<PAGE>
D O D G E & C O X D O D G E & C O X
----------------- -----------------
Income Fund
Income Fund
Established 1989
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Dodge & Cox
Investment Managers 9th Annual Report
35th Floor December 31, 1997
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. 1997
----------------- -----------------
-----------------
-----------------
Printed on recycled paper.
12/97 IF AR
<PAGE>
D o d g e & C o x
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Income Fund
To Our Shareholders
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Reflecting the bond market's recovery from a weak performance in 1996, the Dodge
& Cox Income Fund provided a total return of 10.0% for 1997. This outpaced the
9.7% total return of the Lehman Brothers Aggregate Bond Index (LBAG), a broad-
based index composed of investment grade bonds which serves as a proxy for the
overall market. Average annual total returns for longer periods are listed on
page three of this report.
The net asset value of the Fund rose from $11.68 at the end of 1996 to $12.08 as
of December 31, 1997. In addition, the Fund paid dividends of $0.73 per share
from investment income. At year-end, the Fund's total net assets were valued at
$705 million.
Falling Interest Rates Fuel Strong Returns
The strong performance of the bond market is largely attributable to a
combination of stable economic growth, lower inflation, and minimal changes in
Federal Reserve policy. After expanding at a rate of 3.3% in 1996, U.S. gross
domestic product (GDP) grew at a rate of 3.9% in 1997. Inflation, as measured by
the Consumer Price Index, rose only 1.7% in 1997, the smallest increase in a
decade. Prices at the producer level, as measured by the Producer Price Index,
actually fell by 1.2% in 1997.
This favorable economic environment led to lower interest rates across the
maturity spectrum. During 1997, 30-year U.S. Treasury rates fell from 6.64% to
5.92%, while two-year U.S. Treasury rates fell from 5.87% to 5.64%. In addition
to the overall decline, the difference between yields on longer and shorter
maturities narrowed. As a result of these factors, prices of fixed income
securities increased, with the largest increases recorded by longer-maturity
bonds. Underlying the price appreciation are two key factors that helped the
Fund outperform the LBAG:
* Longer-than-market duration: Compared to the LBAG, a higher percentage
of the Fund's portfolio was in longer-maturity bonds. This led to a
longer portfolio duration (a measure of a portfolio's price sensitivity
to changes in interest rates) for the Fund. As a result, the decline in
interest rates meant a greater price appreciation for the Fund than for
the overall market.
* Security selection: Our attempt to select securities that will perform
well in a broad range of interest rate scenarios led us to prefer
corporate securities that are non-callable, and mortgage-related
securities that exhibit relatively greater cash flow stability. By
focusing on well-structured securities, the Fund experienced greater
price appreciation than the LBAG.
In total, price appreciation comprised nearly one-third of the Fund's 10.0%
total return in 1997, while investment income comprised the other two-thirds. We
maintained the Fund's yield higher than that of the LBAG throughout the year,
which added modestly to relative performance.
1997 Review and Portfolio Changes
Before reviewing specific sector changes, we thought it would be useful to
revisit a relevant aspect of Dodge & Cox's investment philosophy. Our primary
focus as bond managers has always been the utilization of two Dodge & Cox
hallmarks: independent 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.
In an effort to increase the Fund's yield and total return potential, the Fund
is overweight in both the corporate and mortgage-backed sectors, compared to the
LBAG. At year end, holdings in each of these sectors represented roughly 38% of
the Fund, while holdings in U.S. government securities represented 16% of the
Fund. The residual was invested in asset-backed securities and short-term
investments. Following is a discussion of our strategy in each major sector as
well as a review of our duration adjustments.
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D o d g e & C o x
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Income Fund
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* In the mortgage sector, our strategy has been to focus on securities
that exhibit relatively stable cash flows over a wide range of interest
rate scenarios. Therefore, even in periods of declining interest rates,
like 1997, our mortgage-backed securities have made positive
contributions to the Fund's overall return. The Fund's total weighting
in mortgage-backed securities was 38%, exceeding that of the LBAG at
30%.
* Corporate securities, which comprised 38% of the Fund (versus 19% in the
LBAG), were the Fund's best performers in 1997, largely due to our focus
on longer-duration securities in this sector. Our strategy in this
sector is to utilize our in-house team of research analysts to identify
issuers where we believe the market underestimates creditworthiness or
total return potential. Based on this approach, we added new positions
in Norfolk Southern and Raytheon to the portfolio during the year. In
addition, we sold the Fund's holdings of Ralston Purina, because we
believed the valuation fully reflected optimistic expectations about the
company's future. The top performers in the corporate sector were Time
Warner Entertainment, Hydro-Quebec and Dayton Hudson securities.
* One of the Fund's new positions is in the asset-backed sector. Three
investor-owned California electric utilities issued Rate Reduction Bonds
in the fourth quarter as part of the plan to deregulate the state's
electricity generation market. Cash flows for these securities are
generated by a new charge on residential and small commercial electric
utility bills. We believe that these bonds offer stable cash flows and
attractive yields relative to other AAA securities and that they will
add diversification to the Fund due to their low correlation with
interest rate-sensitive assets.
While the duration of the Fund was consistently longer than that of the overall
market, we took three opportunities to manage this price sensitivity to interest
rates during the year. The net effect was that the Fund's duration was shortened
from 113% to 105% of the LBAG's duration. As we discussed in our July 1997
letter, we base our duration modifications on analyses of the Fund's total
return potential under changing interest rate scenarios. For example, if we
believe that the real, inflation-adjusted return will be low, we want less
exposure to interest rates, i.e. a shorter duration. We considered it prudent to
take these actions given that we believe there is a greater risk of higher
inflation, and potentially higher interest rates, in the future.
Looking Ahead
We continue to believe that the long-term outlook for fixed income securities
remains attractive for investors. With this in mind, we will continue to
implement our strategy of individual security selection through diligent,
fundamental research, with the goal of identifying issuers and sectors where we
believe the market underestimates creditworthiness or total return potential.
We will also maintain the Fund's high average quality and diversification, while
striving to attain a higher-than-market yield. Finally, we will continue to
invest the Fund's 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 questions.
For the Board of Directors,
/s/ A. Horton Shapiro
-------------------------------
January 28, 1998 A. Horton Shapiro, President
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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 December 31, 1997
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[LINE GRAPH APPEARS HERE]
Dodge & Cox
Income Fund LBAG Index
----------- -----------
<S> <C> <C>
01/01/1989 10,000 10,000
12/31/1989 11,411 11,455
12/31/1990 12,256 12,482
12/31/1991 14,451 14,479
12/31/1992 15,581 15,550
12/31/1993 17,350 17,067
12/31/1994 16,848 16,568
12/31/1995 20,252 19,630
12/31/1996 20,988 20,339
12/31/1997 23,088 22,308
</TABLE>
<TABLE>
<CAPTION>
Average annual total return for 9 years
periods ended December 31, 1997 1 Year 5 Years (Since Inception)
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<S> <C> <C> <C>
Dodge & Cox Income Fund 10.00% 8.18% 9.74%
Lehman Brothers Aggregate
Bond Index 9.68 7.49 9.32
</TABLE>
The chart covers the period from January 1, 1989 to December 31, 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-rated 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 December 31, 1997
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<TABLE>
<CAPTION>
General Information
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<S> <C>
Net Asset Value Per Share $ 12.08
Total Net Assets (millions) $705
1997 Expense Ratio 0.49%
1997 Portfolio Turnover 28%
30 Day SEC Yield* 6.21%
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 12
years.
</TABLE>
<TABLE>
<CAPTION>
Asset Allocation
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<S> <C>
[PIE CHART APPEARS HERE]
Bonds: 94.7%
Short-Term Investments: 5.3%
</TABLE>
<TABLE>
<CAPTION>
Bond Characteristics
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<S> <C>
Number of Bonds 89
Average Quality AA+
Average Maturity 11.3 years
Effective Duration 4.67 years
</TABLE>
<TABLE>
<CAPTION>
Sector Breakdown % of Fund
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<S> <C>
U.S. Treasury and Government Agency 18.1
Federal Agency CMO and REMIC+ 19.0
Federal Agency Mortgage Pass-Through 18.6
Asset-Backed 1.0
Corporate 32.2
Foreign (U.S. Dollar-denominated) 5.8
Short-Term Investments 5.3
+ Collateralized Mortgage
Obligation and Real Estate
Mortgage Investment Conduit
</TABLE>
<TABLE>
<CAPTION>
Moody's/Standard & Poor's
Quality Ratings % of Fund
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<S> <C>
U.S. Government & Government
Agencies 55.6
Aaa/AAA 5.3
Aa/AA 3.8
A/A 16.0
Baa/BBB 13.3
Ba/BB 0.7
Short-Term Investments 5.3
</TABLE>
<TABLE>
<CAPTION>
Maturity Breakdown % of Fund
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<S> <C>
0-1 Years to Maturity 17.1
1-5 37.4
5-10 17.0
10-15 5.1
15-20 3.1
20-25 7.1
25 and Over 13.2
*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.
</TABLE>
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4
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<TABLE>
<CAPTION>
D o d g e & C o x
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Income Fund
Portfolio of Investments December 31, 1997
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PAR VALUE MARKET VALUE
<C> <C> <S> <C>
BONDS: U.S. TREASURY AND GOVERNMENT AGENCY: 18.1%
94.7% U.S. TREASURY: 16.1%
$ 24,500,000 U.S. Treasury Notes, 5 1/4%, 7/31/1998.......................... $ 24,457,860
29,000,000 U.S. Treasury Notes, 7 1/8%, 10/15/1998.......................... 29,330,890
15,000,000 U.S. Treasury Notes, 5 1/8%, 11/30/1998.......................... 14,934,300
10,000,000 U.S. Treasury Notes, 5 5/8%, 11/30/1998.......................... 10,000,000
35,000,000 U.S. Treasury Notes, 5 7/8%, 11/15/1999.......................... 35,125,650
------------
113,848,700
GOVERNMENT AGENCY: 2.0%
6,409,410 Govt. Small Business Admin. 504 Series 97-20E, 7.30%, 5/1/2017... 6,743,468
6,750,000 Govt. Small Business Admin. 504 Series 97-20J, 6.55%, 10/1/2017.. 6,827,220
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13,570,688
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127,419,388
FEDERAL AGENCY CMO* AND REMIC**: 19.0%
471,276 FBC Mtge. Sec. Trust IV-A2, 8.30%, 8/1/2009...................... 479,081
4,239,372 Federal Home Loan Mtge. Corp., 7%, 10/15/2005.................... 4,243,315
21,000,000 Federal Home Loan Mtge. Corp., 7.10%, 11/15/2006................. 21,380,520
10,900,000 Federal Home Loan Mtge. Corp., 8%, 4/15/2007..................... 11,417,750
13,000,000 Federal Home Loan Mtge. Corp., 7%, 9/15/2007..................... 13,341,250
13,284,798 Federal Home Loan Mtge. Corp., 6%, 8/15/2008..................... 13,031,457
10,000,000 Federal Home Loan Mtge. Corp., 6%, 6/17/2022..................... 9,665,600
3,000,000 Federal Natl. Mtge. Assn., 7%, 2/25/2007......................... 3,048,750
10,000,000 Federal Natl. Mtge. Assn., 7%, 7/17/2015......................... 10,187,500
9,000,000 Federal Natl. Mtge. Assn., 6%, 6/25/2023......................... 8,696,250
12,616,000 Veterans Affairs Vendee Mtge. Trust, 7%, 6/15/2010............... 13,010,250
14,877,000 Veterans Affairs Vendee Mtge. Trust, 7 1/4%, 7/15/2016........... 15,351,130
10,000,000 Veterans Affairs Vendee Mtge. Trust, 8%, 7/15/2018............... 10,440,600
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134,293,453
FEDERAL AGENCY MORTGAGE PASS-THROUGH: 18.6%
37,870 Federal Home Loan Mtge. Corp., 7%, 1/1/2003...................... 38,024
13,929 Federal Home Loan Mtge. Corp., 6%, 10/1/2003..................... 13,859
2,065,976 Federal Home Loan Mtge. Corp., 8%, 12/1/2003..................... 2,114,568
71,957 Federal Home Loan Mtge. Corp., 7%, 3/1/2006...................... 72,436
241,447 Federal Home Loan Mtge. Corp., 7%, 9/1/2006...................... 243,644
567,753 Federal Home Loan Mtge. Corp., 7 1/4%, 1/1/2008.................. 577,342
432,749 Federal Home Loan Mtge. Corp., 8%, 1/1/2008...................... 446,130
337,471 Federal Home Loan Mtge. Corp., 8%, 1/1/2008...................... 345,408
189,309 Federal Home Loan Mtge. Corp., 7 1/2%, 10/1/2008................. 195,353
6,957,426 Federal Home Loan Mtge. Corp., 7%, 11/1/2008..................... 7,091,843
335,738 Federal Home Loan Mtge. Corp., 8%, 5/1/2009...................... 347,173
186,359 Federal Home Loan Mtge. Corp., 8 1/4%, 5/1/2009.................. 191,337
726,265 Federal Home Loan Mtge. Corp., 8%, 8/1/2009...................... 748,721
125,356 Federal Home Loan Mtge. Corp., 6 1/2%, 6/1/2012.................. 125,592
6,553,381 Federal Natl. Mtge. Assn., 7 1/2%, 9/1/2007...................... 6,797,887
2,802,551 Federal Natl. Mtge. Assn., 6 1/4%, 12/1/2007..................... 2,776,795
18,599,645 Federal Natl. Mtge. Assn., 7%, 7/1/2008.......................... 18,942,994
15,773,680 Federal Natl. Mtge. Assn., 6 1/2%, 12/1/2008..................... 15,856,176
See accompanying Notes to Financial Statements
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5
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<CAPTION>
D o d g e & C o x
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Income Fund
Portfolio of Investments December 31, 1997
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PAR VALUE MARKET VALUE
<C> <C> <S> <C>
BONDS FEDERAL AGENCY MORTGAGE PASS-THROUGH (continued)
(cont- $ 12,828,999 Federal Natl. Mtge. Assn., 6 1/2%, 7/1/2009....................... $ 12,896,095
inued) 9,654,939 Federal Natl. Mtge. Assn., 8%, 8/1/2010........................... 9,935,415
727,538 Federal Natl. Mtge. Assn., 7 1/2%, 2/1/2011....................... 747,160
1,978,237 Federal Natl. Mtge. Assn., 8%, 1/1/2012........................... 2,068,484
454,706 Federal Natl. Mtge. Assn., 6 1/2%, 1/1/2013....................... 457,239
2,164,850 Federal Natl. Mtge. Assn., 8%, 8/1/2022........................... 2,261,597
6,285,438 Govt. Natl. Mtge. Assn., 7 1/4%, 2/15/2006........................ 6,424,723
8,003,366 Govt. Natl. Mtge. Assn., 7 1/2%, 7/15/2007........................ 8,229,381
22,847,206 Govt. Natl. Mtge. Assn., 7%, 4/15/2009............................ 23,375,434
7,317,834 Veterans Affairs Vendee Mtge. Trust, 9.29%, 5/15/2025............. 7,894,114
------------
131,214,924
ASSET-BACKED SECURITIES: 1.0%
7,251,000 CA Infrastructure and Econ. Dev. Bank SP Trust SCE-1
Rate Reduction Ctf. 1997-1 A-2, 6.14% 3/25/2002................... 7,262,312
CORPORATE: 32.2%
FINANCE: 15.1%
6,000,000 BankAmerica Capital II, 8%, 12/15/2026, Callable 2006++........... 6,467,460
1,450,000 Barclays No. American Capital 9 3/4%, 5/15/2021, Callable 2001.... 1,635,267
1,000,000 CIGNA Corp. Notes 7.65%, 3/1/2023................................. 1,048,680
5,430,000 Citicorp Capital Trust I, 7.93%, 2/15/2027, Callable 2007++....... 5,789,520
1,315,000 Citicorp Capital Trust II, 8.015%, 2/15/2027, Callable 2007++..... 1,406,629
4,000,000 First Nationwide Bank Subordinated Debentures 10%, 10/1/2006...... 4,760,400
20,000,000 Ford Motor Credit Co. Global Notes 7.20%, 6/15/2007............... 21,085,600
10,000,000 General Electric Capital MTN 8.85%, 3/1/2007...................... 11,756,800
4,000,000 General Electric Capital Notes 8 1/2%, 7/24/2008.................. 4,655,920
8,000,000 GMAC Put Notes 8 7/8%, 6/1/2010, Putable 2000/2005................ 9,551,760
4,500,000 Hartford Financial Services Group Notes 8.30%, 12/1/2001.......... 4,795,065
7,500,000 Hartford Financial Services Group Notes 6 3/8%, 11/1/2002......... 7,509,450
6,300,000 J.P. Morgan Capital Trust I, 7.54%, 1/15/2027, Callable 2007++.... 6,399,918
5,200,000 Norwest Corp. MTN 6.20%, 12/1/2005................................ 5,147,428
3,375,000 Norwest Corp. MTN 6 1/2%, 6/1/2005................................ 3,405,544
2,500,000 Norwest Corp. MTN 6.55%, 12/1/2006................................ 2,529,425
7,625,000 Norwest Corp. MTN 6 7/8%, 8/8/2006................................ 7,864,120
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105,808,986
INDUSTRIAL: 14.8%
1,000,000 Dayton Hudson Corp. Debentures 9.70%, 6/15/2021................... 1,320,670
8,250,000 Dayton Hudson Corp. Debentures 9%, 10/1/2021...................... 10,171,837
4,435,000 Dayton Hudson Corp. Debentures 8 7/8%, 4/1/2022................... 5,412,297
2,450,000 Dayton Hudson Corp. MTN 9.35%, 6/16/2020.......................... 3,127,915
9,750,000 Lockheed Martin Corp. Debentures 7.65%, 5/1/2016.................. 10,656,750
10,000,000 Lockheed Martin Corp. Debentures 7 3/4%, 5/1/2026................. 11,082,100
5,000,000 May Department Stores Debentures 7 5/8%, 8/15/2013................ 5,496,200
7,500,000 May Department Stores 7 7/8%, 8/15/2036, Callable 2016............ 8,181,600
10,000,000 Raytheon Co. Notes 6 3/4%, 8/15/2007.............................. 10,201,700
10,000,000 Raytheon Co. Debentures 7.20%, 8/15/2027.......................... 10,432,400
See accompanying Notes to Financial Statements
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6
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<TABLE>
<CAPTION>
D o d g e & C o x
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Income Fund
Portfolio of Investments December 31, 1997
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PAR VALUE MARKET VALUE
<C> <C> <S> <C>
BONDS INDUSTRIAL (continued)
(Cont- $ 8,000,000 Time Warner Entertainment Senior Debentures 8 3/8%, 7/15/2033...... $ 9,158,080
inued) 2,500,000 Union Camp Corp. Debentures 9 1/4%, 2/1/2011....................... 3,063,100
15,034,000 Walt Disney Co. Debentures 7.55%, 7/15/2093, Callable 2023......... 16,364,208
------------
104,668,857
TRANSPORTATION: 2.1%
5,630,000 Consolidated Rail Corp. Debentures 9 3/4%, 6/15/2020............... 7,387,742
400,000 Norfolk & Western Railroad Equip. Tr., 10 1/8%, 7/1/2000........... 436,740
5,500,000 Norfolk Southern Bonds 7.70%, 5/15/2017............................ 6,059,240
1,000,000 Seaboard Coast Line Railroad Equip. Tr., 11 1/4%, 3/1/1999......... 1,057,110
------------
14,940,832
UTILITIES: 0.2%
1,500,000 Idaho Power Co. 1st Mtge. Bonds 9 1/2%, 1/1/2021, Callable 2001.... 1,661,550
------------
227,080,225
FOREIGN (U.S. DOLLAR-DENOMINATED): 5.8%
CANADIAN CORPORATE: 3.9%
7,062,000 Canadian Pacific Ltd. Debentures 9.45%, 8/1/2021................... 9,028,908
9,000,000 Hydro-Quebec Debentures 8.40%, 1/15/2022........................... 10,601,280
6,000,000 Hydro-Quebec Debentures 9 1/2%, 11/15/2030......................... 7,990,740
------------
27,620,928
INTERNATIONAL AGENCY: 1.9%
4,150,000 European Investment Bank Notes 10 1/8%, 10/1/2000.................. 4,564,876
8,750,000 Inter-American Development Bank 7 1/8%, 3/15/2023,Callable 2003.... 8,829,625
------------
13,394,501
------------
41,015,429
------------
Total Bonds (cost $641,848,309)................................ 668,285,731
------------
SHORT-TERM 2,635,915 General Mills, Inc., Variable Demand Note 5.33%.................... 2,635,915
INVEST- 3,306,595 Pitney Bowes Credit Corp., Variable Demand Note 5.33%.............. 3,306,595
MENTS: 3,536,652 Portico Institutional Money Market Fund............................ 3,536,652
4.1% 3,525,312 Sara Lee Corp., Variable Demand Note 5.32%......................... 3,525,312
11,000,000 U.S. Treasury Bills, 6/18/1998..................................... 10,729,473
2,763,800 Warner Lambert Co., Variable Demand Note 5.49%..................... 2,763,800
2,450,104 Wisconsin Electric Power Corp., Variable Demand Note 5.49%......... 2,450,104
------------
Total Short-Term Investments (cost $28,947,851)................ 28,947,851
------------
TOTAL INVESTMENTS (cost $670,796,160)................ 98.8% 697,233,582
OTHER ASSETS LESS LIABILITIES........................ 1.2% 8,216,506
------- ------------
TOTAL NET ASSETS..................................... 100.0% $705,450,088
======= ============
* CMO: Collateralized Mortgage Obligation
** REMIC: Real Estate Mortgage Investment Conduit
++ Cumulative Preferred Securities
See accompanying Notes to Financial Statements
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7
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
D o d g e & C o x
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Income Fund
Statement of Assets and Liabilities December 31, 1997
--------------------------------------------------------------------------------
<C> <S> <C>
ASSETS:
Investments, at market value (identified cost $670,796,160)..... $697,233,582
Cash............................................................ 320,296
Interest receivable............................................. 8,331,291
Receivable for investments sold................................. 117,004
Prepaid expenses................................................ 8,029
------------
706,010,202
------------
LIABILITIES:
Payable for Fund shares redeemed................................ 239,818
Management fees payable......................................... 238,224
Accounts payable................................................ 82,072
------------
560,114
------------
Net asset NET ASSETS.............................................. $705,450,088
value per ============
share $12.08 NET ASSETS CONSIST OF:
Paid in capital................................................. $675,710,298
Capital Accumulated undistributed net investment income................. 583,799
shares out- Accumulated undistributed net realized gain on investments...... 2,718,569
standing Net unrealized appreciation on investments...................... 26,437,422
58,408,985 ------------
(par value $705,450,088
$.01 each, ============
authorized
shares
100,000,000)
See accompanying Notes to Financial Statements
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8
</TABLE>
<PAGE>
D o d g e & C o x
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Income Fund
<TABLE>
<CAPTION>
Statement of Operations Year Ended December 31, 1997
---------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $ 42,106,904
------------
EXPENSES:
Management fees (Note 2).................................... 2,574,712
Custodian fees.............................................. 66,680
Transfer agent fees......................................... 83,462
Accounting and audit fees................................... 54,964
Legal fees.................................................. 10,485
Shareholder reports......................................... 83,659
Registration fees........................................... 125,098
Directors' fees............................................. 18,000
Miscellaneous............................................... 13,310
------------
3,030,370
------------
NET INVESTMENT INCOME....................................... 39,076,534
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments........................ 2,852,710
Change in unrealized appreciation of investments........ 19,007,311
------------
Net realized and unrealized gain on investments..... 21,860,021
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ 60,936,555
============
</TABLE>
See accompanying Notes to Financial Statements
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9
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D o d g e & C o x
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Income Fund
Statement of Changes in Net Assets Year Ended December 31,
----------------------------------------------------------------------------------------------------------------
1997 1996
<S> <C> <C>
OPERATIONS:
Net investment income............................................................ $ 39,076,534 $ 25,756,897
Net realized gain................................................................ 2,852,710 233,384
Net change in unrealized appreciation............................................ 19,007,311 (9,067,878)
------------- ------------
Net increase in net assets from operations....................................... 60,936,555 16,922,403
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DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................................................ (38,884,448) (25,570,336)
Net realized gain................................................................ (4,666) -
------------- ------------
Total distributions.............................................................. (38,889,114) (25,570,336)
------------- ------------
CAPITAL SHARE TRANSACTIONS:
Amounts received from sale of shares............................................. 261,691,475 283,211,912
Net asset value of shares issued in reinvestment of distributions................ 23,196,538 15,194,756
Amounts paid for shares redeemed................................................. (134,325,526) (60,242,530)
------------- ------------
Net increase from capital share transactions..................................... 150,562,487 238,164,138
------------- ------------
Total increase in net assets..................................................... 172,609,928 229,516,205
NET ASSETS:
Beginning of year................................................................ 532,840,160 303,323,955
------------- ------------
End of year (including undistributed net investment income
of $583,799 and $391,713, respectively).......................................... $ 705,450,088 $532,840,160
============= ============
Shares sold...................................................................... 22,208,423 24,213,830
Shares issued in reinvestment of distributions................................... 1,972,984 1,326,750
Shares redeemed.................................................................. (11,387,493) (5,158,698)
------------- ------------
Net increase in shares outstanding............................................... 12,793,914 20,381,882
============= ============
See accompanying Notes to Financial Statements
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D o d g e & C o x
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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 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 year ended December 31, 1997, purchases and sales of securities,
other than short-term securities, aggregated $298,435,852 and
$163,634,787, respectively, of which U.S. government obligations
aggregated $177,036,954 and $120,338,438, respectively. At December 31,
1997, the cost of investments for Federal income tax purposes was equal
to the cost for financial reporting purposes. Net unrealized
appreciation aggregated $26,437,422, of which $26,780,154 represented
appreciated securities and $342,732 represented depreciated securities.
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Dodge & Cox
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Income Fund
Financial Highlights
-----------------------------------------------------------------------------------------------------------
Selected data and ratios (for a share outstanding throughout each year)
Year Ended December 31,
----------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year.......................... $11.68 $12.02 $ 10.74 $11.89 $11.55
Income from investment operations:
Net investment income....................................... .73 .74 .78 .77 .78
Net realized and unrealized gain (loss)..................... .40 (.34) 1.34 (1.11) .51
------ ------ ------- ------ ------
Total from investment operations............................ 1.13 .40 2.12 (.34) 1.29
------ ------ ------- ------ ------
Distributions to shareholders from:
Net investment income....................................... (.73) (.74) (.78) (.76) (.78)
Net realized gain........................................... - - (.06) (.05) (.17)
------ ------ ------- ------ ------
Total distributions......................................... (.73) (.74) (.84) (.81) (.95)
------ ------ ------- ------ ------
Net asset value, end of year................................ $12.08 $11.68 $ 12.02 $10.74 $11.89
====== ====== ======= ====== ======
Total return................................................ 10.00% 3.62% 20.21% (2.89)% 11.34%
Ratios/Supplemental Data:
Net assets, end of year (millions).......................... $ 705 $ 533 $ 303 $ 195 $ 180
Ratio of expenses to average net assets..................... .49% .50% .54% .54% .60%
Ratio of net investment income to average net assets........ 6.32% 6.65% 6.85% 6.90% 6.50%
Portfolio turnover rate..................................... 28% 37% 53% 55% 26%
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D o d g e & C o x
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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, 1997, 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, 1997 by correspondence with
the custodian, provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
San Francisco, California
January 28, 1998
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D o d g e & C o x
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Income Fund
Proxy Voting Results
----------------------------------------------------------------------
A special meeting of shareholders was held on January 30, 1998
(adjourned from January 20, 1998), to vote on the following proposals.
All of the proposals received the required number of votes and were
adopted.
A summary of voting results is listed below each proposal.
Proposal To approve a reorganization of the Fund as a separate series of
One Dodge & Cox Funds, a newly formed Delaware business trust.
For: 35,233,940
Against: 131,818
Abstain: 215,123
Broker Non-Vote: 3,158,448
Proposal To approve the elimination or revision of certain fundamental
Two investment restrictions for the Fund.
For: 35,360,261
Against: 220,620
Abstain: 0
Broker Non-Vote: 3,158,448
Proposal To ratify the selection of Price Waterhouse LLP as the Fund's
Three independent certified public accountants.
For: 38,488,971
Against: 46,789
Abstain: 203,569
Proposal To approve an increase in authorized capital of the Fund.
Four
For: 38,310,501
Against: 162,911
Abstain: 265,917
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D o d g e & C o x
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Income Fund
General Information
-------------------------------------------------------------------
Investment Since 1930, Dodge & Cox has been providing professional investment
Manager 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 Shares of the Fund are purchased and redeemed at net asset value.
Fund 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 Shareholders may make regular monthly or quarterly investments of
Investment $100 or more through automatic deductions from their bank accounts.
Plan
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. 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 Fund literature and details on all of these Plans are available
Inquiries from the Fund upon request.
Dodge & Cox Income Fund
c/o BFDS
P.O. Box 9051
Boston, MA 02205-9051
(800) 621-3979
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