N-CSR 1 fincsr.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR Certified Shareholder Report of Registered Management Investment Companies Investment Company Act File Number: 811-32 Fundamental Investors, Inc. (Exact Name of Registrant as specified in charter) P.O. Box 7650, One Market, Steuart Tower San Francisco, California 94120 (Address of principal executive offices) Registrant's telephone number, including area code: (415) 421-9360 Date of fiscal year end: December 31, 2003 Date of reporting period: December 31, 2003 Patrick F. Quan Secretary Fundamental Investors, Inc. P.O. Box 7650, One Market, Steuart Tower San Francisco, California 94120 (name and address of agent for service) Copies to: Robert E. Carlson, Esq. Paul, Hastings, Janofsky &Walker LLP 515 South Flower Street Los Angeles, California 90071 (Counsel for the Registrant) ITEM 1 - Reports to Stockholders [logo - American Funds(R)] The right choice for the long term(R) FUNDAMENTAL INVESTORS 25 years of managing through multiple perspectives [photo of an apartment building in the reflection of a mirrored glass office building] Annual report for the year ended December 31, 2003 FUNDAMENTAL INVESTORS(SM) seeks long-term growth of capital and income primarily through investments in common stocks. This fund is one of the 29 American Funds, the nation's third-largest mutual fund family. For more than seven decades, Capital Research and Management Company, SM the American Funds adviser, has invested with a long-term focus based on thorough research and attention to risk. CONTENTS PAGE Letter to shareholders; Results at a glance 1 Chart: The value of a long-term perspective 4 Special report: 25 years of managing through multiple perspectives 6 Investment portfolio 12 Financial statements 20 Directors and officers 32 The American Funds family back cover
Please see page 4 for Class A share results with relevant sales charges deducted. Results for other share classes can be found on page 31. Please see the inside back cover for important information about other share classes. The fund's 30-day yield for Class A shares as of January 31, 2004, calculated in accordance with the Securities and Exchange Commission formula, was 1.48%. The fund's distribution rate for Class A shares as of that date was 1.30%. Both reflect the 5.75% maximum sales charge. The SEC yield reflects the rate at which the fund is earning income on its current portfolio of securities while the distribution rate reflects the fund's past dividends paid to shareholders. Accordingly, the fund's SEC yield and distribution rate may differ. FIGURES SHOWN ARE PAST RESULTS AND ARE NOT PREDICTIVE OF FUTURE PERIODS. CURRENT AND FUTURE RESULTS MAY BE LOWER OR HIGHER THAN THOSE SHOWN. BECAUSE SHARE PRICES MAY DECLINE, THE VALUE OF YOUR HOLDINGS MAY DECREASE. FOR THE MOST CURRENT INFORMATION AND MONTH-END RESULTS, VISIT AMERICANFUNDS.COM. INVESTING FOR SHORT PERIODS MAKES LOSSES MORE LIKELY. INVESTMENTS ARE NOT FDIC-INSURED, NOR ARE THEY DEPOSITS OF OR GUARANTEED BY A BANK OR ANY OTHER ENTITY. INVESTING OUTSIDE THE UNITED STATES INVOLVES ADDITIONAL RISKS, SUCH AS CURRENCY FLUCTUATIONS, POLITICAL INSTABILITY, DIFFERING SECURITIES REGULATIONS AND PERIODS OF ILLIQUIDITY, WHICH ARE DETAILED IN THE FUND'S PROSPECTUS. FELLOW SHAREHOLDERS: [photo of an apartment building in the reflection of a mirrored glass office building] We are pleased to report that Fundamental Investors posted a 32.0% total return for the 12 months ended December 31, 2003, helped by the economic recovery and the decline in the U.S. dollar. That result significantly outpaced the returns of its two benchmarks as well as those of the broader stock market. The Lipper Large-Cap Core Funds Index, which tracks funds that allow a wide latitude of companies in their portfolios, posted a 24.8% return. The Lipper Large-Cap Value Funds Index, which tracks funds that invest in companies that are undervalued within their industries, gained 28.0%. The broader stock market as measured by the unmanaged Standard & Poor's 500 Composite Index, which tracks relatively large companies listed on U.S. exchanges, posted a 28.7% gain for the year. GENERATING A CONSISTENT INCOME Despite the continuing struggle to find companies that pay high dividends, we are also pleased to report that the fund met its goal of providing steady quarterly income, paying shareholders a total of 40 cents a share for the year. Over the past decade, Fundamental Investors has consistently maintained its quarterly dividend, even while the payout of dividends as a percentage of company earnings declined. With the passage of President Bush's tax bill, which reduced the maximum tax rate on qualified dividends to 15% for shareholders, we expect that the dividend culture in the United States will improve. This change is significant to a fund like Fundamental Investors, whose objective is to provide capital appreciation as well as income. [Begin Sidebar] RESULTS AT A GLANCE Returns for periods ended December 31, 2003, with all distributions reinvested. 1 year 5 years(1) 10 years(1) Lifetime(1)(2) Fundamental Investors +32.0% +5.1% +11.9% +14.2% Lipper Large-Cap Core Funds Index +24.8 -1.1 +9.3 --(3) Lipper Large-Cap Value Funds Index +28.0 +1.2 +10.1 +13.1 Standard & Poor's 500 Composite Index(4) +28.7 -0.6 +11.1 +13.5 (1) Average annual total return. (2) Since Capital Research and Management Company began managing the fund on August 1, 1978. (3) Index began on December 29, 1978. (4) Unmanaged.
[End Sidebar] [[Begin Sidebar] Figures shown are past results and are not predictive of future periods. Current and future results may be lower or higher than those shown. Because share prices may decline, the value of your holdings may decrease. For the most current information and month-end results, visit americanfunds.com. Results shown are at net asset value. If a sales charge (maximum 5.75%) had been deducted, the results would have been lower. [End Sidebar] A BROAD-BASED RECOVERY At the beginning of 2003, the fund's portfolio was well positioned to benefit from a global economic recovery and a decline in the U.S. dollar. During the past year, the U.S. dollar declined 8.1% on a trade-weighted basis(1) and significantly more than that against the euro, which has helped U.S. cyclical companies to gain market share globally. As a result, the fund was helped by its significant concentration in cyclical stocks such as Dow Chemical (+40.0%), a chemical manufacturer; Deere (+41.9%), a manufacturer of agricultural and construction equipment; and Alcoa (+66.8%), an aluminum producer. All are among the fund's top 10 holdings and posted gains well above that of the broader stock market. (1) As measured by the J.P. Morgan Trade-Weighted Real Broad Effective U.S. Dollar Index. Semiconductor manufacturer Texas Instruments (+95.7%), another top holding, also helped the fund's results, as its stock price experienced a significant recovery after several years of negative returns. Retail companies, which generally do well during an economic recovery, also posted solid gains for the period. Among these are Lowe's Companies (+47.7%), the home-improvement chain, and Limited Brands (+29.4%), an apparel and personal products retailer. Of the fund's top 10 holdings, only SBC Communications (-3.8%) declined in value, in part due to competitive pressures. Despite its struggles, we remain confident in the company's long-term potential. AN INCREASE IN INTERNATIONAL HOLDINGS The decline of the U.S. dollar, which makes foreign currencies worth more in dollars, helped the stock prices of non-U.S. companies to appreciate this year. Fundamental Investors' ability to invest up to 30% of its assets in non-U.S. companies gave us the flexibility to take advantage of the weakening-dollar trend. Over the past year, we increased the fund's exposure to stocks of non-U.S. companies from 19.6% to 22.9% of the overall portfolio. [Begin Sidebar] [begin pie chart] WHERE THE FUND'S ASSETS WERE INVESTED Percent of net assets as of December 31, 2003 United States 73.2% Europe 12.5% Asia/Pacific 5.7% Other 4.7% Cash & equivalents 3.9% [end pie chart] [End Sidebar] Much of that increase was in Asia/Pacific, where we expanded our presence significantly, particularly in China and Japan. In China, a growing economy and improving political climate are creating new investment opportunities. The increasing number of cellular phone users in that country, for example, has helped China Telecom (+134.7%) to post significant gains this year. China's economic growth has also provided a much-needed boost to Japan, which we believe is finally recovering from a decade-long period of economic malaise. Over the last eight months of the fiscal year, we added holdings such as Hitachi, which manufactures electronics equipment, and NEC, which provides computer-based systems, to the fund's portfolio. Other non-U.S. holdings that posted strong gains this period include Norsk Hydro (+38.1%), a Norwegian oil and gas company; Suncor Energy (+60.2%), a Canadian energy company; and AstraZeneca (+36.9%), a London-based pharmaceutical giant that made progress in getting several new products to market. We believe that improving fundamentals and reasonable valuations in many non-U.S. companies will continue to offer attractive investment opportunities. [Begin Sidebar] FUNDAMENTAL INVESTORS' TOTAL RETURN YEAR BY YEAR (ENDING DECEMBER 31) Capital return Income return Total return 1994 -1.2% +2.5% +1.3% 1995 +31.9 +2.3 +34.2 1996 +18.2 +1.8 +20.0 1997 +25.0 +1.7 +26.7 1998 +15.2 +1.5 +16.7 1999 +23.2 +1.4 +24.6 2000 +3.1 +1.2 +4.3 2001 -10.9 +1.3 -9.6 2002 -19.1 +1.8 -17.3 2003 +30.2 +1.8 +32.0 10-year average annual total return +11.9% 10-year cumulative total return +209.2 Lifetime cumulative total return (since August 1, 1978) +2,803.7 Total return measures both capital results (changes in net asset value) and income return (from income dividends), assuming reinvestment of all dividends and capital gain distributions.
[End Sidebar] STAYING FOCUSED At this point, we believe that the global economic recovery, led by the United States and Asia, is still in its early stages and will likely gain momentum, which should help to increase the profitability of many companies. As a result, we are not planning any major shifts in the portfolio; we will continue to remain focused on cyclical and dividend-paying companies. Over the years, Fundamental Investors' flexibility and ability to react to changing economic environments have helped the fund to produce solid returns for shareholders. During the past 10-year period, the fund has earned an average annual total return of 11.9%, surpassing the S&P 500's 11.1% return, the Lipper Large-Cap Core Funds Index's 9.3% return and the Lipper Large-Cap Value Funds Index's 10.1% return. For a better understanding of what distinguishes Fundamental Investors from other growth-and-income funds, please see our feature starting on page 6. As always, we appreciate your continued support. Sincerely, /s/ James F. Rothenberg James F. Rothenberg Chairman /s/ Dina N. Perry Dina N. Perry President February 11, 2004 [Begin Sidebar] Figures shown are past results and are not predictive of future periods. Current and future results may be lower or higher than those shown. Because share prices may decline, the value of your holdings may decrease. For the most current information and month-end results, visit americanfunds.com. Results shown are at net asset value. If a sales charge (maximum 5.75%) had been deducted, the results would have been lower. [End Sidebar] THE VALUE OF A LONG-TERM PERSPECTIVE HOW A $10,000 INVESTMENT HAS GROWN The chart and accompanying table illustrate how a $10,000 investment in the fund grew between August 1, 1978 -- when Capital Research and Management Company became Fundamental Investors' investment adviser -- and December 31, 2003. The chart also shows how Standard & Poor's 500 Composite Index and the Lipper Large-Cap Value Funds Index fared over this same period, and what happened to inflation (as measured by the Consumer Price Index). Fund figures reflect deduction of the maximum sales charge of 5.75% on the $10,000 investment.1 Thus, the net amount invested was $9,425. Here are the fund's average annual total returns on a $1,000 investment with all distributions reinvested for periods ended December 31, 2003, assuming payment of the 5.75% maximum sales charge at the beginning of the stated periods: Average annual Class A shares total return 1 year +24.36% 5 years +3.85% 10 years +11.29% Results for other share classes can be found on page 31.
Figures shown are past results and are not predictive of future periods. Current and future results may be lower or higher than those shown. Because share prices may decline, the value of your holdings may decrease. For the most current information and month-end results, visit americanfunds.com. (1) As outlined in the prospectus, the sales charge is reduced for accounts of $25,000 or more. (2) Includes reinvested dividends of $46,655 and reinvested capital gain distributions of $130,729. (3) Includes reinvested capital gain distributions of $73,002 but does not reflect income dividends of $27,279 taken in cash. (4) For the period August 1, 1978 (when Capital Research and Management Company became investment adviser) through December 31, 1978. (5) Computed from data supplied by the U.S. Department of Labor, Bureau of Labor Statistics. The results shown are before taxes on fund distributions and sale of fund shares. The S&P 500 is unmanaged, does not reflect sales charges, commissions or expenses and cannot be invested in directly. [begin mountain chart] Fundamental Investors Fundamental Investors with dividends not including reinvested (1) (2) dividends (1) (3) Initial Investment 7/31/1978 $ 9,425 $9,425 1978 High 11-Sep 10,000 9,919 Low 14-Nov 8,667 8,596 Close 29-Dec 9,155 8,947 1979 Low 27-Feb 9,086 8,880 High 5-Oct 10,823 10,310 Close 31-Dec 10,556 9,892 1980 Low 21-Apr 9,625 8,907 High 20-Nov 13,131 11,876 Close 31-Dec 12,807 11,390 1981 High 27-Apr 13,986 12,308 Low 25-Sep 11,906 10,243 Close 31-Dec 12,654 10,688 1982 Low 22-Jan 10,593 8,947 High 7-Dec 17,346 13,833 Close 31-Dec 16,957 13,522 1983 Low 3-Jan 16,636 13,266 High 10-Oct 21,599 16,721 Close 30-Dec 21,389 16,424 1984 High 9-Jan 22,004 16,896 Low 24-Jul 18,549 13,980 Close 31-Dec 22,621 16,759 1985 Low 1-May 22,882 16,819 High 16-Dec 29,736 21,355 Close 31-Dec 29,448 21,148 1986 Low 14-Feb 31,766 22,665 High 4-Sep 36,571 25,757 Close 31-Dec 35,941 25,151 1987 High 25-Aug 50,132 34,478 Low 4-Dec 33,691 23,002 Close 31-Dec 37,295 25,463 1988 Low 20-Jan 36,464 24,895 High 5-Jul 43,076 28,988 Close 30-Dec 43,246 28,561 1989 Low 3-Jan 43,068 28,443 High 9-Oct 58,786 38,138 Close 29-Dec 55,597 35,438 1990 High 4-Jun 60,265 37,947 Low 11-Oct 46,988 29,390 Close 31-Dec 52,130 32,180 1991 Low 9-Jan 50,201 30,989 High 31-Dec 67,947 40,940 Close 31-Dec 67,947 40,940 1992 Low 8-Apr 66,472 39,828 High 12-Nov 72,487 42,938 Close 31-Dec 74,871 44,059 1993 Low 8-Jan 74,615 43,908 High 2-Nov 88,379 51,169 Close 31-Dec 88,466 50,884 1994 High 2-Feb 91,634 52,706 Low 8-Dec 86,773 48,708 Close 30-Dec 89,641 50,319 1995 Low 3-Jan 89,539 50,261 High 29-Nov 119,498 66,056 Close 29-Dec 120,306 66,210 1996 Low 10-Jan 117,715 64,784 High 26-Nov 145,602 79,119 Close 31-Dec 144,352 78,143 1997 Low 11-Apr 144,443 77,891 High 7-Oct 189,427 101,423 Close 31-Dec 182,855 97,513 1998 High 17-Jul 212,584 112,606 Low 8-Oct 173,534 91,600 Close 31-Dec 213,421 112,292 1999 Low 14-Jan 211,060 111,050 High 10-Dec 258,554 134,742 Close 31-Dec 265,882 138,151 2000 High 1-Sep 293,957 151,363 Low 21-Dec 266,380 136,743 Close 29-Dec 277,235 142,315 2001 High 1-Feb 287,822 147,750 Low 21-Sep 211,970 107,718 Close 31-Dec 250,761 126,959 2002 High 19-Mar 260,698 131,491 Low 9-Oct 182,355 91,253 Close 31-Dec 207,271 102,816 2003 Low 12-Mar 186,058 91,854 High 31-Dec 273,523 133,434 Close 31-Dec 273,523 133,434 S&P 500 Index with dividends reinvested Initial Investment 7/31/1978 $10,000 1978 High 12-Sep 10,670 Low 14-Nov 9,306 Close 29-Dec 9,762 1979 Low 27-Feb 9,807 High 5-Oct 11,769 Close 31-Dec 11,579 1980 Low 27-Mar 10,627 High 28-Nov 15,813 Close 31-Dec 15,336 1981 High 6-Jan 15,603 Low 25-Sep 13,172 Close 31-Dec 14,581 1982 Low 12-Aug 12,625 High 9-Nov 17,877 Close 31-Dec 17,723 1983 Low 3-Jan 17,433 High 10-Oct 22,491 Close 30-Dec 21,721 1984 Low 24-Jul 19,933 High 6-Nov 23,337 Close 31-Dec 23,083 1985 Low 4-Jan 22,592 High 16-Dec 30,417 Close 31-Dec 30,407 1986 Low 22-Jan 29,286 High 2-Dec 37,737 Close 31-Dec 36,082 1987 High 25-Aug 51,060 Low 4-Dec 34,314 Close 31-Dec 37,977 1988 Low 20-Jan 37,293 High 21-Oct 44,800 Close 30-Dec 44,267 1989 Low 3-Jan 43,883 High 9-Oct 58,837 Close 29-Dec 58,269 1990 High 16-Jul 61,897 Low 11-Oct 50,026 Close 31-Dec 56,457 1991 Low 9-Jan 53,255 High 31-Dec 73,620 Close 31-Dec 73,620 1992 Low 8-Apr 70,130 High 18-Dec 80,063 Close 31-Dec 79,222 1993 Low 8-Jan 78,011 High 28-Dec 87,854 Close 31-Dec 87,189 1994 High 2-Feb 90,223 Low 4-Apr 82,600 Close 30-Dec 88,336 1995 Low 3-Jan 88,305 High 13-Dec 122,408 Close 29-Dec 121,491 1996 Low 10-Jan 118,049 High 25-Nov 152,084 Close 31-Dec 149,367 1997 Low 2-Jan 148,615 High 5-Dec 201,641 Close 31-Dec 199,183 1998 Low 9-Jan 190,410 High 29-Dec 258,425 Close 31-Dec 256,100 1999 Low 14-Jan 252,550 High 31-Dec 309,980 Close 31-Dec 309,980 2000 High 24-Mar 322,882 Low 20-Dec 269,684 Close 29-Dec 281,766 2001 High 30-Jan 293,173 Low 21-Sep 207,919 Close 31-Dec 248,303 2002 High 19-Mar 253,587 Low 9-Oct 169,983 Close 31-Dec 193,447 2003 Low 12-Mar 176,642 High 31-Dec 248,903 Close 31-Dec 248,903 Lipper Large-Cap Value Fund Index with dividends reinvested Initial Investment 7/31/1978 $ 10,000 1978 High 31-Aug 10,377 Low 31-Oct 9,281 Close 29-Dec 9,669 1979 Low 28-Feb 9,757 High 30-Sep 11,676 Close 31-Dec 11,667 1980 Low 31-Mar 10,929 High 30-Nov 14,925 Close 31-Dec 14,658 1981 High 31-May 15,457 Low 30-Sep 13,965 Close 31-Dec 14,879 1982 Low 31-Jul 14,113 High 31-Dec 18,622 Close 31-Dec 18,622 1983 Low 31-Jan 19,113 High 30-Nov 23,082 Close 30-Dec 22,968 1984 Low 31-May 21,001 High 31-Dec 24,352 Close 31-Dec 24,352 1985 Low 31-Jan 25,997 High 31-Dec 31,784 Close 31-Dec 31,784 1986 Low 31-Jan 32,353 High 31-Aug 38,779 Close 31-Dec 37,754 1987 High 31-Aug 49,169 Low 30-Nov 36,275 Close 31-Dec 38,736 1988 Low 31-Jan 40,556 High 31-Oct 44,818 Close 30-Dec 44,776 1989 Low 28-Feb 46,751 High 29-Dec 56,851 Close 29-Dec 56,851 1990 High 31-May 58,357 Low 31-Oct 49,728 Close 31-Dec 54,547 1991 Low 31-Jan 57,401 High 31-Dec 71,251 Close 31-Dec 71,251 1992 Low 31-Mar 70,391 High 31-Dec 77,417 Close 31-Dec 77,417 1993 Low 31-Jan 78,305 High 31-Dec 87,686 Close 31-Dec 87,686 1994 Low 31-Mar 84,698 High 31-Aug 90,912 Close 30-Dec 87,848 1995 Low 31-Jan 89,430 High 29-Dec 117,051 Close 29-Dec 117,051 1996 Low 31-Jan 120,651 High 30-Nov 144,146 Close 31-Dec 141,708 1997 Low 31-Mar 144,318 High 31-Dec 182,058 Close 31-Dec 182,058 1998 Low 31-Aug 174,202 High 31-Dec 215,266 Close 31-Dec 215,266 1999 Low 28-Feb 213,832 High 30-Jun 239,434 Close 31-Dec 238,470 2000 Low 29-Feb 218,784 High 31-Aug 246,137 Close 29-Dec 243,131 2001 High 31-Jan 245,154 Low 30-Sep 204,448 Close 31-Dec 222,282 2002 High 31-Mar 226,552 Low 30-Sep 164,352 Close 31-Dec 178,544 2003 Low 31-Mar 169,823 High 31-Dec 228,532 Close 31-Dec 228,532 Consumer Price Index (inflation)(5) Initial Investment 7/31/1978 $10,000 1978 Low 31-Jul 10,000 High 29-Dec 10,304 Close 29-Dec 10,304 1979 Low 31-Jan 10,396 High 31-Dec 11,674 Close 31-Dec 11,674 1980 Low 31-Jan 11,842 High 31-Dec 13,135 Close 31-Dec 13,135 1981 Low 31-Jan 13,242 High 31-Dec 14,307 Close 31-Dec 14,307 1982 Low 31-Jan 14,353 High 31-Oct 14,947 Close 31-Dec 14,855 1983 Low 31-Jan 14,886 High 30-Dec 15,419 Close 30-Dec 15,419 1984 Low 31-Jan 15,510 High 31-Oct 16,027 Close 31-Dec 16,027 1985 Low 31-Jan 16,058 High 31-Dec 16,636 Close 31-Dec 16,636 1986 Low 30-Apr 16,530 High 31-Dec 16,819 Close 31-Dec 16,819 1987 Low 31-Jan 16,925 High 30-Nov 17,565 Close 31-Dec 17,565 1988 Low 31-Jan 17,610 High 30-Dec 18,341 Close 30-Dec 18,341 1989 Low 31-Jan 18,432 High 29-Dec 19,193 Close 29-Dec 19,193 1990 Low 31-Jan 19,391 High 30-Nov 20,365 Close 31-Dec 20,365 1991 Low 31-Jan 20,487 High 31-Dec 20,989 Close 31-Dec 20,989 1992 Low 31-Jan 21,020 High 30-Nov 21,613 Close 31-Dec 21,598 1993 Low 31-Jan 21,705 High 30-Nov 22,192 Close 31-Dec 22,192 1994 Low 31-Jan 22,253 High 30-Nov 22,785 Close 30-Dec 22,785 1995 Low 31-Jan 22,877 High 31-Oct 23,394 Close 29-Dec 23,364 1996 Low 31-Jan 23,501 High 30-Nov 24,140 Close 31-Dec 24,140 1997 Low 31-Jan 24,216 High 31-Oct 24,597 Close 31-Dec 24,551 1998 Low 31-Jan 24,597 High 31-Oct 24,962 Close 31-Dec 24,947 1999 Low 31-Jan 25,008 High 30-Nov 25,616 Close 31-Dec 25,616 2000 Low 31-Jan 25,693 High 30-Nov 26,499 Close 29-Dec 26,484 2001 Low 31-Jan 26,651 High 30-Sep 27,139 Close 31-Dec 26,895 2002 Low 31-Jan 26,956 High 31-Oct 27,595 Close 31-Dec 27,534 2003 Low 31-Jan 27,656 High 30-Sep 28,189 Close 31-Dec 28,052
[end mountain chart] Year ended December 31 19784(4) 1979 1980 1981 1982 1983 1984 Capital value Dividends in cash $216 405 553 580 634 594 556 Value at year-end $8,947 9,892 11,390 10,688 13,522 16,424 16,759 Total value Dividends reinvested $217 421 603 665 768 755 734 Value at year-end $9,155 10,556 12,807 12,654 16,957 21,389 22,621 Total return -8.4% 15.3 21.3 -1.2 34.0 26.1 5.8 Year ended December 31 1985 1986 1987 1988 1989 1990 1991 Capital value Dividends in cash 582 636 717 895 1,225 1,058 904 Value at year-end 21,148 25,151 25,463 28,561 35,438 32,180 40,940 Total value Dividends reinvested 795 894 1,034 1,328 1,877 1,679 1,478 Value at year-end 29,448 35,941 37,295 43,246 55,597 52,130 67,947 Total return 30.2 22.0 3.8 16.0 28.6 -6.2 30.3 Year ended December 31 1992 1993 1994 1995 1996 1997 1998 Capital value Dividends in cash 988 1,084 1,238 1,160 1,196 1,351 1,428 Value at year-end 44,059 50,884 50,319 66,210 78,143 97,513 112,292 Total value Dividends reinvested 1,655 1,858 2,171 2,082 2,187 2,511 2,691 Value at year-end 74,871 88,466 89,641 120,306 144,352 182,855 213,421 Total return 10.2 18.2 1.3 34.2 20.0 26.7 16.7 Year ended December 31 1999 2000 2001 2002 2003 Capital value Dividends in cash 1,578 1,716 1,844 2,289 1,850 Value at year-end 138,151 142,315 126,959 102,816 133,434(3) Total value Dividends reinvested 3,013 3,319 3,611 4,553 3,755 Value at year-end 265,882 277,235 250,761 207,271 273,523(2) Total return 24.6 4.3 -9.6 -17.3 32.0
Average annual total rate of return for 25-1/2 years 13.9%(1) 25 YEARS OF MANAGING THROUGH MULTIPLE PERSPECTIVES [Begin Photo Caption] [photo of Dina Perry] VALUE "I try to look for sectors of the economy that I think have been unrecognized by the market, not only in terms of valuation but in terms of their growth prospects." --Dina Perry [photo of a door with chipped white paint] [End Photo Caption] THIS YEAR, FUNDAMENTAL INVESTORS CELEBRATES ITS 25TH ANNIVERSARY WITH CAPITAL RESEARCH AND MANAGEMENT COMPANY, ADVISER TO THE AMERICAN FUNDS. The fund's origins, however, actually date back some 70 years. From its inception in 1932 through 1978, Fundamental Investors was managed by several well-known firms. During that 46-year period, the fund lagged the unmanaged Standard & Poor's 500 Composite Index, which tracks relatively large companies listed on U.S. exchanges. On August 1, 1978, Capital Research became the fund's adviser. Although there have been periods since then when Fundamental Investors lagged the S&P 500, the fund's average annual total return of 14.2% as of December 31, 2003, outpaced the S&P 500's return of 13.5%. While the fund has certainly benefited from the tremendous growth in global stock markets over the past 25-year period, we believe that it is its unique management system, consistent investment approach and focus on dividends that have helped the fund to post above-average returns over the long term. [Begin Sidebar] Figures shown are past results and are not predictive of future periods. Current and future results may be lower or higher than those shown. Because share prices may decline, the value of your holdings may decrease. For the most current information and month-end results, visit americanfunds.com. Results shown are at net asset value. If a sales charge (maximum 5.75%) had been deducted, the results would have been lower. [End Sidebar] In this year's annual report, several of the fund's investment professionals discuss what distinguishes Fundamental Investors among other growth-and-income funds. Included in the discussion are Dina Perry, president of the fund, along with portfolio counselors Gordon Crawford and Mike Kerr, and investment analyst Ron Morrow. WHAT MAKES FUNDAMENTAL INVESTORS SPECIAL? MIKE: The fund is probably the most flexible of the American Funds' growth-and-income portfolios. It is managed by four individuals who are extremely different in how they invest and what motivates them. The fund probably changes its stripes more throughout the investment cycle than the other growth-and-income funds. Right now, we are more exposed to economic forces than we would have been a year or two ago. GORDON: First, I would say that the portfolio counselors who make up the management team are a more aggressive group on average compared with the other growth-and-income funds managed by Capital Research. That, coupled with its relatively smaller size, makes it the most growth-oriented of the growth-and-income funds. As a result, I think this fund will do best in an up market, and hopefully do as well or better than the others over a complete market cycle. DINA: Another distinguishing characteristic is that Fundamental Investors has a larger foreign exposure than most of the other growth-and-income funds. The fund can invest up to 30% of its assets in non-U.S. companies. In addition, let's not forget that dividends are a very important part of the fund, with the distribution rate at net asset value currently at 1.39% for the 12 months ended December 31, 2003. WHAT ARE THE MAIN BENEFITS OF THE MULTIPLE PORTFOLIO COUNSELOR SYSTEM? GORDON: I think the mix of people is pretty interesting. We each have very complementary interests and styles. By nature, I am a growth investor. My analytical responsibilities historically have been entertainment, insurance and semiconductor production equipment, so I tend to migrate toward media and consumer companies, and some financial services and technology. Mike Kerr focuses on energy and other commodities. Jim Drasdo is at the other extreme from myself. He's very much a value-oriented investor, and focuses on cyclical and industrial stocks. Ron Morrow is a food analyst. And Dina's training as an economist leads her to turnaround stories and companies that are out of favor. DINA: Given our different backgrounds and given that we all have our individual prejudices and beliefs, I think we each find different opportunities, some of which would be missed if the fund was run by just one person. MIKE: For me, the main benefit is knowing that I can make investment decisions that may seem unbalanced in my portion of the portfolio because I know they will be offset by decisions being made by the other counselors. The end result tends to be a reasonably balanced portfolio. So it allows me to act on my own convictions and do what I think will produce the best return without having to worry as much about lack of diversification. HOW DO YOU DEFINE FUNDAMENTAL? DINA: I try to look for sectors of the economy that I think have been unrecognized by the market, not only in terms of valuation but in terms of their growth prospects. So, for example, when there was a significant selloff in technology stocks in 2001, we took a look at that area. We also looked at capital goods stocks because the market assumed the economic recovery would be weak and that these companies would not do well. The third area I emphasized was the material sector, which would benefit from a stronger-than-expected global economic recovery and a weak dollar. MIKE: As fundamental investors, we are clearly value-oriented, but we are more willing to match up a high-yielding name such as Altria with a low-yielding name such as Lowe's Companies in order to generate income, which is a strategy not typically found in a growth-and-income portfolio. We're also willing to be flexible to achieve our yield, and that includes looking outside the United States. RON: I would define fundamental as those companies that have better-than-average growth and those industries that have good growth prospects for the next three- to five-year period. So, I'm looking for companies that can accelerate their rate of earnings and dividend growth due to changing circumstances in either their industries or their own businesses. HOW ARE YOU POSITIONING THE FUND IN THE CURRENT ECONOMIC ENVIRONMENT? GORDON: Right now, my part of the portfolio is positioned for a synchronized global economic recovery. The United States is in a strong recovery, boosted by very low interest rates and a very stimulative fiscal policy. Europe, which has been the sick man of the world economy, is beginning to show signs of growth. Perhaps the most exciting part of the global economy is the geographic region spanning from India to Taiwan. That whole sector of the world is growing rapidly and that's beginning to lift Japan out of a decade-long period of economic malaise. So we could have a world in which all the major markets are in an accelerating mode, and that will probably result in robust corporate profits, but inflationary pressures. In that environment, you want to own companies that are economically sensitive and cyclical. So I own a lot of industrial, media and retail companies -- all of which are industries that will benefit from a booming economy. RON: I agree that inflation will probably start to accelerate. So I've been more interested in companies that have businesses and/or assets "in the ground," such as Noranda, a copper producer, and Murphy Oil, an oil and gas producer. In response to the depreciation of the U.S. dollar, I am also positioning my portfolio toward international companies and some domestic companies that export internationally. WHAT ARE SOME OF YOUR FAVORITE STOCKS RIGHT NOW? MIKE: I have a fairly large exposure to energy, metals and minerals companies, which typically do well in an inflationary environment. Some of my favorite holdings include Norsk Hydro, an energy conglomerate; Suncor Energy, another energy company that has been a long-term holding in the fund; Freeport-McMoRan Copper & Gold, a mining company; and BHP Billiton, an oil and gas producer. Another example is Lowe's Companies, which I believe is still a fundamentally sound value. Despite its terrific price performance -- up about 48% for the year -- its price-to-earnings ratio and growth rate are still basically aligned. [Begin Photo Caption] [photo of grass] GROWTH "I'm looking for companies that can accelerate their rate of earnings and dividend growth due to changing circumstances in either their industries or their own businesses." -- Ron Morrow [photo of Ron Morrow] [End Photo Caption] [Begin Photo Caption] [photo of Mike Kerr] "We have the option to invest in non-U.S. companies, but it is not mandatory. That allows us to obtain yield overseas and also to take advantage of U.S. dollar trends as they become visible to us. So again, it's another example of having the flexibility to react to an environment that we see coming." --Mike Kerr FLEXIBILITY [photo of orange construction cones] [End Photo Caption] [Begin Sidebar] RESEARCH MAKES THE DIFFERENCE At the core of Fundamental Investors' investment process is intensive research. The fund is supported by 20 analysts, who are in turn part of the research effort maintained by Capital Research and Management Company, adviser to all of the American Funds. Fundamental research is approached as an ongoing process of information gathering, number crunching and relationship building. Analysts spend much time talking to company officials, competitors, suppliers and creditors to get a well-rounded view of a company's prospects. They typically have long histories with the companies they follow, which allows them to take the level of discussion at meetings with management to a more sophisticated level. At most of the American Funds, analysts are also given a portion of a fund's assets to manage on their own. That enables them, within the fund's guidelines, to act on their own convictions. "It's a great way to communicate ideas," says Terry McGuire, who oversees the research portfolio. "Most importantly, as an analyst, it puts you in the role of putting your money where your mouth is. You have to put your ideas to work." In effect, the system offers the best attributes of both individualism and teamwork, with no need for consensus. As a result, the research portfolio has sometimes been referred to as "the home for lonely ideas." For example, the largest holding in the research portfolio right now is SBC Communications, the telecommunications services company. At first glance, it's a stock that many investors may overlook. During 2003, as Standard & Poor's 500 Composite Index posted a 28.7% gain, SBC declined by 3.8%, in part due to competitive pressures. But for Brad Vogt, a telecommunications analyst for the fund, SBC offers a ripe opportunity to own a company whose stock price does not necessarily reflect the company's improving outlook and potential. "SBC has a strong core base of earnings, a sound balance sheet and solid management," he says. "Plus, it pays a dividend yield more than twice the level of the S&P 500," which helps the fund to meet its dividend requirement. Going forward, Brad feels that some of the competitive pressures are easing, and that the company is making progress in growth areas such as DSL and wireless services. In addition, the company has recently increased its dividend and announced a stock buyback. "I believe SBC's earnings will start to recover and that the company has an opportunity to be a big part of a consolidating telecommunications sector," he says. "In the meantime, the growing dividend and return of capital have given me the confidence to hold the stock during a tough period." Because analysts are evaluated on their results over rolling four-year periods --as are the portfolio counselors -- they can afford to make this kind of long-term investment in a stock that may not provide immediate results, but could have a strong impact over time. In effect, the system not only allows analysts to act on their highest convictions, but also aligns their financial rewards with yours -- the long-term shareholder. [End Sidebar] [Begin Photo Caption] [photo of Gordon Crawford] "Dividends are ultimately how the shareholder gets paid, particularly if you're a longer term investor. Dividend-paying companies tend to have better accounting practices, better balance sheets and better visibility in their process." -- Gordon Crawford INCOME [photo of five similar potted plants, in various stages of growth] [End Photo Caption] DINA: One company I put great emphasis on was Deere, a manufacturer of agricultural and construction equipment, which gained 42% in 2003. Investors had overlooked the company because they expected the capital goods cycle and the recovery in the farm sector to be weak. That was not the case. Just looking at the supply and demand balance, I felt that the price of agricultural commodities would increase and, as a result, farm income would increase, which would mean that farmers would likely buy more equipment. The declining U.S. dollar also helped by making American exports of agricultural commodities more attractive. GORDON: My style is more growth-oriented, but I am broadly diversified in the cyclical area. I own an eclectic group of businesses ranging from paper companies like International Paper and Temple-Inland, to machinery companies like Eaton. I also own growth-oriented companies that are leveraged to a recovery in the industrial economy, such as electrical-equipment manufacturer Emerson Electric, and media and technology companies like Time Warner and Microsoft. HOW DOES THE RESEARCH TEAM BRING VALUE TO THE FUND? GORDON: There's probably just a handful of other investment management companies that have as many research analysts in as many geographic locations speaking as many of their native tongues as we do. As a result, the flow of ideas is unbelievable, regardless of whether you're interested in investing in India, China, Japan, Korea or the United States. (For more about our research effort, see page 9.) WHAT ROLE DO DIVIDENDS PLAY IN THE FUND? DINA: Because of the fund's high dividend requirement, we mostly buy stocks with yields. If I buy a company that doesn't pay any dividends, I have to offset that with companies that pay a high dividend. For example, I own Cisco Systems, which doesn't pay a dividend, but I offset that by owning some REITs or utilities, which have higher dividends than the S&P 500. Given the favorable taxation on dividends under the new tax code, I think the emphasis on dividends by investors will increase. GORDON: Dividends are ultimately how the shareholder gets paid, particularly if you're a longer term investor. Dividend-paying companies tend to have better accounting practices, better balance sheets and better visibility in their process. DO YOU FIND THAT THE NEW TAX CODE HAS MADE IT EASIER TO FIND INCOME? MIKE: I think the payout of dividends as a percentage of earnings will increase after declining for more than a decade. The dividend culture in the United States has clearly improved over the past two years. Companies used to think we were old-fashioned when we asked for dividend hikes rather than stock repurchases. Companies now understand that a dividend, especially with the new tax code, is probably the best way to reward shareholders. So I think the overall attitude is improving. We're proud at Fundamental Investors that we have been able to maintain our dividend throughout one of the worst dividend-paying periods in S&P 500 history. That's a tremendous achievement. [Begin Sidebar] A UNIQUE MANAGEMENT SYSTEM Capital Research and Management Company, adviser to the American Funds, has developed a unique method we call the "multiple portfolio counselor system." Here's how it works: Fundamental Investors' assets are divided into portions. Each of the four portfolio counselors manages his or her own portion of the fund; a fifth segment is managed by the fund's research analysts. What makes this system unique is that it enables counselors to consult with each other, yet follow their own highest convictions. It also provides for diverse viewpoints, with each counselor bringing his or her own investment style to the process and a depth of experience ranging from 20 to 32 years. Years of investment Years with American Funds experience or affiliates Gordon Crawford 32 32 James Drasdo 31 26 Dina Perry 25 12 Mike Kerr 20 18
[End Sidebar] HOW DOES THE FUND'S ABILITY TO INVEST UP TO 30% OF ITS ASSETS IN NON-U.S. COMPANIES ADD VALUE TO THE PORTFOLIO? MIKE: We have the option to invest in non-U.S. companies, but it is not mandatory. That allows us to obtain yield overseas and also to take advantage of U.S. dollar trends as they become visible to us. So again, it's another example of having the flexibility to react to an environment that we see coming. GORDON: I think all of us find a lot of value outside the United States. There's obviously some benefit from owning assets outside the United States with the dollar declining, but there's also just a lot of world-class companies that sell at lower multiples in other parts of the world. WHAT TRENDS AND DEVELOPMENTS DO YOU BELIEVE WILL IMPACT THE FUND OVER THE NEXT SEVERAL YEARS? GORDON: We keep looking at the continued development of technology because it certainly is changing the way people live and work. As a subset of that, I think we have to be aware not only of opportunities to invest in companies related to the Internet, but also to avoid owning companies whose businesses are inevitably threatened by the Internet. DINA: I think some trends will include the development of new and improved technologies, strong defense spending and cost containment in the medical area. Another trend that most people are not anticipating is growth in the manufacturing sector, which I believe will do well for several reasons. First, U.S. companies have really consolidated. Secondly, they had a difficult period due to a strong currency and, as a result, are very lean and mean. Finally, with the declining U.S. dollar, they are able to have some pricing power. RON: Being an election year, 2004 is going to be an interesting time for domestic companies. Changes in the administration and Congress can either be extremely detrimental or beneficial to companies in the health care, pharmaceutical and certainly tobacco industries. Considering how much the dollar has already declined, I will probably look more toward Asia rather than Europe in some of my international holdings. I'm extremely interested in the resurgence of the Japanese economy and the growth in Asia, particularly in China and India. I'm interested in not only the companies based there, but in some of the domestic companies that will benefit from the growth in those economies. MIKE: Globalization is just a nonstoppable trend. The role of China over the next decade is a huge issue. If China and India are successful in becoming more meaningful parts of the global economy, it will be extremely bullish for the global economy because another 2 billion people will have joined the world and are going to become consumers. Whether China can successfully pull off this great leap forward is unprecedented and highly risky, but it's the most meaningful question for anyone investing globally today. INVESTMENT PORTFOLIO, December 31, 2003 [begin pie chart] Percent of INDUSTRY DIVERSIFICATION Net Assets Equity securities 94.92 % Oil & Gas 8.70 Metals & Mining 5.90 Aerospace & Defense 5.08 Pharmaceuticals 5.05 Commercial Banks 4.98 Other industries 65.21 Bonds & notes 1.16 Cash & equivalents 3.92 [end pie chart] Percent of net LARGEST EQUITY HOLDINGS assets Dow Chemical 2.67 % Suncor Energy 2.12 Altria Group 2.07 Time Warner 2.02 Norsk Hydro 1.89 FleetBoston Financial 1.86 Deere 1.84 Microsoft 1.76 Alcoa 1.64 SBC Communications 1.61
Shares or Market value EQUITY SECURITIES (COMMON AND PREFERRED STOCKS AND CONVERTIBLE DEBENTURES) - 94.92% principal amount (000) OIL & GAS - 8.70% Suncor Energy Inc. (Canada) 17,903,010 $ 449,165 Norsk Hydro AS (ADR) (Norway) 3,559,000 219,946 Norsk Hydro AS 2,934,600 180,130 LUKoil Holding (ADR) (Russia) 2,250,000 209,475 Murphy Oil Corp. 2,370,000 154,785 Shell Canada Ltd. (Canada) 3,273,200 154,766 ConocoPhillips 1,700,000 111,469 Unocal Corp. 1,900,000 69,977 Unocal Capital Trust 6.25% convertible preferred 2026 $ 450,000 22,950 ChevronTexaco Corp. 1,000,000 86,390 Burlington Resources Inc. 1,000,000 55,380 Imperial Oil Ltd. (Canada) 1,184,778 52,628 Royal Dutch Petroleum Co., New York registered (Netherlands) 875,000 45,841 Exxon Mobil Corp. 750,000 30,750 METALS & MINING - 5.90% Alcoa Inc. 9,173,800 348,604 BHP Billiton Ltd. (Australia) 23,945,030 219,501 Freeport-McMoRan Copper & Gold Inc., Class B 4,973,100 209,517 Rio Tinto PLC (United Kingdom) 6,500,000 178,866 CONSOL Energy Inc. (1) (2) 3,700,000 86,247 Phelps Dodge Corp. (3) 965,620 73,474 Inco Ltd. (Canada) (3) 1,632,300 64,998 Massey Energy Co. 2,011,700 41,843 Arch Coal, Inc. 5.00% convertible preferred 2049 $ 200,000 17,068 BlueScope Steel Ltd. (formerly BHP Steel Ltd.) (Australia) 2,113,020 8,898 AEROSPACE & DEFENSE - 5.08% Boeing Co. 7,350,000 309,729 Raytheon Co. 7,592,732 228,086 Raytheon Co. - RC Trust I 8.25% convertible preferred 2006 1,180,000 units 64,050 Northrop Grumman Corp. 1,150,000 109,940 Northrop Grumman Corp. 7.25% convertible preferred 2004 572,690 units 59,388 General Dynamics Corp. 1,772,900 160,252 Honeywell International Inc. 1,500,000 50,145 United Technologies Corp. 525,000 49,754 Bombardier Inc., Class B (Canada) 7,500,000 31,670 Lockheed Martin Corp. 248,200 12,757 PHARMACEUTICALS - 5.05% AstraZeneca PLC (Sweden) 2,660,000 129,399 AstraZeneca PLC (United Kingdom) 2,000,000 95,590 AstraZeneca PLC (ADR) 1,676,266 81,098 Sanofi-Synthelabo (France) 2,850,000 213,566 Eli Lilly and Co. 2,850,000 200,440 Bristol-Myers Squibb Co. 4,350,000 124,410 Merck & Co., Inc. 1,700,000 78,540 Schering-Plough Corp. 3,900,000 67,821 Forest Laboratories, Inc. (3) 700,000 43,260 Pfizer Inc 1,000,000 35,330 COMMERCIAL BANKS - 4.98% FleetBoston Financial Corp. 9,030,000 394,160 Allied Irish Banks, PLC (Ireland) 12,170,334 194,466 Cullen/Frost Bankers, Inc. 2,550,000 103,453 KeyCorp 3,100,000 90,892 Bank of Ireland (Ireland) 6,500,000 88,278 Bank of America Corp. 698,400 56,172 National Bank of Canada (Canada) 1,405,000 46,790 Comerica Inc. 800,000 44,848 St. George Bank Ltd. (Australia) 2,450,279 35,931 DIVERSIFIED TELECOMMUNICATION SERVICES - 4.33% SBC Communications Inc. 13,050,000 340,213 China Telecom Corp. Ltd., Class H (China) 400,000,000 164,895 Verizon Communications Inc. 4,615,000 161,894 Telecom Italia SpA, nonvoting (Italy) (3) 34,200,000 69,328 Deutsche Telekom AG (Germany) (3) 2,300,000 41,890 Deutsche Telekom International Finance BV 6.50% convertible bonds 2006 Euro 12,000,000 17,612 Swisscom AG (Switzerland) $ 167,510 55,041 Telefonica, SA (Spain) (3) 2,950,000 43,101 AT&T Corp. 800,000 16,240 Sprint Corp. - FON Group 400,000 6,568 MEDIA - 4.29% Time Warner Inc. (formerly AOL Time Warner Inc.) (3) 23,815,000 428,432 News Corp. Ltd., preferred (ADR) (Australia) 8,610,000 260,452 Comcast Corp., Class A (3) 2,825,500 92,874 Comcast Corp., Class A, special nonvoting stock (3) 500,000 15,640 Dow Jones & Co., Inc. 1,800,000 89,730 Liberty Media Corp., Class A (3) 915,000 10,879 Interpublic Group of Companies, Inc. 1.87% convertible subordinated notes 2006 (1) $ 8,168,000 7,576 UnitedGlobalCom, Inc., Class A (1) (2) (3) 225,035 1,717 Antena 3 Television, SA (Spain) (3) 9,979 438 CHEMICALS - 4.17% Dow Chemical Co. 13,625,000 566,391 E.I. du Pont de Nemours and Co. 3,000,000 137,670 Shin-Etsu Chemical Co., Ltd. (Japan) 1,940,000 79,110 Air Products and Chemicals, Inc. 1,300,000 68,679 Lyondell Chemical Co. 1,450,000 24,577 Potash Corp. of Saskatchewan Inc. (Canada) 69,200 5,984 MACHINERY - 4.16% Deere & Co. 5,971,100 388,420 Caterpillar Inc. 2,600,000 215,852 Parker Hannifin Corp. 2,600,000 154,700 Eaton Corp. 850,000 91,783 Illinois Tool Works Inc. 357,200 29,973 INSURANCE - 3.81% American International Group, Inc. 3,800,000 251,864 Allstate Corp. 3,500,000 150,570 XL Capital Ltd., Class A 1,825,000 141,529 Irish Life & Permanent PLC (Ireland) 7,000,000 112,466 Chubb Corp. 7.00% convertible preferred 2005 1,200,000 units 34,272 Chubb Corp. 300,000 20,430 Aon Corp. 1,767,400 42,312 St. Paul Companies, Inc. 700,000 27,755 21st Century Insurance Group 1,808,900 24,872 PAPER & FOREST PRODUCTS - 2.98% International Paper Co. 5,275,000 227,405 Weyerhaeuser Co. 2,883,000 184,512 Norske Skogindustrier ASA, Class A (Norway) 6,566,900 124,706 Oji Paper Co., Ltd. (Japan) 6,500,000 41,877 Bowater Inc. 700,000 32,417 Georgia-Pacific Corp., Georgia-Pacific Group 698,640 21,427 INDUSTRIAL CONGLOMERATES - 2.98% General Electric Co. 9,150,000 283,467 3M Co. 2,500,000 212,575 Tyco International Ltd. 5,125,000 135,813 SPECIALTY RETAIL - 2.57% Lowe's Companies, Inc. 5,524,900 306,024 Limited Brands, Inc. 13,200,000 237,996 ELECTRIC UTILITIES - 2.31% Dominion Resources, Inc. 4,590,000 292,980 DTE Energy Co. 1,606,900 63,312 American Electric Power Co., Inc. 1,902,100 58,033 TXU Corp. 1,167,200 27,686 FirstEnergy Corp. 569,200 20,036 E.ON AG (Germany) 300,000 19,483 Entergy Corp. 150,000 8,570 MULTI-UTILITIES & UNREGULATED POWER - 2.15% Duke Energy Corp. 10,275,000 210,124 Questar Corp. 3,000,000 105,450 Public Service Enterprise Group Inc. 1,480,000 64,824 Constellation Energy Group, Inc. 1,500,000 58,740 El Paso Corp. 2,100,000 17,199 COMPUTERS & PERIPHERALS - 2.14% International Business Machines Corp. 2,225,000 206,213 Sun Microsystems, Inc. (3) 21,000,000 94,290 NEC Corp. (Japan) 11,516,000 84,593 Hewlett-Packard Co. 3,000,000 68,910 TOBACCO - 2.07% Altria Group, Inc. 8,050,000 438,081 FOOD PRODUCTS - 1.94% Unilever NV, New York registered (Netherlands) 4,100,000 266,090 Sara Lee Corp. 3,375,000 73,271 General Mills, Inc. 1,404,200 63,610 Kraft Foods Inc., Class A 200,000 6,444 H.J. Heinz Co. 70,000 2,550 SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT - 1.89% Texas Instruments Inc. 11,353,424 333,564 Maxim Integrated Products, Inc. 701,600 34,940 Linear Technology Corp. 500,000 21,035 ASML Holding NV 5.50% convertible notes 2010 Euro 6,000,000 10,760 ELECTRONIC EQUIPMENT & INSTRUMENTS - 1.88% Sanmina Corp. 0% convertible subordinated debentures 2020 $ 166,000,000 85,075 SCI Systems, Inc. 3.00% convertible subordinated debentures 2007 $ 54,500,000 51,775 Agilent Technologies, Inc. (3) 3,700,000 108,188 Agilent Technologies, Inc. 3.00% convertible debentures 2021 (4) $ 15,074,000 16,544 Agilent Technologies, Inc. 3.00% convertible debentures 2021 (1) (4) $ 10,370,000 11,381 Hitachi, Ltd. (Japan) 14,824,000 89,157 Solectron Corp. 7.25% ACES convertible preferred 2004 1,200,000 units 20,016 Murata Manufacturing Co., Ltd. (Japan) 300,000 16,172 SOFTWARE - 1.76% Microsoft Corp. 13,565,000 373,580 IT SERVICES - 1.59% Automatic Data Processing, Inc. 5,375,000 212,904 Sabre Holdings Corp., Class A 2,645,304 57,112 Electronic Data Systems Corp. 1,400,000 34,356 Electronic Data Systems Corp. 7.625% FELINE PRIDES 2004 279,600 units 6,411 Ceridian Corp. (3) 1,200,000 25,128 COMMUNICATIONS EQUIPMENT - 1.57% Cisco Systems, Inc. (3) 7,000,000 170,030 Motorola, Inc. 8,000,000 112,560 Motorola, Inc. 7.00% convertible preferred 2004 800,000 units 34,744 Corning Inc. (3) 1,520,000 15,854 AUTOMOBILES - 1.41% Toyota Motor Corp. (Japan) 6,000,000 202,216 General Motors Corp. 1,800,000 96,120 ENERGY EQUIPMENT & SERVICES - 1.41% Halliburton Co. 7,500,000 195,000 Baker Hughes Inc. 3,200,000 102,912 CAPITAL MARKETS - 1.33% J.P. Morgan Chase & Co. 7,685,000 282,270 ELECTRICAL EQUIPMENT - 1.31% Emerson Electric Co. 4,300,000 278,425 MULTILINE RETAIL - 1.30% Target Corp. 4,890,000 187,776 May Department Stores Co. 3,000,000 87,210 BEVERAGES - 1.18% Anheuser-Busch Companies, Inc. 1,700,000 89,556 PepsiCo, Inc. 1,800,000 83,916 Coca-Cola Co. 1,500,000 76,125 THRIFTS & MORTGAGE FINANCE - 0.97% Fannie Mae 2,117,800 158,962 Independence Community Bank Corp. 1,295,900 46,614 CONTAINERS & PACKAGING - 0.81% Temple-Inland Inc. (5) 2,750,000 172,343 ROAD & RAIL - 0.81% Union Pacific Corp. 1,500,000 104,220 Burlington Northern Santa Fe Corp. 2,100,000 67,935 FOOD & STAPLES RETAILING - 0.61% Walgreen Co. 3,345,000 121,691 SYSCO Corp. 200,000 7,446 AUTO COMPONENTS - 0.57% Magna International Inc., Class A (Canada) 1,000,000 80,050 Dana Corp. 2,215,300 40,651 GAS UTILITIES - 0.57% NiSource Inc. 2,800,000 61,432 KeySpan Corp. 1,584,000 58,291 AIR FREIGHT & LOGISTICS - 0.53% United Parcel Service, Inc., Class B 1,500,000 111,825 REAL ESTATE - 0.46% Equity Residential 2,850,000 84,104 MI Developments Inc., Class A (Canada) (3) 500,000 13,960 HEALTH CARE PROVIDERS & SERVICES - 0.40% HCA Inc. 1,000,000 42,960 CIGNA Corp. 725,000 41,688 WIRELESS TELECOMMUNICATION SERVICES - 0.35% Vodafone Group PLC (United Kingdom) 30,175,000 74,533 AIRLINES - 0.32% Continental Airlines, Inc., Class B (3) 2,675,000 43,522 Southwest Airlines Co. 1,500,000 24,210 OTHER - 0.41% Amgen Inc. (3) 500,000 30,900 Allied Waste Industries, Inc., Series C, 6.25% convertible preferred 2006 $ 360,000 27,540 InterActiveCorp (3) 456,000 15,472 Avon Products, Inc. 170,000 11,473 Colgate-Palmolive Co. 10,000 501 MISCELLANEOUS - 1.87% Other equity securities in initial period of acquisition 396,852 TOTAL EQUITY SECURITIES (cost: $16,872,105,000) 20,107,307 Principal amount BONDS & NOTES - 1.16% (000) AIRLINES - 0.75% Northwest Airlines, Inc.: 8.875% 2006 $ 58,185 53,094 7.625% 2005 37,860 37,103 9.875% 2007 15,335 14,032 7.875% 2008 16,566 13,874 8.52% 2004 5,000 5,050 Continental Airlines, Inc. 8.00% 2005 28,600 27,956 Delta Air Lines, Inc., Series 1993-A2, 10.50% 2016 (6) 11,500 8,740 MEDIA - 0.26% Charter Communications Holdings, LLC 8.25% 2007 50,000 47,250 Time Warner Inc. 10.15% 2012 6,000 8,021 DIVERSIFIED TELECOMMUNICATION SERVICES - 0.15% Comcast UK Cable Partners Ltd. 11.20% 2007 19,570 19,864 AT&T Corp. 6.50% 2006 (1) (4) Euro 8,950 12,048 TOTAL BONDS & NOTES (cost: $226,029,000) 247,032 SHORT-TERM SECURITIES - 3.82% CORPORATE SHORT-TERM NOTES - 3.15% CAFCO, LLC 1.07%-1.09% due 1/22-1/28/2004 (1) $ 79,700 79,641 Coca-Cola Co. 1.01%-1.03% due 1/26-3/5/2004 72,000 71,918 Park Avenue Receivables Corp. 1.08%-1.09% due 1/9-1/29/2004 (1) 60,999 60,971 Procter & Gamble Co. 1.02%-1.05% due 1/9-2/9/2004 (1) 55,000 54,959 Pfizer Inc 1.02%-1.03% due 1/16-1/28/2004 (1) 54,200 54,170 Receivables Capital Corp. 1.07%-1.08% due 1/20-2/3/2004 (1) 50,000 49,958 Edison Asset Securitization LLC 1.07%-1.08% due 1/8-2/17/2004 (1) 49,100 49,044 Preferred Receivables Funding Corp. 1.08% due 1/29-2/5/2004 (1) 47,611 47,568 E.I. DuPont de Nemours & Co. 1.04%-1.05% due 1/23-1/27/2004 45,000 44,966 BellSouth Corp. 1.01%-1.03% due 1/7-1/21/2004 (1) 35,200 35,187 Netjets Inc. 1.06%-1.07% due 1/12-2/10/2004 (1) 33,600 33,575 Verizon Network Funding Corp. 1.02%-1.03% due 1/22-2/11/2004 25,000 24,979 Merck & Co. Inc. 1.01% due 1/20/2004 21,018 21,006 Caterpillar Financial Serivces Corp. 1.01% due 3/4/2004 20,000 19,964 Harley-Davidson Funding Corp. 1.01%-1.05% due 1/2-1/15/2004 (1) 14,500 14,496 Johnson Controls Inc. 0.94% due 1/2/2004 (1) 5,000 5,000 U.S. TREASURIES - 0.34% U.S. Treasury Bills 0.87%-0.93% due 2/12-2/19/2004 72,100 72,026 CERTIFICATES OF DEPOSIT - 0.18% Wells Fargo & Co. 1.04%-1.07% due 1/9-1/13/2004 38,000 38,000 FEDERAL AGENCY DISCOUNT NOTES - 0.15% International Bank for Reconstruction and Development 1.01% due 2/6/2004 26,100 26,073 Student Loan Marketing Assn. 1.00% due 1/13/2004 5,300 5,298 TOTAL SHORT-TERM SECURITIES (cost: $808,795,000) 808,799 TOTAL INVESTMENT SECURITIES (cost: $17,906,929,000) 21,163,138 OTHER ASSETS LESS LIABILITIES 20,899 NET ASSETS $21,184,037
(1) Purchased in a private placement transaction; resale may be limited to qualified institutional buyers; resale to the public may require registration. (2) Valued under fair value procedures adopted by authority of the Board of Directors. (3) Security did not produce income during the last 12 months. (4) Coupon rate may change periodically. (5) The fund owns 5.07% of the outstanding voting securities of Temple-Inland Inc., and thus is considered an affiliate of this company under the Investment Company Act of 1940. (6) Pass-through security backed by a pool of mortgages or other loans on which principal payments are periodically made. Therefore, the effective maturity is shorter than the stated maturity. ADR = American Depositary Receipts See Notes to Financial Statements FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES (dollars and shares in thousands, at December 31, 2003 except per-share amounts) ASSETS: Investment securities at market: Unaffiliated issuers (cost: $17,786,564) $20,990,795 Affiliated issuers (cost: $120,365) 172,343 $21,163,138 Cash 184 Receivables for: Sales of investments 10,918 Sales of fund's shares 28,061 Dividends and interest 39,234 78,213 21,241,535 LIABILITIES: Payables for: Purchases of investments 12,832 Repurchases of fund's shares 32,289 Investment advisory services 4,711 Services provided by affiliates 6,294 Deferred Directors' compensation 1,145 Other fees and expenses 227 57,498 NET ASSETS AT DECEMBER 31, 2003 $21,184,037 NET ASSETS CONSIST OF: Capital paid in on shares of capital stock $19,291,562 Undistributed net investment income 65,000 Accumulated net realized loss (1,429,024) Net unrealized appreciation 3,256,499 NET ASSETS AT DECEMBER 31, 2003 $21,184,037
TOTAL AUTHORIZED CAPITAL STOCK - 1,000,000 SHARES, $1.00 PAR VALUE Net asset Net assets Shares outstanding value per share (1) Class A $19,211,574 665,890 $28.85 Class B 836,257 29,039 28.80 Class C 413,527 14,371 28.78 Class F 310,658 10,771 28.84 Class 529-A 88,073 3,054 28.84 Class 529-B 18,648 647 28.83 Class 529-C 26,786 929 28.83 Class 529-E 4,447 154 28.83 Class 529-F 1,116 39 28.82 Class R-1 2,122 74 28.79 Class R-2 45,068 1,566 28.77 Class R-3 65,698 2,280 28.82 Class R-4 47,539 1,649 28.83 Class R-5 112,524 3,899 28.86 (1) Maximum offering price and redemption price per share were equal to the net asset value per share for all share classes, except for classes A and 529-A, for which the maximum offering prices per share were $30.61 and $30.60, respectively.
See Notes to Financial Statements STATEMENT OF OPERATIONS for the year ended December 31, 2003 (dollars in thousands) INVESTMENT INCOME: Income: Dividends (net of non-U.S. withholding tax of $8,769; also includes $3,485 from affiliates) $409,558 Interest 73,821 $483,379 Fees and expenses: Investment advisory services 48,382 Distribution services 50,115 Transfer agent services 20,126 Administrative services 1,703 Reports to shareholders 678 Registration statement and prospectus 341 Postage, stationery and supplies 2,172 Directors' compensation 354 Auditing and legal 84 Custodian 1,002 State and local taxes 1 Other 187 Total expenses before reimbursement 125,145 Reimbursement of expenses 126 125,019 Net investment income 358,360 NET REALIZED LOSS AND UNREALIZED APPRECIATION ON INVESTMENTS AND NON-U.S. CURRENCY: Net realized loss on: Investments (602,732) Non-U.S. currency transactions (764) (603,496) Net unrealized appreciation on: Investments 5,356,632 Non-U.S. currency translations 51 5,356,683 Net realized loss and unrealized appreciation on investments and non-U.S. currency 4,753,187 NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $5,111,547
See Notes to Financial Statements STATEMENT OF CHANGES IN NET ASSETS (dollars in thousands) Year ended December 31 2003 2002 OPERATIONS: Net investment income $358,360 $306,427 Net realized loss on investments and non-U.S. currency transactions (603,496) (425,234) Net unrealized appreciation (depreciation) on investments and non-U.S. currency translations 5,356,683 (3,522,999) Net increase (decrease) in net assets resulting from operations 5,111,547 (3,641,806) DIVIDENDS PAID TO SHAREHOLDERS FROM NET INVESTMENT INCOME (283,809) (362,738) CAPITAL SHARE TRANSACTIONS (69,713) 90,287 TOTAL INCREASE (DECREASE) IN NET ASSETS 4,758,025 (3,914,257) NET ASSETS: Beginning of year 16,426,012 20,340,269 End of year (including undistributed (distributions in excess of) net investment income: $65,000 and $(19,176), respectively) $21,184,037 $16,426,012
See Notes to Financial Statements NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION - Fundamental Investors, Inc. (the "fund") is registered under the Investment Company Act of 1940 as an open-end, diversified management investment company. The fund seeks long-term growth of capital and income primarily through investments in common stocks. The fund offers 14 share classes consisting of four retail share classes, five CollegeAmerica savings plan share classes and five retirement plan share classes. The CollegeAmerica savings plan share classes (529-A, 529-B, 529-C, 529-E and 529-F) are sponsored by the Commonwealth of Virginia and can be utilized to save for college education. The five retirement plan share classes (R-1, R-2, R-3, R-4 and R-5) are sold without any sales charges and do not carry any conversion rights. The fund's share classes are described below: --------------------------------------------------------------------------------------------------------- SHARE CLASS INITIAL SALES CHARGE CONTINGENT DEFERRED SALES CONVERSION FEATURE CHARGE UPON REDEMPTION --------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------- Classes A and 529-A Up to 5.75% None (except 1% for None certain redemptions within one year of purchase without an initial sales charge) --------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------- Classes B and 529-B None Declines from 5% to zero for Classes B and 529-B redemptions within six years convert to classes A and of purchase 529-A, respectively, after eight years --------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------- Class C None 1% for redemptions within Class C converts to Class F one year of purchase after 10 years --------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------- Class 529-C None 1% for redemptions within None one year of purchase --------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------- Class 529-E None None None --------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------- Classes F and 529-F None None None --------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------- Classes R-1, R-2, R-3, None None None R-4 and R-5 ---------------------------------------------------------------------------------------------------------
Holders of all share classes have equal pro rata rights to assets, dividends and liquidation. Each share class has identical voting rights, except for the exclusive right to vote on matters affecting only its class. Share classes have different fees and expenses ("class-specific fees and expenses"), primarily due to different arrangements for distribution, administrative and shareholder services. Differences in class-specific fees and expenses will result in differences in net investment income and, therefore, the payment of different per-share dividends by each class. SIGNIFICANT ACCOUNTING POLICIES - The financial statements have been prepared to comply with accounting principles generally accepted in the United States of America. These principles require management to make estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates. The following is a summary of the significant accounting policies followed by the fund: SECURITY VALUATION - Equity securities are valued at the official closing price of, or the last reported sale price on, the exchange or market on which such securities are traded, as of the close of business on the day the securities are being valued or, lacking any sales, at the last available bid price. Prices for each security are taken from the principal exchange or market in which the security trades. Fixed-income securities are valued at prices obtained from an independent pricing service, when such prices are available. However, where the investment adviser deems it appropriate, such securities will be valued at the mean quoted bid and asked prices or at prices for securities of comparable maturity, quality and type. Short-term securities maturing within 60 days are valued at amortized cost, which approximates market value. The ability of the issuers of the debt securities held by the fund to meet their obligations may be affected by economic developments in a specific industry, state or region. Securities and other assets for which representative market quotations are not readily available are fair valued as determined in good faith by authority of the fund's Board of Directors. Various factors may be reviewed in order to make a good faith determination of a security's fair value. These factors include, but are not limited to, the type and cost of the security; contractual or legal restrictions on resale of the security; relevant financial or business developments of the issuer; actively traded similar or related securities; conversion or exchange rights on the security; related corporate actions; significant events occurring after the close of trading in the security; and changes in overall market conditions. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME - Security transactions are recorded by the fund as of the date the trades are executed with brokers. Realized gains and losses from security transactions are determined based on the specific identified cost of the securities. Dividend income is recognized on the ex-dividend date and interest income is recognized on an accrual basis. Market discounts, premiums and original issue discounts on fixed-income securities are amortized daily over the expected life of the security. CLASS ALLOCATIONS - Income, fees and expenses (other than class-specific fees and expenses) and realized and unrealized gains and losses are allocated daily among the various share classes based on their relative net assets. Class-specific fees and expenses, such as distribution, administrative and shareholder services, are charged directly to the respective share class. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS - Dividends and distributions paid to shareholders are recorded on the ex-dividend date. NON-U.S. CURRENCY TRANSLATION - Assets and liabilities, including investment securities, denominated in non-U.S. currencies are translated into U.S. dollars at the exchange rates in effect at the end of the reporting period. Purchases and sales of investment securities and income and expenses are translated into U.S. dollars at the exchange rates on the dates of such transactions. In the accompanying financial statements, the effects of changes in non-U.S. exchange rates on investment securities are included with the net realized gain or loss and net unrealized appreciation or depreciation on investments. The realized gain or loss and unrealized appreciation or depreciation resulting from all other transactions denominated in non-U.S. currencies are disclosed separately. 2. NON-U.S. INVESTMENTS INVESTMENT RISK - The risks of investing in securities of non-U.S. issuers may include, but are not limited to, investment and repatriation restrictions; revaluation of currencies; adverse political, social and economic developments; government involvement in the private sector; limited and less reliable investor information; lack of liquidity; certain local tax law considerations; and limited regulation of the securities markets. TAXATION - Dividend and interest income is recorded net of non-U.S. taxes paid. 3. FEDERAL INCOME TAXATION AND DISTRIBUTIONS The fund complies with the requirements under Subchapter M of the Internal Revenue Code applicable to mutual funds and intends to distribute substantially all of its net taxable income and net capital gains each year. The fund is not subject to income taxes to the extent such distributions are made. DISTRIBUTIONS - Distributions paid to shareholders are based on net investment income and net realized gains determined on a tax basis, which may differ from net investment income and net realized gains for financial reporting purposes. These differences are due primarily to differing treatment for items such as non-U.S. currency gains and losses; short-term capital gains and losses; capital losses related to sales of securities within 30 days of purchase; scheduled interest payments not received; deferred expenses; cost of investments sold; and net capital losses. The fiscal year in which amounts are distributed may differ from the year in which the net investment income and net realized gains are recorded by the fund. As of December 31, 2003, the cost of investment securities for federal income tax purposes was $17,921,825,000. During the year ended December 31, 2003, the fund reclassified $9,625,000 from accumulated net realized loss to undistributed net investment income to align financial reporting with tax reporting. As of December 31, 2003, the components of distributable earnings on a tax basis were as follows: (dollars in thousands) Undistributed net investment income and currency gains $ 66,238 Loss deferrals related to non-U.S. currency that were realized during the period November 1, 2003 through December 31, 2003 (93) Short-term and long-term capital loss deferrals (1,414,128) Gross unrealized appreciation on investment securities 4,287,323 Gross unrealized depreciation on investment securities (1,046,010)
Short-term and long-term capital loss deferrals above include capital loss carryforwards of $95,779,000, $577,387,000 and $740,962,000 expiring in 2009, 2010 and 2011, respectively. The capital loss carryforwards will be used to offset any capital gains realized by the fund in future years through the expiration dates. The fund will not make distributions from capital gains while capital loss carryforwards remain. Distributions paid to shareholders from net investment income and currency gains were as follows (dollars in thousands): YEAR ENDED DECEMBER 31 Share class 2003 2002(1) Class A $ 267,613 $ 345,886 Class B 6,070 8,215 Class C 2,626 3,168 Class F 3,841 3,838 Class 529-A 962 482 Class 529-B 89 64 Class 529-C 127 90 Class 529-E 35 15 Class 529-F 8 2 Class R-1 7 1 Class R-2 213 49 Class R-3 477 78 Class R-4 415 43 Class R-5 1,326 807 Total $ 283,809 $ 362,738
(1) Class 529-A, 529-B, 529-C, 529-E and 529-F shares were offered beginning February 15, 2002. Class R-1, R-2, R-3, R-4 and R-5 shares were offered beginning May 15, 2002. 4. FEES AND TRANSACTIONS WITH RELATED PARTIES Capital Research and Management Company ("CRMC"), the fund's investment adviser, is the parent company of American Funds Service Company ("AFS"), the fund's transfer agent, and American Funds Distributors, Inc. ("AFD"), the principal underwriter of the fund's shares. INVESTMENT ADVISORY SERVICES - The Investment Advisory and Service Agreement with CRMC provides for monthly fees accrued daily. These fees are based on a declining series of annual rates beginning with 0.390% on the first $1 billion of daily net assets and decreasing to 0.246% on such assets in excess of $27 billion. For the year ended December 31, 2003, the investment advisory services fee was $48,382,000, which was equivalent to an annualized rate of 0.275% of average daily net assets. CLASS-SPECIFIC FEES AND EXPENSES - Expenses that are specific to individual share classes are accrued directly to the respective share class. The principal class-specific fees and expenses are described below: DISTRIBUTION SERVICES - The fund has adopted plans of distribution for all share classes, except Class R-5. Under the plans, the Board of Directors approves certain categories of expenses that are used to finance activities primarily intended to sell fund shares. The plans provide for annual expenses, based on a percentage of average daily net assets, ranging from 0.25% to 1.00% as noted below. In some cases, the Board of Directors has approved expense amounts lower than plan limits. ------------------------------------------------ ----------------------------- ----------------------------- SHARE CLASS CURRENTLY APPROVED LIMITS PLAN LIMITS ------------------------------------------------ ----------------------------- ----------------------------- ------------------------------------------------ ----------------------------- ----------------------------- Class A 0.25% 0.25% ------------------------------------------------ ----------------------------- ----------------------------- ------------------------------------------------ ----------------------------- ----------------------------- Class 529-A 0.25 0.50 ------------------------------------------------ ----------------------------- ----------------------------- ------------------------------------------------ ----------------------------- ----------------------------- Classes B and 529-B 1.00 1.00 ------------------------------------------------ ----------------------------- ----------------------------- ------------------------------------------------ ----------------------------- ----------------------------- Classes C, 529-C and R-1 1.00 1.00 ------------------------------------------------ ----------------------------- ----------------------------- ------------------------------------------------ ----------------------------- ----------------------------- Class R-2 0.75 1.00 ------------------------------------------------ ----------------------------- ----------------------------- ------------------------------------------------ ----------------------------- ----------------------------- Classes 529-E and R-3 0.50 0.75 ------------------------------------------------ ----------------------------- ----------------------------- ------------------------------------------------ ----------------------------- ----------------------------- Classes F, 529-F and R-4 0.25 0.50 ------------------------------------------------ ----------------------------- -----------------------------
All share classes may use up to 0.25% of average daily net assets to pay service fees, or to compensate AFD for paying service fees, to firms that have entered into agreements with AFD for providing certain shareholder services. Expenses in excess of these amounts, up to approved limits, may be used to compensate dealers and wholesalers for shares sold. For classes A and 529-A, the Board of Directors has also approved the reimbursement of dealer and wholesaler commissions paid by AFD for certain shares sold without a sales charge. Each class reimburses AFD for amounts billed within the prior 15 months but only to the extent that the overall annual expense limit of 0.25% is not exceeded. As of December 31, 2003, there were no unreimbursed expenses subject to reimbursement for classes A or 529-A. TRANSFER AGENT SERVICES - The fund has a transfer agent agreement with AFS for classes A and B. Under this agreement, these share classes compensate AFS for transfer agent services including shareholder recordkeeping, communications and transaction processing. AFS is also compensated for certain transfer agent services provided to all other share classes from the administrative services fees paid to CRMC described below. ADMINISTRATIVE SERVICES - The fund has an administrative services agreement with CRMC to provide transfer agent and other related shareholder services for all classes of shares other than classes A and B. Each relevant class pays CRMC annual fees of 0.15% (0.10% for Class R-5) based on its respective average daily net assets. Each relevant class also pays AFS additional amounts for certain transfer agent services. CRMC and AFS may use these fees to compensate third parties for performing these services. During the start-up period for classes R-1, R-2, and R-3, CRMC has voluntarily agreed to pay a portion of these fees. Each 529 share class is subject to an additional annual administrative services fee of 0.10% of its respective average daily net assets; this fee is payable to the Commonwealth of Virginia for the maintenance of the CollegeAmerica plan. Although these amounts are included with administrative services fees in the accompanying financial statements, the Commonwealth of Virginia is not considered a related party. Administrative services fees are presented gross of any payments made by CRMC. Expenses under the agreements described above for the year ended December 31, 2003, were as follows (dollars in thousands): -------------------------------------------------------------------------------------------------------------- SHARE CLASS DISTRIBUTION TRANSFER AGENT ADMINISTRATIVE SERVICES SERVICES SERVICES -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- CRMC TRANSFER AGENT COMMONWEALTH OF ADMINISTRATIVE SERVICES VIRGINIA SERVICES SERVICES ADMINISTRATIVE -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Class A $38,778 $19,207 Not applicable Not applicable Not applicable -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Class B 6,809 919 Not applicable Not applicable Not applicable -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Class C 3,117 Included $467 135 Not applicable in administrative services -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Class F 594 Included 357 40 Not applicable in administrative services -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Class 529-A 62 Included 87 11 $ 58 in administrative services -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Class 529-B 123 Included 18 8 12 in administrative services -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Class 529-C 173 Included 26 8 17 in administrative services -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Class 529-E 14 Included 4 1 1 in administrative services -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Class 529-F 1 Included 1 -* 3 in administrative services -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Class R-1 9 Included 1 2 Not applicable in administrative services -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Class R-2 182 Included 40 177 Not applicable in administrative services -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Class R-3 190 Included 59 57 Not applicable in administrative services -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Class R-4 63 Included 38 3 Not applicable in administrative services -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Class R-5 Not applicable Included 70 2 Not applicable in administrative services -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Total $50,115 $20,126 $1,168 $444 $91 -------------------------------------------------------------------------------------------------------------- * Amount less than one thousand.
DEFERRED DIRECTORS' COMPENSATION - Since the adoption of the deferred compensation plan in 1993, Directors who are unaffiliated with CRMC may elect to defer the cash payment of part or all of their compensation. These deferred amounts, which remain as liabilities of the fund, are treated as if invested in shares of the fund or other American Funds. These amounts represent general, unsecured liabilities of the fund and vary according to the total returns of the selected funds. Directors' compensation in the accompanying financial statements includes $188,000 in current fees (either paid in cash or deferred) and a net increase of $166,000 in the value of the deferred amounts. AFFILIATED OFFICERS AND DIRECTORS - Officers and certain Directors of the fund are or may be considered to be affiliated with CRMC, AFS and AFD. No affiliated officers or Directors received any compensation directly from the fund. 5. CAPITAL SHARE TRANSACTIONS Capital share transactions in the fund were as follows (dollars and shares in thousands): Reinvestments of dividends Share class Sales(1) and distributions Amount Shares Amount Shares Year ended December 31, 2003 Class A $ 1,760,807 73,050 $ 252,281 10,556 Class B 106,466 4,450 5,861 248 Class C 103,912 4,277 2,524 106 Class F 105,565 4,359 3,347 139 Class 529-A 32,444 1,333 962 40 Class 529-B 7,209 297 89 4 Class 529-C 11,156 458 127 5 Class 529-E 2,001 83 35 1 Class 529-F 730 30 8 -* Class R-1 2,361 97 7 -* Class R-2 37,622 1,581 213 9 Class R-3 57,216 2,436 461 19 Class R-4 35,621 1,487 415 17 Class R-5 42,345 1,675 1,097 45 Total net increase (decrease) $ 2,305,455 95,613 $ 267,427 11,189 Year ended December 31, 2002(2) Class A $ 2,510,082 99,589 $ 325,159 13,445 Class B 196,132 7,724 7,923 335 Class C 161,418 6,407 3,050 130 Class F 135,377 5,446 3,355 141 Class 529-A 44,610 1,774 482 21 Class 529-B 9,031 362 64 3 Class 529-C 12,734 508 90 4 Class 529-E 1,753 72 15 1 Class 529-F 227 10 2 -* Class R-1 179 8 1 -* Class R-2 8,884 402 49 2 Class R-3 14,900 674 78 3 Class R-4 7,251 326 43 2 Class R-5 69,699 2,695 607 27 Total net increase (decrease) $ 3,172,277 125,997 $ 340,918 14,114 Share class Repurchases(1) Net (decrease) increase Amount Shares Amount Shares Year ended December 31, 2003 Class A $ (2,408,135) (101,674) $ (395,047) (18,068) Class B (82,223) (3,502) 30,104 1,196 Class C (46,686) (1,989) 59,750 2,394 Class F (68,012) (2,847) 40,900 1,651 Class 529-A (1,893) (78) 31,513 1,295 Class 529-B (373) (15) 6,925 286 Class 529-C (881) (35) 10,402 428 Class 529-E (81) (3) 1,955 81 Class 529-F (29) (1) 709 29 Class R-1 (760) (31) 1,608 66 Class R-2 (8,100) (342) 29,735 1,248 Class R-3 (15,665) (670) 42,012 1,785 Class R-4 (4,201) (174) 31,835 1,330 Class R-5 (5,556) (217) 37,886 1,503 Total net increase (decrease) $ (2,642,595) (111,578) $ (69,713) (4,776) Year ended December 31, 2002(2) Class A $ (3,217,263) (133,389) $ (382,022) (20,355) Class B (96,136) (4,053) 107,919 4,006 Class C (46,109) (1,969) 118,359 4,568 Class F (48,639) (2,052) 90,093 3,535 Class 529-A (818) (36) 44,274 1,759 Class 529-B (81) (4) 9,014 361 Class 529-C (247) (11) 12,577 501 Class 529-E (5) -* 1,763 73 Class 529-F -* -* 229 10 Class R-1 (2) -* 178 8 Class R-2 (1,911) (86) 7,022 318 Class R-3 (4,035) (182) 10,943 495 Class R-4 (188) (9) 7,106 319 Class R-5 (7,474) (326) 62,832 2,396 Total net increase (decrease) $ (3,422,908) (142,117) $ 90,287 (2,006)
* Amount less than one thousand. (1) Includes exchanges between share classes of the fund. (2) Class 529-A, 529-B, 529-C, 529-E and 529-F shares were offered beginning February 15, 2002. Class R-1, R-2, R-3, R-4 and R-5 shares were offered beginning May 15, 2002. 6. RESTRICTED SECURITIES The fund has invested in certain securities for which resale may be limited to qualified buyers or which are otherwise restricted. These securities are identified in the investment portfolio. As of December 31, 2003, the total value of restricted securities was $603,538,000, which represented 2.85% of the net assets of the fund. 7. INVESTMENT TRANSACTIONS AND OTHER DISCLOSURES The fund made purchases and sales of investment securities, excluding short-term securities, of $5,266,791,000 and $5,506,954,000, respectively, during the year ended December 31, 2003. The fund receives a reduction in its custodian fee equal to the amount of interest calculated on certain cash balances held at the custodian bank. For the year ended December 31, 2003, the custodian fee of $1,002,000 included $7,000 that was offset by this reduction, rather than paid in cash. Financial Highlights (1) Income (loss) from investment operations(2) Net Net asset gains(losses) value, Net on securities Total from beginning investment (both realized investment of period income and unrealized) operations CLASS A: Year ended 12/31/2003 $22.23 $.50 $6.52 $7.02 Year ended 12/31/2002 27.45 .42 (5.14) (4.72) Year ended 12/31/2001 31.16 .40 (3.34) (2.94) Year ended 12/31/2000 32.59 .42 .90 1.32 Year ended 12/31/1999 28.92 .41 6.45 6.86 CLASS B: Year ended 12/31/2003 22.19 .31 6.51 6.82 Year ended 12/31/2002 27.40 .23 (5.14) (4.91) Year ended 12/31/2001 31.12 .18 (3.34) (3.16) Period from 3/15/2000 to 12/31/2000 31.93 .15 1.02 1.17 CLASS C: Year ended 12/31/2003 22.17 .30 6.51 6.81 Year ended 12/31/2002 27.39 .21 (5.14) (4.93) Period from 3/15/2001 to 12/31/2001 28.52 .11 (1.13) (1.02) CLASS F: Year ended 12/31/2003 22.22 .49 6.52 7.01 Year ended 12/31/2002 27.44 .40 (5.14) (4.74) Period from 3/15/2001 to 12/31/2001 28.56 .28 (1.12) (.84) CLASS 529-A: Year ended 12/31/2003 22.22 .50 6.52 7.02 Period from 2/15/2002 to 12/31/2002 26.71 .33 (4.34) (4.01) CLASS 529-B: Year ended 12/31/2003 22.22 .27 6.52 6.79 Period from 2/19/2002 to 12/31/2002 26.27 .16 (3.91) (3.75) CLASS 529-C: Year ended 12/31/2003 22.22 .27 6.52 6.79 Period from 2/15/2002 to 12/31/2002 26.71 .16 (4.34) (4.18) CLASS 529-E: Year ended 12/31/2003 22.21 .40 6.52 6.92 Period from 3/7/2002 to 12/31/2002 28.13 .26 (5.85) (5.59) CLASS 529-F: Year ended 12/31/2003 22.22 .45 6.52 6.97 Period from 9/23/2002 to 12/31/2002 21.22 .12 1.08 1.20 CLASS R-1: Year ended 12/31/2003 22.19 .27 6.54 6.81 Period from 6/19/2002 to 12/31/2002 26.04 .13 (3.75) (3.62) CLASS R-2: Year ended 12/31/2003 22.18 .30 6.51 6.81 Period from 5/21/2002 to 12/31/2002 27.39 .14 (5.13) (4.99) CLASS R-3: Year ended 12/31/2003 22.21 .40 6.52 6.92 Period from 6/4/2002 to 12/31/2002 26.66 .18 (4.38) (4.20) CLASS R-4: Year ended 12/31/2003 22.21 .48 6.53 7.01 Period from 7/25/2002 to 12/31/2002 21.75 .22 .55 .77 CLASS R-5: Year ended 12/31/2003 22.23 .56 6.53 7.09 Period from 5/15/2002 to 12/31/2002 27.62 .28 (5.34) (5.06) Dividends and distributions Dividends (from net Distributions Total Net asset investment (from capital dividends and value, end income) gains) distributions of period CLASS A: Year ended 12/31/2003 $(.40) $- $(.40) $28.85 Year ended 12/31/2002 (.50) - (.50) 22.23 Year ended 12/31/2001 (.40) (.37) (.77) 27.45 Year ended 12/31/2000 (.40) (2.35) (2.75) 31.16 Year ended 12/31/1999 (.40) (2.79) (3.19) 32.59 CLASS B: Year ended 12/31/2003 (.21) - (.21) 28.80 Year ended 12/31/2002 (.30) - (.30) 22.19 Year ended 12/31/2001 (.19) (.37) (.56) 27.40 Period from 3/15/2000 to 12/31/2000 (.13) (1.85) (1.98) 31.12 CLASS C: Year ended 12/31/2003 (.20) - (.20) 28.78 Year ended 12/31/2002 (.29) - (.29) 22.17 Period from 3/15/2001 to 12/31/2001 (.11) - (.11) 27.39 CLASS F: Year ended 12/31/2003 (.39) - (.39) 28.84 Year ended 12/31/2002 (.48) - (.48) 22.22 Period from 3/15/2001 to 12/31/2001 (.28) - (.28) 27.44 CLASS 529-A: Year ended 12/31/2003 (.40) - (.40) 28.84 Period from 2/15/2002 to 12/31/2002 (.48) - (.48) 22.22 CLASS 529-B: Year ended 12/31/2003 (.18) - (.18) 28.83 Period from 2/19/2002 to 12/31/2002 (.30) - (.30) 22.22 CLASS 529-C: Year ended 12/31/2003 (.18) - (.18) 28.83 Period from 2/15/2002 to 12/31/2002 (.31) - (.31) 22.22 CLASS 529-E: Year ended 12/31/2003 (.30) - (.30) 28.83 Period from 3/7/2002 to 12/31/2002 (.33) - (.33) 22.21 CLASS 529-F: Year ended 12/31/2003 (.37) - (.37) 28.82 Period from 9/23/2002 to 12/31/2002 (.20) - (.20) 22.22 CLASS R-1: Year ended 12/31/2003 (.21) - (.21) 28.79 Period from 6/19/2002 to 12/31/2002 (.23) - (.23) 22.19 CLASS R-2: Year ended 12/31/2003 (.22) - (.22) 28.77 Period from 5/21/2002 to 12/31/2002 (.22) - (.22) 22.18 CLASS R-3: Year ended 12/31/2003 (.31) - (.31) 28.82 Period from 6/4/2002 to 12/31/2002 (.25) - (.25) 22.21 CLASS R-4: Year ended 12/31/2003 (.39) - (.39) 28.83 Period from 7/25/2002 to 12/31/2002 (.31) - (.31) 22.21 CLASS R-5: Year ended 12/31/2003 (.46) - (.46) 28.86 Period from 5/15/2002 to 12/31/2002 (.33) - (.33) 22.23 Ratio of Ratio of Net assets, expenses net income Total end of period to average to average return(3) (in millions) net assets net assets CLASS A: Year ended 12/31/2003 31.96% $19,212 .66% 2.08% Year ended 12/31/2002 (17.34) 15,201 .67 1.68 Year ended 12/31/2001 (9.55) 19,331 .65 1.41 Year ended 12/31/2000 4.27 19,872 .64 1.28 Year ended 12/31/1999 24.58 16,603 .63 1.33 CLASS B: Year ended 12/31/2003 30.97 836 1.44 1.30 Year ended 12/31/2002 (17.97) 618 1.45 .91 Year ended 12/31/2001 (10.24) 653 1.42 .64 Period from 3/15/2000 to 12/31/2000 3.73 299 1.39 (5) .53 (5) CLASS C: Year ended 12/31/2003 30.93 413 1.50 1.23 Year ended 12/31/2002 (18.06) 266 1.50 .86 Period from 3/15/2001 to 12/31/2001 (3.60) 203 1.55 (5) .49 (5) CLASS F: Year ended 12/31/2003 31.92 311 .71 2.02 Year ended 12/31/2002 (17.38) 203 .72 1.65 Period from 3/15/2001 to 12/31/2001 (2.97) 153 .74 (5) 1.31 (5) CLASS 529-A: Year ended 12/31/2003 31.99 88 .68 2.03 Period from 2/15/2002 to 12/31/2002 (15.16) 39 .76 (5) 1.64 (5) CLASS 529-B: Year ended 12/31/2003 30.74 19 1.61 1.10 Period from 2/19/2002 to 12/31/2002 (14.35) 8 1.62 (5) .77 (5) CLASS 529-C: Year ended 12/31/2003 30.75 27 1.60 1.11 Period from 2/15/2002 to 12/31/2002 (15.74) 11 1.60 (5) .79 (5) CLASS 529-E: Year ended 12/31/2003 31.42 4 1.08 1.61 Period from 3/7/2002 to 12/31/2002 (19.92) 2 1.07 (5) 1.35 (5) CLASS 529-F: Year ended 12/31/2003 31.72 1 .82 1.81 Period from 9/23/2002 to 12/31/2002 5.65 - (4) .22 .51 CLASS R-1: Year ended 12/31/2003 30.90 2 1.50 (6) 1.08 Period from 6/19/2002 to 12/31/2002 (13.91) - (4) 1.50 (5,6) 1.11 (5) CLASS R-2: Year ended 12/31/2003 30.93 45 1.46 (6) 1.19 Period from 5/21/2002 to 12/31/2002 (18.22) 7 1.46 (5,6) 1.05 (5) CLASS R-3: Year ended 12/31/2003 31.45 66 1.08 (6) 1.60 Period from 6/4/2002 to 12/31/2002 (15.75) 11 1.08 (5,6) 1.41 (5) CLASS R-4: Year ended 12/31/2003 31.91 48 .71 1.94 Period from 7/25/2002 to 12/31/2002 3.51 7 .32 (6) .96 CLASS R-5: Year ended 12/31/2003 32.34 112 .39 2.30 Period from 5/15/2002 to 12/31/2002 (18.34) 53 .40 (5) 1.91 (5)
YEAR ENDED DECEMBER 31 2003 2002 2001 2000 1999 Portfolio turnover rate for all classes of shares 31% 38% 29% 43% 46%
(1) Based on operations for the period shown (unless otherwise noted) and, accordingly, may not be representative of a full year. (2) Year ended 1999 is based on shares outstanding on the last day of the year; all other periods are based on average shares outstanding. (3) Total returns exclude all sales charges, including contingent deferred sales charges. (4) Amount less than 1 million. (5) Annualized. (6) During the start-up period for this class, CRMC voluntarily agreed to pay a portion of the fees relating to transfer agent services. Had CRMC not paid such fees, expense ratios would have been 1.70%, 1.94% and 1.10% for classes R-1, R-2 and R-3, respectively, during the year ended December 31, 2003, and 4.20%, 1.64%, 1.13% and .34% for classes R-1, R-2, R-3 and R-4, respectively, during the period ended December 31, 2002. INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF FUNDAMENTAL INVESTORS, INC.: We have audited the accompanying statement of assets and liabilities of Fundamental Investors, Inc. (the "Fund"), including the investment portfolio, as of December 31, 2003, and the related statement of operations for the year then ended, the statement of changes in 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. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2003, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Fundamental Investors, Inc. as of December 31, 2003, 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 accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP Los Angeles, California February 5, 2004 TAX INFORMATION (UNAUDITED) We are required to advise you within 60 days of the fund's fiscal year-end regarding the federal tax status of certain distributions received by shareholders during such fiscal year. As a result of recent tax legislation, individual shareholders are now eligible for reduced tax rates on qualified dividend income received during the year. For purposes of computing the dividends eligible for reduced tax rates, 98% of the dividends paid by the fund from net investment income are considered qualified dividend income. Corporate shareholders may exclude up to 70% of qualifying dividends received during the year. For purposes of computing this exclusion, 90% of the dividends paid by the fund from net investment income represent qualifying dividends. Certain states may exempt from income taxation that portion of the dividends paid from net investment income that was derived from direct U.S. government obligations. For purposes of computing this exclusion, 0.17% of the dividends paid by the fund from net investment income were derived from interest on direct U.S. government obligations. Dividends and distributions received by retirement plans such as IRAs, Keogh-type plans and 403(b) plans need not be reported as taxable income. However, many retirement plan trusts may need this information for their annual information reporting. SHAREHOLDERS SHOULD REFER TO THEIR FORM 1099-DIV OR OTHER TAX INFORMATION WHICH WILL BE MAILED IN JANUARY 2004 TO DETERMINE THE AMOUNTS TO BE INCLUDED ON THEIR 2003 TAX RETURNS. SHAREHOLDERS SHOULD CONSULT THEIR TAX ADVISERS. OTHER SHARE CLASS RESULTS (UNAUDITED) CLASS B, CLASS C, CLASS F AND CLASS 529 RETURNS FOR PERIODS ENDED DECEMBER 31, 2003: 1 year Life of class CLASS B SHARES Reflecting applicable contingent deferred sales charge (CDSC), maximum of 5%, payable only if shares are sold within six years of purchase +25.97% -0.71%(1) Not reflecting CDSC +30.97% +0.01%(1) CLASS C SHARES Reflecting CDSC, maximum of 1%, payable only if shares are sold within one year of purchase +29.93% +1.21%(2) Not reflecting CDSC +30.93% +1.21%(2) CLASS F SHARES(3) Not reflecting annual asset-based fee charged by sponsoring firm +31.92% +2.02%(2) CLASS 529-A SHARES Reflecting 5.75% maximum sales charge +24.37% +2.92%(4) Not reflecting maximum sales charge +31.99% +6.22%(4) CLASS 529-B SHARES Reflecting applicable CDSC, maximum of 5%, payable only if shares are sold within six years of purchase +25.74% +4.20%(5) Not reflecting CDSC +30.74% +6.26%(5) CLASS 529-C SHARES Reflecting CDSC, maximum of 1%, payable only if shares are sold within one year of purchase +29.75% +5.30%(4) Not reflecting CDSC +30.75% +5.30%(4) CLASS 529-E SHARES(3) +31.42% +2.85%(6) CLASS 529-F SHARES(3) Not reflecting annual asset-based fee charged by sponsoring firm +31.72% +29.68%(7) Figures shown are past results and not predictive of future periods. Current and future results may be lower or higher than those shown. Because share prices may decline, the value of your holdings may decrease. For the most current information and month-end results, visit americanfunds.com. (1) Average annual total return from March 15, 2000, when Class B shares were first sold. (2) Average annual total return from March 15, 2001, when Class C and Class F shares were first sold. (3) These shares are sold without any initial or contingent deferred sales charge. (4) Average annual total return from February 15, 2002, when Class 529-A and Class 529-C shares were first sold. (5) Average annual total return from February 19, 2002, when Class 529-B shares were first sold. (6) Average annual total return from March 7, 2002, when Class 529-E shares were first sold. (7) Average annual total return from September 23, 2002, when Class 529-F shares were first sold.
BOARD OF DIRECTORS AND OFFICERS "NON-INTERESTED" DIRECTORS YEAR FIRST ELECTED A DIRECTOR NAME AND AGE OF THE FUND(1) PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS JOSEPH C. BERENATO, 57 2003 Chairman of the Board and CEO, Ducommun Incorporated ROBERT A. FOX, 66 1998 Managing General Partner, Fox Investments LP; former Professor, University of California; retired President and CEO, Foster Farms (poultry producer) LEONADE D. JONES, 56 1998 Co-founder, VentureThink LLC (developed and managed e-commerce businesses) and Versura Inc. (education loan exchange); former Treasurer, The Washington Post Company JOHN G. MCDONALD, 66 1998 The IBJ Professor of Finance, Graduate School of Business, Stanford University GAIL L. NEALE, 69 1985 President, The Lovejoy Consulting Group, Inc. (a pro bono consulting group advising nonprofit organizations) HENRY E. RIGGS, 69 1989 Chairman of the Board and President Emeritus, Keck Graduate Institut of Applied Life Sciences PATRICIA K. WOOLF, PH.D., 69 1998 Private investor; corporate director; lecturer, Department of Molecular Biology, Princeton University "NON-INTERESTED" DIRECTORS NUMBER OF BOARDS WITHIN THE FUND COMPLEX(2) ON WHICH NAME AND AGE DIRECTOR SERVES OTHER DIRECTORSHIPS(3) HELD BY DIRECTOR JOSEPH C. BERENATO, 57 4 Ducommun Incorporated ROBERT A. FOX, 66 7 Crompton Corporation LEONADE D. JONES, 56 6 None JOHN G. MCDONALD, 66 8 iStar Financial, Inc.; Plum Creek Timber Co.; Scholastic Corporation; Varian, Inc. GAIL L. NEALE, 69 5 None HENRY E. RIGGS, 69 4 None PATRICIA K. WOOLF, PH.D., 69 6 Crompton Corporation; First Energy Corporation; National Life Holding Co. GUILFORD C. BABCOCK, a member of the Board since 1991, has retired. The Directors thank him for his many contributions to the fund. "INTERESTED" DIRECTORS(4) YEAR FIRST ELECTED A DIRECTOR OR PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS NAME, AGE AND OFFICER AND POSITIONS HELD WITH AFFILIATED ENTITIES OR THE POSITION WITH FUND OF THE FUND(1) PRINCIPAL UNDERWRITER OF THE FUND JAMES F. ROTHENBERG, 57 1998 President and Director, Capital Research and Chairman of the Board Management Company; Director, American Funds and Principal Executive Officer Distributors, Inc.;(5) Director, American Funds Service Company; (5) Director, The Capital Group Companies, Inc.; (5) Director, Capital Group Research, Inc. (5) JAMES E. DRASDO, 58 1987 Senior Vice President, Capital Research and Vice Chairman of the Board Management Company; Director, The Capital Group Companies, Inc. (5) "INTERESTED" DIRECTORS(4) NUMBER OF BOARDS WITHIN THE FUND COMPLEX(2) NAME, AGE AND ON WHICH POSITION WITH FUND DIRECTOR SERVES OTHER DIRECTORSHIPS(3) HELD BY DIRECTOR JAMES F. ROTHENBERG, 57 3 None Chairman of the Board and Principal Executive Officer JAMES E. DRASDO, 58 2 None Vice Chairman of the Board THE STATEMENT OF ADDITIONAL INFORMATION INCLUDES ADDITIONAL INFORMATION ABOUT FUND DIRECTORS AND IS AVAILABLE WITHOUT CHARGE UPON REQUEST BY CALLING AMERICAN FUNDS SERVICE COMPANY AT 800/421-0180. THE ADDRESS FOR ALL DIRECTORS AND OFFICERS OF THE FUND IS 333 SOUTH HOPE STREET, LOS ANGELES, CA 90071, ATTENTION: FUND SECRETARY. (1) Directors and officers of the fund serve until their resignation, removal or retirement. (2) Capital Research and Management Company manages the American Funds, consisting of 29 funds. Capital Research and Management Company also manages American Funds Insurance Series,(R) which serves as the underlying investment vehicle for certain variable insurance contracts; and Endowments, whose shareholders are limited to certain nonprofit organizations. (3) This includes all directorships (other than those in the American Funds) that are held by each Director as a director of a public company or a registered investment company. (4) "Interested persons" within the meaning of the 1940 Act on the basis of their affiliation with the fund's investment adviser, Capital Research and Management Company, or affiliated entities (including the fund's principal underwriter). (5) Company affiliated with Capital Research and Management Company. (6) All of the officers listed, except Martin Romo, are officers and/or Directors/Trustees of one or more of the other funds for which Capital Research and Management Company serves as investment adviser.
OTHER OFFICERS(6) YEAR FIRST ELECTED PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS NAME, AGE AND AN OFFICER AND POSITIONS HELD WITH AFFILIATED ENTITIES OR POSITION WITH FUND OF THE FUND(1) THE PRINCIPAL UNDERWRITER OF THE FUND DINA N. PERRY, 58 1994 Senior Vice President, Capital Research and President Management Company; Director, Capital Research Company(5) GORDON CRAWFORD, 57 1994 Senior Vice President and Director, Capital Senior Vice President Research and Management Company PAUL G. HAAGA, JR., 55 1994 Executive Vice President and Director, Capital Senior Vice President Research and Management Company; Director, The Capital Group Companies, Inc.;(5) Director, American Funds Distributors, Inc.(5) MICHAEL T. KERR, 44 1995 Senior Vice President, Capital Research Company(5) Senior Vice President MARTIN ROMO, 36 1999 Executive Vice President and Director, Capital Vice President Research Company(5) PATRICK F. QUAN, 45 1989-1998 Vice President-- Fund Business Management Secretary 2000 Group, Capital Research and Management Company SHERYL F. JOHNSON, 35 1998 Vice President-- Fund Business Management Treasurer Group, Capital Research and Management Company DAVID A. PRITCHETT, 37 1999 Vice President-- Fund Business Management Assistant Treasurer Group, Capital Research and Management Company
OFFICE OF THE FUND One Market Steuart Tower, Suite 1800 Mailing address: P.O. Box 7650 San Francisco, CA 94120-7650 INVESTMENT ADVISEr Capital Research and Management Company 333 South Hope Street Los Angeles, CA 90071-1406 135 South State College Boulevard Brea, CA 92821-5823 TRANSFER AGENT FOR SHAREHOLDER ACCOUNTS American Funds Service Company (Please write to the address nearest you.) P.O. Box 25065 Santa Ana, CA 92799-5065 P.O. Box 659522 San Antonio, TX 78265-9522 P.O. Box 6007 Indianapolis, IN 46206-6007 P.O. Box 2280 Norfolk, VA 23501-2280 CUSTODIAN OF ASSETS State Street Bank and Trust Company 225 Franklin Street Boston, MA 02105-1713 COUNSEL Paul, Hastings, Janofsky & Walker LLP 515 South Flower Street Los Angeles, CA 90071-2228 INDEPENDENT AUDITORS Deloitte & Touche LLP Two California Plaza 350 South Grand Avenue Los Angeles, CA 90071-3462 PRINCIPAL UNDERWRITER American Funds Distributors, Inc. 333 South Hope Street Los Angeles, CA 90071-1406 There are several ways to invest in Fundamental Investors. Class A shares are subject to a 5.75% maximum up-front sales charge that declines for accounts (and aggregated investments) of $25,000 or more. Other share classes, which are generally not available for certain employer-sponsored retirement plans, have no up-front sales charges but are subject to additional annual expenses and fees. Annual expenses for Class B shares were 0.78 percentage points higher than for Class A shares; Class B shares convert to Class A shares after eight years of ownership. If redeemed within six years, Class B shares may also be subject to a contingent deferred sales charge ("CDSC") of up to 5% that declines over time. Class C shares were subject to annual expenses 0.84 percentage points higher than those for Class A shares and a 1% CDSC if redeemed within the first year after purchase. Class C shares convert to Class F shares after 10 years. Class F shares, which are available only through certain fee-based programs offered by broker-dealer firms and registered investment advisers, had higher annual expenses (by 0.05 percentage points) than did Class A shares, and an annual asset-based fee charged by the sponsoring firm. Expenses are deducted from income earned by the fund. As a result, dividends and investment results will differ for each share class. INVESTORS SHOULD CONSIDER THE INVESTMENT OBJECTIVES, RISKS, CHARGES AND EXPENSES OF FUNDAMENTAL INVESTORS AND COLLEGEAMERICA CAREFULLY. THIS AND OTHER IMPORTANT INFORMATION IS CONTAINED IN THE PROSPECTUS, WHICH CAN BE OBTAINED FROM YOUR FINANCIAL ADVISER AND SHOULD BE READ CAREFULLY BEFORE INVESTING. YOU MAY ALSO CALL AMERICAN FUNDS SERVICE COMPANY AT 800/421-0180 OR VISIT THE AMERICAN FUNDS WEBSITE AT AMERICANFUNDS.COM. "AMERICAN FUNDS PROXY VOTING GUIDELINES" -- WHICH DESCRIBES HOW WE VOTE PROXIES RELATING TO PORTFOLIO SECURITIES -- IS AVAILABLE UPON REQUEST, FREE OF CHARGE, BY CALLING AMERICAN FUNDS SERVICE COMPANY, VISITING THE AMERICAN FUNDS WEBSITE OR ACCESSING THE U.S. SECURITIES AND EXCHANGE COMMISSION WEBSITE AT WWW.SEC.GOV. This report is for the information of shareholders of Fundamental Investors, but it may also be used as sales literature when preceded or accompanied by the current prospectus, which gives details about charges, expenses, investment objectives and operating policies of the fund. If used as sales material after March 31, 2004, this report must be accompanied by an American Funds statistical update for the most recently completed calendar quarter. [logo - American Funds(R)] The right choice for the long term(R) WHAT MAKES AMERICAN FUNDS DIFFERENT? For more than 70 years, we have followed a consistent philosophy that we firmly believe is in our investors' best interests. The range of opportunities offered by our family of just 29 carefully conceived, broadly diversified funds has attracted over 25 million shareholder accounts. OUR UNIQUE COMBINATION OF STRENGTHS INCLUDES THESE FIVE FACTORS: o A LONG-TERM, VALUE-ORIENTED APPROACH Rather than follow fads, we pursue a consistent strategy, focusing on each investment's long-term potential. o AN UNPARALLELED GLOBAL RESEARCH EFFORT American Funds draws on one of the industry's most globally integrated research networks. o THE MULTIPLE PORTFOLIO COUNSELOR SYSTEM Every American Fund is divided among a number of portfolio counselors. Each takes responsibility for a portion independently, within each fund's objectives; in most cases, research analysts manage a portion as well. Over time this method has contributed to a consistency of results and continuity of management. o EXPERIENCED INVESTMENT PROFESSIONALS The recent market decline was not the first for most of the portfolio counselors who serve the American Funds. Nearly 70% of them were in the investment business before the sharp market decline of 1987. o A COMMITMENT TO LOW OPERATING EXPENSES American Funds' operating expenses are among the lowest in the mutual fund industry. Our portfolio turnover rates are low as well, keeping transaction costs and tax consequences contained. 29 MUTUAL FUNDS, CONSISTENT PHILOSOPHY, CONSISTENT RESULTS o GROWTH FUNDS Emphasis on long-term growth through stocks AMCAP Fund(R) EuroPacific Growth Fund(R) The Growth Fund of America(R) The New Economy Fund(R) New Perspective Fund(R) New World Fund(SM) SMALLCAP World Fund(R) o GROWTH-AND-INCOME FUNDS Emphasis on long-term growth and dividends through stocks American Mutual Fund(R) Capital World Growth and Income Fund(SM) > Fundamental Investors(SM) The Investment Company of America(R) Washington Mutual Investors Fund(SM) o EQUITY-INCOME FUNDS Emphasis on above-average income and growth throughstocks and/or bonds Capital Income Builder(R) The Income Fund of America(R) o BALANCED FUND Emphasis on long-term growth and current income through stocks and bonds American Balanced Fund(R) o BOND FUNDS Emphasis on current income through bonds American High-Income Trust(SM) The Bond Fund of America(SM) Capital World Bond Fund(R) Intermediate Bond Fund of America(R) U.S. Government Securities Fund(SM) o TAX-EXEMPT BOND FUNDS Emphasis on tax-free current income through municipal bonds American High-Income Municipal Bond Fund(R) Limited Term Tax-Exempt Bond Fund of America(SM) The Tax-Exempt Bond Fund of America(R) STATE-SPECIFIC TAX-EXEMPT FUNDS The Tax-Exempt Fund of California(R) The Tax-Exempt Fund of Maryland(R) The Tax-Exempt Fund of Virginia(R) o MONEY MARKET FUNDS The Cash Management Trust of America(R) The Tax-Exempt Money Fund of America(SM) The U.S. Treasury Money Fund of America(SM) THE CAPITAL GROUP COMPANIES American Funds Capital Research and Management Capital International Capital Guardian Capital Bank and Trust Lit. No. MFGEAR-910-0204 Litho in USA KBD/GRS/8056 Printed on recycled paper ITEM 2 - Code of Ethics This Registrant has adopted a Code of Ethics that applies to its Principal Executive Officer and Principal Financial Officer. The Registrant undertakes to provide to any person without charge, upon request, a copy of the Code of Ethics. Such request can be made to American Funds Service Company at 800/421-0180 or to the Secretary of the Registrant, 333 South Hope Street, Los Angeles, California 90071. ITEM 3 - Audit Committee Financial Expert The Registrant's Board has determined that Leonade D. Jones, a member of the Registrant's Audit Committee, is an "audit committee financial expert" and "independent," as such terms are defined in this Item. This designation will not increase the designee's duties, obligations or liability as compared to his duties, obligations and liability as a member of the Audit Committee and of the Board; nor will it reduce the responsibility of the other Audit Committee members. There may be other individuals who, through education or experience, would qualify as "audit committee financial experts" if the Board had designated them as such. Most importantly, the Board believes each member of the Audit Committee contributes significantly to the effective oversight of the Registrant's financial statements and condition. ITEM 4 - Principal Accountant Fees and Services Fees paid to the registrant's auditors for each of the last two fiscal years, including fees for non-audit services billed to the adviser and affiliates for engagements that relate directly to the operations and financial reporting of the registrant, and a description of the nature of the services comprising the fees, are listed below: Registrant: a) Audit Fees: 2002 $57,000 2003 $57,000 b) Audit- Related Fees: 2002 none 2003 none c) Tax Fees: 2002 $6,000 2003 $5,000 The tax fees consist of professional services relating to the preparation of the fund's tax returns including returns relating to the fund's investments in a non-U.S. jurisdiction. d) All Other Fees: 2002 none 2003 none Adviser and affiliates (includes only fees for non-audit services billed to the adviser and affiliates for engagements that relate directly to the operations and financial reporting of the registrant and were subject to the pre-approval policies described below): b) Audit- Related Fees: 2002 $318,000 2003 $305,000 The audit-related fees consist of assurance and related services relating to the examination of the fund's transfer agency conducted in accordance with Statement on Auditing Standards Number 70 issued by the American Institute of Certified Public Accountants. c) Tax Fees: 2002 none 2003 none d) All Other Fees: 2002 none 2003 none The registrant's Audit Committee will pre-approve all audit and permissible non-audit services that the Committee considers compatible with maintaining the auditors' independence. The pre-approval requirement will extend to all non-audit services provided to the registrant, the investment adviser, and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant, if the engagement relates directly to the operations and financial reporting of the registrant. The Committee will not delegate its responsibility to pre-approve these services to the investment adviser. The Committee may delegate to one or more Committee members the authority to review and pre-approve audit and permissible non-audit services. Actions taken under any such delegation will be reported to the full Committee at its next meeting. The pre-approval requirement is waived with respect to non-audit services if certain conditions are met. The pre-approval requirement was not waived for any of the services listed above under paragraphs b, c and d. Aggregate non-audit fees paid to the registrant's auditors, including fees for all services billed to the adviser and affiliates were $362,000 for fiscal year 2002 and $315,000 for fiscal year 2003. The non-audit services represented by these amounts were brought to the attention of the Committee and considered to be compatible with maintaining the auditors' independence. ITEM 5 - Audit Committee Disclosure for Listed Companies Not applicable. ITEM 6 - Reserved ITEM 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies Not applicable to this Registrant, insofar as the Registrant is not a closed-end management investment company. ITEM 8 - Reserved ITEM 9 - Controls and Procedures (a) The officers providing the certifications in this report in accordance with rule 30a-2 under the Investment Company Act of 1940 have concluded, based on their evaluation of the Registrant's disclosure controls and procedures (as such term is defined in such rule), that such controls and procedures are adequate and reasonably designed to achieve the purposes described in paragraph (c) of such rule. (b) There were no changes in the Registrant's internal controls over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) that occurred during the Registrant's last fiscal half-year (the Registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting. ITEM 10 - Exhibits (a) The Code of Ethics that is the subject of the disclosure required by Item 2 is attached as an exhibit hereto. (b) The certifications required by Rule 30a-2 of the Investment Company Act of 1940, as amended, and Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are attached as exhibits hereto. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FUNDAMENTAL INVESTORS, INC. By /s/ James F. Rothenberg ------------------------------------------------------- James F. Rothenberg, Chairman and PEO Date: March 8, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /s/ James F. Rothenberg -------------------------------------------------- James F. Rothenberg, Chairman and PEO Date: March 8, 2004 By /s/ Sheryl F. Johnson ------------------------------------------------- Sheryl F. Johnson, Treasurer Date: March 8, 2004