<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.
---------------------------------------------------------
DODGE & COX
---------------------------------------------------------
Income Fund
Established 1989
---------------------------------------------------------
---------------------------------------------------------
8th Annual Report
December 31, 1996
1996
=========================================================
<PAGE>
D O D G E & C O X
================================================================================
Income Fund
Fellow Shareholders
- --------------------------------------------------------------------------------
Reflecting a rather difficult market environment for fixed income securities,
the Dodge & Cox Income Fund provided a total return of 3.6% for 1996. This
matched the 3.6% total return of the Lehman Brothers Aggregate Bond Index
(LBAG), a broad-based index composed of investment grade bonds. Returns for
longer time periods are presented on page 3 of this report.
While the net asset value of the Fund fell from $12.02 at the end of 1995 to
$11.68 as of December 31, 1996, the Fund paid dividends of $0.74 per share from
investment income, generating the modest 3.6% return. At year-end, the Fund's
total net assets were $533 million.
Sector allocations within the Fund changed only slightly during 1996. At year-
end, 40% of the Fund was invested in mortgage-backed securities, while 34% was
in corporate bonds, 22% in U.S. Government securities and the residual 4% in
cash equivalents.
Rising Interest Rates Constrain Bond Returns
Interest rates rose quickly in the first half of 1996, fueled by a perceived
resurgence in economic growth and market fears of growing inflation. Economic
growth did indeed turn out to be stronger in 1996, as gross domestic product
grew at a 2.9% annualized rate during the first three quarters of 1996 compared
to 2% growth in 1995. Inflation also rose slightly, with the consumer price
index posting a 3.3% increase, versus a 2.5% increase in 1995.
Despite a modest retracement in the fall, interest rates ended the year higher
across the maturity spectrum - from year-end 1995 to year-end 1996, two-year
U.S. Treasury rates rose from 5.15% to 5.87%, while thirty-year U.S. Treasury
rates rose from 5.95% to 6.64%. As a result, most fixed income securities lost
value, with the largest price declines recorded by longer-maturity bonds. Thus,
the Fund's 3.6% return reflected net income earned of 6.6% offset by an
approximate 3% price decline.
Fund's 1996 Total Return Matches Overall Market
While the Fund's return matched that of the LBAG in 1996, the Fund's portfolio
has distinctive characteristics which differentiate it from the overall market.
We would like to highlight three of the differences that impacted relative
performance last year:
. Significant overweighting of the mortgage sector. 40% of the Fund was
invested in mortgage related securities -- as opposed to 30% of the
LBAG -- and throughout 1996 we continued to see opportunities in selected
mortgage-backed securities. As is typical in a rising interest rate
environment, the mortgage-backed sector performed well, and the Fund's
emphasis on the sector positively influenced the Fund's return relative
to the overall market.
. A higher-than-market yield. Our emphasis on mortgage-backed and corporate
securities gives the Fund a higher potential yield than the LBAG. While
this added modestly to relative performance in 1996, we continue to
believe that a relatively high and stable yield will be an important
source of return over longer time periods.
. A longer-than-market duration. Compared to the LBAG, a higher percentage
of the Fund was in longer maturity bonds, leading to a longer portfolio
duration (a measure of a portfolio's price sensitivity to changes in
interest rates) for the Fund. This longer duration meant that the general
rise in interest rates negatively impacted the Fund's relative
performance.
================================================================================
1
<PAGE>
D O D G E & C O X
================================================================================
Income Fund
1996 Review: Mortgage-Backed Securities Led the Way
The mortgage sector was the best performing area for the Fund in 1996. Higher
interest rates reduced prepayment fears among market participants, which led to
lower yield premiums on mortgage-backed securities and good price performance
relative to U.S. Treasuries. Our strategy in this sector, as we have discussed
in past letters, has been to focus on securities that exhibit relatively stable
cash flows over a wide range of interest rate scenarios. These securities
served the Fund well; the rise in rates, which can exacerbate price declines in
less stable mortgage securities, did not have such an adverse impact on the
Fund's mortgage holdings.
In July, we purchased a new security for the Fund: Federal Home Loan Mortgage
Corporation G10139, a seasoned pool of 7%, 15-year term mortgages. This was the
first of several similar investments made during the year. We invested in these
seasoned 15-year pools because they have attributes, such as lower borrower loan
balances, that tend to reduce the probability of dramatic prepayment surprises.
Importantly, these attributes do not appear to be fully valued by other market
participants.
The corporate sector had several changes in composition in 1996. We added
securities from General Motors, Lockheed Martin, Ralston Purina and Walt Disney
- - all strong competitors within their respective industries, and all capable of
consistently generating the cash flow necessary to service their debt
obligations. We also added to several existing holdings, including ITT
Hartford, Norwest, Dayton-Hudson, Hydro-Quebec, Time Warner Entertainment and
Canadian Pacific. We sold one of the Fund's European Investment Bank
securities, as well as the Fund's holdings in AMR Corporation (the parent of
American Airlines), as we believed their valuations fully reflected optimistic
scenarios about their futures.
While maintaining the duration of the Fund longer than that of the broad market
throughout 1996, we did take a couple of opportunities to adjust the Fund's
price sensitivity to interest rates as the year progressed. We moved the Fund's
duration from 110% of the LBAG's duration at the beginning of the year to 115%
in April. In November, after interest rates on long U.S. Treasuries had fallen
80 basis points (one basis point equals 1/100th of one percent) from their June
1996 peak, we slightly lowered the duration of the Fund and closed the year with
a duration of 5.1 years, nearly 10% longer than the LBAG's 4.7 years. Given the
current and prospective levels of both real and nominal rates, we are
comfortable positioning the Fund with slightly greater price sensitivity to
interest rate changes as 1997 unfolds.
Looking Ahead
We believe that the long-term outlook for fixed income returns remains
attractive for investors seeking a high and stable rate of current income and
preservation of capital. We will continue to use thorough, fundamental research
to identify issuers and sectors where potential total return adequately
compensates for the incremental risk. We will do this while maintaining the
Fund's high average quality and broad diversification. Finally, we will
continue to invest your assets with a focus on the long-term total return
potential of securities.
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 24, 1997 A. Horton Shapiro, President
================================================================================
2
<PAGE>
D O D G E & C O X
================================================================================
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
<TABLE>
<CAPTION>
[LINE GRAPH APPEARS HERE]
Dodge & Cox
Year Income Fund LBAG Index
<S> <C> <C>
88 10,000 10,000
89 11,409 11,454
90 12,256 12,480
91 14,454 14,477
92 15,582 15,548
93 17,350 17,064
94 16,849 16,566
95 20,254 19,628
96 20,983 20,336
</TABLE>
<TABLE>
<CAPTION>
Average annual total return for periods 8 Years
ended December 31, 1996 1 Year 5 Years (Since Inception)
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dodge & Cox Income Fund 3.62% 7.74% 9.71%
LBAG Index 3.61 7.03 9.28
</TABLE>
The chart covers the period from January 1, 1989 to December 31, 1996. 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 gains distributions. The LBAG Index is a broad-based, unmanaged
measure of U.S. dollar-denominated investment grade rated securities,
including U.S. Government, corporate, asset-backed and mortgage-backed
issues. 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.
================================================================================
3
<PAGE>
D O D G E & C O X
================================================================================
Income Fund
Selected data
and ratios for a
share outstanding
throughout each year
<TABLE>
<CAPTION>
Financial Highlights Year Ended December 31,
- -------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year............. $12.02 $10.74 $ 11.89 $11.55 $11.59
Income from investment operations:
Net investment income.......................... .74 .78 .77 .78 .82
Net realized and unrealized gain (loss)........ (.34) 1.34 (1.11) .51 .05
------ ------ ------- ------ ------
Total income (loss) from investment operations. .40 2.12 (.34) 1.29 .87
------ ------ ------- ------ ------
Distributions:
Dividends from net investment income........... (.74) (.78) (.76) (.78) (.82)
Distributions from net realized gain on
investments................................... -- (.06) (.05) (.17) (.09)
------ ------ ------- ------ ------
Total distributions............................ (.74) (.84) (.81) (.95) (.91)
------ ------ ------- ------ ------
Net asset value, end of year................... $11.68 $12.02 $ 10.74 $11.89 $11.55
====== ====== ======= ====== ======
Total return................................... 3.62% 20.21% (2.89)% 11.34% 7.80%
Ratios/Supplemental Data:
Net assets, end of year (millions)............. $ 533 $ 303 $ 195 $ 180 $ 136
Ratio of expenses to average net assets........ .50% .54% .54% .60% .62%
Ratio of net investment income to average net
assets........................................ 6.65% 6.85% 6.90% 6.50% 7.14%
Portfolio turnover rate........................ 37% 53% 55% 26% 12%
</TABLE>
<TABLE>
<CAPTION>
Quality Ratings and Portfolio Characteristics As of December 31, 1996 (unaudited)
- ----------------------------------------------------------------------------------
Moody's/
Standard & Poor's % of Portfolio
Quality Ratings Fund Characteristics
- --------------- ----- ---------------
<S> <C> <C>
U.S. Government Securities 62.0 S.E.C. 30 Day Yield 6.43%
Aaa/AAA 6.9 Average Quality AA+
Aa/AA 3.9 Average Maturity 12.8 years
A/A 18.0 Effective Duration 5.1 years
Baa/BBB 8.7
Ba/BB 0.5
-----
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. S.E.C. 30 Day Yield is 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. 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>
D O D G E & C O X
================================================================================
Income Fund
<TABLE>
<CAPTION>
Portfolio of Investments December 31, 1996
- ------------------------------------------------------------------------------------------------------------------
PAR VALUE MARKET VALUE
<C> <S> <C>
BONDS:
96.2%
U.S. TREASURY: 21.9%
$ 5,000,000 U.S. Treasury Notes, 5 1/8%, 1998............................................ $ 4,933,600
24,500,000 U.S. Treasury Notes, 5 1/4%, 1998............................................ 24,297,140
10,000,000 U.S. Treasury Notes, 5 5/8%, 1998............................................ 9,954,700
29,000,000 U.S. Treasury Notes, 7 1/8%, 1998............................................ 29,616,250
17,500,000 U.S. Treasury Notes, 5 3/4%, 2000............................................ 17,267,600
20,750,000 U.S. Treasury Notes, 6 1/4%, 2003............................................ 20,724,062
6,500,000 U.S. Treasury Bonds, 14%, 2011, Callable 2006................................ 9,994,790
------------
116,788,142
FEDERAL AGENCY MORTGAGE PASS-THROUGH, CMO* AND REMIC**: 40.2%
55,347 Federal Home Loan Mtge. Corp. Group 54-1078, 6%, 2003........................ 54,863
83,237 Federal Home Loan Mtge. Corp. Group 25-5222, 7%, 2003........................ 83,228
2,563,615 Federal Home Loan Mtge. Corp. Group 25-6654, 8%, 2003........................ 2,631,141
359,318 Federal Home Loan Mtge. Corp. Group 18-0233, 7%, 2006........................ 359,027
156,334 Federal Home Loan Mtge. Corp. Group 26-0478, 7%, 2006........................ 156,278
8,261,213 Federal Home Loan Mtge. Corp. Group G10139 15 year, 7%, 2008................. 8,307,641
723,249 Federal Home Loan Mtge. Corp. Group 27-2784, 7 1/4%, 2008.................... 732,160
230,039 Federal Home Loan Mtge. Corp. Group 53-0142, 7 1/2%, 2008.................... 233,950
531,929 Federal Home Loan Mtge. Corp. Group 18-8028, 8%, 2008........................ 547,355
442,335 Federal Home Loan Mtge. Corp. Group 18-9269, 8%, 2008........................ 453,987
409,407 Federal Home Loan Mtge. Corp. Group 29-0537, 8%, 2009........................ 423,351
858,357 Federal Home Loan Mtge. Corp. Group 29-2668, 8%, 2009........................ 885,215
279,909 Federal Home Loan Mtge. Corp. Group 26-0671, 8 1/4%, 2009.................... 287,981
206,883 Federal Home Loan Mtge. Corp. Group 53-4727, 6 1/2%, 2012.................... 205,917
9,943,053 Federal Home Loan Mtge. Corp. Multi PC Series 1209-H, 7%, 2005............... 10,020,709
16,000,000 Federal Home Loan Mtge. Corp. Multi PC Series 1467-E, 7.10%, 2006............ 16,069,920
13,000,000 Federal Home Loan Mtge. Corp. Multi PC Series 1457-PJ, 7%, 2007.............. 13,113,750
10,900,000 Federal Home Loan Mtge. Corp. Multi PC Series 1258-EA, 8%, 2007.............. 11,366,629
13,284,798 Federal Home Loan Mtge. Corp. Multi PC Series 1565-G, 6%, 2008............... 12,628,795
10,000,000 Federal Home Loan Mtge. Corp. Multi PC Series G-37 I, 6%, 2022............... 9,100,000
3,618,850 Federal Natl. Mtge. Assn. MBS Pool 57358, 6 1/4%, 2007....................... 3,580,454
7,846,710 Federal Natl. Mtge. Assn. MBS Pool 70255, 7 1/2%, 2007....................... 8,029,616
21,583,558 Federal Natl. Mtge. Assn. MBS Pool 362447 15 year, 7%, 2008.................. 21,691,476
11,858,054 Federal Natl. Mtge. Assn. MBS Pool 353892 15 year, 8%, 2010.................. 12,214,625
963,092 Federal Natl. Mtge. Assn. MBS Pool 478, 7 1/2%, 2011......................... 986,804
2,269,756 Federal Natl. Mtge. Assn. MBS Pool 151777, 8%, 2012.......................... 2,354,101
589,477 Federal Natl. Mtge. Assn. MBS Pool 83014, 6 1/2%, 2013....................... 587,891
2,852,356 Federal Natl. Mtge. Assn. MBS Pool 260892, 8%, 2022.......................... 2,967,106
3,000,000 Federal Natl. Mtge. Assn. PC 1992-109 J, 7%, 2007............................ 3,000,000
10,000,000 Federal Natl. Mtge. Assn. PC G1994-13 E, 7%, 2015............................ 10,093,700
9,000,000 Federal Natl. Mtge. Assn. PC 1994-72 J, 6%, 2023............................. 8,192,790
7,858,610 Govt. Natl. Mtge. Assn. Pool 780337, 7 1/4%, 2006............................ 8,004,623
9,731,363 Govt. Natl. Mtge. Assn. Pool 780258, 7 1/2%, 2007............................ 9,914,313
684,250 FBC Mtge. Sec. Trust IV-A2, 8.30%, 2009...................................... 695,793
14,877,000 Veterans Affairs Vendee Mtge. Trust 1995-3-1 D, 7 1/4%, 2016................. 14,988,578
10,000,000 Veterans Affairs Vendee Mtge. Trust 1995-1C-3E, 8%, 2018..................... 10,250,000
8,596,902 Veterans Affairs Vendee Mtge. Trust 1995-2D-4A, 9.2925%, 2025................ 9,197,997
------------
214,411,764
</TABLE>
See accompanying Notes to Financial Statements
================================================================================
5
<PAGE>
D O D G E & C O X
================================================================================
Income Fund
<TABLE>
<CAPTION>
Portfolio of Investments December 31, 1996
- ------------------------------------------------------------------------------------------------------------------
PAR VALUE MARKET VALUE
<C> <S> <C>
BONDS:
(Continued)
INDUSTRIAL: 16.0%
$ 4,000,000 Dayton-Hudson Corp. Debentures, 9%, 2021..................................... $ 4,563,880
1,000,000 Dayton-Hudson Corp. Debentures, 9.70%, 2021.................................. 1,216,990
4,435,000 Dayton-Hudson Corp. Debentures, 8 7/8%, 2022................................. 5,035,765
2,415,000 Dayton-Hudson Corp. MTN, 9.35%, 2020, Putable 1997........................... 2,840,378
5,000,000 Ford Holdings, Inc. Debentures, 9 3/8%, 2020................................. 6,019,850
6,500,000 Ford Motor Co. Debentures, 9.95%, 2032....................................... 8,418,930
4,000,000 General Motors Corp. Debentures, 7.70%, 2016................................. 4,136,920
8,125,000 Lockheed Martin Corp. Debentures, 7.65%, 2016................................ 8,404,581
5,000,000 Lockheed Martin Corp. Debentures, 7 3/4%, 2026............................... 5,193,400
5,000,000 May Department Stores Debentures, 7 7/8%, 2036, Callable 2016................ 5,080,500
5,000,000 May Department Stores Debentures, 7 5/8%, 2013............................... 5,143,100
2,500,000 Ralston Purina Debentures, 8 5/8%, 2022...................................... 2,781,025
8,000,000 Time Warner Entertainment Senior Debentures, 8 3/8%, 2033.................... 8,028,720
2,500,000 Union Camp Corp. Debentures, 9 1/4%, 2011.................................... 2,955,300
15,034,000 Walt Disney Co. Debentures, 7.55%, 2093...................................... 15,188,098
------------
85,007,437
FINANCE: 10.0%
735,737 Banamex Export Funding Corp. Coll. Notes Series K, 5.74%, 1997............... 735,435
1,450,000 Barclays North American Capital Corp. Notes, 9 3/4%, 2021, Callable 2001..... 1,652,478
1,000,000 CIGNA Corp. Debentures, 7.65%, 2023.......................................... 983,970
5,250,000 Citicorp Capital Trust I, 7.93%, 2027, Callable 2007......................... 5,304,757
2,205,000 First Nationwide Bank Subordinated Debentures, 10%, 2006..................... 2,536,037
1,600,000 General Electric Capital Services Subordinated Notes, 7 1/2%, 2035........... 1,661,456
8,000,000 GMAC Put Bonds, 8 7/8%, 2010, Putable 2000/2005.............................. 9,257,760
4,500,000 ITT Hartford Group Notes, 8.30%, 2001........................................ 4,777,110
7,500,000 ITT Hartford Group Notes, 6 3/8%, 2002....................................... 7,309,575
4,500,000 J.P. Morgan Capital Trust I, 7.54%, 2027, Callable 2007...................... 4,397,805
5,200,000 Norwest Corp. MTN, 6.20%, 2005............................................... 4,936,568
4,000,000 Norwest Corp. MTN, 6 1/2%, 2005.............................................. 3,881,080
5,750,000 Norwest Corp. MTN, 6 7/8%, 2006.............................................. 5,722,802
------------
53,156,833
CANADIAN: 3.8%
7,062,000 Canadian Pacific Ltd. Debentures, 9.45%, 2021................................ 8,333,160
4,000,000 Hydro-Quebec Debentures, 8.40%, 2022......................................... 4,368,600
6,000,000 Hydro-Quebec Debentures, 9 1/2%, 2030........................................ 7,324,380
------------
20,026,140
INTERNATIONAL AGENCY: 2.4%
4,150,000 European Investment Bank Notes, 10 1/8%, 2000................................ 4,660,906
8,750,000 Inter-American Development Bank Debentures, 7 1/8%, 2023, Callable 2003...... 8,429,837
------------
13,090,743
</TABLE>
See accompanying Notes to Financial Statements
================================================================================
6
<PAGE>
D O D G E & C O X
================================================================================
Income Fund
<TABLE>
<CAPTION>
Portfolio of Investments December 31, 1996
- ------------------------------------------------------------------------------------------------------------------
PAR VALUE MARKET VALUE
<C> <S> <C>
BONDS:
(Continued)
TRANSPORTATION: 1.6%
$ 5,630,000 Consolidated Rail Corp. Debentures, 9 3\4%, 2020............................. $ 6,921,128
400,000 Norfolk & Western Railroad Equipment Trust Certificate, 10 1\8%, 2000........ 444,600
1,000,000 Seaboard Coast Line Railroad Equipment Trust Certificate, 11 1\4%, 1999...... 1,098,610
------------
8,464,338
PUBLIC UTILITIES: 0.3%
1,500,000 Idaho Power Co. 1st Mortgage Bonds, 9 1\2%, 2021, Callable 2001.............. 1,684,200
------------
Total Bonds (cost $505,199,486)....................................... 512,629,597
------------
SHORT-TERM
INVESTMENTS:
5.3%
3,893,138 General Mills, Inc., Variable Demand Note, 5.50%, 1997....................... 3,893,138
4,253,916 Pitney Bowes Credit Corp., Variable Demand Note, 5.51%, 1997................. 4,253,916
11,073,781 Sara Lee Corp., Variable Demand Note, 5.49%, 1997............................ 11,073,781
3,992,058 Southwestern Bell Telephone Co., Variable Demand Note, 5.49%, 1997........... 3,992,058
4,524,030 Warner Lambert Co., Variable Demand Note, 5.48%, 1997........................ 4,524,030
574,000 Wisconsin Electric Power Corp., Variable Demand Note, 5.55%, 1997............ 574,000
------------
Total Short-Term Investments (cost $28,310,923)....................... 28,310,923
------------
TOTAL INVESTMENTS (cost $533,510,409)....................... 101.5% 540,940,520
OTHER ASSETS LESS LIABILITIES.............................. (1.5) (8,100,360)
-------- ------------
TOTAL NET ASSETS............................................ 100.0% $532,840,160
======== ============
</TABLE>
* CMO: Collateralized Mortgage Obligation
** REMIC: Real Estate Mortgage Investment Conduit
See accompanying Notes to Financial Statements
================================================================================
7
<PAGE>
D O D G E & C O X
================================================================================
Income Fund
<TABLE>
<CAPTION>
Statement of Assets and Liabilities December 31, 1996
- ------------------------------------------------------------------------------------------------------------------
ASSETS:
<S> <C>
Investments (identified cost $533,510,409) at market quotations................................ $540,940,520
Cash........................................................................................... 131,408
Interest accrued............................................................................... 6,927,085
Receivable for investments sold................................................................ 137,507
Prepaid expenses............................................................................... 5,924
------------
548,142,444
------------
LIABILITIES:
Payable for Fund shares redeemed............................................................... 187,573
Payable for investments purchased.............................................................. 15,070,857
Accounts payable............................................................................... 43,854
------------
15,302,284
------------
NET ASSETS.................................................................. $532,840,160
Net asset value
per share $11.68
============
NET ASSETS CONSIST OF:
Paid in capital................................................................................ $525,147,811
Accumulated undistributed net investment income................................................ 391,713
Accumulated undistributed net realized loss on investments..................................... (129,475)
Net unrealized appreciation on investments..................................................... 7,430,111
------------
$532,840,160
============
Capital
shares outstanding
45,615,071
(par value $.01 each,
authorized shares
100,000,000)
</TABLE>
See accompanying Notes to Financial Statements
================================================================================
8
<PAGE>
D O D G E & C O X
================================================================================
Income Fund
<TABLE>
<CAPTION>
Statement of Operations Year Ended December 31, 1996
- --------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Interest....................................... $27,710,491
EXPENSES:
Management fees (Note 2)....................... 1,650,053
Custodian fees................................. 42,595
Transfer agent fees............................ 52,241
Accounting and audit fees...................... 32,202
Legal fees..................................... 2,210
Shareholder reports............................ 60,833
S.E.C. and state registration fees............. 88,272
Directors' fees................................ 10,000
Miscellaneous.................................. 15,188
------------
1,953,594
------------
NET INVESTMENT INCOME.......................... 25,756,897
------------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS:
Net realized gain on investments.............. 233,384
Change in unrealized appreciation of
investments................................. (9,067,878)
------------
Net realized and unrealized loss on
investments................................ (8,834,494)
------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS..................... $16,922,403
============
</TABLE>
See accompanying Notes to Financial Statements
================================================================================
9
<PAGE>
D O D G E & C O X
================================================================================
Income Fund
<TABLE>
<CAPTION>
Statement of Changes in Net Assets Year Ended December 31,
- --------------------------------------------------------------------------------
1996 1995
<S> <C> <C>
OPERATIONS:
Net investment income................... $ 25,756,897 $ 16,172,766
Net realized gain....................... 233,384 1,800,568
Net change in unrealized
appreciation (depreciation)............. (9,067,878) 24,346,915
------------ ------------
Net increase in net assets
from operations......................... 16,922,403 42,320,249
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income................... (25,570,336) (16,120,304)
Net realized gain....................... -- (1,448,533)
------------ ------------
Total distributions to shareholders..... (25,570,336) (17,568,837)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Amounts received from
sale of shares.......................... 283,211,912 137,967,192
Net asset value of shares issued
in reinvestment of distributions........ 15,194,756 9,874,550
------------ ------------
298,406,668 147,841,742
Amounts paid for shares redeemed........ (60,242,530) (64,643,184)
------------ ------------
Net increase from capital share
transactions............................ 238,164,138 83,198,558
------------ ------------
Total increase in net assets............ 229,516,205 107,949,970
NET ASSETS:
Beginning of year....................... 303,323,955 195,373,985
------------ ------------
End of year (including undistributed
net investment income of $391,713
and $205,152,respectively).............. $532,840,160 $303,323,955
============ ============
Shares sold............................. 24,213,830 11,803,101
Shares issued in reinvestment of
distributions........................... 1,326,750 844,987
Shares redeemed......................... (5,158,698) (5,606,147)
------------ ------------
Net increase in shares
outstanding............................. 20,381,882 7,041,941
============ ============
</TABLE>
See accompanying Notes to Financial Statements
================================================================================
10
<PAGE>
D O D G E & C O X
================================================================================
Income Fund
Notes to Financial Statements
1 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) Securities are stated at
market value based on latest quoted prices; (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 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 1996 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.
3 For the year ended December 31, 1996, purchases and sales of
securities, other than short-term securities, aggregated
$374,212,159 and $138,251,652, respectively, of which U.S.
government obligations aggregated $280,221,449 and $123,932,593,
respectively. At December 31, 1996, the cost of investments for
Federal income tax purposes was equal to the cost for financial
reporting purposes. Net unrealized appreciation aggregated
$7,430,111, of which $9,990,764 represented appreciated securities
and $2,560,653 represented depreciated securities.
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11
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DODGE & COX
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Income Fund
Report of Independent Accountants
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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, 1996, 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, 1996 by correspondence with the custodian and brokers,
provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
San Francisco, California
January 24, 1997
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12
<PAGE>
D O D G E & C O X
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Income Fund
Officers and Directors
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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
Thomas M. Mistele, Assistant
Secretary-Treasurer
General Counsel, 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
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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
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13
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D O D G E & C O X
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Income Fund
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14
<PAGE>
D O D G E & C O X
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Income Fund
General Information
-------------------------------------------------------------------
Dodge & Cox The Fund is a no-load mutual fund with the primary objective of
Income Fund 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.
Investment Since 1930, Dodge & Cox has been providing professional investment
Manager management for individuals, trustees, 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 There are no commissions on the purchase or redemption of
Charge 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.
Automatic Shareholders may make regular monthly or quarterly investments of
Investment $100 or more through automatic deductions from their bank
Plan accounts.
Withdrawal Shareholders owning $10,000 or more of the Fund's shares may
Plan 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 Shareholders may direct that dividend and capital gains
Plan 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 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
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