<PAGE>
D O D G E & C O X
Income Fund
Dodge & Cox
Investment Managers
35th Floor
One Sansome Street
San Francisco
California 94104
(415) 981-1710
For Fund literature and
information, please call:
(800) 621-3979
- --------------------------------------------------------------------------------
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.
Printed on recycled paper.
D O D G E & C O X
Income Fund
Established 1989
Semi-Annual Report
June 30, 1997
1997
<PAGE>
D O D G E & C O X
================================================================================
Income Fund
To Our Shareholders
- --------------------------------------------------------------------------------
The Dodge & Cox Income Fund had a total return of 3.7% for the quarter ended
June 30, 1997, and a 2.9% return for the first half of 1997. The total return
for the Lehman Brothers Aggregate Bond (LBAG) Index was 3.7% and 3.1% for the
same periods, respectively. Average annual returns for longer time periods are
summarized on page three of this report.
Mutual Fund Management at Dodge & Cox
- --------------------------------------------------------------------------------
Dodge & Cox began managing its first mutual fund in 1931, decades before the
explosive growth of the fund business experienced during the last ten years.
Our Balanced Fund has one of the longest track records in the industry--over
sixty five years. We introduced the Stock Fund in 1965 and, more recently, the
Income Fund in 1989.
Our business approach in mutual funds remains quite simple. We maintain low
operating expenses and focus on what we do best--independent fundamental
research and prudent investment of equity and fixed income assets with a long-
term time horizon. We purposely do not offer a multitude of services or niche
funds. We believe that our consistent investment philosophy and proven results
will appeal to a variety of investors.
- --------------------------------------------------------------------------------
Slowing Economy and Lower Inflation Lead to a Drop in Interest Rates
Bond yields dropped this quarter on the heels of economic news that showed the
economy was slowing considerably from its rapid first quarter pace. Inflation
news has also been positive for bondholders. In June, the Producer Price Index,
a measure of price changes at the producer level, declined for the sixth
consecutive month. Similarly, the Consumer Price Index continues to show
restrained price increases at the consumer level. Finally, the Federal Reserve
Board left short-term interest rates unchanged at its May 20 meeting. This had
the effect of reinforcing the growing market consensus of a slowing, and
potentially less inflationary, economy.
This quarter's interest rate decline retraced most of the first quarter's rise
in rates. Both short and intermediate Treasury note rates fell between 35 and
40 basis points (one basis point equals 1/100 of one percent), while the 30-year
Treasury bond yield declined by approximately 30 basis points to 6.8% at June
30. Nevertheless, these rates remain above their corresponding levels at the
beginning of this year.
The Fund's performance, relative to that of the benchmark LBAG Index, benefited
from its longer duration (a measure of a bond's price sensitivity to changes in
interest rates) and its higher yield. Relative performance was negatively
impacted by wider yield premiums in the bank and finance areas of the corporate
sector. As we devote a relatively high percentage of the Fund's assets to this
area, its weak relative price performance offset the duration and yield
benefits, resulting in the Fund's quarterly return equaling that of the Index.
A Discussion of "Real Yield"
Mathematically, "real," or effective, yield is straightforward. It represents
the difference between the nominal yield of an investment and the projected rate
of inflation over that investment's time horizon. Conceptually, real yield
attempts to quantify the potential return of an investment in terms
of the change in purchasing power. Real return is the return an investor
realizes, after the impact of inflation.
Attention to the potential real return of the portfolio is critical in
determining what we believe is the appropriate amount of interest rate risk
(measured by the portfolio's duration) to assume in the portfolio. To this end
we perform frequent portfolio total return simulations, using a range of
interest rate and inflation projections, over various time horizons. Generally,
the higher the real rate "cushion" (nominal yield less average inflation
projection) at the start,
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1
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D O D G E & C O X
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Income Fund
the higher the probability of attractive real returns for bonds over longer time
periods, and the more comfortable we are with a longer duration for the
portfolio. A recent example is illuminating.
In April of this year, rates on long-term U.S. government bonds had risen above
7% as the U.S. economy recorded an annualized first quarter growth rate of over
5%. Inflation, however, remained stable at a 2.5% to 3% level. We did not see a
fundamental reason for a sustained or dramatic pick-up in the inflation rate.
The 4% to 4.5% real yield "cushion" implied by the market seemed attractive, and
based on the simulations described above, we increased the interest rate
sensitivity of the portfolio by modestly lengthening the Fund's duration
relative to the overall market. As readers of past letters know, we are not
active "market timers"; we do not devote energy and/or resources to trying to
forecast small changes in market levels. However, in situations such as this,
when a meaningful change in the relationship between bond yields and projected
inflation has occurred, we will make an appropriate adjustment to the Fund's
duration. With this quarter's extension, the duration of the Fund's portfolio
now stands at 5.2 years, roughly 13% longer than that of the LBAG Index.
In Closing
While the decision on an appropriate duration for the Fund is an important one,
our primary focus as bond managers will continue to be the utilization of two
Dodge & Cox hallmarks: fundamental research and individual security selection.
Through our efforts in these areas we actively seek to build the incremental
yield of the Fund and its long-term total return potential. Thank you for your
continued confidence in the Dodge & Cox Income Fund. As always, we welcome your
comments and questions.
For the Board of Directors,
/s/ A. Horton Shapiro, President
--------------------------------
July 31, 1997 A. Horton Shapiro, President
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2
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D O D G E & C O X
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Income Fund
Objective The Fund's primary objective is to provide 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.
Strategy The Fund seeks to achieve these objectives by remaining fully
invested in a diversified portfolio of primarily high quality bonds
and other fixed income securities, while striving to maintain the
Fund's yield higher than that of the broad bond market. Dodge & Cox
conducts thorough fundamental research on each of the Fund's
investments, taking many factors into consideration including
creditworthiness and structural characteristics. Fixed income
securities in the Fund will generally include U.S. Treasury,
mortgage-related and corporate issues.
<TABLE>
<CAPTION>
Investment Performance Since Inception through June 30, 1997
- --------------------------------------------------------------------------------
Comparison of change in value of a $10,000 investment in the
Dodge & Cox Income Fund and the LBAG Index
[LINE GRAPH APPEARS HERE]
DODGE & COX
INCOME LBAG
FUND INDEX
---- -----
<S> <C> <C>
1/1/89 $ 10,000 $ 10,000
12/31/89 11,411 11,455
12/31/90 12,256 12,482
12/31/91 14,451 14,479
12/31/92 15,581 15,550
12/31/93 17,350 17,067
12/31/94 16,848 16,568
12/31/95 20,252 19,630
12/31/96 20,988 20,339
6/30/97 21,592 20,971
</TABLE>
<TABLE>
<CAPTION>
8.5 Years
Average annual total return for periods ended June 30, 1997 1 Year 5 Years (Since Inception)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dodge & Cox Income Fund 8.36% 7.74% 9.48%
Lehman Brothers Aggregate Bond Index 8.16 7.12 9.10
</TABLE>
The chart covers the period from January 1, 1989 to June 30, 1997. 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 (LBAG) Index. The Fund's total
returns include the reinvestment of dividend and capital gain distributions. The
LBAG Index is a broad-based unmanaged measure of investment-grade corporate and
U.S. Government fixed income securities. Index returns include interest income
and, unlike Fund returns, do not reflect fees or expenses. Past performance does
not guarantee future results. Investment return and share price will fluctuate
with market conditions, and investors may have a gain or loss when shares are
sold.
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3
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D O D G E & C O X
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Income Fund
Fund Information June 30, 1997
- ---------------------------------------------------------------------
<TABLE>
<CAPTION>
General Information
- ---------------------------------------------------------------------
<S> <C>
Net Asset Value Per Share $11.64
Total Net Assets (millions) $ 610
1996 Expense Ratio 0.50%
1996 Portfolio Turnover 37%
30 Day SEC Yield* 6.71%
Quarterly Distribution to Shareholders
of Record 6/25/97 (per share): $0.19 Dividend
Fund Inception Date 1989
Investment Manager: Dodge & Cox, San Francisco.
Managed by ten member Bond Strategy Committee, with
members' average tenure at Dodge & Cox of 11 years.
</TABLE>
<TABLE>
<CAPTION>
Asset Allocation
- ---------------------------------------------------------------------
[PIE CHART APPEARS HERE]
<S> <C>
Bonds: 95.5%
Short-Term Investments: 4.5%
</TABLE>
<TABLE>
<CAPTION>
Bond Characteristics
- ---------------------------------------------------------------------
<S> <C>
Number of Bonds 87
Average Quality AA+
Average Maturity 12.7 years
Effective Duration 5.21 years
</TABLE>
<TABLE>
<CAPTION>
Sector Breakdown % of Fund
- ---------------------------------------------------------------------
<S> <C>
U.S. Treasury and Government Agency 14.1
Federal Agency CMO and REMIC+ 19.9
Federal Agency Mortgage Pass-Through 23.0
Corporate 32.3
Foreign (U.S. Dollar Denominated) 6.2
Short-Term Investments 4.5
</TABLE>
<TABLE>
<CAPTION>
Moody's/Standard & Poor's
Quality Ratings % of Fund
- ---------------------------------------------------------------------
<S> <C>
U.S. Government & Government Agencies 56.9
Aaa/AAA 4.4
Aa/AA 4.2
A/A 18.5
Baa/BBB 10.8
Ba/BB 0.7
Short-Term Investments 4.5
</TABLE>
+Collateralized Mortgage Obligation and
Real Estate Mortgage Investment Conduit
<TABLE>
<CAPTION>
Maturity Breakdown % of Fund
- ---------------------------------------------------------------------
<S> <C>
0-1 Years to Maturity 5.7
1-5 39.6
5-10 21.9
10-15 4.8
15-20 4.6
20-25 10.7
25 and Over 12.7
</TABLE>
* An annualization of the Fund's total net investment income per share for the
30-day period ended on the last day of the month.
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4
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D O D G E & C O X
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Income Fund
<TABLE>
<CAPTION>
Portfolio of Investments June 30, 1997
--------------------------------------------------------------------------------------------
PAR VALUE MARKET VALUE
<C> <C> <S> <C>
BONDS: U.S. TREASURY AND GOVERNMENT AGENCY: 14.1%
95.5% U.S. TREASURY: 13.0%
$24,500,000 U.S. Treasury Notes, 5 1/4%, 7/31/1998 .................... $ 24,346,875
29,000,000 U.S. Treasury Notes, 7 1/8%, 10/15/1998 ................... 29,426,010
5,000,000 U.S. Treasury Notes, 5 1/8%, 11/30/1998 ................... 4,943,750
10,000,000 U.S. Treasury Notes, 5 5/8%, 11/30/1998 ................... 9,954,700
10,750,000 U.S. Treasury Notes, 6 1/4%, 2/15/2003 ................... 10,666,043
-------------
79,337,378
GOVERNMENT AGENCY: 1.1%
6,500,000 Govt. Small Business Administration, 7.30%, 5/1/2017 ...... 6,612,710
-------------
85,950,088
FEDERAL AGENCY MORTGAGE PASS-THROUGH: 23.0%
55,877 Federal Home Loan Mtge. Corp., 7%, 1/1/2003 ............... 55,972
31,511 Federal Home Loan Mtge. Corp., 6%, 10/1/2003 .............. 31,341
2,322,977 Federal Home Loan Mtge. Corp., 8%, 12/1/2003 .............. 2,370,853
106,995 Federal Home Loan Mtge. Corp., 7%, 3/1/2006 ............... 107,182
297,177 Federal Home Loan Mtge. Corp., 7%, 9/1/2006 ............... 297,664
647,257 Federal Home Loan Mtge. Corp., 7 1/4%, 1/1/2008 ........... 647,833
475,482 Federal Home Loan Mtge. Corp., 8%, 1/1/2008 ............... 487,555
393,137 Federal Home Loan Mtge. Corp., 8%, 1/1/2008 ............... 401,239
207,444 Federal Home Loan Mtge. Corp., 7 1/2%, 10/1/2008 .......... 211,404
7,628,577 Federal Home Loan Mtge. Corp., 7%, 11/1/2008 .............. 7,656,269
366,284 Federal Home Loan Mtge. Corp., 8%, 5/1/2009 ............... 376,364
238,996 Federal Home Loan Mtge. Corp., 8 1/4%, 5/1/2009 ........... 244,220
805,756 Federal Home Loan Mtge. Corp., 8%, 8/1/2009 ............... 826,214
161,621 Federal Home Loan Mtge. Corp., 6 1/2%, 6/1/2012 ........... 161,170
7,200,548 Federal Natl. Mtge. Assn., 7 1/2%, 9/1/2007 ............... 7,296,747
3,189,998 Federal Natl. Mtge. Assn., 6 1/4%, 12/1/2007 .............. 3,164,542
20,143,471 Federal Natl. Mtge. Assn., 7%, 7/1/2008 ................... 20,212,563
16,973,918 Federal Natl. Mtge. Assn., 6 1/2%, 12/1/2008 .............. 16,754,615
10,673,565 Federal Natl. Mtge. Assn., 8%, 8/1/2010 ................... 10,977,442
878,785 Federal Natl. Mtge. Assn., 7 1/2%, 2/1/2011 ............... 889,515
2,107,489 Federal Natl. Mtge. Assn., 8%, 1/1/2012 ................... 2,174,528
524,894 Federal Natl. Mtge. Assn., 6 1/2%, 1/1/2013 ............... 524,343
2,384,621 Federal Natl. Mtge. Assn., 8%, 8/1/2022 ................... 2,460,071
6,982,202 Govt. Natl. Mtge. Assn., 7 1/4%, 2/15/2006 ................ 7,057,889
8,793,330 Govt. Natl. Mtge. Assn., 7 1/2%, 7/15/2007 ................ 8,901,752
24,994,439 Govt. Natl. Mtge. Assn., 7%, 4/15/2009 .................... 25,166,151
12,616,000 Veterans Affairs Vendee Mtge. Trust, 7%, 6/15/2010 ........ 12,399,131
7,995,507 Veterans Affairs Vendee Mtge. Trust, 9.2925%, 5/15/2025 ... 8,527,688
-------------
140,382,257
</TABLE>
See accompanying Notes to Financial Statements
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5
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D O D G E & C O X
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Income Fund
<TABLE>
<CAPTION>
Portfolio of Investments June 30, 1997
------------------------------------------------------------------------------------------------
PAR VALUE MARKET VALUE
<C> <C> <S> <C>
BONDS FEDERAL AGENCY CMO* AND REMIC**: 19.9%
(Continued) $ 585,618 FBC Mtge. Sec. Trust IV-A2, 8.30%, 8/1/2009 ..................... $ 595,867
7,230,331 Federal Home Loan Mtge. Corp., 7%, 10/15/2005 ................... 7,261,927
21,000,000 Federal Home Loan Mtge. Corp., 7.10%, 11/15/2006 ................ 21,045,780
10,900,000 Federal Home Loan Mtge. Corp., 8%, 4/15/2007 .................... 11,247,383
13,000,000 Federal Home Loan Mtge. Corp., 7%, 9/15/2007 .................... 13,028,340
13,284,798 Federal Home Loan Mtge. Corp., 6%, 8/15/2008 .................... 12,603,952
10,000,000 Federal Home Loan Mtge. Corp., 6%, 6/17/2022 .................... 9,162,500
3,000,000 Federal Natl. Mtge. Assn., 7%, 2/25/2007 ........................ 2,982,180
10,000,000 Federal Natl. Mtge. Assn., 7%, 7/17/2015 ........................ 10,056,200
9,000,000 Federal Natl. Mtge. Assn., 6%, 6/25/2023 ........................ 8,246,250
14,877,000 Veterans Affairs Vendee Mtge. Trust, 7 1/4%, 7/15/2016 .......... 14,914,192
10,000,000 Veterans Affairs Vendee Mtge. Trust, 8%, 7/15/2018 .............. 10,281,200
-------------
121,425,771
CORPORATE: 32.3%
INDUSTRIAL: 16.9%
1,000,000 Dayton Hudson Corp. Debentures 9.70%, 6/15/2021 ................. 1,206,210
8,250,000 Dayton Hudson Corp. Debentures 9%, 10/1/2021 .................... 9,401,535
4,435,000 Dayton Hudson Corp. Debentures 8 7 1/8%, 4/1/2022 ............... 4,986,936
2,450,000 Dayton Hudson Corp. MTN 9.35%, 6/16/2020 ........................ 2,850,673
5,000,000 Ford Holdings, Inc. Debentures 9 3/8%, 3/1/2020 ................. 5,942,800
11,000,000 Ford Motor Co. Debentures 8 7/8%, 1/15/2022 ..................... 12,503,040
9,000,000 General Motors Corp. Debentures 7.70%, 4/15/2016 ................ 9,260,730
8,125,000 Lockheed Martin Corp. Debentures 7.65%, 5/1/2016 ................ 8,303,262
10,000,000 Lockheed Martin Corp. Debentures 7 3/4%, 5/1/2026 ............... 10,243,700
5,000,000 May Department Stores Debentures 7 5/8%, 8/15/2013 .............. 5,065,350
7,500,000 May Department Stores 7 7/8%, 8/15/2036, Callable 2016 .......... 7,569,150
8,000,000 Time Warner Entertainment Sr. Debentures 8 3/8%, 7/15/2033 ...... 8,168,880
2,500,000 Union Camp Corp. Debentures 9 1/4%, 2/1/2011 .................... 2,913,225
15,034,000 Walt Disney Co. Debentures 7.55%, 7/15/2093, Callable 2023 ...... 14,973,563
-------------
103,389,054
FINANCE: 12.8%
367,868 Banamex Export Funding Corp., 5.74%, 10/15/1997 ................. 367,857
6,000,000 BankAmerica Capital II, 8%, 12/15/2026, Callable 2006++ ......... 6,081,480
1,450,000 Barclays No. American Capital 9 3/4%, 5/15/2021, Callable 2001 .. 1,617,809
1,000,000 CIGNA Corp. Notes 7.65%, 3/1/2023 ............................... 984,520
5,430,000 Citicorp Capital Trust I, 7.93%, 2/15/2027, Callable 2007++ ..... 5,437,168
520,000 Citicorp Capital Trust II, 8.015%, 2/15/2027, Callable 2007++ ... 524,321
4,000,000 First Nationwide Bank Subordinated Debentures 10%, 10/1/2006 .... 4,571,120
10,000,000 General Electric Capital Debentures 8.85%, 3/1/2007 ............. 11,302,000
1,600,000 General Electric Capital Services Sub. Notes 7 1/2%, 8/21/2035 .. 1,636,032
8,000,000 GMAC Put Notes 8 7/8%, 6/1/2010, Putable 2000/2005 .............. 9,118,640
4,500,000 Hartford Financial Services Group Notes 8.30%, 12/1/2001 ........ 4,729,680
7,500,000 Hartford Financial Services Group Notes 6 3/8%, 11/1/2002 ....... 7,340,175
6,300,000 J.P. Morgan Capital Trust I, 7.54%, 1/15/2027, Callable 2007++ .. 6,027,651
3,375,000 Norwest Corp. MTN 6 1/2%, 6/1/2005 .............................. 3,261,904
5,200,000 Norwest Corp. MTN 6.20%, 12/1/2005 .............................. 4,936,464
</TABLE>
See accompanying Notes to Financial Statements
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6
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D O D G E & C O X
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Income Fund
<TABLE>
<CAPTION>
Portfolio of Investments June 30, 1997
------------------------------------------------------------------------------------------------
PAR VALUE MARKET VALUE
<C> <C> <S> <C>
BONDS FINANCE (continued)
(Continued) $ 7,625,000 Norwest Corp. MTN 6 7/8%, 8/8/2006 .............................. $ 7,547,606
2,500,000 Norwest Corp. MTN 6.55%, 12/1/2006 ............................. 2,415,450
-------------
77,899,877
TRANSPORTATION: 2.3%
5,630,000 Consolidated Rail Corp. Debentures 9 3/4%, 6/15/2020 ............ 6,894,442
400,000 Norfolk & Western Railroad Equipment 10 1/8%, 7/1/2000 .......... 437,216
5,500,000 Norfolk Southern Bonds 7.70%, 5/15/2017 ......................... 5,624,190
1,000,000 Seaboard Coast Line Railroad Equipment 11 1/4%, 3/1/1999 ........ 1,075,260
-------------
14,031,108
UTILITIES: 0.3%
1,500,000 Idaho Power Co. 1st Mtg. Bonds 9 1/2%, 1/1/2021, Callable 2001 .. 1,646,325
-------------
196,966,364
FOREIGN (U.S. DOLLAR DENOMINATED): 6.2%
CANADIAN CORPORATE: 4.1%
7,062,000 Canadian Pacific Ltd. Debentures 9.45%, 8/1/2021 ................ 8,322,426
9,000,000 Hydro-Quebec Debentures 8.40%, 1/15/2022 ........................ 9,737,820
6,000,000 Hydro-Quebec Debentures 9 1/2%, 11/15/2030 ...................... 7,267,440
-------------
25,327,686
INTERNATIONAL AGENCY: 2.1%
4,150,000 European Investment Bank Notes 10 1/8%, 10/1/2000 ................ 4,577,159
8,750,000 Inter-American Development Bank 7 1/8%, 3/15/2023, Callable 2003.. 8,339,975
-------------
12,917,134
-------------
38,244,820
-------------
Total Bonds (cost $576,477,944) ....................... 582,969,300
-------------
SHORT-TERM 4,800,000 American Express Credit Corp., Comm. Paper 5.7%, 7/3/1997 ...... 4,800,000
INVESTMENTS: 1,427,768 Eli Lilly & Co., Variable Demand Note 5.09% ..................... 1,427,768
2.8% 1,621,757 General Mills, Inc., Variable Demand Note 5.24% ................. 1,621,757
2,685,678 Pitney Bowes Credit Corp., Variable Demand Note 5.25% ........... 2,685,678
1,327,749 Portico Institutional Money Market Fund ......................... 1,327,749
3,010,874 Warner Lambert Co., Variable Demand Note 5.22% .................. 3,010,874
2,163,520 Wisconsin Electric Power Corp., Variable Demand Note 5.29% ...... 2,163,520
-------------
Total Short-Term Investments (cost $17,037,346) .............. 17,037,346
-------------
TOTAL INVESTMENTS (cost $593,515,290).............. 98.3% 600,006,646
OTHER ASSETS LESS LIABILITIES ..................... 1.7% 10,114,128
------ -------------
TOTAL NET ASSETS .................................. 100.0% $610,120,774
====== =============
</TABLE>
* CMO: Collateralized Mortgage Obligation
** REMIC: Real Estate Mortgage Investment Conduit
++ Cumulative Preferred Securities
See accompanying Notes to Financial Statements
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7
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Income Fund
<TABLE>
<CAPTION>
Statement of Assets and Liabilities June 30, 1997
------------------------------------------------------------------------------------------------
<C> <S> <C>
ASSETS:
Investments, at market value (identified cost $593,515,290)...................... $600,006,646
Cash ............................................................................ 2,092,295
Interest receivable ............................................................. 8,179,245
Receivable for investments sold ................................................. 125,078
Prepaid expenses ................................................................ 52,794
------------
610,456,058
------------
LIABILITIES:
Payable for Fund shares redeemed ................................................ 69,594
Management fees payable ......................................................... 208,832
Accounts payable ................................................................ 56,858
------------
335,284
Net asset value ------------
per share $11.64 NET ASSETS ................................................................. $610,120,774
============
Capital NET ASSETS CONSIST OF:
shares outstanding Paid in capital ................................................................. $603,721,274
52,396,558 Accumulated undistributed net investment income ................................. 738,424
(par value $.01 each, Accumulated undistributed net realized loss on investments....................... (830,280)
authorized shares Net unrealized appreciation on investments ...................................... 6,491,356
100,000,000) ------------
$610,120,774
============
</TABLE>
See accompanying Notes to Financial Statements
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8
<PAGE>
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Income Fund
<TABLE>
<CAPTION>
Statement of Operations Six Months Ended June 30, 1997
------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Interest ....................................................................... $ 20,395,087
------------
EXPENSES:
Management fees (Note 2) ....................................................... 1,199,787
Custodian fees ................................................................. 31,764
Transfer agent fees ............................................................ 33,374
Accounting and audit fees ...................................................... 25,394
Legal fees ..................................................................... 1,301
Shareholder reports ............................................................ 45,207
S.E.C. and state registration fees ............................................. 73,120
Directors' fees ................................................................ 7,000
Miscellaneous .................................................................. 9,330
------------
1,426,277
------------
NET INVESTMENT INCOME .......................................................... 18,968,810
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments ............................................. (700,805)
Change in unrealized appreciation of investments ............................. (938,755)
------------
Net realized and unrealized loss on investments ........................... (1,639,560)
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ........................... $ 17,329,250
============
</TABLE>
See accompanying Notes to Financial Statements
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9
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Income Fund
<TABLE>
<CAPTION>
Statement of Changes in Net Assets Six Months Ended June 30,
-------------------------------------------------------------------------------------------
1997 1996
<S> <C> <C>
OPERATIONS:
Net investment income......................................... $ 18,968,810 $ 11,247,914
Net realized loss............................................. (700,805) (1,454,724)
Net change in unrealized appreciation......................... (938,755) (14,621,447)
------------ ------------
Net increase (decrease) in net assets from operations......... 17,329,250 (4,828,257)
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income......................................... (18,622,099) (11,289,472)
Net realized gain............................................. -- --
------------ ------------
Total distributions........................................... (18,622,099) (11,289,472)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Amounts received from sale of shares.......................... 148,156,989 97,839,113
Net asset value of shares issued in reinvestment of
distributions................................................. 11,279,293 6,431,582
Amounts paid for shares redeemed.............................. (80,862,819) (22,170,165)
------------- ------------
Net increase from capital share transactions.................. 78,573,463 82,100,530
------------- ------------
Total increase in net assets.................................. 77,280,614 65,982,801
NET ASSETS:
Beginning of period........................................... 532,840,160 303,323,955
------------- ------------
End of period (including undistributed net investment
income of $738,424 and $163,594, respectively)................ $610,120,774 $369,306,756
============= ============
Shares sold................................................... 12,736,845 8,367,522
Shares issued in reinvestment of distributions................ 978,299 565,572
Shares redeemed............................................... (6,933,657) (1,895,117)
------------- ------------
Net increase in shares outstanding............................ 6,781,487 7,037,977
============= ============
</TABLE>
See accompanying Notes to Financial Statements
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Income Fund
Notes to Financial Statements
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1 The Fund is registered under the Investment Company Act of 1940, as
amended, as a diversified open-end investment company. The Fund
consistently follows accounting policies which are in conformity
with generally accepted accounting principles for investment
companies. Significant accounting policies are as follows: (a)
Security valuation: long-term debt securities are priced on the
basis of valuations furnished by pricing services which utilize
both dealer-supplied valuations and electronic data processing
techniques; securities for which market quotations are not readily
available are valued at fair value as determined in good faith by
or at the direction of the Board of Directors; short-term
securities are valued at amortized cost or original cost plus
accrued interest, both of which approximate current value; all
securities held by the Fund are denominated in U.S. Dollars. (b)
Security transactions are accounted for on the trade date in the
financial statements. (c) Gains and losses on securities sold are
determined on the basis of identified cost. (d) Interest income is
recorded on the accrual basis and dividend income is recorded on
the ex-dividend date. (e) Distributions to shareholders of income
and capital gains are reflected in the net asset value per share
computation on the ex-dividend date. (f) 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 daily net asset value up to
$100 million and 4/10 of 1% of the Fund's average daily net asset
value in excess of $100 million to Dodge & Cox, investment 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 daily net
asset value for the year. 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 Board
or Committee meeting attended. The Fund does not pay any other
remuneration to its officers or directors.
3 For the six months ended June 30, 1997, purchases and sales of
securities, other than short-term securities, aggregated
$158,132,602 and $86,153,339, respectively, of which U.S.
government obligations aggregated $91,815,079 and $74,400,307,
respectively. At June 30, 1997, the cost of investments for Federal
income tax purposes was equal to the cost for financial reporting
purposes. Net unrealized appreciation aggregated $6,491,356, of
which $10,077,176 represented appreciated securities and $3,585,820
represented depreciated securities.
The financial information has been taken from the records of the Fund and
has not been audited by our independent accountants who do not express an
opinion thereon. The financial statements of the Fund will be subject to
audit by our independent accountants as of the close of the calendar year.
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Income Fund
<TABLE>
<CAPTION>
Financial Highlights
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SELECTED DATA AND RATIOS (for a share outstanding throughout each period)
Six Months Ended
June 30, Year Ended December 31,
---------------- -------------------------------------------
1997 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period........................ $ 11.68 $12.02 $10.74 $ 11.89 $11.55 $11.59
Income from investment operations:
Net investment income....................................... .38 .74 .78 .77 .78 .82
Net realized and unrealized gain (loss)..................... (.05) (.34) 1.34 (1.11) .51 .05
------- ------ ------ ------- ------ ------
Total from investment operations............................ .33 .40 2.12 (.34) 1.29 .87
------- ------ ------ ------- ------ ------
Distributions to shareholders from:
Net investment income....................................... (.37) (.74) (.78) (.76) (.78) (.82)
Net realized gain........................................... - - (.06) (.05) (.17) (.09)
------- ------ ------ ------- ------ ------
Total distributions......................................... (.37) (.74) (.84) (.81) (.95) (.91)
------- ------ ------ ------- ------ ------
Net asset value, end of period.............................. $ 11.64 $11.68 $12.02 $ 10.74 $11.89 $11.55
======= ====== ====== ======= ====== ======
Total return................................................ 2.88% 3.62% 20.21% (2.89)% 11.34% 7.80%
Ratios/supplemental Data:
Net assets, end of period (millions)........................ $ 610 $ 533 $ 303 $ 195 $ 180 $ 136
Ratio of expenses to average net assets..................... .50%* .50% .54% .54% .60% .62%
Ratio of net investment income to average net assets........ 6.59%* 6.65% 6.85% 6.90% 6.50% 7.14%
Portfolio turnover rate..................................... 16% 37% 53% 55% 26% 12%
* Annualized
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General Information
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Investment Manager
Since 1930, Dodge & Cox has been providing professional investment management
for individuals, trustees, corporations, pension and profit-sharing funds, and
charitable institutions. Dodge & Cox manages the Dodge & Cox Income Fund, the
Dodge & Cox Balanced Fund and the Dodge & Cox Stock Fund.
No-Load Fund
Shares of the Fund are purchased and redeemed at net asset value. There are no
sales, redemption or rule 12b-1 plan distribution charges.
Gifts
Fund shares provide a convenient method for making gifts to children and to
other family members. 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.
Automatic Investment Plan
Shareholders may make regular monthly or quarterly 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.
Reinvestment Plan
Shareholders may direct that dividend and capital gains distributions be
reinvested in additional Fund shares. The above plans are completely voluntary
and involve no service charge of any kind.
IRA Plan
The Fund has an Individual Retirement Plan (IRA) available for shareholders of
the Fund.
Shareholder Inquiries
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
(800) 621-3979
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