a portion of its assets in mortgage pass-
through securities which are guaranteed by an agency of the U.S. Government or
are issued by a private entity. These securities represent ownership in "pools"
of mortgage loans and are called "pass-throughs" because principal and interest
payments are passed through to security holders monthly. The security holder
may also receive unscheduled principal payments representing prepayments of the
underlying mortgage loans. When the Fund reinvests the principal and interest
payments, it may receive a rate of interest which is either higher or lower than
the rate on the existing mortgage.
During periods of declining interest rates there is increased likelihood that
mortgage securities may be prepaid. Consequently, if a premium had been paid
for the mortgage pass-through securities, then such prepayment would most likely
be reinvested at lower rates. On the other hand, if the pass-through securities
had been purchased at a discount, then such prepayments of principal would
increase total returns.
COLLATERALIZED MORTGAGE OBLIGATIONS
Collateralized Mortgage Obligations ("CMOs") are private entity or U.S.
government agency-issued multi-class bonds that are collateralized by U.S.
agency-guaranteed mortgage pass-through securities. A CMO is created when the
issuer purchases a collection of mortgage pass-through securities ("the
collateral") and places these securities in a trust, which is administered by an
independent trustee. Next, the issuer typically issues several classes, or
"tranches" of bonds, the debt service of which is provided by the principal and
interest payments from the mortgage pass-through securities in the trust. Each
of these tranches is valued and traded separately based on its distinct cash
flow characteristics.
Although the mortgage pass-through collateral typically has monthly payments
of principal and interest, CMO bonds will generally have semiannual or quarterly
payments of principal and interest. Payments received from the collateral are
reinvested in short-term debt securities by the trustee between payment dates on
the CMO. On the CMO payment dates, the principal and interest payments received
from the collateral plus reinvestment income, are applied first to pay interest
on the bonds and then to repay principal. Generally, the bonds are retired
sequentially; the first payments of principal are applied to retire the first
tranche, while all other tranches receive interest only. Only after the first
tranche is retired do principal payments commence on the second tranche. The
process continues in this sequence until all tranches are retired.
At issuance, each CMO tranche has a stated final maturity date. The stated
final maturity date is the date by which the bonds would be completely retired
assuming standard amortization of principal but no prepayments of principal on
the underlying collateral. However, since it is likely that the collateral will
have principal prepayments, the CMO bonds are actually valued on the basis of an
assumed prepayment rate. The assumed prepayment rate is used in the calculation
of the securities' weighted-average life, a measure of the securities' cash flow
characteristics. The Manager will purchase the tranche with the weighted-
average life and cash flow characteristics that it believes will contribute to
achieving the objectives of the Fund.
All CMOs purchased by the Fund will have a AAA rating by either S & P or
Moody's, the major rating services. To qualify for this rating, a CMO is
structured so that even under the most conservative prepayment and reinvestment
assumptions, the principal and interest payments from the collateral are
expected to meet or exceed the cash flow obligations of all the tranches of the
CMO. However, there are risks associated with CMOs, which relate to the risks
of the underlying mortgage pass-through securities. In a falling interest rate
environment, the mortgage securities may be prepaid faster than the assumed
rate. In this scenario, the
-4-
<PAGE>
prepayments of principal will generally be reinvested at a rate which is lower
than the rate that the security holder is currently receiving. The later
tranches of a CMO (the tranches which are not currently receiving principal
payments) provide some degree of protection from reinvestment risk. The Fund
typically purchases the later tranches of a CMO. Conversely, in a rising
interest rate environment, the mortgage collateral may be prepaid at a rate
which is slower than the assumed rate. In this case, the cash flow of the bond
decreases. A reduced prepayment rate effectively lengthens the time period the
security will be outstanding and may adversely affect the value of the security.
The Fund has been advised by the staff of the Securities and Exchange
Commission ("SEC") that it is the staff's position that under the Investment
Company Act of 1940 ("1940 Act"), the Fund may invest no more than 10% of its
total assets in certain CMOs which, under the guidelines formulated by the SEC
staff, are considered to be investment companies which issue their securities
pursuant to an exemptive order from the SEC under the 1940 Act. The Fund also
may invest no more than 5% of its total assets in any single issue of such CMOs.
The Fund's investment in such CMOs is also subject to the restrictions on the
Fund's investment in securities of investment companies set forth elsewhere
herein. The Fund will limit its investments in accordance with the SEC staff's
position unless and until the staff changes such position or grants an exemption
therefrom.
FOREIGN SECURITIES
The Fund may invest in foreign securities denominated in U.S. dollars.
Investment in these securities may entail certain risks, including adverse
political and economic developments, possible imposition of withholding or
confiscatory taxes, currency blockage, expropriation, nationalization and the
difficulty of enforcing obligations in foreign countries. Moreover, special
consideration must be given to the reduced availability of public information
concerning issuers, the differences in accounting, auditing and financial
reporting standards and requirements, and the possibility of a less liquid
trading market.
Securities of some foreign issuers are less liquid and are more price
volatile than securities of U.S. companies. Foreign brokerage commissions and
custodian fees are generally higher than in the United States and may be non-
negotiable. In general, there is less overall governmental supervision and
regulation of securities exchanges, brokers and listed companies than in the
United States. Under normal market conditions, the Fund will invest no more
than 25% of its total assets in foreign securities denominated in U.S. dollars.
RESTRICTED SECURITIES
The Fund may invest in restricted securities (privately-placed debt and
preferred equity securities) and other securities without readily available
market quotations, but will not acquire such securities or other illiquid
securities, including repurchase agreements maturing in more than seven days, if
as a result they would comprise more than 10% of the value of the Fund's total
assets.
Restricted securities may be sold only in privately-negotiated transactions
or in a public offering with respect to which a registration statement is in
effect under the Securities Act of 1933. Where registration is required, the
Fund may be obligated to pay all or a part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and the
time the Fund may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions
were to develop, the Fund might obtain a less favorable price than prevailed
when it decided to sell. Restricted securities will be priced at fair value as
determined in good faith by the Fund's Board of Directors.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreement transactions as a means to earn
income during a relatively short period, normally seven days or less. In a
typical repurchase agreement, the Fund purchases a security, generally a
security issued by the U.S. Government or an agency or instrumentality thereof,
subject to an obligation of the seller to repurchase the security at a specified
time and price (representing the Fund's cost plus earned interest). During the
time period of the agreement, the Fund will receive a fixed rate of return
(interest) that is not subject to market fluctuations. Repurchase agreements
are treated as loans made by the Fund which are collateralized by the security
subject to repurchase. The Manager will monitor such transactions to ensure
that the value of the underlying security will be at least equal at all times to
the total amount of the repurchase obligation, including the interest factor.
The Fund will enter into repurchase agreements only with banks that are members
of the Federal Reserve System and broker/dealers registered with the Securities
and Exchange Commission which the Manager, through ongoing research, deems to be
creditworthy.
Repurchase agreements could involve certain risks in the event of default or
bankruptcy of the seller, including delays in liquidating the underlying
securities, collection expenses and possible losses on the securities if their
market value declines during the period that the Fund seeks to enforce its
rights thereto. The Fund will not invest more than 5% of its assets in
repurchase agreements. The Fund does not presently intend to invest in
repurchase agreements maturing in more than seven days, or with respect to
securities for which there are no readily available market quotations.
-5-
<PAGE>
WHEN-ISSUED OR DELAYED-DELIVERY SECURITIES
The Fund may purchase securities on a when-issued or a delayed-delivery
basis, that is, for payment and delivery on a date later than normal settlement,
but generally within 30 days.
The purchase price and yield on these securities are generally set at the
time of purchase. On the date that a security is purchased on a when-issued
basis, the Fund reserves liquid assets with a value at least as great as the
purchase price of the security, in a segregated account at the custodian bank,
as long as the obligation to purchase continues. The value of the delayed-
delivery security is reflected in the Fund's net asset value as of the purchase
date, however, no income accrues to the Fund from these securities prior to
their delivery to the Fund. The Fund makes such purchases for long-term
investment reasons, but may actually sell the securities prior to settlement
date if the Manager deems it advisable in seeking to achieve the objectives of
the Fund. The purchase of these types of securities may increase the Fund's
overall investment exposure and involves a risk of loss if the value of the
securities declines prior to the settlement date. Unsettled securities
purchased on a when-issued or delayed-delivery basis will not exceed 5% of the
Fund's total assets at any one time.
LENDING OF PORTFOLIO SECURITIES
The Fund has reserved the right to lend its securities to qualified broker-
dealers, banks or other financial institutions. By lending its portfolio
securities, the Fund would attempt to increase its income by receiving a fixed
fee or a percentage of the collateral, in addition to continuing to receive the
interest or dividends on the securities loaned. The terms, structure and the
aggregate amount of such loans would be consistent with the Investment Company
Act of 1940, and the Rules and Regulations and interpretations of the Securities
and Exchange Commission. The borrower would be required to secure any such loan
with collateral in cash or cash equivalents maintained on a current basis in an
amount at least equal to the total market value and accrued interest of the
securities loaned by the Fund.
The Fund does not presently intend to lend portfolio securities.
PERFORMANCE INFORMATION
- -----------------------
The Fund may, from time to time, include figures indicating the Fund's yield
or total return in advertisements or reports to shareholders or prospective
investors. Quotations of the Fund's yield, as defined by the Securities &
Exchange Commission, will be based on all investment income per share earned
during a particular thirty-day period and will be computed by dividing this net
investment income by the net asset value per share on the last day of the period
and annualizing the results, according to the following formula:
a-b 6
YIELD = 2[(--- + 1) -1]
cd
where a = dividends and interest earned during the period,
b = expenses accrued for the period (net of
reimbursements or waivers),
c = the average daily number of shares
outstanding during the period that
were entitled to receive dividends, and
d = the maximum offering price per share on the
last day of the period.
The Fund's current yield for the thirty days ended December 31, 1995
was 6.41%. Yield does not directly reflect changes in net asset value per share
which occurred during the period.
Quotations of the Fund's average annual total return will be expressed
in terms of the average annual compounded rate of return on a hypothetical
investment in the Fund over periods of one, five and ten years (but not for a
period greater than the life of the Fund), will reflect the deduction of a
proportional share of Fund expenses (on an annual basis), will assume that all
dividends and capital gains distributions are reinvested when paid, and will be
calculated pursuant to the following formula:
n
P (1 + T) = ERV
where P = a hypothetical initial payment of $1,000,
T = the average annual total return,
n = the number of years,
ERV = the ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
period.
The average annual total return of the Fund for the one, five and
seven year periods ended December 31, 1995 (life of the Fund) was 20.21%, 10.57%
and 10.61%, respectively. Total return indicates the positive or negative rate
of return that an investor would have earned from reinvested dividends and
distributions and changes in net asset value per share during the period.
-6-
<PAGE>
Performance information for the Fund may be compared, in reports and
promotional literature, to: (i) the Lehman Brothers Aggregate Bond Index, the
Salomon Brothers Broad Investment-Grade Bond Index, or other appropriate managed
and unmanaged indices of the performance of various types of investments, so
that investors may compare the Fund's results with those of indices widely
regarded by investors as representative of the fixed-income markets in general,
and (ii) the performance of other mutual funds. Unmanaged indices may assume
the reinvestment of dividends, but generally do not reflect deductions for
administrative and management costs and expenses; managed indices do reflect
such deductions.
Performance information for the Fund reflects only the performance of
a hypothetical investment in the Fund during the particular time period on which
the calculations are based. Performance information should be considered in
light of the Fund's investment objectives and policies, the types and quality of
the Fund's portfolio investments, market conditions during the particular time
period and operating expenses. Such information should not be considered as a
representation of the Fund's future performance. Further information about the
performance of the Fund is contained in the Fund's Annual Report which may be
obtained without charge from the Fund.
PURCHASE, REDEMPTION, AND PRICING OF SHARES
- -------------------------------------------
The procedures for purchasing and redeeming shares of the Fund are
described in the Fund's Prospectus, which is incorporated herein by reference.
ADDITIONAL INFORMATION ON PRICING OF SHARES
In determining the total net asset value of the Fund, debt securities,
including listed issues, are priced on the basis of valuations furnished by a
pricing service which utilizes both dealer-supplied valuations and electronic
data processing techniques. These values take into account appropriate factors
such as institutional-size trading markets in similar groups of securities,
yield, quality, coupon rate, maturity, type of issue, trading characteristics
and other market data and do not rely exclusively upon exchange or over-the-
counter listed prices. Use of the pricing service has been approved by the
Board of Directors. If acquired, preferred stocks, common stocks and warrants,
if listed on an exchange, will be valued at market, using as a price the last
sale of the day at the close of the New York Stock Exchange. If not traded, or
if unlisted, the security is valued at the mean between the last current bid and
ask prices. Portfolio securities for which there are no such quotations or
valuations are valued at fair value as determined in good faith by or at the
direction of the Board of Directors.
OFFICERS AND DIRECTORS
- ----------------------
<TABLE>
<CAPTION>
Aggregate 1995 Total Compensation
Position(s) Principal Occupation Compensation From Fund and Fund
Name and Address Age with Fund During Past 5 Years from Fund Complex **
- ---------------- --- --------- ------------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
A. Horton Shapiro* 56 President and Senior Vice-President of $ ---- $ ----
Director Dodge & Cox; Vice-Chairman
and Trustee, Dodge & Cox
Balanced Fund
John A. Gunn* 52 Vice-President President of Dodge & Cox; ---- ----
and Director President and Director,
Dodge & Cox Stock Fund
W. Timothy Ryan* 58 Secretary- Senior Vice-President and ---- ----
Treasurer Secretary-Treasurer and
and Director Director of Dodge & Cox;
Secretary-Treasurer and
Director, Dodge & Cox
Stock Fund; Secretary,
Dodge & Cox Balanced Fund
Dana M. Emery* 34 Assistant Vice-President of Dodge & Cox ---- ----
Secretary-
Treasurer and
Director
Max Gutierrez, Jr. 65 Director Partner in Brobeck, Phleger 2,500 7,500
One Market Plaza & Harrison, Attorneys; Director,
San Francisco, Dodge & Cox Stock Fund; Trustee,
California Dodge & Cox Balanced Fund
</TABLE>
-7-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Frank H. Roberts 76 Director Retired Partner in Pillsbury, 2,000 6,000
114 Sansome Street Madison & Sutro, Attorneys;
San Francisco, Director, Dodge & Cox
California Stock Fund; Trustee,
Dodge & Cox Balanced Fund
John B. Taylor 49 Director Professor of Economics and 2,500 7,500
Department of Director of the Center
Economics for Economic Policy Research,
Stanford University Stanford University;
Stanford, California Director, Dodge & Cox
Stock Fund; Trustee,
Dodge & Cox Balanced Fund
Will C. Wood 56 Director Principal, Kentwood 2,500 7,500
3000 Sand Hill Road Associates, Financial Advisers;
Menlo Park, California prior to 1994, Managing Director,
IDI Associates, Financial Advisers;
Director, Dodge & Cox Stock Fund;
Trustee, Dodge & Cox
Balanced Fund
</TABLE>
* Each has been an employee of Dodge & Cox, 35th Floor, One Sansome Street,
San Francisco, California for over ten years in an executive position and is an
"interested person" of the Fund as defined in the Investment Company Act of
1940. As of February 29, 1996, each has a beneficial interest in the 289,212 of
the Fund (1.1% of total outstanding shares) owned by Dodge & Cox Pension Trust
and 253,923 shares of the Fund (0.9% of total outstanding shares) owned by Dodge
& Cox Profit Sharing Trust.
** Total 1995 Compensation From Fund and Fund Complex consists of compensation
and fees paid to directors and trustees by all the Dodge & Cox Funds: Dodge &
Cox Balanced Fund, Dodge & Cox Stock Fund, and Dodge & Cox Income Fund.
- -------------------------------
Directors and officers of the Fund affiliated with Dodge & Cox hold a
controlling interest in Dodge & Cox. Those directors who are not affiliated
with Dodge & Cox receive from the Fund an annual fee of $1,000 and an attendance
fee of $500 for each meeting of the Board of Directors attended. The Fund does
not pay any other remuneration to its officers or directors, and has no bonus,
profit-sharing, pension or retirement plan. On February 29, 1996 the officers
and directors of the Fund and members of their families and relatives owned less
than 1.0% of the outstanding shares of the Fund.
On February 29, 1996, Charles Schwab & Co. Inc., 101 Montgomery Street, San
Francisco, California 94101 owned of record 2,068,664 shares (or 7.5% of the
outstanding shares of the Fund); University of California Berkeley Foundation,
2440 Bancroft Way, Berkeley, California 94720 owned beneficially and of record
1,997,216 shares (or 7.3% of the outstanding shares of the Fund); City of
Englewood Pension Trusts, 3400 S. Elati Street, Englewood, Colorado 80110 owned
beneficially and of record 1,705,607 shares (or 6.2% of the outstanding shares
of the Fund); Geneva Steel Pension Plan, 1600 West Center Street, Orem, Utah
84057 owned beneficially and of record 1,395,543 shares (or 5.1% of the
outstanding shares of the Fund); and HEP and Co., c/o First Interstate Bank,
26610 W. Agoura Road, Calabasas, California 91302 owned of record 1,372,104
shares (or 5.0% of the outstanding shares of the Fund). The Fund knows of no
other person who owns beneficially or of record more than 5% of the outstanding
shares of the Fund.
INVESTMENT ADVISER
- ------------------
Dodge & Cox, One Sansome Street, San Francisco, California 94104, a California
corporation, is the Fund's manager and investment adviser, subject to the
direction of the Board of Directors. Dodge & Cox (the "Manager") is one of the
oldest professional investment management firms in the United States, having
acted continuously as investment managers since 1930. The Fund's investments
are managed by Dodge & Cox's Bond Policy Committee, and no one person is
primarily responsible for making investment recommendations to the Committee.
The research work of the firm is organized for comprehensive and continuous
appraisal of the economy and of various industries and companies. Supplemental
research facilities are used to obtain additional coverage of business and
financial developments affecting comparative security values.
The revenues of the Manager are derived from fees for investment management
services. The Manager is not engaged in the brokerage business nor in the
business of dealing in or selling securities. Its activities are devoted to
investment research and the supervision of investment accounts for individuals,
trustees, corporations, pension and profit-sharing funds, and charitable
institutions. In addition, the Manager has managed the Dodge & Cox Balanced
Fund since 1931 and the Dodge & Cox Stock Fund since 1965. The investment
advisory contract between the Fund and the Manager was approved by a majority of
the shares of the Fund and, as amended, provides for a management fee which is
accrued daily and payable quarterly to the Manager at a rate of 1/8 of 1%
(equivalent to 5/10 of 1% annually) of the average weekly net asset value of the
Fund up to $100 million and 1/10 of 1% (equivalent to 4/10 of 1% annually) of
the average weekly net asset value of the Fund in excess of $100 million.
However, the contract provides that the Manager shall waive its fee for any
calendar year to the extent that such fee plus all other ordinary operating
expenses paid by the Fund exceeds 1% of the average weekly net asset value of
the Fund. Brokerage commissions and
-8-
<PAGE>
taxes on the Fund's portfolio transactions are not deemed ordinary operating
expenses for purposes of limiting the Manager's fee. No waiver of management fee
was required in 1995, 1994 and 1993 under this agreement, and the Manager was
paid a fee of $1,045,074 for the year 1995, $869,973 for the year 1994 and
$773,645 for the year 1993. The contract may be terminated at any time without
penalty upon 60 days written notice by action of the directors, shareholders or
by Dodge & Cox. The contract will terminate automatically should there be an
"assignment" thereof (as defined in the Investment Company Act of 1940). In
addition to the Manager's fee, the Fund pays other ordinary operating expenses,
primarily for bank custody of assets, stock transfer agent, printing of reports
and prospectuses (not for promotional purposes), registration fees, and legal
and auditing services. The Manager furnishes personnel and other facilities
necessary for the operation of the Fund for which it receives no additional
compensation. The Manager supervises the administration of the Fund and directs
the investment and reinvestment of its assets and furnishes all executive
personnel and office space required.
PORTFOLIO TRANSACTIONS
- ----------------------
Decisions to purchase or to sell securities for the Fund's portfolio are based
on the Manager's appraisal of the investment merits of such transactions. The
Manager provides facilities and personnel for the placement of purchase and sale
orders with brokerage firms and the negotiation of net purchase and sale prices.
One or more of several broker-dealers who the Manager believes can obtain the
most favorable prices and executions will be given orders for securities
transactions. Subject to this primary requirement, the Manager places some
purchase and sale transactions with broker-dealers who supply research and
quotation services to the Manager. These services, which are merely
supplementary to the Manager's own research effort, include reports on
companies, industries, securities, business conditions and portfolio strategy,
research-oriented computer software and services, computer data bases, and
performance measurement and analysis. The Manager may pay a broker-dealer an
effective commission in excess of that which another broker-dealer might have
charged for effecting the same transaction for the Fund, in recognition of the
value of favorable price and execution or research services if the Manager
determines in good faith that the amount of the commission is reasonable in
relation to the value of those services in terms either of the particular
transaction, or in terms of the overall responsibility of the Manager to the
Fund and to any other accounts over which the Manager exercises investment
discretion. No specific formula is used in allocating such commission business.
Periodically the Manager reviews the current effective commission rates and
discusses the execution capabilities and the services provided by the various
broker-dealers that the Manager is utilizing in the execution of orders.
Research services furnished by the brokers through whom the Manager effects
securities transactions for the Fund may be used in servicing all of the
Manager's accounts, however, all such services may not be used by the Manager in
connection with the Fund. Except as indicated above, the Manager does not
intend to place portfolio transactions with any particular broker-dealer.
Investment decisions for the Fund are made independently from those of the
Dodge & Cox Stock Fund, the Dodge & Cox Balanced Fund and other accounts managed
by the Manager. It may frequently develop that the same investment decision is
made for more than one account. Simultaneous transactions may often occur when
the same security is suitable for the investment objective of more than one
account. When two or more accounts are simultaneously engaged in the purchase
or sale of the same security, the transactions are averaged as to price and
allocated as to amount in accordance with a formula equitable to each account.
It is recognized that in some cases this system could have a detrimental effect
on the price or availability of the security as far as the Fund is concerned.
In other cases, however, it is believed that the ability of the Fund to
participate in volume transactions will produce more advantageous executions for
the Fund. It is the opinion of the Board of Directors that the possible
advantages involved outweigh any possible disadvantages that may result from
simultaneous transactions.
ADDITIONAL TAX CONSIDERATIONS
- -----------------------------
Any dividend or capital gains distribution reduces the net asset value per
share by the per share amount of such distribution. Distributions received
shortly after the purchase of shares are in effect a return of capital, but are
nonetheless subject to taxation.
The discussion above and in the Fund's Prospectus regarding the Federal income
tax consequences of investing in the Fund have been prepared by the Manager and
do not purport to be complete descriptions of all tax implications of an
investment in the Fund. Shareholders are advised to consult with their own tax
advisers concerning the application of Federal, state and local taxes to an
investment in the Fund. The Fund's legal counsel has expressed no opinion in
respect thereof.
INDEPENDENT ACCOUNTANTS
- -----------------------
Price Waterhouse LLP, 555 California Street, San Francisco, California 94104,
are independent accountants to the Fund, subject to annual appointment by the
Board of Directors. The accountant conducts an annual audit of the accounts and
records of the Fund, reports on the Fund's annual financial statements, and
performs tax and accounting advisory services.
LEGAL COUNSEL
- -------------
The validity of the shares offered by the Fund's Prospectus and Statement of
Additional Information will be passed on by Heller, Ehrman, White & McAuliffe,
333 Bush Street, Suite 3000, San Francisco, California 94104. Such firm is also
legal counsel to the Manager and certain affiliates of the Manager and the Fund.
-9-
<PAGE>
APPENDIX: RATINGS
- -----------------
A debt obligation rating by Moody's or S & P reflects their current assessment
of the creditworthiness of an obligor with respect to a specific obligation. The
purpose of the rating systems is to provide investors with a simple system of
gradation by which the relative investment qualities of bonds may be noted. A
rating is not a recommendation as to investment value, inasmuch as it does not
comment as to market price or suitability for a particular investor.
The ratings are based on current information furnished by the issuer or from
other sources that the rating agencies deem reliable. The ratings may be
changed, suspended, or withdrawn as a result of changes in, or unavailability
of, such information, or for other circumstances.
The following is a description of the characteristics of ratings as published
by Moody's and S & P.
RATINGS BY MOODY'S (MOODY'S INVESTORS SERVICE)
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during other good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Note: Moody's applies numerical modifiers, 1, 2, and 3 in each generic
rating classification from Aa through B in its corporate bond rating system.
The modification 1 indicates that the security ranks in the higher end of its
generic rating group; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic rating
group.
RATINGS BY S & P (STANDARD & POOR'S CORPORATION)
AAA Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated groups.
BBB Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this group than in higher rated groups.
BB,B Debt rated BB and B is regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. While such debt will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
Plus (+) or Minus (-): The ratings from AA to B may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
groups.
-10-
<PAGE>
DODGE & COX INCOME FUND
PART C - OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS
- -------- ---------------------------------
(a) Financial Statements:
Statement of Assets and Liabilities*
Statement of Changes in Net Assets*
Statement of Operations*
Portfolio of Investments*
* Incorporated by reference to similarly named financial statement in
Registrant's 1995 Annual Report to Shareholders, including Notes to
Financial Statements and Report of Independent Accountants.
Registrant's 1995 Annual Report dated December 31, 1995, was filed
with the Commission on February 20, 1996 (File No. 811-5580).
(b) Exhibits:
B10 - Consent of Counsel.
B11 - Consent of Independent Accountants.
B12 - 1995 Annual Report -- reference is made to (a) above.
B17 - Financial Data Schedule.
All other exhibits required under this section were filed with the
original registration statement or post-effective amendments and are
herein incorporated by reference.
Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
- -------- -------------------------------------------------- ----------
It may be deemed that Dodge & Cox, the investment adviser of
Registrant, is under common control with Registrant in that four of
the eight directors and all officers of Registrant are controlling
stockholders of Dodge & Cox.
Dodge & Cox is a California corporation. As of December 31, 1995, the
persons who are directors and officers of Registrant and also
controlling stockholders of Dodge & Cox are as follows:
<TABLE>
<CAPTION>
% of Stock Owned in
Name Dodge & Cox
---- -------------------
<S> <C>
Dana M. Emery 3.10%
John A. Gunn 17.04
W. Timothy Ryan 9.54
A. Horton Shapiro 10.01
</TABLE>
Item 26. NUMBER OF HOLDERS OF SECURITIES
- -------- -------------------------------
<TABLE>
<CAPTION>
Number of Record Holders
Title of Class as of 12/31/95
-------------- --------------
<S> <C>
Capital Stock (only class) 1,200
</TABLE>
<PAGE>
Item 27. INDEMNIFICATION
- -------- ---------------
Under Section 317 of the California Corporations Code, and under
provisions of Registrant's articles of incorporation and by-laws, the
liability of Registrant's directors for monetary damages has been
eliminated to the fullest extent permissible under applicable law.
Registrant's directors, officers, employees and other agents are also
entitled to indemnification against expenses, judgments, fines,
settlements and other amounts actually and reasonably incurred by them
in connection with any proceeding by reason of the fact that such
persons are or were directors or officers of Registrant, or are or
were serving at the request of Registrant as a director, officer,
trustee, employee or agent of another corporation, or of a
partnership, joint venture, trust or other enterprise. Those
provisions also provide that expenses incurred by a director or
officer of Registrant seeking indemnification in defending any
proceeding shall be advanced by Registrant as they are incurred upon
receipt by Registrant of an undertaking by or on behalf of the
director or officer to repay such amount if it shall ultimately be
determined that the director or officer is not entitled to to be
indemnified by Registrant for those expenses.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provision, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
Registrant and Dodge & Cox maintain officers' and directors' liability
insurance in the amount of $10,000,000 with a $5,000 deductible
provision. Dodge & Cox has agreed to indemnify officers and directors
of Registrant in the amount of the deductible portion of such
insurance.
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
- -------- ----------------------------------------------------
Dodge & Cox is also investment adviser to Dodge & Cox Balanced Fund,
Dodge & Cox Stock Fund and to numerous individuals and institutions.
Item 29. PRINCIPAL UNDERWRITERS
- -------- ----------------------
None.
<PAGE>
Item 30. LOCATION OF ACCOUNTS AND RECORDS
- -------- --------------------------------
Dodge & Cox
One Sansome Street, 35th Floor
San Francisco, CA 94104
Firstar Trust Company
615 East Michigan Street
Milwaukee, Wisconsin 53202
Item 31. MANAGEMENT SERVICES
- -------- -------------------
None.
Item 32. UNDERTAKINGS
- -------- ------------
(1) Registrant hereby undertakes to call a meeting of shareholders for
the purpose of voting upon the question of removal of a director or
directors when requested in writing to do so by the holders of at
least 10% of Registrant's outstanding shares of common stock and in
connection with such meeting to comply with the provisions of Section
16(c) of the Investment Company Act of 1940 relating to shareholder
communications.
(2) Registrant hereby undertakes to furnish to each person, to whom
Registrant's Prospectus is delivered, with a copy of Registrant's
most recent Annual Report to Shareholders upon request and without
charge.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for the effectiveness of this Registration Statement pursuant
to Rule 485(b) under the Securities Act of 1933 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized in the City of San Francisco and State of California on the
8TH day of MARCH , 1996.
DODGE & COX INCOME FUND
By:
/s/ A. HORTON SHAPIRO
------------------------------------------
A. Horton Shapiro, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons as
Directors on the 8TH day of MARCH , 1996.
SIGNATURES
----------
/s/ DANA M. EMERY /s/ W. TIMOTHY RYAN
- ------------------------------- -------------------------------
Dana M. Emery W. Timothy Ryan
/s/ JOHN A. GUNN /s/ A. HORTON SHAPIRO
- ------------------------------- -------------------------------
John A. Gunn A. Horton Shapiro
/s/ MAX GUTIERREZ, JR. /s/ JOHN B. TAYLOR
- ------------------------------- -------------------------------
Max Gutierrez, Jr. John B. Taylor
/s/ FRANK H. ROBERTS /s/ WILL C. WOOD
- ------------------------------- -------------------------------
Frank H. Roberts Will C. Wood
<PAGE>
DODGE & COX INCOME FUND
INDEX TO EXHIBITS
<TABLE>
<S> <C> <C>
ITEM 24(b)10 Consent of Counsel...................................... EX-23.B10
ITEM 24(b)11 Consent of Independent Accountants...................... EX-23.B11
ITEM 24(b)12 1995 Annual Report - Dodge & Cox Income Fund............ EX-13.B12
ITEM 24(b)17 Financial Data Schedule................................. EX-27.B17
</TABLE>
<PAGE>
HELLER EHRMAN WHITE & MCAULIFFE
333 BUSH STREET
SAN FRANCISCO, CALIFORNIA 94104-2878
FACSIMILE: (415) 772-6268
TELEPHONE: (415) 772-6000
March 1, 1996
CONSENT OF COUNSEL
We hereby consent to the reference to our firm in the Prospectus
contained in Post-Effective Amendment No. 8 to the Registration Statement on
Form N-1A (registration No. 33-23184) of the Dodge & Cox Income Fund.
Very truly yours,
/S/ HELLER, EHRMAN, WHITE & McAULIFFE
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 8 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
January 23, 1996, relating to the financial statements and financial highlights
of the Dodge & Cox Income Fund, which appears in such Statement of Additional
Information, and to the incorporation by reference of our report into the
Prospectus which constitutes part of this Registration Statement. We also
consent to the reference to us under the heading "Independent Accountants" in
such Statement of Additional Information and to the reference to us under the
heading "Financial Highlights" in such Prospectus.
/S/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
San Francisco, California
March 4, 1996
<PAGE>
DODGE & COX DODGE & COX
Income Fund
- --------------------------------------- ---------------------------------------
Income Fund
Established 1989
---------------------------------------
---------------------------------------
Dodge & Cox
Investment Managers
35th Floor
One Sansome Street
San Francisco
California 94104
(415) 981-1710
7th Annual Report
For Fund literature and December 31, 1995
information, please call:
(800) 621-3979 1995
- --------------------------------------- ---------------------------------------
<PAGE>
DODGE & COX
======================================---=======================================
Income Fund
To Our Shareholders
----------------------------------------------------------------------------
Reflecting the bond market's recovery from a weak performance in 1994, the
Dodge & Cox Income Fund provided its shareholders a total return of 20.2%
for 1995. This outpaced the 18.5% total return of the Lehman Brothers
Aggregate Bond (LBAG) Index, a broad-based index composed of investment
grade bonds that serves as a proxy for the overall market. The Income Fund
and the LBAG Index annual returns for one, five and seven years are shown on
page 3 of this report.
The net asset value of the Fund rose from $10.74 at the end of 1994 to
$12.02 as of December 31, 1995. In addition, the Fund paid dividends of
$0.78 per share from investment income and $0.06 per share from net realized
short and long-term capital gains. At year-end, the Fund's total net assets
were valued at $303 million.
Falling Interest Rates Propel Strong Returns
The strong performance of the bond market--and the Dodge & Cox Income Fund--
was largely attributable to a combination of slowing economic growth and low
inflation. After expanding at a robust 5.1% annual pace in the fourth
quarter of 1994, U.S. gross domestic product (GDP) grew at a more modest
annualized rate of 2.7% through the end of September 1995. Inflation, as
measured by the Consumer Price Index, remained steady, posting a 2.5%
increase for 1995.
This slowing GDP growth and restrained inflation, coupled with two interest
rate reductions by the Federal Reserve Board, fueled a powerful rally in the
bond market. Interest rates declined across the maturity spectrum: from
year-end 1994 to year-end 1995, thirty year U.S. Treasury rates fell from
7.88% to 5.95% while two year U.S. Treasury rates declined from 7.70% to
5.15%. As a result of the large drop in interest rates, prices of fixed-
income securities soared, with the largest price increases recorded by
longer-maturity bonds. This price appreciation was the primary driver of the
Fund's 20.2% total return in 1995.
Underlying the price appreciation are two key factors that helped the Fund
outperform the LBAG Index:
. Longer-than-market duration: Because a relatively high percentage of
the Fund's holdings are in longer-maturity bonds, which had greater
price appreciation than short-term securities, the decline in
interest rates boosted the net asset value of the Fund more
dramatically than that of the overall market.
. Good security selection: Our focus on both credit fundamentals and
the structure of individual securities contributed to the Fund's
higher returns as the Fund's non-callable and call-protected
corporate and mortgage-backed securities outperformed callable ones.
The Fund's higher-than-market yield added modestly to relative performance
this year, but we believe it will be an important source of relative return
over longer time periods.
1995 Review and Portfolio Changes
Sector allocations within the Fund remained relatively constant during 1995
with roughly 34% - 40% allocations to each of the corporate and mortgage-
backed sectors and 19% - 25% to the U.S. Treasury sector.
The corporate sector was the best performer for the Fund in 1995, reflecting
both our focus on long-duration corporate securities and reductions in the
yield premiums on many of the Fund's corporate holdings. Time
======================================---=======================================
1
<PAGE>
DODGE & COX
======================================---=======================================
Income Fund
Warner Entertainment and AMR, two of the Fund's higher-yielding corporate
holdings, had particularly strong returns. The prices of both benefited from
their long-maturity, non-callable structure and significant improvement in
the market's perception of their creditworthiness. We had previously
identified this value through the comprehensive, fundamental credit research
of our in-house analysts. We added to existing corporate positions during
the year and established new positions in May Department Stores and Norwest
Bank. Caterpillar and Bank of Boston were sold, as we believed their
valuations fully reflected optimistic scenarios about their futures.
Despite 1995's rapidly falling rates, an environment that can be troublesome
for securities vulnerable to prepayments, mortgage-backed securities made
significant contributions to the Fund's return. Security selection proved to
be the key in this regard as our focus on embedded call protection and
average life stability ensured that these securities participated fully in
1995's rally. Short, well-seasoned mortgage pass-throughs, which have good
defensive qualities, returned between 9% and 15% for the year. The Fund's
collateralized mortgage obligations (CMOs), which primarily have five-to-ten
year average lives, contributed total returns of between 19% and 27% for the
year.
New positions in the mortgage-backed securities sector included two
purchases of V.A. Vendees--CMOs issued by the Department of Veteran Affairs
and collateralized by mortgage loans that carry a U.S. Government guarantee.
The borrowers whose mortgage payments provide the cash flow for these CMOs
have proven less responsive to refinancing opportunities; this has added to
the stability and attractiveness of these securities.
While maintaining the duration of the Fund longer than that of the broad
market throughout 1995, we did take several opportunities to lower the
Fund's price sensitivity to interest rates as the year progressed. We moved
the Fund's duration from 115% of the LBAG Index's duration at the beginning
of the year to 110% in June and reduced it further in December. While we
have not abandoned the possibility of lower interest rates in the future, we
considered it prudent to reduce modestly the duration of the Fund, given the
current levels of both real and nominal rates.
Looking Ahead
In closing, we would like to remind shareholders that 1995's returns were
unusually strong. With nominal interest rates and the Fund's yield
significantly lower than a year ago, it is highly unlikely that the Fund in
1996 and beyond will see a repeat of the large total return of 1995.
Nonetheless, our investment philosophy will not waver. We construct the
Fund's portfolio security-by-security, relying upon diligent, fundamental
research to identify issuers or sectors where we believe the market
underestimates creditworthiness or total return potential. We will do this
while maintaining the Fund's high average quality, diversification, and
higher-than-market yield. And finally, we will continue to invest with a
focus on the long-term return potential of securities.
We would like to recognize and thank a distinguished member of the Board of
Directors who resigned at the end of 1995. Robert C. Harris served as a
Director of the Fund since the Fund's inception in 1989. We have valued his
wise counsel and wish him well in the future.
Thank you for your continued confidence in the Dodge & Cox Income Fund.
As always, we welcome your comments and suggestions.
For the Board of Directors,
/s/ A. Horton Shapiro
January 23, 1996 A. Horton Shapiro, President
======================================---=======================================
2
<PAGE>
DODGE & COX
======================================---=======================================
Income Fund
Investment Performance Since Inception
----------------------------------------------------------------------------
Comparison of change in value of a $10,000 investment in the Dodge & Cox
Income Fund and the Lehman Brothers Aggregate Bond (LBAG) Index
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Dodge & Cox LBAG
Year Income Fund Index
<S> <C> <C>
88 $ 10,000 $ 10,000
89 11,409 11,454
90 12,255 12,480
91 14,453 14,477
92 15,581 15,549
93 17,348 17,065
94 16,847 16,567
95 20,251 19,628
</TABLE>
<TABLE>
<CAPTION>
Average annual total return for periods ended December 31, 1995 1 Year 5 Years 7 Years
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dodge & Cox Income Fund 20.21% 10.57% 10.61%
LBAG Index 18.48 9.48 10.11
</TABLE>
The chart covers the period from January 1, 1989 to December 31, 1995. It
compares a $10,000 investment made in the Dodge & Cox Income Fund to a
$10,000 investment made in the Lehman Brothers Aggregate Bond Index (a broad
based index composed of investment grade bonds). The chart and average
annual total return figures include the reinvestment of dividend and capital
gain distributions. These results represent past performance; past
performance is no guarantee of future results. Investment return and share
price will vary, and shares may be worth more or less at redemption than at
original purchase.
======================================---=======================================
3
<PAGE>
DODGE & COX
======================================---=======================================
Income Fund
<TABLE>
<CAPTION>
Financial Highlights Year Ended December 31,
-------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
<C> <S> <C> <C> <C> <C> <C>
Selected data NET ASSET VALUE, BEGINNING OF YEAR........................... $10.74 $11.89 $11.55 $11.59 $10.61
and ratios for a Income from investment operations:
share outstanding Net investment income........................................ .78 .77 .78 .82 .81
throughout Net realized and unrealized gain (loss) on investments....... 1.34 (1.11) .51 .05 1.02
each year ------ ------ ------ ------ ------
Total income (loss) from investment operations............... 2.12 (.34) 1.29 .87 1.83
------ ------ ------ ------ ------
Distributions:
Dividends from net investment income......................... (.78) (.76) (.78) (.82) (.82)
Distributions from net realized gain on investments.......... (.06) (.05) (.17) (.09) (.03)
------ ------ ------ ------ ------
Total distributions.......................................... (.84) (.81) (.95) (.91) (.85)
------ ------ ------ ------ ------
NET ASSET VALUE, END OF YEAR................................. $12.02 $10.74 $11.89 $11.55 $11.59
====== ====== ====== ====== ======
TOTAL RETURN.................................................% 20.21 (2.89) 11.34 7.80 17.94
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (millions)........................... $ 303 $ 195 $ 180 $ 136 $ 96
Ratio of expenses to average net assets......................% .54 .54 .60 .62 .64
Ratio of net investment income to average net assets.........% 6.85 6.90 6.50 7.14 7.63
Portfolio turnover rate......................................% 53 55 26 12 15
</TABLE>
<TABLE>
<CAPTION>
QUALITY RATINGS AND PORTFOLIO CHARACTERISTICS AS OF DECEMBER 31, 1995
-------------------------------------------------------------------------------------------------------------
Moody's/
Standard & Poor's % of Portfolio
Quality Ratings Fund Characteristics
----------------- ------ ---------------
<S> <C> <C>
U.S. Government Securities 58.7 S.E.C. 30 Day Yield 6.41%
Aaa/AAA 13.5 Average Quality AA+
Aa/AA 1.9 Average Maturity 10.7 years
A/A 17.0 Effective Duration 4.9 years
Baa/BBB 5.1
Ba/BB 3.8
------
100.0%
</TABLE>
In calculating the quality sector weightings, the lower of Moody's or
Standard & Poor's ratings were used for each individual security. U.S.
Government Securities represent obligations issued or guaranteed by the U.S.
Government and its agencies. The Aaa/AAA rating includes the Fund's
investments in short-term demand notes and commercial paper. Average
Maturity is a market-weighted average calculation using the final maturity
date on the U.S. Treasury, Federal Agency and corporate bonds, and the
calculated average-life date based on conservative prepayment assumptions on
mortgage pass-throughs and collateralized mortgage obligations. Effective
Duration is a measure of the Fund's exposure to changes in the level of
interest rates; it is an estimate of the percentage change in price for a 1%
absolute change in interest rates.
======================================---=======================================
4
<PAGE>
DODGE & COX
======================================---=======================================
Income Fund
<TABLE>
<CAPTION>
Portfolio of Investments December 31, 1995
------------------------------------------------------------------------------------------------------------
PAR VALUE MARKET VALUE
<C> <C> <S> <C>
BONDS: U.S. TREASURY: 19.0%
94.1% $ 8,500,000 U.S. Treasury Notes, 6 1/2%, 1996............................................ $ 8,590,270
15,000,000 U.S. Treasury Notes, 7 1/4%, 1996............................................ 15,182,850
22,000,000 U.S. Treasury Notes, 7 7/8%, 1996............................................ 22,323,180
7,000,000 U.S. Treasury Bonds, 14%, 2011, Callable 2006................................ 11,610,130
------------
57,706,430
FEDERAL AGENCY: 0.2%
562,000 Patriot II Shipping-Leo U.S. Govt. Gtd. Title XI, 8%, 2003................... 575,229
FEDERAL AGENCY MORTGAGE PASS-THROUGH, CMO* AND REMIC**: 39.7%
131,328 Federal Home Loan Mtge. Corp. Group 54-1078, 6%, 2003........................ 130,830
156,759 Federal Home Loan Mtge. Corp. Group 25-5222, 7%, 2003........................ 157,638
3,056,679 Federal Home Loan Mtge. Corp. Group 25-6654, 8%, 2003........................ 3,168,034
474,392 Federal Home Loan Mtge. Corp. Group 18-0233, 7%, 2006........................ 483,258
252,916 Federal Home Loan Mtge. Corp. Group 26-0478, 7%, 2006........................ 254,975
956,383 Federal Home Loan Mtge. Corp. Group 27-2784, 7 1/4%, 2008.................... 979,499
276,892 Federal Home Loan Mtge. Corp. Group 53-0142, 7 1/2%, 2008.................... 287,422
670,667 Federal Home Loan Mtge. Corp. Group 18-8028, 8%, 2008........................ 696,374
558,787 Federal Home Loan Mtge. Corp. Group 18-9269, 8%, 2008........................ 582,468
507,413 Federal Home Loan Mtge. Corp. Group 29-0537, 8%, 2009........................ 532,362
1,041,272 Federal Home Loan Mtge. Corp. Group 29-2668, 8%, 2009........................ 1,082,590
399,582 Federal Home Loan Mtge. Corp. Group 26-0671, 8 1/4%, 2009.................... 414,091
350,185 Federal Home Loan Mtge. Corp. Group 53-4727, 6 1/2%, 2012.................... 351,911
10,000,000 Federal Home Loan Mtge. Corp. Multi PC Series 1209-H, 7%, 2005............... 10,159,300
9,900,000 Federal Home Loan Mtge. Corp. Multi PC Series 1258-EA, 8%, 2007.............. 10,416,582
13,284,798 Federal Home Loan Mtge. Corp. Multi PC Series 1565-G, 6%, 2008............... 13,085,526
10,000,000 Federal Home Loan Mtge. Corp. Multi PC Series G-37 I, 6%, 2022............... 9,521,100
4,563,784 Federal Natl. Mtge. Assn. MBS Pool 57358, 6 1/4%, 2007....................... 4,598,286
9,345,664 Federal Natl. Mtge. Assn. MBS Pool 70255, 7 1/2%, 2007....................... 9,721,920
1,188,256 Federal Natl. Mtge. Assn. MBS Pool 478, 7 1/2%, 2011......................... 1,228,312
2,552,890 Federal Natl. Mtge. Assn. MBS Pool 151777, 8%, 2012.......................... 2,709,382
751,804 Federal Natl. Mtge. Assn. MBS Pool 83014, 6 1/2%, 2013....................... 762,450
3,480,690 Federal Natl. Mtge. Assn. MBS Pool 260892, 8%, 2022.......................... 3,639,479
3,000,000 Federal Natl. Mtge. Assn. PC 1992-109-J, 7%, 2007............................ 3,049,590
9,000,000 Federal Natl. Mtge. Assn. PC 1994-72-J, 6%, 2023............................. 8,565,120
11,692,283 Govt. Natl. Mtge. Assn. Pool 780258, 7 1/2%, 2007............................ 12,179,617
959,971 FBC Mtge. Sec. Trust IV-A2, 8.30%, 2009...................................... 988,770
10,000,000 Veterans Affairs Vendee Mtge. Trust Series 1995-1C 3E, 8%, 2018.............. 10,580,000
9,618,621 Veterans Affairs Vendee Mtge. Trust Series 1995-2D 4A, 9.2925%, 2025......... 10,339,152
------------
120,666,038
</TABLE>
* CMO: Collateralized Mortgage Obligation
** REMIC: Real Estate Mortgage Investment Conduit
See accompanying Notes to Financial Statements
======================================---=======================================
5
<PAGE>
DODGE & COX
======================================---=======================================
Income Fund
<TABLE>
<CAPTION>
Portfolio of Investments December 31, 1995
------------------------------------------------------------------------------------------------------------
PAR VALUE MARKET VALUE
<C> <C> <S> <C>
BONDS INDUSTRIAL: 10.5%
(Continued) $ 2,650,000 Dayton-Hudson Corp. Debentures 9%, 2021...................................... $ 3,152,679
1,000,000 Dayton-Hudson Corp. Debentures 9.70%, 2021................................... 1,269,010
4,435,000 Dayton-Hudson Corp. Debentures 8 7/8%, 2022.................................. 5,217,733
3,000,000 Ford Holdings, Inc. Debentures 9 3/8%, 2020.................................. 3,859,410
3,500,000 Ford Motor Co. Debentures 9.95%, 2032........................................ 4,889,640
5,000,000 May Department Stores Notes 7 5/8%, 2013..................................... 5,437,150
4,500,000 Time Warner Entertainment Senior Debentures 8 3/8%, 2033..................... 4,802,490
2,500,000 Union Camp Corp. Debentures 9 1/4%, 2011..................................... 3,168,600
------------
31,796,712
FINANCE: 9.1%
1,471,474 Banamex Export Funding Corp. Coll. Notes Series K, 5.74%, 1997............... 1,472,342
1,450,000 Barclays North American Capital Corp. Notes 9 3/4%, 2021, Callable 2001...... 1,723,934
1,000,000 CIGNA Corp. Debentures 7.65%, 2023........................................... 1,029,310
500,000 Export Finance Corp. Coll. MTN Series I, 8.16%, 1996......................... 503,520
1,955,000 First Nationwide Bank Subordinated Debentures 10%, 2006...................... 2,363,419
1,600,000 General Electric Capital Services Subordinated Notes 7 1/2%, 2035............ 1,814,384
8,000,000 GMAC Put Bonds 8 7/8%, 2010, Putable 2000/2005............................... 9,789,520
4,500,000 ITT Hartford Group Notes 8.30%, 2001......................................... 4,986,810
4,000,000 Norwest Corp. MTN 6 1/2%, 2005............................................... 4,090,960
------------
27,774,199
INTERNATIONAL AGENCY: 5.9%
4,150,000 European Investment Bank Bonds 10 1/8%, 2000................................. 4,891,854
3,300,000 European Investment Bank Bonds 9 1/8%, 2002.................................. 3,876,213
8,750,000 Inter-American Development Bank Debentures 7 1/8%, 2023, Callable 2003....... 8,991,325
------------
17,759,392
TRANSPORTATION: 4.8%
2,590,000 AMR Corp. Debentures 9.88%, 2020............................................. 3,175,107
5,000,000 AMR Corp. Debentures 9 3/4%, 2021............................................ 6,075,150
2,630,000 Consolidated Rail Corp. Debentures 9 3/4%, 2020.............................. 3,557,022
400,000 Norfolk & Western Railroad Equipment Trust Certificate 10 1/8%, 2000......... 468,504
1,000,000 Seaboard Coast Line Railroad Equipment Trust Certificate 11 1/4%, 1999....... 1,156,370
------------
14,432,153
CANADIAN: 4.3%
4,100,000 Canadian Pacific Ltd. Debentures 9.45%, 2021................................. 5,230,616
6,000,000 Hydro-Quebec Debentures 9 1/2%, 2030......................................... 7,783,620
------------
13,014,236
PUBLIC UTILITIES: 0.6%
1,500,000 Idaho Power Co. 1st Mortgage Bonds 9 1/2%, 2021, Callable 2001............... 1,779,195
------------
TOTAL BONDS (cost $269,005,595)......................................... 285,503,584
------------
</TABLE>
See accompanying Notes to Financial Statements
======================================---=======================================
6
<PAGE>
DODGE & COX
======================================---=======================================
Income Fund
<TABLE>
<CAPTION>
Portfolio of Investments December 31, 1995
------------------------------------------------------------------------------------------------------------
PAR VALUE MARKET VALUE
<C> <C> <S> <C>
SHORT-TERM $1,000,000 American Express Co., Commercial Paper 5.65%, 1996........................... $ 1,000,000
INVESTMENTS: 1,521,047 General Mills Inc., Variable Demand Note 5.58%, 1996......................... 1,521,047
3.8% 2,315,905 Pitney Bowes Credit Corp., Variable Demand Note 5.49%, 1996.................. 2,315,905
4,745,723 Sara Lee Corp., Variable Demand Note 5.47%, 1996............................. 4,745,723
1,977,041 Southwestern Bell Telephone Co., Variable Demand Note 5.72%, 1996............ 1,977,041
------------
TOTAL SHORT-TERM INVESTMENTS (cost $11,559,716)......................... 11,559,716
------------
TOTAL INVESTMENTS (cost $280,565,311)......................... 97.9% 297,063,300
OTHER ASSETS LESS LIABILITIES................................. 2.1 6,260,655
----- ------------
TOTAL NET ASSETS.............................................. 100.0% $303,323,955
===== ============
</TABLE>
See accompanying Notes to Financial Statements
======================================---=======================================
7
<PAGE>
DODGE & COX
======================================---=======================================
Income Fund
<TABLE>
<CAPTION>
Statement of Assets and Liabilities December 31, 1995
-------------------------------------------------------------------------------------------
<C> <S> <C>
ASSETS:
Investments (identified cost $280,565,311) at market quotations.......... $297,063,300
Cash..................................................................... 2,131,456
Interest accrued......................................................... 4,070,259
Receivable for investments sold.......................................... 146,475
Deferred charges......................................................... 6,282
------------
303,417,772
------------
LIABILITIES:
Payable for Fund shares redeemed......................................... 82,864
Accounts payable......................................................... 10,953
------------
93,817
Net asset value ------------
per share $12.02 NET ASSETS.......................................................... $303,323,955
============
Capital
shares NET ASSETS CONSIST OF:
outstanding Paid in capital.......................................................... $286,983,673
25,233,189 Accumulated undistributed net investment income.......................... 205,152
(par value Accumulated undistributed net realized loss on investments............... (362,859)
$.01 each, Net unrealized appreciation on investments............................... 16,497,989
authorized shares ------------
100,000,000) $303,323,955
============
</TABLE>
See accompanying Notes to Financial Statements
<TABLE>
<CAPTION>
Condensed Financial Information
--------------------------------------------------------------------------------------------------
Net Asset Value Per Share Distributions Per Share
------------------------- -----------------------
Year Ended Capital
December 31 Net Assets Actual Adjusted* Income Gains
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1989 $ 32,762,573 $10.68 $10.69 $ .69 $.01
1990 52,086,033 10.61 10.63 .81 .01
1991 96,219,763 11.59 11.65 .82 .03
1992 136,261,902 11.55 11.70 .82 .09
1993 180,032,487 11.89 12.21 .78 .17
1994 195,373,985 10.74 11.07 .76 .05
1995 303,323,955 12.02 12.45 .78 .06**
----- ----
$5.46 $.42
===== ====
</TABLE>
* Adjusted for assumed reinvestment of capital gains
distributions.
** The capital gains distribution of $.06 per share includes
a net short-term capital gain of $.03 per share which was
distributed to shareholders as ordinary income.
======================================---=======================================
8
<PAGE>
DODGE & COX
======================================---=======================================
Income Fund
<TABLE>
<CAPTION>
Statement of Operations Year Ended December 31, 1995
-----------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Interest........................................................................ $17,443,770
EXPENSES:
Management fees (Note 2)........................................................ 1,045,074
Custodian fees.................................................................. 40,234
Transfer agent fees............................................................. 27,822
Audit fees...................................................................... 29,600
Legal fees (Note 2)............................................................. 7,867
Shareholder reports............................................................. 39,167
S.E.C. and state registration fees.............................................. 53,898
Directors' fees................................................................. 12,000
Miscellaneous................................................................... 15,342
-----------
1,271,004
-----------
NET INVESTMENT INCOME........................................................... 16,172,766
-----------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS:
Net realized gain on investments (excluding short-term investments)........... 1,800,568
Change in unrealized appreciation of investments.............................. 24,346,915
-----------
Net realized and unrealized gain on investments........................... 26,147,483
-----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS..................................................... $42,320,249
===========
</TABLE>
See accompanying Notes to Financial Statements
======================================---=======================================
9
<PAGE>
DODGE & COX
======================================---=======================================
Income Fund
<TABLE>
<CAPTION>
Statement of Changes in Net Assets Year Ended December 31,
---------------------------------------------------------------------------------------------------------
1995 1994
<S> <C> <C>
OPERATIONS:
Net investment income................................................. $ 16,172,766 $ 13,281,313
Net realized gain (loss) on investments............................... 1,800,568 (714,895)
Net change in unrealized appreciation (depreciation).................. 24,346,915 (18,113,134)
------------ ------------
Net increase (decrease) in net assets from operations................. 42,320,249 (5,546,716)
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income................................................. (16,120,304) (13,157,967)
Net realized gain from investment transactions........................ (1,448,533) (793,013)
------------ ------------
Total distributions to shareholders................................... (17,568,837) (13,950,980)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Amounts received from sale of shares.................................. 137,967,192 72,687,480
Net asset value of shares issued in connection with
reinvestment of dividends from net investment income
and from distribution of net realized gain on investments............. 9,874,550 8,362,194
------------ ------------
147,841,742 81,049,674
Amounts paid for shares redeemed...................................... (64,643,184) (46,210,480)
------------ ------------
Net increase from capital share transactions.......................... 83,198,558 34,839,194
------------ ------------
Total increase in net assets.......................................... 107,949,970 15,341,498
NET ASSETS:
Beginning of year..................................................... 195,373,985 180,032,487
------------ ------------
End of year (including undistributed net investment income
of $205,152 and $152,690, respectively)............................... $303,323,955 $195,373,985
============ ============
Shares sold........................................................... 11,803,101 6,436,642
Shares issued in connection with reinvestment
of dividends from net investment income and
from distribution of net realized gain on investments................. 844,987 754,949
Shares redeemed....................................................... (5,606,147) (4,137,249)
------------ ------------
Net increase in shares outstanding.................................... 7,041,941 3,054,342
============ ============
</TABLE>
See accompanying Notes to Financial Statements
======================================---=======================================
10
<PAGE>
DODGE & COX
======================================---=======================================
Income Fund
Notes to Financial Statements
----------------------------------------------------------------------------
1 Dodge & Cox Income Fund commenced offering its shares to the public on
January 3, 1989. The Fund is registered under the Investment Company Act of
1940, as amended, as a diversified open-end management company. The Fund
consistently follows accounting policies which are in conformity with
generally accepted accounting principles for investment companies.
Significant policies are: (a) Investments are stated at market value based
on latest quoted prices; (b) Security transactions are accounted for on the
trade date. Gains and losses on securities sold are determined on the basis
of identified cost. Interest income is recorded on the accrual basis and
dividend income is recorded on the ex-dividend date; (c) Distributions to
shareholders of income and capital gains are reflected in the net asset
value per share computation on the date following the date of record; (d) No
provision for Federal income taxes has been included in the accompanying
financial statements since the Fund intends to distribute all of its taxable
income and otherwise continue to comply with requirements for regulated
investment companies.
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements. Actual results could
differ from those estimates.
2 Under a written agreement, the Fund pays an annual management fee of 5/10
of 1% of the Fund's average weekly net asset value up to $100 million and
4/10 of 1% of the Fund's average weekly net asset value in excess of $100
million to Dodge & Cox, a corporation and manager of the Fund. The agreement
further provides that Dodge & Cox shall waive its fee to the extent that
such fee plus all other ordinary operating expenses of the Fund exceed 1% of
the average weekly net asset value for the year. No waiver of management fee
was required for 1995 under this agreement. All officers and four of the
directors of the Fund are officers and employees of Dodge & Cox. Those
directors who are not affiliated with Dodge & Cox receive from the Fund an
annual fee of $1,000 and an attendance fee of $500 for each meeting of the
Board of Directors attended. The Fund does not pay any other remuneration to
its officers or directors. Legal fees are paid to Heller, Ehrman, White &
McAuliffe, legal counsel for the Fund. Robert C. Harris, an employee of that
firm, was a director of the Fund until December 31, 1995.
3 For the year ended December 31, 1995, purchases and sales of securities,
other than short-term securities, aggregated $190,269,918 and $119,877,771,
respectively, of which U.S. government obligations aggregated $156,461,696
and $101,130,959, respectively. At December 31, 1995, the cost of
investments for Federal income tax purposes was equal to the cost for
financial reporting purposes. Net unrealized appreciation aggregated
$16,497,989, of which $16,823,859 represented appreciated securities and
$325,870 represented depreciated securities.
======================================---=======================================
11
<PAGE>
DODGE & COX
======================================---=======================================
Income Fund
Report of Independent Accountants
----------------------------------------------------------------------------
To the Directors and Shareholders of Dodge & Cox Income Fund
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of the Dodge & Cox
Income Fund (the "Fund") at December 31, 1995, the results of its operations
for the year then ended, the changes in its net assets for each of the two
years in the period then ended and the financial highlights for each of the
five years in the period then ended, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of
the Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits, which included confirmation of securities at
December 31, 1995 by correspondence with the custodian, provide a reasonable
basis for the opinion expressed above.
PRICE WATERHOUSE LLP
San Francisco, California
January 23, 1996
======================================---=======================================
12
<PAGE>
DODGE & COX
======================================---=======================================
Income Fund
Officers and Directors
----------------------------------------------------------------------------
A. Horton Shapiro, President and Director
Senior Vice-President, Dodge & Cox
John A. Gunn, Vice President and Director
President, Dodge & Cox
W. Timothy Ryan, Secretary-Treasurer
and Director
Senior Vice-President, Dodge & Cox
Dana M. Emery, Assistant
Secretary-Treasurer and Director
Vice-President, Dodge & Cox
Max Gutierrez, Jr., Director
Partner, Brobeck, Phleger & Harrison, Attorneys
Frank H. Roberts, Director
Retired Partner, Pillsbury, Madison & Sutro, Attorneys
John B. Taylor, Director
Professor of Economics, Stanford University
Will C. Wood, Director
Principal, Kentwood Associates, Financial Advisers
----------------------------------------------------------------------------
MANAGERS
Dodge & Cox
One Sansome Street, 35th Floor
San Francisco, California 94104
Telephone (415) 981-1710
CUSTODIAN & TRANSFER AGENT
Firstar Trust Company
P. O. Box 701
Milwaukee, Wisconsin 53201-0701
Telephone (800) 621-3979
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
San Francisco, California
LEGAL COUNSEL
Heller, Ehrman, White & McAuliffe
San Francisco, California
----------------------------------------------------------------------------
This report is submitted for the general information of the shareholders of
the Fund. The report is not authorized for distribution to prospective
investors in the Fund unless it is accompanied by an effective prospectus.
======================================---=======================================
13
<PAGE>
DODGE & COX
======================================---=======================================
Income Fund
THIS PAGE INTENTIONALLY LEFT BLANK
======================================---=======================================
14
<PAGE>
DODGE & COX
======================================---=======================================
Income Fund
General Information
-------------------------------------------------------------
DODGE & COX The Fund enables investors to obtain the benefits of
INCOME FUND experienced and continuous investment supervision. The Fund
is invested in a diversified portfolio of fixed-income
securities with the primary objective of providing
shareholders with a high and stable rate of current income
consistent with long-term preservation of capital.
INVESTMENT Since 1930, Dodge & Cox has been providing professional
COUNSEL investment management for individuals, trustees,
MANAGEMENT corporations, pension and profit-sharing funds, and
charitable institutions. In addition, Dodge & Cox manages the
Dodge & Cox Balanced Fund and the Dodge & Cox Stock Fund.
Dodge & Cox is not engaged in the brokerage business nor in
the business of dealing in or selling securities.
NO SALES CHARGE There are no commissions on the purchase or redemption of
shares of the Fund.
GIFTS Dodge & Cox Income Fund shares provide a convenient method
for making gifts to children and to other family members.
Fund shares may be held by an adult custodian for the benefit
of a minor under a Uniform Gifts/Transfers to Minors Act.
Trustees and guardians may also hold shares for a minor's
benefit.
REINVESTMENT Shareholders may direct that dividend and capital gains
PLAN distributions be reinvested in additional Fund shares.
AUTOMATIC Shareholders may make regular monthly or quarterly
INVESTMENT PLAN investments of $100 or more through automatic deductions from
their bank accounts.
WITHDRAWAL PLAN Shareholders owning $10,000 or more of the Fund's shares may
elect to receive periodic monthly or quarterly payments of at
least $50. Under the plan, all dividend distributions are
automatically reinvested at net asset value with the periodic
payments made from the proceeds of the redemption of
sufficient shares.
The above plans are completely voluntary and involve no
service charge of any kind.
IRA PLAN The Fund has available an Individual Retirement Plan (IRA)
for shareholders of the Fund.
Fund literature and details on all of these Plans are
available from the Fund upon request.
DODGE & COX INCOME FUND
c/o Firstar Trust Company
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
Telephone (800) 621-3979
======================================---=======================================
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the Dodge &
Cox Income Fund Annual Report dated December 31, 1995, and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 280,565,311
<INVESTMENTS-AT-VALUE> 297,063,300
<RECEIVABLES> 4,216,734
<ASSETS-OTHER> 6,282
<OTHER-ITEMS-ASSETS> 2,131,456
<TOTAL-ASSETS> 303,417,772
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 93,817
<TOTAL-LIABILITIES> 93,817
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 286,983,673
<SHARES-COMMON-STOCK> 25,233,189
<SHARES-COMMON-PRIOR> 18,191,249
<ACCUMULATED-NII-CURRENT> 205,152
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (362,859)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 16,497,989
<NET-ASSETS> 303,323,955
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 17,443,770
<OTHER-INCOME> 0
<EXPENSES-NET> 1,271,004
<NET-INVESTMENT-INCOME> 16,172,766
<REALIZED-GAINS-CURRENT> 1,800,568
<APPREC-INCREASE-CURRENT> 24,346,915
<NET-CHANGE-FROM-OPS> 42,320,249
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 16,120,304
<DISTRIBUTIONS-OF-GAINS> 1,448,533
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 11,803,101
<NUMBER-OF-SHARES-REDEEMED> 5,606,147
<SHARES-REINVESTED> 844,987
<NET-CHANGE-IN-ASSETS> 107,949,970
<ACCUMULATED-NII-PRIOR> 152,690
<ACCUMULATED-GAINS-PRIOR> (714,895)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,045,074
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,271,004
<AVERAGE-NET-ASSETS> 236,268,426
<PER-SHARE-NAV-BEGIN> 10.74
<PER-SHARE-NII> .78
<PER-SHARE-GAIN-APPREC> 1.34
<PER-SHARE-DIVIDEND> 0.78
<PER-SHARE-DISTRIBUTIONS> 0.06
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.02
<EXPENSE-RATIO> 0.54
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
