-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Li028Qd+eeV9dbr9wZn5Ayo0pggSpwHZbGLuv5/8TLgTUumllwdwqJzYgl9MlQAv vTInv27bHJXVZdqihrk+cw== 0000051931-03-000005.txt : 20030306 0000051931-03-000005.hdr.sgml : 20030306 20030306162656 ACCESSION NUMBER: 0000051931-03-000005 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030306 EFFECTIVENESS DATE: 20030306 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INVESTMENT CO OF AMERICA CENTRAL INDEX KEY: 0000051931 IRS NUMBER: 951426645 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-00116 FILM NUMBER: 03594860 BUSINESS ADDRESS: STREET 1: 333 S HOPE ST - 52ND FLOOR CITY: LOS ANGELES STATE: CA ZIP: 90071 BUSINESS PHONE: 2134869200 N-30D 1 ica.txt [logo - American Funds(R)] The right choice for the long termSM ICA THE INVESTMENT COMPANY OF AMERICA [cover photo: close-up of country flags in front of New York's Rockefeller Center] Special report: How ICA's broad portfolio is built Annual report for the year ended December 31, 2002 ICA SM The Investment Company of America(R) 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. ICA seeks long-term growth of capital and income, placing greater emphasis on future dividends than on current income. [Begin Table] 2002 RESULTS AT A GLANCE Year ended December 31, 2002 (with dividends and capital gain distributions reinvested) Standard & Poor's 500 ICA Composite Index Income return +1.84% +1.41% Capital return -16.31% -23.50% Total return -14.47% -22.09% DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS PAID IN 2002 Per share Payment date Income dividends $0.13 March 4 $0.13 June 10 $0.13 Sept. 9 $0.13 Dec. 17 $0.52 Capital gain distributions $0.11 March 4 $0.35 Dec. 17 $0.46 EXPENSE RATIOS AND PORTFOLIO TURNOVER RATES* Year ended December 31, 2002 ICA Industry average+ Expense ratio 0.59% 1.29% Portfolio turnover rate 27% 70% *The expense ratio is the annual percentage of net assets used to pay fund expenses. The portfolio turnover rate is a measure of how often securities are bought and sold by a fund. +Growth & Income Funds, as measured by Lipper Inc. ABOUT THE COVER Last fall's display of state flags at New York's Rockefeller Center serves as a reminder that ICA's shareholders hail from across the United States. [End Table] CONTENTS Letter to shareholders 1 Growth over time 3 Special report: How ICA's broad portfolio is built 6 Corporate governance 13 The portfolio counselors 14 Investment portfolio 15 Directors and officers 33 The American Funds family back cover Fund results in this report were calculated for Class A shares at net asset value (without a sales charge) unless otherwise indicated. 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. For the most current investment results, please refer to americanfunds.com. The fund's 30-day yield for Class A shares as of January 31, 2003, reflecting the 5.75% maximum sales charge and calculated in accordance with the Securities and Exchange Commission formula, was 2.18%. FIGURES SHOWN ARE PAST RESULTS AND ARE NOT PREDICTIVE OF FUTURE RESULTS. SHARE PRICE AND RETURN WILL VARY, SO YOU MAY LOSE MONEY. 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 IS SUBJECT TO ADDITIONAL RISKS, SUCH AS CURRENCY FLUCTUATIONS AND POLITICAL INSTABILITY, WHICH ARE DETAILED IN THE FUND'S PROSPECTUS. FELLOW SHAREHOLDERS: [photograph: close-up of country flags in front of New York's Rockefeller Center] Perhaps the best thing that can be said about 2002 is that it is over. It was a terrible year that saw the stock market fall for a third year in a row, the first time that has happened since 1939-41. ICA was not spared, producing a total return of -14.5%, the fund's worst year since 1974. Still, this was considerably better than the 22.1% loss turned in by Standard & Poor's 500 Composite Stock Index. The fund also did better than the average of its peer group, as measured by the Lipper Growth & Income Fund Index, which fell 17.9%. We obviously take no pleasure in reporting a loss. But we take solace in the fact that our conservative, research-based approach helped ICA avoid some of the broader market's pain. The net result of the last three years is that the stock market now stands pretty much where it did as recently as 1997. Its historic collapse has been dramatic and extraordinary -- but no less so than the rise that preceded it. To paraphrase Charles Dickens, we've experienced the best of times and worst of times -- all in a few short years. COMPARISON OVER A FULL MARKET CYCLE As the table below shows, viewing this period as a whole -- a full market cycle - -- reflects just how well ICA has weathered the storm, relative to the stock market. From its low on August 31, 1998 to its high on March 24, 2000, the S&P's total return was 62.7%; ICA's was 52.6%. But from its March 24, 2000 high to the low of October 9, 2002, the S&P fell 47.4% while the fund's total return was - -28.3%. Over the full period, using the 1998 and 2002 lows as bookends, the S&P lost 14.3%, while ICA gained 9.5%. The message is clear: ICA tends to lag the stock market when it is booming, but holds up quite well during a market decline. [Begin Table] Low to high High to low Low to low UP AND DOWN CYCLES 8/31/98-3/24/00 3/24/00-10/9/02 8/31/98-10/9/02 S&P 500 +62.7% -47.4% -14.3% ICA +52.6 -28.3 +9.5 [End Table] An even longer time frame shows ICA's consistency and resiliency. Over the 69 years that the fund has been advised by Capital Research and Management Company, ICA has produced an average annual compound return of 12.8%, compared with 11.1% for the S&P 500. (The index is unmanaged and reflects no expenses.) As the chart on pages 3-5 shows, an edge of 1.7 percentage points, compounding year after year, has helped ICA grow significantly more than its benchmark. A $10,000 investment in ICA on January 1, 1934, would now be worth 165% more than an equivalent investment in the S&P 500, assuming reinvestment of all dividends. A TALE OF TWO MARKETS Looking at the overall stock market decline we've just experienced, it's instructive to note that 58% of securities listed on the New York Stock Exchange actually rose in 2000 and 60% did so in 2001. It was only last year, when the market decline broadened significantly that decliners outnumbered advancers. Even so, a healthy minority of stocks -- 45% -- managed to gain ground in 2002. If so many stocks rose, how could the stock market suffer its worst decline in decades? The answer lies in the fact that the S&P 500 is a weighted index, meaning that the companies with the biggest market values can move the index more. Thus, when behemoths like Microsoft and General Electric soared in the late 1990s, the S&P 500 soared right along with them. This was a deceptive indicator of the stock market's overall strength: Even as the index was surging in 1999, the final full year of the bull market, nearly two-thirds of stocks trading on the New York Stock Exchange actually fell. When the giants began collapsing in 2000, the sheer weight of their huge market capitalizations had a proportionate influence on the S&P 500 index itself. An old adage comes to mind: The bigger they are, the harder they fall. Just how hard did the giants fall? An American Funds study found that of the 385 stocks in the S&P 500 for the entire period between March 2000 and last September, the weighted total return of the biggest 20% was -43%. The next quintile had a weighted total return of -16%. It was a different story for the remaining 60%: The weighted total return of this group averaged a healthy gain of 26%. [Begin Sidebar] HOW ICA HAS DONE COMPARED TO THE S&P 500 in major market declines (with dividends reinvested) [Begin Bar Chart] S&P ICA 3/6/1937-4/28/1942 -46.2% -34.5 5/29/1946-6/13/1949 -16.3 -25.1 1/5/1953-9/14/1953 -11.7 -10.8 8/2/1956-10/22/1957 -18.1 -18.0 12/12/1961-6/26/1962 -26.9 -27.8 2/9/1966-10/7/1966 -20.5 -20.2 11/29/1968-5/26/1970 -33.0 -33.9 1/11/1973-10/3/1974 -44.8 -38.8 9/21/1976-3/6/1978 -13.5 - 6.3 11/28/1980-8/12/1982 -20.2 - 5.1 8/25/1987-12/4/1987 -32.8 -27.6 7/16/1990-10/11/1990 -19.2 -15.2 7/17/1998-8/31/1998 -19.1 -16.5 3/24/2000-10/9/2002 -47.4 -28.3 [End Bar Chart] [End Sidebar] Amid all these numbers, we're reminded of the importance of diversification and stock selection based on thorough investment research. This is the subject of our feature story this year, which begins on page 6. The story will introduce you to several of our talented analysts and show how their experience and insight have helped ICA stay on a relatively even keel during the last few, tough years. BUILDING OUR PORTFOLIO As for stock selection in 2002, it should come as no surprise that the majority of ICA's investments fell last year. But most, including eight of our ten largest holdings, held up better than the overall stock market. There are two main reasons for this. First, because of our research and risk-averse approach, we had little exposure to the fads and sectors that lifted the markets to such unsustainable levels in the first place. Second, ICA's return was helped by its focus on future dividend growth. Companies that are committed to paying dividends have tended to do better in a bear market. ICA itself paid an income return of 1.8%, which exceeded the S&P 500's 1.4%. Reinvested income has traditionally provided a significant portion of ICA's total return; we think this will continue to be the case in the years ahead. Some of that income came from our temporary holdings in corporate bonds, whose prices had been severely depressed on liquidity concerns. Those concerns later eased, lifting the value of our investments. When we think stock prices are too high, we have the option of investing a portion of our assets in bonds and cash. This is an advantage an actively managed fund can have over an index fund that tracks the S&P 500, because an index fund must be fully invested in stocks and thus fully exposed to the ravages of a bear market. REALISTIC EXPECTATIONS As we enter 2003, ICA's portfolio remains well-diversified, and as always, focused on strong companies with solid prospects for long-term growth of capital and income. After rebounding somewhat last fall, the stock market has retreated again amid reasons for caution. The outlook for corporate earnings is unclear. Interest rates, after hitting 40-year lows, are likely to rise at some point. The weakest holiday season for retailers in many years, along with rising levels of mortgage foreclosures and personal bankruptcies is not encouraging. On the geopolitical front, there is the threat of war and the ever-present shadow of terrorism. In short, there are many uncertainties hanging over the stock market. It is fair to say that the road ahead could be bumpy. Even so, the U.S. economy has proven its resiliency time and again. As for the stock market, many of the excesses of the 1990s have been washed away. Both expectations and stock prices have returned to more reasonable levels, presenting us with attractive opportunities for long-term investments. We will continue to focus on finding them on your behalf. Thank you for your continued support and your commitment to long-term investing. Sincerely, /s/ R. Michael Shanahan R. Michael Shanahan Chairman /s/ James F. Rothenberg James F. Rothenberg President February 6, 2003 THE VALUE OF A LONG-TERM PERSPECTIVE (1934-2002) This chart illustrates a hypothetical $10,000 investment in The Investment Company of America over the past 69 years, from January 1, 1934 through December 31, 2002, showing the high, low and closing values for each year. The figures in the table below the chart include the fund's total return for each of those years. As you look through the table, you will see that the fund's total return can fluctuate greatly from year to year. In some years it was well into double digits. In other years, the fund had a negative return. During the entire period, a $10,000 investment in the fund, with all dividends reinvested, would have grown to $38,709,050 compared with $14,593,631 in the S&P 500 Index. Over the same period, $10,000 in a savings account would have grown to $186,825 with all interest compounded.* You can use this table to estimate how the value of your own holdings has grown. Let's say, for example, that you have been reinvesting all of your dividends and want to know how your investment has done since the end of 1992. At that time, the value of the investment illustrated here was $14.1 million. Since then, it has more than doubled to $38.7 million. Thus, in the same period, the value of your 1992 investment -- regardless of size -- has also more than doubled. * Based on figures from the U.S. League of Savings Institutions and the Federal Reserve Board, reflecting all kinds of savings deposits (maximum allowable interest rates imposed by law until 1983). Savings accounts are guaranteed; the fund is not. [Begin Table] AVERAGE ANNUAL COMPOUND RETURNS For periods ended December 31, 2002 CLASS A SHARES* reflecting 5.75% maximum sales charge 1 year -19.4% 5 years +2.7% 10 years +10.0% *Results for other share classes can be found on page 31. [End Table] [Begin Table] AVERAGE ANNUAL COMPOUND RETURN FOR 69 YEARS: Income return 3.2% Capital return 9.5% Total return 12.7%1 [End Table] [Begin Mountain Chart] ICA with dividends reinvested $38,709,050/1/,/2/ S&P 500 with dividends reinvested $14,593,631 ICA not including dividends $ 4,616,859/1/,/3/ original investment $ 10,000/1/ Year ended December 31 1934 1935 1936 1937 1938 1939 YEAR-BY-YEAR SUMMARY OF RESULTS (DOLLARS IN THOUSANDS) Dividends reinvested -- -- $0.4 1.0 0.2 0.5 Value at year-end/1/ $11.8 21.6 31.6 19.4 24.8 25.0 Dividends in cash -- -- $0.4 1.0 0.2 0.5 Value at year-end/1/ $11.8 21.6 31.0 18.3 23.2 22.9 ANNUAL PERCENTAGE RETURNS ASSUMING DIVIDENDS REINVESTED Income return 0.0% 0.0 1.8 3.2 0.9 2.2 Capital return 18.2% 83.1 44.0 (41.7) 26.7 (1.4) ICA total return 18.2% 83.1 45.8 (38.5) 27.6 0.8 Fund expenses/4/ 0.94% 1.13 1.19 1.53 1.89 2.02 S&P 500/Div. Reinvested $9,851 14,555 19,479 12,670 16,604 16,542 Year ended December 31 1940 1941 1942 1943 1944 1945 YEAR-BY-YEAR SUMMARY OF RESULTS (DOLLARS IN THOUSANDS) Dividends reinvested 0.9 1.3 1.2 1.1 1.2 1.2 Value at year-end/1/ 24.4 22.6 26.4 35.0 43.2 59.1 Dividends in cash 0.8 1.1 1.0 0.9 0.9 0.9 Value at year-end/1/ 21.5 18.8 20.9 26.9 32.1 42.9 ANNUAL PERCENTAGE RETURNS ASSUMING DIVIDENDS REINVESTED Income return 3.6 5.2 5.3 4.2 3.5 2.8 Capital return (6.0) (12.6) 11.5 28.6 19.8 34.0 ICA total return (2.4) (7.4) 16.8 32.8 23.3 36.8 Fund expenses/4/ 1.88 1.95 2.13 1.72 1.45 1.06 S&P 500/Div. Reinvested 14,918 13,193 15,880 19,980 23,920 32,629 Year ended December 31 1946 1947 1948 1949 1950 1951 YEAR-BY-YEAR SUMMARY OF RESULTS (DOLLARS IN THOUSANDS) Dividends reinvested 1.8 2.4 2.7 2.7 3.2 3.4 Value at year-end/1/ 57.7 58.2 58.4 63.9 76.6 90.3 Dividends in cash 1.3 1.7 1.8 1.7 1.9 2.0 Value at year-end/1/ 40.7 39.3 37.7 39.4 45.2 51.2 ANNUAL PERCENTAGE RETURNS ASSUMING DIVIDENDS REINVESTED Income return 3.0 4.2 4.6 4.6 4.9 4.4 Capital return (5.4) (3.3) (4.2) 4.8 14.9 13.4 ICA total return (2.4) 0.9 0.4 9.4 19.8 17.8 Fund expenses/4/ 0.98 1.10 1.08 0.96 1.01 0.93 S&P 500/Div. Reinvested 29,994 31,703 33,420 39,688 52,266 64,813 Year ended December 31 1952 1953 1954 1955 1956 1957 YEAR-BY-YEAR SUMMARY OF RESULTS (DOLLARS IN THOUSANDS) Dividends reinvested 3.5 3.9 4.1 5.1 5.6 6.2 Value at year-end/1/ 101.3 101.7 158.9 199.2 220.6 194.4 Dividends in cash 2.0 2.1 2.1 2.6 2.7 3.0 Value at year-end/1/ 55.3 53.4 80.8 98.5 106.3 90.9 ANNUAL PERCENTAGE RETURNS ASSUMING DIVIDENDS REINVESTED Income return 3.9 3.9 4.0 3.2 2.8 2.8 Capital return 8.3 (3.5) 52.1 22.2 8.0 (14.7) ICA total return 12.2 0.4 56.1 25.4 10.8 (11.9) Fund expenses/4/ 0.81 0.85 0.88 0.86 0.80 0.76 S&P 500/Div. Reinvested 76,702 75,955 115,881 152,428 162,378 144,887 Year ended December 31 1958 1959 1960 1961 1962 1963 YEAR-BY-YEAR SUMMARY OF RESULTS (DOLLARS IN THOUSANDS) Dividends reinvested 6.5 7.0 8.1 8.4 9.1 9.6 Value at year-end/1/ 281.5 321.4 336.0 413.6 358.8 440.9 Dividends in cash 3.0 3.2 3.6 3.6 3.8 3.9 Value at year-end/1/ 128.0 142.9 145.6 175.4 148.2 177.8 ANNUAL PERCENTAGE RETURNS ASSUMING DIVIDENDS REINVESTED Income return 3.4 2.5 2.5 2.5 2.2 2.7 Capital return 41.4 11.7 2.0 20.6 (15.4) 20.2 ICA total return 44.8 14.2 4.5 23.1 (13.2) 22.9 Fund expenses/4/ 0.68 0.64 0.62 0.59 0.61 0.59 S&P 500/Div. Reinvested 207,642 232,467 233,601 296,461 270,656 332,369 Year ended December 31 1964 1965 1966 1967 1968 1969 YEAR-BY-YEAR SUMMARY OF RESULTS (DOLLARS IN THOUSANDS) Dividends reinvested 10.7 12.1 15.5 18.4 22.6 25.3 Value at year-end/1/ 512.6 650.7 657.1 846.9 990.6 884.8 Dividends in cash 4.3 4.7 5.9 6.9 8.3 9.0 Value at year-end/1/ 202.3 251.6 248.0 312.5 356.6 309.6 ANNUAL PERCENTAGE RETURNS ASSUMING DIVIDENDS REINVESTED Income return 2.4 2.4 2.4 2.8 2.7 2.6 Capital return 13.9 24.5 (1.4) 26.1 14.3 (13.3) ICA total return 16.3 26.9 1.0 28.9 17.0 (10.7) Fund expenses/4/ 0.58 0.57 0.52 0.50 0.49 0.48 S&P 500/Div. Reinvested 387,133 435,356 391,500 485,272 538,975 493,481 Year ended December 31 1970 1971 1972 1973 1974 1975 YEAR-BY-YEAR SUMMARY OF RESULTS (DOLLARS IN THOUSANDS) Dividends reinvested 27.3 28.6 29.9 33.4 52.2 49.8 Value at year-end/1/ 908.0 1,062.7 1,231.1 1,024.1 840.3 1,137.7 Dividends in cash 9.4 9.6 9.7 10.6 15.9 14.3 Value at year-end/1/ 307.4 349.7 394.7 317.9 245.5 317.7 ANNUAL PERCENTAGE RETURNS ASSUMING DIVIDENDS REINVESTED Income return 3.1 3.1 2.8 2.7 5.1 5.9 Capital return (0.5) 13.9 13.1 (19.5) (23.0) 29.5 ICA total return 2.6 17.0 15.9 (16.8) (17.9) 35.4 Fund expenses/4/ 0.55 0.51 0.49 0.47 0.49 0.48 S&P 500/Div. Reinvested 512,963 586,320 697,692 595,206 437,674 600,610 Year ended December 31 1976 1977 1978 1979 1980 1981 YEAR-BY-YEAR SUMMARY OF RESULTS (DOLLARS IN THOUSANDS) Dividends reinvested 46.4 49.8 56.0 70.0 91.3 115.9 Value at year-end/1/ 1,474.4 1,436.4 1,647.5 1,963.3 2,380.2 2,401.1 Dividends in cash 12.8 13.3 14.4 17.3 21.7 26.4 Value at year-end/1/ 398.1 374.3 414.4 475.7 552.2 530.9 ANNUAL PERCENTAGE RETURNS ASSUMING DIVIDENDS REINVESTED Income return 4.1 3.4 3.9 4.2 4.7 4.9 Capital return 25.5 (6.0) 10.8 15.0 16.5 (4.0) ICA total return 29.6 (2.6) 14.7 19.2 21.2 0.9 Fund expenses/4/ 0.46 0.49 0.49 0.47 0.46 0.45 S&P 500/Div. Reinvested 744,318 691,044 736,452 873,499 1,156,970 1,100,011 Year ended December 31 1982 1983 1984 1985 1986 1987 YEAR-BY-YEAR SUMMARY OF RESULTS (DOLLARS IN THOUSANDS) Dividends reinvested 146.1 147.2 160.4 174.9 203.8 267.5 Value at year-end/1/ 3,212.0 3,859.7 4,117.2 5,491.9 6,685.7 7,049.2 Dividends in cash 31.6 30.3 31.7 33.2 37.3 47.5 Value at year-end/1/ 670.6 774.5 792.0 1,017.9 1,200.5 1,220.9 ANNUAL PERCENTAGE RETURNS ASSUMING DIVIDENDS REINVESTED Income return 6.1 4.6 4.2 4.2 3.7 4.0 Capital return 27.7 15.6 2.5 29.2 18.0 1.4 ICA total return 33.8 20.2 6.7 33.4 21.7 5.4 Fund expenses/4/ 0.46 0.44 0.47 0.43 0.41 0.42 S&P 500/Div. Reinvested 1,337,025 1,638,595 1,741,395 2,293,883 2,722,038 2,864,962 Year ended December 31 1988 1989 1990 1991 1992 1993 YEAR-BY-YEAR SUMMARY OF RESULTS (DOLLARS IN THOUSANDS) Dividends reinvested 318.7 370.8 406.3 320.4 357.8 374.4 Value at year-end/1/ 7,989.3 10,338.6 10,409.0 13,171.9 14,092.3 15,729.4 Dividends in cash 54.4 60.7 64.1 48.7 53.0 54.0 Value at year-end/1/ 1,327.4 1,652.8 1,598.8 1,969.9 2,052.2 2,234.2 ANNUAL PERCENTAGE RETURNS ASSUMING DIVIDENDS REINVESTED Income return 4.5 4.6 3.9 3.1 2.7 2.7 Capital return 8.8 24.8 (3.2) 23.4 4.3 8.9 ICA total return 13.3 29.4 0.7 26.5 7.0 11.6 Fund expenses/4/ 0.48 0.52 0.55 0.59 0.58 0.59 S&P 500/Div. Reinvested 3,339,470 4,395,793 4,259,140 5,553,915 5,976,474 6,577,517 Year ended December 31 1994 1995 1996 1997 1998 1999 YEAR-BY-YEAR SUMMARY OF RESULTS (DOLLARS IN THOUSANDS) Dividends reinvested 407.2 450.1 480.1 510.3 584.1 651.8 Value at year-end/1/ 15,753.9 20,578.7 24,560.6 31,881.2 39,193.5 45,682.2 Dividends in cash 57.3 61.7 64.3 67.0 75.4 82.8 Value at year-end/1/ 2,180.6 2,779.7 3,247.9 4,142.7 5,008.2 5,748.5 ANNUAL PERCENTAGE RETURNS ASSUMING DIVIDENDS REINVESTED Income return 2.6 2.9 2.3 2.1 1.8 1.7 Capital return (2.4) 27.7 17.0 27.7 21.1 14.9 ICA total return 0.2 30.6 19.3 29.8 22.9 16.6 Fund expenses/4/ 0.60 0.60 0.59 0.56 0.55 0.55 S&P 500/Div. Reinvested 6,664,017 9,165,271 11,268,247 15,026,327 19,320,168 23,384,822 Year ended December 31 2000 2001 2002 YEAR-BY-YEAR SUMMARY OF RESULTS (DOLLARS IN THOUSANDS) Dividends reinvested 743.4 804.1 833.3 /1/,/2/ Value at year-end/1/ 47,435.2 45,258.6 38,709.1 Dividends in cash 93.0 99.0 100.7 /1/,/3/ Value at year-end/1/ 5,875.5 5,507.5 4,616.9 ANNUAL PERCENTAGE RETURNS ASSUMING DIVIDENDS REINVESTED Income return 1.6 1.7 1.8 Capital return 2.2 (6.3) (16.3) ICA total return 3.8 (4.6) (14.5) Fund expenses/4/ 0.56 0.57 0.59 S&P 500/Div. Reinvested 21,256,384 18,731,955 14,593,631 Past results are not predictive of future results. The results shown are before taxes on fund distributions and sale of fund shares. The S&P 500 Index is unmanaged and does not reflect the effects of sales charges, commissions or expenses. /1/These figures, unlike those shown earlier in this report, reflect payment of the maximum sales charge of 5.75% on the $10,000 investment. Thus, the net amount invested was $9,425. As outlined in the prospectus, the sales charge is reduced for investments of $25,000 or more. There is no sales charge for dividends or capital gain distributions. The maximum initial sales charge was 8.5% prior to July 1, 1988. No adjustment has been made for income or capital gain taxes. /2/Includes dividends of $9,570,435 and capital gain distributions of $22,136,969 reinvested in the years 1936-2002. /3/Includes reinvested capital gain distributions of $3,214,069 but does not reflect income dividends of $1,515,713 taken in cash. /4/Fund expense percentages are provided as additional information. They should not be subtracted from any other figure on the table because all fund results already reflect their effect.
[End Mountain Chart] [Begin Sidebar] [photographs: Jeanne Carroll, analyst, talking with a worker in a greenhouse; David Carpenter, analyst, speaking with Matthew Rose, President and CEO of Burlington Northern Santa Fe Corp.] SPECIAL REPORT: HOW ICA'S BROAD PORTFOLIO IS BUILT "Our research analysts are the fuel that makes our entire enterprise run. They are the lifeblood of our investment system." Portfolio counselor Don O'Neal [End Sidebar] Capital Research and Management Company: The most important word in the name is the second one. That's because research is what Capital -- the investment adviser for The Investment Company of America and the 28 other American Funds -- is all about. What is research, anyway? "To study something thoroughly so as to present it in a detailed, accurate manner," according to Webster's dictionary. Our view has always been that thorough research is the best way -- in fact the only way -- of consistently finding good long-term investments. And given the number of scandals that have tarnished the reputation of corporate America in the past year or so, research is our first line of defense. Since we place so much importance on investment research, we thought you'd like to know more about the process and how it works. In this year's feature, we'll introduce you to several of ICA's research analysts -- the talented men and women who uncover investment opportunities for the fund. We'll explain how they work hand-in-hand with portfolio counselors, and why analysts themselves manage a portion of ICA's investment portfolio. [photographs: (1) Analyst Ron Morrow talking with Bob Phillips of Coca Cola Enterprises; (2) and (3) Coca Cola Enterprises, Los Angeles bottling plant] [Begin Caption] Constant research: Analyst Ron Morrow (left) chats with Bob Phillips of Coca Cola Enterprises at a Los Angeles bottling plant. [End Caption] [Begin Sidebar] "I'm on the lookout for those little nuggets of information that I think can become meaningful in valuing a stock." Ron Morrow [End Sidebar] LONG TERM VIEW "The first thing I'd tell a shareholder about our research process," says analyst Ron Morrow, "is this: we take the long-term view. We ignore short-term fads, we don't `follow the crowd.' That means we're free to select companies with good prospects, that are reasonably priced and selling for less than what we believe they are worth. Instead of trying to determine where a company will be in six months, we'll try and figure out where it'll be in six years. That's what I mean by long-term." But how do you determine what "reasonably priced" means? And how do you figure out what a company is really worth -- today, and several years down the road? By conducting research: an ongoing cycle of information gathering, number-crunching and constant questioning of a wide variety of individuals. "This is a wonderful job because it combines three passions of mine: reading, analyzing information and speaking to people," says analyst Mary Sheridan. "It is the fulfillment of intellectual curiosity." Mary, who has been following electric utilities for 30 years, even likens her job to that of her father, a longtime New York City police detective. "I consider myself an investment detective. My job is to uncover the facts and to find good investment opportunities for our shareholders." METHODS AND MEANS Like a detective hunting for clues, an analyst's search for investment insight can be long and intensive. It generally centers around two things: poring over a company's financial statements and meeting with a company's management. "It's impossible to underestimate the importance of knowing the management," says Ron, who has been following consumer product companies like Coca-Cola for nearly 35 years. "In the case of Coke, it's a huge global company, very complex. So I'm going to spend as much time with the top people as I can, getting to know them and understand their business plan. I'll also talk with their bottlers, customers and competitors." You'll also find Ron prowling the aisles of grocery stores, studying how Coke's products are displayed. "When I'm researching a company," he says, "I'm on the lookout for those little nuggets of information that I think can become meaningful in valuing a stock. It's always a challenge." Insurance and health care analyst Ray Joseph, Jr. says it's also impossible to underestimate the importance of studying a company's books. "I like to look at the numbers because it gives me a financial snapshot of the company," he says. "I can then compare it with companies in that industry for a relative view. Are sales and earnings growing at a decent rate? How much debt are they carrying? Examining a company's assets and liabilities is an extremely important part of the research process." It is only after looking over the books that Ray, who has been an analyst for five years, will sit down with a company's management. "I want to know the numbers before I talk with the executives," he says. "It enables me to dig deeper, and understand where they're trying to take the company." Then there is Rick Beleson, who downplays the impact that a company's management has on the research process. Rick, a pharmaceutical analyst with Capital for 18 years, says he often learns more about a company from outsiders. "For me, the management of a company isn't necessarily the key source of information. There are less biased sources elsewhere -- physicians, clinical researchers and so forth," he points out. "If anything, company managements tend to be overly optimistic. Talking with others helps me make more informed investment decisions about companies." That's how ICA came to own a sizable portion of drug manufacturer Warner-Lambert in 1992. "They were coming out with Lipitor, which today is the leading drug for cholesterol reduction," he recalls. "I knew management quite well and they were enthusiastic about Lipitor and its market potential. But it wasn't until I telephoned several customers -- in this case, doctors -- to get their assessment. They were so overwhelmingly enthusiastic, it convinced me that Warner-Lambert would be a great investment for ICA -- and it was." (Warner-Lambert has since been acquired by Pfizer, another long-time ICA holding.) "Lipitor is a good example of what I think is the key to successful investing," Rick says. "If you can identify a promising product with great market potential, and if you can identify it early, it can be a very successful investment for many years." In the end, there are many paths an analyst can take when researching a company; each leads to investment insight and an ultimate judgment on whether that company would make a good investment for ICA. FREQUENT FLIERS Most analysts travel extensively. Jeanne Carroll, a New York-based analyst whose coverage area includes the paper and forest products industry, spends about a third of her time on the road visiting companies in Asia, Europe and North and South America. Given the sheer distances involved, she prefers to make several lengthy trips annually, each two or three weeks long. "Instead of crossing the Atlantic to see one or two companies," she says, "I'll see several. It's more efficient and I can spend more time on research." [photographs: (1) Weyerhaeuser paper mill in Washington State; (2), (3) and (4) Jeanne Carroll talking with various employees at the Weyerhaeuser paper mill; (5) Jeanne Carroll, analyst, and Steve Moore, analyst, with Steve Rogel, Weyerhaeuser's Chairman, President and CEO] [Begin Caption] Clear vision: Jeanne Carroll visits a Weyerhaeuser paper mill in Washington state. At right, she and fellow analyst Steve Moore talk with the company's Chairman, President and CEO, Steve Rogel (center). [End Caption] [Begin Sidebar] "Like other analysts at Capital, my goal is to invest our shareholders' money well. So anything I learn that can help a colleague's investment research is passed along." Jeanne Carroll [End Sidebar] A typical day on the road for Jeanne starts early and ends late -- like a recent 14-hour day visiting Weyerhaeuser's facilities in Washington state. Starting with coffee at 7 a.m. with the paper company's investor relations executive, Jeanne proceeded to drive some 250 miles, slogging through mud at a seedling farm, donning ear plugs and goggles at a lumber mill and walking through the humidity and 95-decibel roar of a newsprint mill. Then it was back to Seattle for dinner with the CEO. Maintaining a schedule like that can be grueling at times, but Jeanne, who has been an analyst for 20 years, says it's worth it. "I travel because I think an important part of the research process is meeting people. When I'm visiting a company and find workers who are enthusiastic about what they're doing and are excited about their company's mission, that tells me things. It's a very enjoyable part of the job." The overall research process is thorough and never-ending. "We don't talk with management once, we don't look over their financials once, we don't talk with their customers once," says Dave Carpenter, who follows an eclectic group of industries, including railroads, food manufacturers and household products companies. "We're always talking with management. We're always studying financial documents. And we're in the field as often as possible. Business conditions can change quickly. You've got to stay ahead of the curve whenever you can." Yet there's more to the process than being thorough. ICA's long-term focus encourages analysts to be patient as well; sometimes they'll follow a company for years before recommending it as an investment. And when an investment is made, that scrutiny continues. "It's important to remember that the money ultimately belongs to our shareholders," Ron Morrow points out. "I want to make sure it's well-invested." [photographs: (1) time-lapse of moving train; (2) David Carpenter, with Matthew Rose, President and CEO of Burlington Northern Santa Fe Corp.] [Begin Caption] One-on-one: Analyst David Carpenter (right) spends as much time as he can with a company's management. Here, he chats with Matthew Rose, President and CEO of Burlington Northern Santa Fe Corp. [End Caption MULTIPLE PERSPECTIVES Even though Capital's analysts know their companies and industries extraordinarily well, we think that having many points of view is a boon to the research process. For example, Mary Sheridan is just one of several analysts who follow the nation's 200 or so publicly-held utilities. "Consolidated Edison, which provides power for New York City, is different than Southern Company, which provides power for parts of the south," Mary says. "Their service territories are different, as are their regulations. So sharing information and perspectives with a team of analysts around the country helps each of us make better-informed investment decisions. I've been in this business since 1972, but am always learning new things from my colleagues." Because Capital has research offices all over the world, an analyst in, say, Tokyo, can get a global perspective by communicating with counterparts in London and Los Angeles. These so-called "global clusters" are an effective way of sharing information, according to Brad Vogt, one of Capital's research directors and a telecommunications analyst based in Washington, D.C. "A global cluster gives both analysts and portfolio counselors the opportunity to share ideas with one another," he says. "Within these clusters, discussions (in the form of conference calls and e-mails) often focus on specific topics that people are interested in, allowing them to focus on the key information, ideas and points of view that can help them make better investment decisions." Brad says the system is as simple as it is effective. "On any given day there are multiple investment calls by topic, by region, and by fund. There is a daily research newsletter, available on a database for analysts and portfolio counselors worldwide. All information is sorted by analyst, by region and by company. When it comes to research, everyone has access to everything and everyone." He adds, "Communicating globally is one of the real secrets to our long-term investment success. It gives us an advantage." [photographs: (1) utility workers repairing a utility pole with the twilight view of New York City in the backdrop; (2) Mary Sheridan, analyst, in a control room of Consolidated Edison] [Begin Caption] Plugged in: In the photo at right, utilities analyst Mary Sheridan (left) visits a control room of Consolidated Edison, which provides power for New York City. [End Caption] [Begin Sidebar] "I consider myself an investment detective. My job is to uncover the facts and to find the best investment opportunities for our shareholders." Mary Sheridan [End Sidebar] Another advantage: Many analysts at Capital cover industries they previously worked in, giving an insider's perspective to their research. Rick Beleson is one of them. He studied molecular biology in college and briefly ran his own biotech firm before deciding he'd rather cover companies than run them. "I find that having a background in both the technical and business aspects of the industry really helps my investment research," he says. Information and opinion do not just flow between analysts in one industry, but among analysts in industries that overlap and affect one another. For example, Jeanne says the weak economy has sapped advertising revenue at media companies like Dow Jones and Knight Ridder, both ICA holdings. That in turn has meant less demand for Weyerhaeuser's products. "My colleagues who cover the publishing business keep me plugged in on things like newspaper subscriptions and ad revenue, and I'll keep them informed about things that can help them." The bottom line, she says, is this: "Like other analysts at Capital, my goal is to invest our shareholders' money well. So anything I learn that can help a colleague's investment research is passed along." TRUST BUT VERIFY How do analysts know what they're hearing and reading is truthful? Two words come to mind: vigilance and persistence, qualities that help us determine what we'll invest in -- and what we won't. "I insist on long-term credibility of management," says Mary. "When you have the opportunity to reconcile what management says and what it does through many business cycles, you really get to know them," she says. Mary recalls one company where it was impossible to reconcile either its financial or management statements. "This company's stock price had been climbing over a period of years, but it just didn't make sense," she recalls. "I visited top management two or three times a year and could never get a straight answer to any of my questions regarding the execution of their strategy and the numbers on their balance sheet. I was never comfortable with any of their explanations. Most executives at companies I follow are willing and able to answer my questions in an open, forthright way. Not here." To Mary, it was a red flag. "We waited six years, but the company never met my - -- or Capital's -- requirements for investing. So we didn't." The stock price eventually crumbled when accounting irregularities were discovered at the company. [photographs: (1, 2) Rick Beleson, analyst, with Dr. Julie Cherrington, in a SUGEN research lab; (3) close-up of lab technician] [Begin Caption] Expertise: Rick Beleson's background in biological sciences helps him follow pharmaceutical companies. Here, he discusses drug research with Dr. Julie Cherrington of SUGEN, a subsidiary of Pharmacia. [End Caption] [Begin Sidebar] "When you make an investment in a company that you have researched thoroughly, and it works out, it is a tremendously gratifying experience. That's what I enjoy about the job." Rick Beleson [End Sidebar] Although we haven't been able to avoid every bad investment, Mary's story reflects Capital's willingness to resist fads and seek solid investment returns through diligent research. "It's hard to spot fraud," Ray admits. "But the more research you do, the more questions you ask, the more people you see, the more likely you are to develop an accurate picture. But nothing is foolproof. At the end of the day, you still use your gut and ask: `Do they seem trustworthy?'" He adds that it's useful to use a company's rivals as a benchmark. "When one company says things are great, but you know the industry as a whole is having problems, that can be a red flag. I'll also ask executives in one industry who they respect and why. I always learn a lot from that question." "A balance sheet can be impressive," says Ray, "but it's only as impressive as the people behind the numbers." A CAREER IN AND OF ITSELF You may have noticed that some of the analysts we've introduced have been on the job for quite a while: Ron's been at it for 35 years, Mary 30, and so forth. Capital places such a premium on research that it is considered a career position, not just a rung on the ladder to something else. That kind of tenure helps analysts develop an understanding of their companies and industries that's as wide as it is deep -- two things you want from someone who's making investment recommendations. Capital's philosophy for compensation of research analysts is also unique in the investment industry. Since the company thinks long term, analyst bonuses are based on results over four-year periods. "Anyone can have an up year, but that doesn't make them a good analyst," Ron points out. "Nor does having a down year make them a bad analyst. To really judge an analyst's investment acumen, it helps to look at how they do during both up and down times -- and a four-year period is more likely to include both." "As a portfolio counselor, I think there is tremendous value in having analysts who know their companies the way ours do," says Gregg Ireland. "ICA invests in many large, complex companies. It takes years to really understand how these companies work and really understand the people who manage them. The depth and intensity of the work our analysts do is just amazing. To have teams of people following these companies allows me to zero in on their ideas and make decisions that are based on the best analysis around. It's really a great system." ICA's longest-serving portfolio counselor, Mike Shanahan, notes that the experience of Capital's research analysts manifested itself during the stock market's run up of the late 1990s. "Big technology stocks were powering the market. But our analysts thought it was an unsustainable trend; that those companies had no hope of living up to overblown earnings expectations. They were right." Little wonder that ICA didn't rise as much as the broader market during that period of "irrational exuberance." But it hasn't fallen nearly as much during the bear market of the last three years, either. "Remember, Capital's mantra is, `Invest with a long-term focus based on thorough research and attention to risk,'" Mike says. "This bear market makes me appreciate the vigilance of our analysts all the more." [Begin Sidebar] ACCOUNTING PRACTICES AND CORPORATE GOVERNANCE Given the number of business scandals that have erupted during the past year, it's worth noting that the Investment Company of America's investment adviser, Capital Research and Management Company, has always considered corporate governance to be a vital issue and part of its intensive research process. Corporate scandals -- which are hardly new in the annals of business history -- have a way of being uncovered in the aftermath of a bull market. A case in point: After the stock market crash of 1929, more than a few companies were shown to have created elaborate schemes to hide liabilities -- a foreshadowing of Enron's off-the-books partnerships some seven decades later. During the so-called "go-go" years of the late 1960s and early 1970s, questions about accounting practices swirled around a number of once highflying companies - -- some of whose stock prices plunged as much as technology stocks have in the past two-and-a-half years. Capital strongly supports legislation -- signed into law last summer by President Bush -- aimed at ending corporate fraud in the United States. The new law creates an independent auditing and oversight board to be supervised by the U.S. Securities and Exchange Commission, increases penalties (including stiff fines and potential jail time for corporate wrongdoers), forces speedier and more extensive financial disclosure, and creates avenues of recourse for aggrieved investors. We believe that in the long run, these reforms will strengthen corporate governance and be good for investors and for the stock market. Through direct contact with a company's management and its proxy voting, Capital works hard to encourage wise and ethical corporate conduct. It has no hesitation about using proxy voting to oppose management on certain matters we consider contrary to the best interests of shareholders. [End Sidebar] [Begin Sidebar] [photograph: Dina Perry, portfolio counselor, and Ray Joseph, Jr., analyst] Teamwork: Portfolio counselors and analysts work closely together. Pictured here: Portfolio counselor Dina Perry and analyst Ray Joseph, Jr. A WEALTH OF EXPERIENCE ICA currently has nine portfolio counselors who together bring 233 years of investment experience to managing your investment. Here are the years of experience for these primary decision-makers for the fund. Years of investment experience Mike Shanahan 38 Jim Rothenberg 33 Jim Drasdo 31 Gregg Ireland 30 Joyce Gordon 27 Dina Perry 25 Jim Lovelace 21 Don O'Neal 17 Ross Sappenfield 11 [End Sidebar] PORTFOLIO MANAGEMENT No discussion of Capital's research effort would be complete without mentioning that analysts do more than give advice to portfolio counselors; they act as portfolio counselors themselves by running a portion of each American Fund. In ICA's case, the fund is divided into ten parts. Nine are the domain of portfolio counselors like Mike, Gregg and Don O'Neal; the tenth belongs to the research analysts. Capital calls this the "multiple portfolio counselor system." Blending the best attributes of individualism and teamwork, the system provides stability, flexibility and continuity, not to mention a diversity of experience and investment philosophies. "Since analysts have spent years getting to know their companies and industries inside and out, it stands to reason that they should be given the opportunity to act on that investment insight," Don says. That investment insight tends to be extremely influential for portfolio counselors. "Practically all of the stocks in ICA are based on our analysts' recommendations," Gregg says. "We rely heavily on their judgment and insight." "Giving a portion of ICA's portfolio to us," says Mary, "gives us a direct stake in the fund. It's both a privilege and a responsibility. I get to act on my highest investment convictions. When those investments do well, it's just a great feeling, because it means our shareholders are making money. In the end, that's what we're here for." Investment portfolio, December 31, 2002 Percent of Largest investment categories net assets Food, beverage & tobacco 7.44 Pharmaceuticals & biotechnology 6.73 Telecommunication services 6.71 Largest industry holdings Pharmaceuticals 6.66 % Diversified telecommunication services 5.79 Beverages and tobacco 5.24 Oil & gas 5.13 Media 4.20 Percent of Largest equity holdings net assets Altria Group (formerly Philip Morris) 3.44 % Eli Lilly 2.34 SBC Communications 1.56 Viacom 1.52 Pharmacia 1.49 Fannie Mae 1.45 Dow Chemical 1.40 Lowe's 1.39 Bank of America 1.27 ChevronTexaco 1.27 Shares or Market principal value Equity securities (common and preferred stocks and convertible debentures) amount (000) ENERGY ENERGY EQUIPMENT & SERVICES - 0.96% Baker Hughes Inc. 8,225,000 $264,763 Schlumberger Ltd. 5,100,000 214,659 OIL & GAS - 5.13% ChevronTexaco Corp. 9,495,500 631,261 ConocoPhillips (formed by the merger of Conoco Inc. and Phillips Petroleum Co.) 3,050,000 147,589 ENI SpA 18,000,000 286,199 Exxon Mobil Corp. 3,500,000 122,290 Marathon Oil Corp. 12,550,000 267,189 Murphy Oil Corp. 2,050,000 87,842 Royal Dutch Petroleum Co. (New York registered) 7,620,000 335,432 "Shell" Transport and Trading Co., PLC (ADR) (New York registered) 4,500,000 175,140 "Shell" Transport and Trading Co., PLC 2,900,000 19,095 TOTAL FINA ELF SA, Class B 900,000 128,553 Unocal Corp. 11,440,000 349,835 3,029,847 MATERIALS CHEMICALS - 1.61% Air Products and Chemicals, Inc. 200,000 8,550 Dow Chemical Co. 23,450,000 696,465 Rohm and Haas Co. 3,000,000 97,440 METALS & MINING - 1.99% Alcoa Inc. 10,246,400 233,413 Alumina Ltd. (formerly WMC Ltd.) 19,804,346 54,285 Barrick Gold Corp. 9,250,000 142,542 BHP Billiton Ltd. 9,412,655 53,444 Newmont Mining Corp. 8,000,000 232,240 Phelps Dodge Corp. (1) 1,000,000 31,650 Placer Dome Inc. 10,000,000 115,000 Rio Tinto PLC 4,000,000 79,851 WMC Resources Ltd (1) 19,804,346 46,751 PAPER & FOREST PRODUCTS - 1.53% Georgia-Pacific Corp., Georgia-Pacific Group 9,599,298 155,125 International Paper Co. 7,097,235 248,190 MeadWestvaco Corp. 3,800,000 93,898 Weyerhaeuser Co. 5,375,000 264,504 2,553,348 CAPITAL GOODS AEROSPACE & DEFENSE - 1.37% Boeing Co. 3,700,000 122,063 Honeywell International Inc. 4,000,000 96,000 Lockheed Martin Corp. 87,400 5,047 Northrop Grumman Corp. 500,000 48,500 Raytheon Co. 13,334,735 410,043 CONSTRUCTION & ENGINEERING - 0.05% Fluor Corp. 824,300 23,080 INDUSTRIAL CONGLOMERATES - 2.44% 3M Co. 700,000 86,310 General Electric Co. 21,000,000 511,350 Siemens AG 4,600,000 195,522 Tyco International Ltd. 24,728,000 422,354 MACHINERY - 2.13% Caterpillar Inc. 8,900,000 406,908 Cummins Inc. 1,700,000 47,821 Deere & Co. 7,900,000 362,215 Illinois Tool Works Inc. 2,200,000 142,692 Parker Hannifin Corp. 2,200,000 101,486 2,981,391 COMMERCIAL SERVICES & SUPPLIES COMMERCIAL SERVICES & SUPPLIES - 0.75% Cendant Corp. (1) 2,500,000 26,200 Concord EFS, Inc. (1) 2,666,600 41,972 Pitney Bowes Inc. 2,000,000 65,320 Sabre Holdings Corp., Class A (1) 6,009,680 108,835 Waste Management, Inc. 5,652,600 129,558 371,885 TRANSPORTATION AIR FREIGHT & LOGISTICS - 0.31% FedEx Corp. 2,870,000 155,611 AIRLINES - 0.27% AMR Corp. (1) 2,000,000 13,200 Delta Air Lines, Inc. 942,100 11,399 Southwest Airlines Co. 8,000,000 111,200 ROAD & RAIL - 0.25% Burlington Northern Santa Fe Corp. 3,000,000 78,030 Canadian Pacific Railway Ltd. 1,150,000 22,655 Norfolk Southern Corp. 1,200,000 23,988 416,083 AUTOMOBILES & COMPONENTS AUTOMOBILES - 1.55% Ford Motor Co. 2,500,000 23,250 Ford Motor Co. Capital Trust II 6.50% cumulative convertible trust preferred 2032 $ 170,000,000 138,890 General Motors Corp. 13,155,900 484,926 General Motors Corp., Series B, 5.25% convertible debentures 2032 $ 61,025,000 56,387 Honda Motor Co., Ltd. 1,825,000 67,473 770,926 CONSUMER DURABLES & APPAREL HOUSEHOLD DURABLES - 0.18% Newell Rubbermaid Inc. 3,000,000 90,990 LEISURE EQUIPMENT & PRODUCTS - 0.10% Eastman Kodak Co. 1,425,000 49,932 TEXTILES, APPAREL & LUXURY GOODS - 0.12% NIKE, Inc., Class B 1,300,000 57,811 198,733 HOTELS, RESTAURANTS & LEISURE HOTELS, RESTAURANTS & LEISURE - 0.49% Carnival Corp. 8,647,100 215,745 McDonald's Corp. 1,600,000 25,728 241,473 MEDIA MEDIA - 4.20% AOL Time Warner Inc. (1) 44,100,000 577,710 Clear Channel Communications, Inc. (1) 784,100 29,239 Comcast Corp., Class A (1) 13,845,800 326,346 Comcast Corp., Class A, nonvoting (1) 3,000,000 67,770 Dow Jones & Co., Inc. 1,687,000 72,929 General Motors Corp., Class H (1) 2,200,000 23,540 Interpublic Group of Companies, Inc. 9,600,000 135,168 Knight-Ridder, Inc. 550,500 34,819 Liberty Media Corp., Class A (1) 7,280,000 65,083 Viacom Inc., Class A (1) 2,392,800 97,650 Viacom Inc., Class B, nonvoting (1) 16,150,000 658,274 2,088,528 RETAILING INTERNET & CATALOG RETAIL - 0.17% eBay Inc. (1) 1,250,000 84,775 MULTILINE RETAIL - 0.68% Dollar General Corp. 6,126,100 73,207 Kohl's Corp. (1) 2,800,000 156,660 May Department Stores Co. 4,800,000 110,304 SPECIALTY RETAIL - 1.95% Limited Brands, Inc. 20,149,400 280,681 Lowe's Companies, Inc. 18,430,000 691,125 1,396,752 FOOD & DRUG RETAILING FOOD & DRUG RETAILING - 0.56% Albertson's, Inc. 2,976,500 66,257 Walgreen Co. 7,220,000 210,752 277,009 FOOD, BEVERAGE & TOBACCO BEVERAGES AND TOBACCO - 5.24% Anheuser-Busch Companies, Inc. 3,000,000 145,200 Coca-Cola Co. 3,750,000 164,325 PepsiCo, Inc. 9,400,000 396,868 Altria Group (formerly Philip Morris Companies Inc.) 42,250,000 1,712,392 R.J. Reynolds Tobacco Holdings, Inc. (2) 4,461,666 187,881 FOOD PRODUCTS - 2.20% General Mills, Inc. 6,035,000 283,343 H.J. Heinz Co. 5,990,900 196,921 Sara Lee Corp. 9,316,100 209,705 Unilever NV (New York registered) 6,575,000 405,743 3,702,378 HOUSEHOLD & PERSONAL PRODUCTS HOUSEHOLD PRODUCTS - 0.14% Kimberly-Clark Corp. 1,500,000 71,205 PERSONAL PRODUCTS - 0.70% Avon Products, Inc. 4,935,000 265,848 Gillette Co. 2,800,000 85,008 422,061 HEALTH CARE EQUIPMENT & SERVICES HEALTH CARE EQUIPMENT & SUPPLIES - 0.40% Applera Corp. - Applied Biosystems Group 5,170,500 90,691 Becton, Dickinson and Co. 1,500,000 46,035 Guidant Corp. (1) 2,020,000 62,317 HEALTH CARE PROVIDERS & SERVICES - 0.81% Aetna Inc. 5,000,000 205,600 HCA Inc. 4,150,000 172,225 IMS Health Inc. 1,500,000 24,000 600,868 PHARMACEUTICALS & BIOTECHNOLOGY BIOTECHNOLOGY - 0.07% Genentech, Inc. (1) 1,000,000 33,160 PHARMACEUTICALS - 6.66% Abbott Laboratories 1,500,000 60,000 AstraZeneca PLC 5,485,000 193,423 AstraZeneca PLC 5,800,900 207,323 AstraZeneca PLC (ADR) 199,000 6,983 Bristol-Myers Squibb Co. 11,907,600 275,661 Eli Lilly and Co. 18,316,700 1,163,110 Merck & Co., Inc. 1,700,000 96,237 Novartis AG 1,366,000 49,898 Novartis AG (ADR) 256,556 9,423 Pfizer Inc 9,300,000 284,301 Pharmacia Corp. 17,710,000 740,278 Schering-Plough Corp. 3,900,000 86,580 Wyeth 3,777,800 141,290 3,347,667 BANKS BANKS - 3.67% Bank of America Corp. 9,094,240 632,686 BANK ONE CORP. 7,415,000 271,018 FleetBoston Financial Corp. 11,013,400 267,626 National City Corp. 3,850,000 105,182 Wachovia Corp. 2,010,000 73,244 Washington Mutual, Inc. 7,000,000 241,710 Wells Fargo & Co. 5,000,000 234,350 1,825,816 DIVERSIFIED FINANCIALS DIVERSIFIED FINANCIALS - 3.63% Capital One Financial Corp. 5,250,000 156,030 Capital One Financial Corp. 6.25% Upper DECS 2005 $ 72,500,000 41,543 Fannie Mae 11,200,000 720,496 Freddie Mac 1,100,000 64,955 Household International, Inc. 5,550,000 154,346 J.P. Morgan Chase & Co. 24,850,000 596,400 SLM Corp. 693,200 71,996 1,805,766 INSURANCE INSURANCE - 3.29% Allstate Corp. 11,750,000 434,633 American International Group, Inc. 10,363,900 599,552 Aon Corp. 2,183,800 41,252 Berkshire Hathaway Inc., Class A (1) 1,500 109,125 Hartford Financial Services Group, Inc. 2,200,000 99,946 Lincoln National Corp. 2,200,000 69,476 Marsh & McLennan Companies, Inc. 574,200 26,534 SAFECO Corp. 4,150,000 143,881 St. Paul Companies, Inc. 3,300,000 112,365 1,636,764 SOFTWARE & SERVICES IT CONSULTING & SERVICES - 0.54% Computer Sciences Corp. (1) 3,178,300 109,492 Electronic Data Systems Corp. 8,600,000 158,498 SOFTWARE - 0.83% Microsoft Corp. (1) 7,237,300 374,168 Oracle Corp. (1) 3,683,300 39,780 681,938 TECHNOLOGY HARDWARE & EQUIPMENT COMMUNICATIONS EQUIPMENT - 1.14% Cisco Systems, Inc. (1) 22,550,000 295,405 Motorola, Inc. 4,500,000 38,925 Motorola, Inc. 7.00% convertible preferred 2004, units $ 120,000,000 76,800 Nokia Corp. (ADR) 10,150,000 157,325 COMPUTERS & PERIPHERALS - 1.74% Dell Computer Corp. (1) 1,700,000 45,458 EMC Corp. (1) 5,500,000 33,770 Hewlett-Packard Co. 10,500,000 182,280 International Business Machines Corp. 7,195,000 557,613 Sun Microsystems, Inc. (1) 15,000,000 46,650 ELECTRONIC EQUIPMENT & INSTRUMENTS - 0.49% Agilent Technologies, Inc. (1) 3,000,000 53,880 Agilent Technologies, Inc. 3.00% convertible debentures 2021 (3) (4) $ 4,445,000 4,284 Sanmina-SCI Corp. (1) 11,850,000 53,207 Solectron Corp. (1) 23,500,000 83,425 Solectron Corp. 7.25% convertible preferred 2004, units $ 100,000,000 46,800 SEMICONDUCTOR EQUIPMENT & PRODUCTS - 2.24% Altera Corp. (1) 3,500,000 43,155 Applied Materials, Inc. (1) 6,770,000 88,213 Intel Corp. 2,140,000 33,320 KLA-Tencor Corp. (1) 1,425,000 50,402 Linear Technology Corp. 4,950,000 127,314 LSI Logic Corp. (1) 2,200,000 12,694 Maxim Integrated Products, Inc. 3,200,000 105,728 Micron Technology, Inc. (1) 1,500,000 14,610 Taiwan Semiconductor Manufacturing Co. Ltd. (1) 80,300,000 98,866 Texas Instruments Inc. 29,810,000 447,448 Xilinx, Inc. (1) 4,500,000 92,700 2,790,272 TELECOMMUNICATION SERVICES DIVERSIFIED TELECOMMUNICATION SERVICES - 5.79% ALLTEL Corp. 6,450,000 328,950 ALLTEL Corp. 7.75% 2005, units $ 57,200,000 58,722 AT&T Corp. 13,780,000 359,796 Deutsche Telekom AG 13,186,200 169,112 SBC Communications Inc. 28,550,000 773,991 Sprint Corp. - FON Group (formerly Sprint FON Group) 43,300,000 626,984 Telefonos de Mexico, SA de CV, Class L (ADR) 3,000,000 95,940 Verizon Communications Inc. 12,100,000 468,875 WIRELESS TELECOMMUNICATION SERVICES - 0.92% AT&T Wireless Services, Inc. (1) 43,723,700 247,039 Sprint Corp. 7.125% convertible preferred 2004, units $ 172,500,000 50,439 Vodafone Group PLC (ADR) 8,750,000 158,550 3,338,398 UTILITIES ELECTRIC UTILITIES - 1.70% Ameren Corp. 2,000,000 83,140 American Electric Power Co., Inc. 4,850,000 132,551 Consolidated Edison, Inc. 166,900 7,147 Dominion Resources, Inc. 7,131,912 391,542 FPL Group, Inc. 1,000,000 60,130 Southern Co. 4,386,500 124,533 TXU Corp. 2,400,000 44,832 MULTI-UTILITIES & UNREGULATED POWER - 1.25% Calpine Corp. (1) 5,000,000 16,300 Duke Energy Corp. 25,000,000 488,500 El Paso Corp. 17,155,900 119,405 1,468,080 Miscellaneous - 2.14% Other equity securities in initial period of acquisition 1,063,664 Total equity securities (cost: $33,664,301,000) 37,009,647 Principal Market amount value Corporate bonds & notes (000) (000) AUTOMOBILES & COMPONENTS AUTOMOBILES - 0.33% Ford Motor Credit Co. 6.875% 2006 $ 30,000 $30,073 General Motors Acceptance Corp.: 6.15% 2007 30,000 30,550 6.875% 2011 50,000 49,944 7.25% 2011 50,000 51,029 161,596 MEDIA MEDIA - 0.04% AOL Time Warner Inc. 5.625% 2005 21,045 21,534 HEALTH CARE EQUIPMENT & SERVICES HEALTH CARE EQUIPMENT & SERVICES - 0.06% Columbia/HCA Healthcare Corp. 6.91% 2005 15,000 15,770 HCA Inc. 7.125% 2006 15,000 15,908 31,678 DIVERSIFIED FINANCIALS DIVERSIFIED FINANCIALS - 0.17% Capital One Financial Corp.: 7.25% 2006 17,385 16,698 8.75% 2007 14,750 14,433 Household Finance Corp. 5.75% 2007 50,000 52,378 83,509 TELECOMMUNICATION SERVICES DIVERSIFIED TELECOMMUNICATION SERVICES - 2.15% AT&T Corp.: (4) 6.50% 2006 (3) Euro 9,815 10,311 7.00% 2006 $ 80,065 85,661 7.80% 2011 257,425 281,914 Deutsche Telekom International Finance B.V. 8.125% 2012 Euro 30,000 35,227 VoiceStream Wireless Corp. 10.375% 2009 $ 50,000 52,750 Sprint Capital Corp.: 5.875% 2004 104,518 103,513 7.90% 2005 242,710 245,285 7.125% 2006 19,500 19,321 6.00% 2007 2,000 1,892 6.125% 2008 23,050 21,006 7.625% 2011 15,500 14,751 8.375% 2012 197,500 196,886 WIRELESS TELECOMMUNICATION SERVICES - 0.54% AT&T Wireless Services, Inc.: 6.875% 2005 15,500 15,975 7.35% 2006 59,690 61,532 7.50% 2007 134,530 138,718 7.875% 2011 22,000 22,150 8.125% 2012 30,000 30,209 1,337,101 UTILITIES UTILITIES - 0.05% The Williams Companies, Inc.: 6.625% 2004 3,550 2,663 9.25% 2004 12,500 10,000 8.125% 2012 (3) 5,450 3,733 Williams Holdings of Delaware, Inc. 6.50% 2008 11,000 7,095 23,491 Total corporate bonds & notes (cost: $1,524,228,000) 1,658,909 Principal Market amount value U.S. Treasury & agency obligations (000) (000) FEDERAL AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS - 6.13% Fannie Mae 6.00%-6.50% due 4/1/2017-5/1/2032 (5) $ 2,902,884 $3,050,984 NON-PASS-THROUGH OBLIGATIONS - 3.31% Fannie Mae 5.25%-7.125% due 8/15/2004-5/15/2011 1,316,000 1,442,780 Freddie Mac 7.00% due 7/15/2005 183,000 205,258 4,699,022 U.S. TREASURY NOTES & BONDS U.S. TREASURY NOTES & BONDS - 3.60% 4.25% March 2003 580,000 584,304 5.25% August 2003 580,000 594,430 3.00% February 2004 600,000 611,964 1,790,698 Total U.S. Treasury & agency obligations (cost: $6,248,440,000) 6,489,720 Principal Market amount value Short-term securities (000) (000) Federal agency discount notes - 5.99% Fannie Mae 1.25%-1.77% due 1/8-4/28/2003 $ 1,088,565 $1,086,608 Federal Home Loan Bank 1.24%-1.692% due 1/2-4/30/2003 842,116 840,598 Freddie Mac 1.24%-1.70% due 1/2-4/14/2003 1,057,366 1,055,337 Corporate short-term notes - 2.92% Abbott Laboratories Inc. 1.28% due 1/7-1/16/2003 (3) 87,200 87,167 American Express Credit Corp. 1.29% due 1/10/2003 50,000 49,982 Archer Daniels Midland Co. 1.32%-1.34% due 2/26-3/3/2003 (3) 37,300 37,218 BellSouth Corp. 1.27%-1.31% due 1/7-1/14/2003 (3) 46,000 45,982 Citicorp 1.33%-1.37% due 1/6-4/29/2003 125,000 124,718 Coca-Cola Co. 1.29%-1.52% due 1/17-3/4/2003 74,300 74,189 E.I. DuPont de Nemours & Co. 1.50% due 1/14-1/30/2003 64,400 64,332 Gannett Co. 1.28% due 1/8-1/10/2003 (3) 77,700 77,674 General Dynamics Corp. 1.74% due 1/23/2003 (3) 25,000 24,972 General Electric Capital Corp. 1.32%-1.36% due 1/6-1/29/2003 150,000 149,893 Johnson & Johnson 1.28% due 3/10/2003 (3) 35,000 34,912 Kraft Foods Inc. 1.30%-1.35% due 1/27-2/26/2003 148,917 148,696 Medtronic Inc. 1.61% due 1/16/2003 (3) 35,000 34,975 Merck & Co. Inc. 1.29%-1.30% due 1/14-1/31/2003 117,800 117,719 Minnesota Mining and Manufacturing Co. 1.28% due 1/31/2003 28,415 28,384 Pfizer Inc 1.27%-1.31% due 1/13-3/3/2003 (3) 150,000 149,789 Procter & Gamble Co. 1.31% due 1/13/2003 (3) 25,000 24,988 Schering Corp. 1.29%-1.30% due 1/23-2/13/2003 50,000 49,940 United Parcel Service Inc. 1.27%-1.29% due 1/21-1/31/2003 100,000 99,907 Wells Fargo & Co. 1.31% due 1/24/2003 30,000 29,974 U.S. Treasuries - 0.10% U.S. Treasury Bills 1.245% due 4/24/2003 50,000 49,813 Total short-term securities (cost: $4,487,675,000) 4,487,767 Total investment securities (cost: $45,924,644,000) 49,646,043 New Taiwanese Dollar (cost: $7,652,000) NT$263,187 7,607 Other assets less liabilities 106,976 Net assets $49,760,626 (1) Security did not produce income during the last 12 months. (2) The fund owns 5.06% of the outstanding voting securities of R.J. Reynolds Tobacco Holdings, Inc. and thus is considered an affiliate of this company under the Investment Company Act of 1940. (3) Purchased in a private placement transaction; resale may be limited to qualified institutional buyers; resale to the public may require registration. (4) Coupon rate may change periodically. (5) 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
Equity Securities appearing in the portfolio Since June 30, 2002 Calpine Capital One Concord EFS eBay KLA-Tencor MeadWestvaco Norfolk Southern Northrop Grumman WMC Resources Equity Securities eliminated from the portfolio Since June 30, 2002 America Movil AutoZone Chubb Comerica ConAgra Foods Corning Edison International EnCana Fuji Photo Film Fujitsu Gap Halliburton Jefferson-Pilot Johnson & Johnson Pinnacle West Capital PMC-Sierra Sumitomo Mitsui Banking Thermo Electron Toronto-Dominion Bank United Technologies Williams Companies The Investment Company of America Financial statements Statement of assets and liabilities at December 31, 2002 (dollars and shares in thousands, except per-share amounts) Assets: Investment securities at market: Unaffiliated issuers (cost: $45,787,993) $49,458,162 Affiliated issuers (cost: $136,651) 187,881 $49,646,043 Cash denominated in non-U.S. currencies (cost: $7,652) 7,607 Cash 201 Receivables for: Sales of investments 17,377 Sales of fund's shares 82,082 Dividends and interest 190,458 289,917 49,943,768 Liabilities: Payables for: Purchases of investments 74,841 Repurchases of fund's shares 79,636 Investment advisory services 10,140 Services provided by affiliates 16,486 Deferred Directors' and Advisory Board compensation 1,924 Other fees and expenses 115 183,142 Net assets at December 31, 2002 $49,760,626 Net assets consist of: Capital paid in on shares of capital stock $45,878,912 Undistributed net investment income 161,948 Distributions in excess of net realized gain (1,757) Net unrealized appreciation 3,721,523 Net assets at December 31, 2002 $49,760,626 Authorized shares of capital stock - Net asset value $.001 par value Net assets Shares outstanding per share (1) Class A 2,500,000 $46,128,884 1,964,419 $23.48 Class B 250,000 1,841,136 78,635 23.41 Class C 250,000 1,024,864 43,830 23.38 Class F 250,000 414,956 17,685 23.46 Class 529-A 325,000 153,204 6,526 23.48 Class 529-B 75,000 40,460 1,725 23.45 Class 529-C 150,000 45,065 1,922 23.45 Class 529-E 75,000 5,699 243 23.45 Class 529-F 75,000 382 16 23.47 Class R-1 75,000 1,028 44 23.46 Class R-2 100,000 23,887 1,018 23.46 Class R-3 300,000 24,397 1,039 23.47 Class R-4 75,000 8,839 377 23.47 Class R-5 150,000 47,825 2,037 23.48 (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 $24.91 for each. See Notes to Financial Statements Statement of operations for the year ended December 31, 2002 (dollars in thousands) Investment income: Income: Dividends (net of non-U.S. withholding tax of $14,387; also includes $16,620 from affiliates) $912,800 Interest (net of non-U.S. withholding tax of $20) 416,637 $1,329,437 Fees and expenses: Investment advisory services 129,674 Distribution services 142,403 Transfer agent services 49,033 Administrative services 2,452 Reports to shareholders 2,334 Registration statement and prospectus 1,706 Postage, stationery and supplies 7,253 Directors' and Advisory Board compensation 588 Auditing and legal 150 Custodian 1,454 State and local taxes 632 Other 113 Total expenses before reimbursement 337,792 Reimbursement of expenses 12 337,780 Net investment income 991,657 Net realized gain and unrealized depreciation on investments and non-U.S. currency: Net realized gain (loss) on: Investments 838,303 Non-U.S. currency transactions (1,572) 836,731 Net unrealized (depreciation) appreciation on: Investments (10,409,716) Non-U.S. currency translations 251 (10,409,465) Net realized gain and unrealized depreciation on investments and non-U.S. currency (9,572,734) Net decrease in net assets resulting from operations $(8,581,077) Statement of changes in net assets (dollars in thousands) Year ended December 31 2002 2001 Operations: Net investment income $991,657 $819,564 Net realized gain on investments and non-U.S. currency transactions 836,731 972,412 Net unrealized depreciation on investments and non-U.S. currency translations (10,409,465) (4,453,803) Net decrease in net assets resulting from operations (8,581,077) (2,661,827) Dividends and distributions paid to shareholders: Dividends from net investment income (1,050,322) (972,633) Distributions from net realized gain on investments (948,702) (1,116,727) Total dividends and distributions paid to shareholders (1,999,024) (2,089,360) Capital share transactions 4,053,315 4,387,730 Total decrease in net assets (6,526,786) (363,457) Net assets: Beginning of year 56,287,412 56,650,869 End of year (including undistributed net investment income: $161,948 and $224,805,respectively) $49,760,626 $56,287,412 See Notes to Financial Statements
Notes to financial statements 1. Organization and significant accounting policies Organization - The Investment Company of America (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, placing greater emphasis on future dividends than on current income. 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 None - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- Classes B and 529-B None Declines from 5% Classes B and 529-B to zero convert to for redemptions within classes A and 529-A, six years of respectively, after purchase 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 last reported sale price on the broadest and most representative exchange or market on which such securities are traded, as determined by the fund's investment adviser, as of the close of business or, lacking any sales, at the last available bid price. Fixed-income securities are valued at prices obtained from a pricing service. However, where the investment adviser deems it appropriate, they 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. Forward currency contracts are valued at the mean of their representative quoted bid and asked prices. Securities and other assets for which representative market quotations are not readily available are valued at fair value as determined in good faith by authority of the fund's Board of Directors. 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. In the event a security is purchased with a delayed payment date, the fund will segregate liquid assets sufficient to meet its payment obligations. 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; expenses deferred for tax purposes; and cost of investments sold. 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. The fund may also designate a portion of the amount paid to redeeming shareholders as a distribution for tax purposes. As of December 31, 2002, the cost of investment securities and cash denominated in non-U.S. currencies for federal income tax purposes was $45,929,757,000. During the year ended December 31, 2002, the fund reclassified $116,042,000 from undistributed net realized gains to additional paid-in capital to align financial reporting with tax reporting. As of December 31, 2002, the components of distributable earnings on a tax basis were as follows: (dollars in thousands) Undistributed net investment income and currency gains $164,138 Loss deferrals related to non-U.S. currency that were realized during the period November 1, 2002 through December 31, 2002 (267) Gross unrealized appreciation on investment securities 8,027,930 Gross unrealized depreciation on investment securities (4,304,037)
The tax character of distributions paid to shareholders was as follows (dollars in thousands): Year ended December 31, 2002 Distributions from ordinary income Net investment income and Short-term Distributions from long-term Total distributions Share class currency gains capital gains capital gains paid Class A $ 1,008,396 - $ 887,548 $ 1,895,944 Class B 21,641 - 32,496 54,137 Class C 10,712 - 17,283 27,995 Class F 6,321 - 6,593 12,914 Class 529-A(1) 1,613 - 2,082 3,695 Class 529-B(1) 269 - 555 824 Class 529-C(1) 303 - 611 914 Class 529-E(1) 47 - 74 121 Class 529-F(1) 2 - 4 6 Class R-1(2) 5 - 15 20 Class R-2(2) 114 - 321 435 Class R-3(2) 112 - 309 421 Class R-4(2) 46 - 112 158 Class R-5(2) 741 - 699 1,440 Total $ 1,050,322 - $ 948,702 $ 1,999,024 Year ended December 31, 2001 Distributions from ordinary income Net investment income and Short-term Distributions from long-term Total distributions Share class currency gains capital gains capital gains paid Class A $ 959,826 - $ 1,089,756 $ 2,049,582 Class B 9,501 - 19,552 29,053 Class C(3) 2,076 - 5,375 7,451 Class F(3) 1,230 - 2,044 3,274 Total $ 972,633 - $ 1,116,727 $ 2,089,360 (1) Class 529-A, 529-B, 529-C, 529-E and 529-F shares were offered beginning February 15, 2002. (2) Class R-1, R-2, R-3, R-4 and R-5 shares were offered beginning May 15, 2002. (3) Class C and F shares were offered beginning March 15, 2001.
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 ("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 month-end net assets and decreasing to 0.222% on such assets in excess of $71 billion. For the year ended December 31, 2002, the investment advisory services fee was equivalent to an annualized rate of 0.242% of average month-end 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 these expenses 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, 2002, there were no unreimbursed expenses which remain subject to reimbursement for Class A or for Class 529-A. Transfer agent services - The fund has a transfer agent agreement with AFS for Class A and B shares. 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, R-3 and R-4, CRMC has voluntarily agreed to pay a portion of these fees. Each 529 share class is subject to an additional annual administrative 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. Administrative services fees are presented gross of any payments made by CRMC. Expenses under the agreements described above for the year ended December 31, 2002, were as follows (dollars in thousands): - ----------------------------------------------------------------------- Share class Distribution Transfer agent Administrative services services services - ----------------------------------------------------------------------- Class A $116,270 $47,118 Not applicable - ----------------------------------------------------------------------- - ----------------------------------------------------------------------- Class B 16,571 1,915 Not applicable - ----------------------------------------------------------------------- - ----------------------------------------------------------------------- Class C 8,184 Included in $1,472 administrative services - ----------------------------------------------------------------------- - ----------------------------------------------------------------------- Class F 775 Included in 584 administrative services - ----------------------------------------------------------------------- - ----------------------------------------------------------------------- Class 529-A 129 Included in 193 administrative services - ----------------------------------------------------------------------- - ----------------------------------------------------------------------- Class 529-B 188 Included in 59 administrative services - ----------------------------------------------------------------------- - ----------------------------------------------------------------------- Class 529-C 213 Included in 63 administrative services - ----------------------------------------------------------------------- - ----------------------------------------------------------------------- Class 529-E 11 Included in 5 administrative services - ----------------------------------------------------------------------- - ----------------------------------------------------------------------- Class 529-F -* Included in -* administrative services - ----------------------------------------------------------------------- - ----------------------------------------------------------------------- Class R-1 3 Included in 3 administrative services - ----------------------------------------------------------------------- - ----------------------------------------------------------------------- Class R-2 36 Included in 27 administrative services - ----------------------------------------------------------------------- - ----------------------------------------------------------------------- Class R-3 19 Included in 14 administrative services - ----------------------------------------------------------------------- - ----------------------------------------------------------------------- Class R-4 4 Included in 4 administrative services - ----------------------------------------------------------------------- - ----------------------------------------------------------------------- Class R-5 Not applicable Included in 28 administrative services - ----------------------------------------------------------------------- - ----------------------------------------------------------------------- Total $142,403 $49,033 $2,452 - ----------------------------------------------------------------------- * Amount less than one thousand. Deferred Directors' and Advisory Board compensation - Since the adoption of the deferred compensation plan in 1993, Directors and Advisory Board members 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' and Advisory Board fees in the accompanying financial statements include the current fees (either paid in cash or deferred) and the net increase or decrease 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. Warrants As of December 31, 2002, the fund had warrants outstanding which may be exercised at any time for the purchase of 822,026 Class A shares at approximately $5.24 per share. If these warrants had been exercised as of December 31, 2002, the net asset value of Class A shares would have been reduced by $0.01 per share. 6. Capital share transactions Capital share transactions in the fund were as follows (dollars and shares in thousands): Year ended December 31, 2002 Share class Sales(1) Sales(1) Reinvestments of dividends and distributions Amount Shares Amount Shares Class A $ 6,693,985 255,431 $ 1,756,908 69,477 Class B 1,057,376 40,132 52,386 2,107 Class C 837,810 31,926 26,931 1,092 Class F 381,789 14,772 11,110 448 Class 529-A(2) 168,803 6,496 3,695 152 Class 529-B(2) 44,496 1,722 824 34 Class 529-C(2) 50,297 1,938 913 38 Class 529-E(2) 6,158 243 121 5 Class 529-F(2) 385 16 6 -* Class R-1(3) 1,100 46 20 1 Class R-2(3) 28,401 1,199 434 18 Class R-3(3) 27,920 1,172 419 17 Class R-4(3) 9,005 390 157 7 Class R-5(3) 57,752 2,155 1,273 52 Total net increase (decrease) in fund $ 9,365,277 357,638 $ 1,855,197 73,448 Year ended December 31, 2001 Share class Sales(1) Sales(1) Reinvestments of dividends and distributions Amount Shares Amount Shares Class A $ 6,534,080 221,910 $ 1,884,217 64,925 Class B 976,698 33,294 28,010 978 Class C(4) 501,953 17,317 7,161 254 Class F(4) 198,978 6,922 2,696 95 Total net increase (decrease) in fund $ 8,211,709 279,443 $ 1,922,084 66,252 Year ended December 31, 2002 Share class Repurchases(1) Repurchases(1) Net increase Net increase Amount Shares Amount Shares Class A $ (6,665,696) (264,017) $ 1,785,197 60,891 Class B (230,619) (9,342) 879,143 32,897 Class C (148,918) (6,075) 715,823 26,943 Class F (103,788) (4,193) 289,111 11,027 Class 529-A(2) (2,983) (122) 169,515 6,526 Class 529-B(2) (737) (31) 44,583 1,725 Class 529-C(2) (1,301) (54) 49,909 1,922 Class 529-E(2) (112) (5) 6,167 243 Class 529-F(2) (1) -* 390 16 Class R-1(3) (77) (3) 1,043 44 Class R-2(3) (4,693) (199) 24,142 1,018 Class R-3(3) (3,568) (150) 24,771 1,039 Class R-4(3) (451) (20) 8,711 377 Class R-5(3) (4,215) (170) 54,810 2,037 Total net increase (decrease) in fund $ (7,167,159) (284,381) $ 4,053,315 146,705 Year ended December 31, 2001 Share class Repurchases(1) Repurchases(1) Net increase Net increase Amount Shares Amount Shares Class A $ (5,639,751) (192,784) $ 2,778,546 94,051 Class B (76,876) (2,684) 927,832 31,588 Class C(4) (19,333) (683) 489,781 16,888 Class F(4) (10,103) (359) 191,571 6,658 Total net increase (decrease) in fund $ (5,746,063) (196,510) $ 4,387,730 149,185 * 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. (3) Class R-1, R-2, R-3, R-4 and R-5 shares were offered beginning May 15, 2002. (4) Class C and F shares were offered beginning March 15, 2001.
7. 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, 2002, the total value of restricted securities was $536,005,000, which represents 1.08% of the net assets of the fund. 8. Investment transactions and other disclosures The fund made purchases and sales of investment securities, excluding short-term securities, of $21,891,306,000 and $12,967,078,000, respectively, during the year ended December 31, 2002. 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, 2002, the custodian fee of $1,454,000 includes $111,000 that was offset by this reduction, rather than paid in cash. Financial Highlights (1) Income (loss) from investment operations(2) Net Net asset (losses)gains value, Net on securities Total from beginning investment (both realized investment of period income and unrealized) operations Class A: Year ended 12/31/2002 $28.53 $.49 $(4.56) $(4.07) Year ended 12/31/2001 31.07 .44 (1.87) (1.43) Year ended 12/31/2000 32.46 .56 .65 1.21 Year ended 12/31/1999 31.07 .49 4.45 4.94 Year ended 12/31/1998 28.25 .48 5.79 6.27 Class B: Year ended 12/31/2002 28.47 .30 (4.57) (4.27) Year ended 12/31/2001 31.01 .19 (1.83) (1.64) Period from 3/15/2000 to 12/31/2000 31.13 .26 1.55 1.81 Class C: Year ended 12/31/2002 28.44 .30 (4.58) (4.28) Period from 3/15/2001 to 12/31/2001 29.05 .09 (.14) (.05) Class F: Year ended 12/31/2002 28.52 .49 (4.59) (4.10) Period from 3/15/2001 to 12/31/2001 29.10 .27 (.13) .14 Class 529-A: Period from 2/15/2002 to 12/31/2002 27.88 .46 (3.91) (3.45) Class 529-B: Period from 2/15/2002 to 12/31/2002 27.88 .28 (3.92) (3.64) Class 529-C: Period from 2/19/2002 to 12/31/2002 27.47 .28 (3.50) (3.22) Class 529-E: Period from 3/1/2002 to 12/31/2002 28.27 .38 (4.52) (4.14) Class 529-F: Period from 9/16/2002 to 12/31/2002 23.98 .16 (.19) (.03) Class R-1: Period from 6/6/2002 to 12/31/2002 27.27 .20 (3.36) (3.16) Class R-2: Period from 5/21/2002 to 12/31/2002 28.23 .23 (4.34) (4.11) Class R-3: Period from 6/4/2002 to 12/31/2002 27.58 .27 (3.69) (3.42) Class R-4: Period from 5/28/2002 to 12/31/2002 28.22 .32 (4.33) (4.01) Class R-5: Period from 5/15/2002 to 12/31/2002 28.37 .39 (4.50) (4.11) Dividends and distributions Dividends (from net Distributions Total investment (from capital dividends and income) gains) distributions Class A: Year ended 12/31/2002 $(.52) $(.46) $(.98) Year ended 12/31/2001 (.52) (.59) (1.11) Year ended 12/31/2000 (.52) (2.08) (2.60) Year ended 12/31/1999 (.51) (3.04) (3.55) Year ended 12/31/1998 (.51) (2.94) (3.45) Class B: Year ended 12/31/2002 (.33) (.46) (.79) Year ended 12/31/2001 (.31) (.59) (.90) Period from 3/15/2000 to 12/31/2000 (.25) (1.68) (1.93) Class C: Year ended 12/31/2002 (.32) (.46) (.78) Period from 3/15/2001 to 12/31/2001 (.21) (.35) (.56) Class F: Year ended 12/31/2002 (.50) (.46) (.96) Period from 3/15/2001 to 12/31/2001 (.37) (.35) (.72) Class 529-A: Period from 2/15/2002 to 12/31/2002 (.49) (.46) (.95) Class 529-B: Period from 2/15/2002 to 12/31/2002 (.33) (.46) (.79) Class 529-C: Period from 2/19/2002 to 12/31/2002 (.34) (.46) (.80) Class 529-E: Period from 3/1/2002 to 12/31/2002 (.33) (.35) (.68) Class 529-F: Period from 9/16/2002 to 12/31/2002 (.13) (.35) (.48) Class R-1: Period from 6/6/2002 to 12/31/2002 (.30) (.35) (.65) Class R-2: Period from 5/21/2002 to 12/31/2002 (.31) (.35) (.66) Class R-3: Period from 6/4/2002 to 12/31/2002 (.34) (.35) (.69) Class R-4: Period from 5/28/2002 to 12/31/2002 (.39) (.35) (.74) Class R-5: Period from 5/15/2002 to 12/31/2002 (.43) (.35) (.78)
Ratio of Ratio of Net asset Net assets, expenses net income value, end Total end of period to average to average of period return(3) (in millions) net assets net assets Class A: Year ended 12/31/2002 $23.48 (14.47)% $46,129 .59% 1.89% Year ended 12/31/2001 28.53 (4.59) 54,315 .57 1.49 Year ended 12/31/2000 31.07 3.84 56,212 .56 1.74 Year ended 12/31/1999 32.46 16.55 56,095 .55 1.54 Year ended 12/31/1998 31.07 22.93 48,498 .55 1.65 Class B: Year ended 12/31/2002 23.41 (15.18) 1,841 1.39 1.18 Year ended 12/31/2001 28.47 (5.30) 1,302 1.35 .66 Period from 3/15/2000 to 12/31/2000 31.01 5.87 439 1.34 (5) 1.06 (5) Class C: Year ended 12/31/2002 23.38 (15.20) 1,025 1.45 1.17 Period from 3/15/2001 to 12/31/2001 28.44 (.19) 480 1.52 (5) .38 (5) Class F: Year ended 12/31/2002 23.46 (14.59) 415 .70 1.92 Period from 3/15/2001 to 12/31/2001 28.52 .48 190 .72 (5) 1.17 (5) Class 529-A: Period from 2/15/2002 to 12/31/2002 23.48 (12.57) 153 .71 (5) 2.17 (5) Class 529-B: Period from 2/15/2002 to 12/31/2002 23.45 (13.22) 41 1.58 (5) 1.30 (5) Class 529-C: Period from 2/19/2002 to 12/31/2002 23.45 (11.91) 45 1.57 (5) 1.32 (5) Class 529-E: Period from 3/1/2002 to 12/31/2002 23.45 (14.72) 6 1.03 (5) 1.90 (5) Class 529-F: Period from 9/16/2002 to 12/31/2002 23.47 (.14) - (4) .23 .68 Class R-1: Period from 6/6/2002 to 12/31/2002 23.46 (11.68) 1 1.47 (5),(6) 1.49 (5) Class R-2: Period from 5/21/2002 to 12/31/2002 23.46 (14.64) 24 1.43 (5),(6) 1.61 (5) Class R-3: Period from 6/4/2002 to 12/31/2002 23.47 (12.49) 24 1.05 (5),(6) 2.00 (5) Class R-4: Period from 5/28/2002 to 12/31/2002 23.47 (14.31) 9 .69 (5),(6) 2.25 (5) Class R-5: Period from 5/15/2002 to 12/31/2002 23.48 (14.59) 48 .37 (5) 2.56 (5)
Year ended December 31 2002 2001 2000 1999 1998 Portfolio turnover rate for all classes of shares 27% 22% 25% 28% 24%
(1) Based on operations for the period shown (unless otherwise noted) and, accordingly, may not be representative of a full year. (2) Years ended 1999 and 1998 are 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 2.43%, 1.57%, 1.11% and .73% for classes R-1, R-2, R-3 and R-4, respectively. Such expense ratios are the result of higher expenses during the start-up period and are not indicative of expense ratios expected in the future. Report of independent accountants To the Board of Directors and Shareholders of The Investment Company of America: In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio, and the related statements of operations and changes in net assets and the financial highlights present fairly, in all material respects, the financial position of The Investment Company of America (the "Fund") at December 31, 2002, and the results of its operations, the changes in its net assets and its financial highlights for each of the periods presented in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities owned at December 31, 2002, by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PRICEWATERHOUSECOOPERS LLP Los Angeles, California January 31, 2003 OTHER SHARE CLASS RESULTS (unaudited) CLASS B, CLASS C, CLASS F AND CLASS 529 Returns for periods ended December 31, 2002: 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 -19.29% -6.84%/1/ Not reflecting CDSC -15.18% -5.63%/1/ CLASS C SHARES Reflecting CDSC, maximum of 1%, payable only if shares are sold within one year of purchase -16.02% -8.86%/2/ Not reflecting CDSC -15.20% -8.86%/2/ CLASS F SHARES/3/ Not reflecting annual asset-based fee charged by sponsoring firm -14.59% -8.15%/2/ CLASS 529-A SHARES Reflecting 5.75% maximum sales charge -- -17.59%/4/ Not reflecting maximum sales charge -- -12.57%/4/ CLASS 529-B SHARES Reflecting applicable CDSC, maximum of 5%, payable only if shares are sold within six years of purchase -- -17.43%/4/ Not reflecting CDSC -- -13.22%/4/ CLASS 529-C SHARES Reflecting CDSC, maximum of 1%, payable only if shares are sold within one year of purchase -- -12.76%/5/ Not reflecting CDSC -- -11.91%/5/ CLASS 529-E SHARES/3/ Total return -- -14.72%/6/ CLASS 529-F SHARES Results for Class 529-F shares are not shown because of the brief time between their initial sales and the end of the period. /1/ Average annual compound return from March 15, 2000, when Class B shares were first sold. /2/ Average annual compound 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/ Total return from February 15, 2002, when Class 529-A and Class 529-B shares were first sold. /5/ Total return from February 19, 2002, when Class 529-C shares were first sold. /6/ Total return from March 1, 2002, when Class 529-E shares were first sold.
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. During the fiscal year ended December 31, 2002, the fund paid a long-term capital gain distribution of $948,702,000. The fund also designated as a capital gain distribution a portion of earnings and profits paid to shareholders in redemption of their shares. Corporate shareholders may exclude up to 70% of qualifying dividends received during the year. For purposes of computing this exclusion, 83% 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. Treasury obligations. For purposes of computing this exclusion, 4% of the dividends paid by the fund from net investment income were derived from interest on direct U.S. Treasury 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 WAS MAILED IN JANUARY 2003 TO DETERMINE THE AMOUNTS TO BE INCLUDED ON THEIR 2002 TAX RETURNS. SHAREHOLDERS SHOULD CONSULT THEIR TAX ADVISERS. RESULTS OF MEETING OF SHAREHOLDERS held august 8, 2002 (unaudited) Shares outstanding (all classes) on record date (June 10, 2002) 2,088,341,286 Total shares voting on August 8, 2002 1,341,281,762 (64.2%)
PROPOSAL 1: ELECTION OF DIRECTORS PERCENT PERCENT OF SHARES OF SHARES DIRECTOR VOTES FOR VOTING FOR VOTES WITHHELD WITHHELD Louise H. Bryson 1,320,525,650 99% 20,756,112 1% Mary Anne Dolan 1,320,391,087 99 20,890,675 1 Martin Fenton 1,319,060,011 99 22,221,751 1 Leonard R. Fuller 1,319,602,616 99 21,679,146 1 Claudio X. Gonzalez Laporte 1,318,270,375 99 23,011,387 1 Paul G. Haaga, Jr. 1,319,696,954 99 21,584,808 1 James B. Lovelace 1,320,651,696 99 20,630,066 1 John G. McDonald 1,319,167,077 99 22,114,685 1 Bailey Morris-Eck 1,320,591,469 99 20,690,293 1 Richard G. Newman 1,319,258,743 99 22,023,019 1 Donald D. O'Neal 1,320,964,561 99 20,317,201 1 Olin C. Robison 1,320,349,926 99 20,931,836 1 James F. Rothenberg 1,320,723,831 99 20,557,931 1 R. Michael Shanahan 1,320,949,276 99 20,332,486 1 William J. Spencer 1,319,580,133 99 21,701,629 1
PROPOSAL 2: RATIFICATION OF ACCOUNTANTS PERCENT PERCENT PERCENT OF SHARES OF SHARES OF SHARES VOTES FOR VOTING FOR VOTES AGAINST VOTING AGAINST ABSTENTIONS ABSTAINING 1,311,293,659 98% 9,180,014 1% 20,808,089 1%
BOARD OF DIRECTORS, ADVISORY BOARD AND OFFICERS "NON-INTERESTED" DIRECTORS YEAR FIRST ELECTED A DIRECTOR OF NAME AND AGE THE FUND/1/ PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS Louise H. Bryson, 58 1999 Executive Vice President, Distribution and Business Development, Lifetime Television; Director and former Chairman of the Board, KCET - Los Angeles (public television station); former Senior Vice President, fx Networks, Inc: Fox Inc. Mary Anne Dolan, 55 2000 Founder and President, M.A.D., Inc. (communications company); former Editor-in-Chief, The Los Angeles Herald Examiner Martin Fenton, 67 2000 Managing Director, Senior Resource Group LLC (development and management of senior living communities) Leonard R. Fuller, 56 2002 President and CEO, Fuller Consulting (financial management consulting firm) Claudio X. Gonzalez Laporte, 68 2001 Chairman of the Board and CEO, Kimberly-Clark de Mexico, S.A John G. McDonald, 65 1976 The IBJ Professor of Finance, Graduate School of Business, Stanford University Bailey Morris-Eck, 58 1993 Senior Associate, Reuters Foundation; Senior Fellow, Institute for International Economics; Consultant, The Independent of London Richard G. Newman, 68 1996 Chairman of the Board and CEO, AECOM Technology Corporation (engineering, consulting and professional services) Olin C. Robison, Ph.D., 66 1987 President of the Salzburg Seminar; President Emeritus, Middlebury College William J. Spencer, Ph.D., 72 1997 Chairman of the Board and CEO, SEMATECH (research and development consortium); Trustee, William Jewell College; Trustee, Associated Universities, Inc.
"NON-INTERESTED" DIRECTORS NUMBER OF BOARDS WITHIN THE FUND COMPLEX/2/ ON WHICH NAME AND AGE DIRECTOR SERVES OTHER DIRECTORSHIPS/3/ HELD BY DIRECTOR Louise H. Bryson, 58 1 None Mary Anne Dolan, 55 3 None Martin Fenton, 67 16 None Leonard R. Fuller, 56 14 None Claudio X. Gonzalez Laporte, 68 1 America Movil S.A.; General Electric Company; Grupo Carso; Grupo Alfa; The Home Depot; Kellogg Company; Kimberly-Clark Corp.; The Mexico Fund John G. McDonald, 65 8 Capstone Turbine Corp.; iStar Financial, Inc.; Plum Creek Timber Co.; Scholastic Corporation.; Varian, Inc. Bailey Morris-Eck, 58 3 None Richard G. Newman, 68 13 Sempra Energy; Southwest Water Company Olin C. Robison, Ph.D., 66 3 None William J. Spencer, Ph.D., 72 1 None
"INTERESTED" DIRECTORS/4/ YEAR FIRST ELECTED A PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS NAME, AGE AND DIRECTOR OR OFFICER AND POSITIONS HELD WITH AFFILIATED ENTITIES OR THE POSITION WITH FUND OF THE FUND/1/ PRINCIPAL UNDERWRITER OF THE FUND R. Michael Shanahan, 64 1994 Chairman of the Board and Principal Executive Chairman of the Board Officer, Capital Research and Management Company; Director, American Funds Distributors, Inc.;/5/ Director, The Capital Group Companies, Inc.;/5/ Chairman of the Board, Capital Management Services, Inc.;/5/ Director, Capital Strategy Research, Inc./5/ James F. Rothenberg, 56 2000 President and Director, Capital Research and President Management Company; Director, American Funds Distributors, Inc.;/5/ Director, American Funds Service Company;/5/ Director, The Capital Group Companies, Inc.;/5/ Director, Capital Group Research, Inc.;/5/ Director, Capital Management Services, Inc.5 James B. Lovelace,6 46 1994 Senior Vice President and Director, Senior Vice President Capital Research and Management Company Donald D. O'Neal, 42 1994 Senior Vice President, Senior Vice President Capital Research and Management Company Paul G. Haaga, Jr., 54 2002 Executive Vice President and Director, Capital Research and Management Company; Director, American Funds Distributors, Inc./5/
"INTERESTED" DIRECTORS4 NUMBER OF BOARDS WITHIN THE FUND COMPLEX/2/ NAME, AGE AND ON WHICH POSITION WITH FUND DIRECTOR SERVES OTHER DIRECTORSHIPS/3/ HELD BY DIRECTOR R. Michael Shanahan, 64 2 None Chairman of the Board James F. Rothenberg, 56 3 None President James B. Lovelace,6 46 2 None Senior Vice President Donald D. O'Neal, 42 2 None Senior Vice President Paul G. Haaga, Jr., 54 17 None Malcolm R. Currie, a member of the Board since 1992, retired in August 2002. The Directors thank him for his wise counsel and many contributions to the fund.
BOARD OF DIRECTORS, ADVISORY BOARD AND OFFICERS CHAIRMAN EMERITUS YEAR FIRST ELECTED A PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS DIRECTOR OF AND POSTIONS HELD WITH AFFILIATED ENTITIES OR NAME AND AGE THE FUND/1/ THE PRINCIPAL UNDERWRITER OF THE FUND Jon B. Lovelace, Jr., 76 1953 Chairman Emeritus, Capital Research and Management Company Chairman Emeritus
NUMBER OF BOARDS WITHIN THE FUND COMPLEX/2/ ON WHICH NAME AND AGE DIRECTOR SERVES OTHER DIRECTORSHIPS/3/ HELD BY DIRECTOR Jon B. Lovelace, Jr., 76 1 None
ADVISORY BOARD MEMBERS YEAR FIRST ELECTED TO ADVISORY NAME AND AGE BOARD/1/ PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS Thomas M. Crosby, Jr., 64 1995 Partner, Faegre & Benson (law firm) Ellen H. Goldberg, Ph.D., 57 1998 President, Santa Fe Institute; Research Professor, University of New Mexico William H. Kling, 60 1985 President, American Public Media Group Robert J. O'Neill, Ph.D., 66 1988 Chairman of the Council, Australian Strategic Policy Institute; Adjunct Professor in Strategic and Defense Studies Center, Australian National University; former Chichele Professor of the History of War; former Fellow of All Souls College, University of Oxford Norman R. Weldon, Ph.D., 68 1977 Managing Director, Partisan Management Group, Inc.; former Chairman of the Board, Novoste Corporation; former President and Director, Corvita Corporation
ADVISORY BOARD MEMBERS NUMBER OF BOARDS WITHIN THE FUND COMPLEX/2/ ON WHICH ADVISORY BOARD NAME AND AGE MEMBER SERVES OTHER DIRECTORSHIPS HELD/3 Thomas M. Crosby, Jr., 64 1 None Ellen H. Goldberg, Ph.D., 57 1 None William H. Kling, 60 6 Irwin Financial Corporation; St. Paul Companies Robert J. O'Neill, Ph.D., 66 3 None Norman R. Weldon, Ph.D., 68 3 Novoste Corporation Farzad Nazem completed his Advisory Board term as of December 31, 2002. The Board thanks him for his contributions to the fund.
OTHER OFFICERS 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 Gregg E. Ireland, 53 1994 Senior Vice President, Capital Research and Senior Vice President Management Company Joyce E. Gordon, 46 1998 Senior Vice President, Capital Research Company/5/ Vice President Anne M. Llewellyn, 55 1984 Associate, Capital Research and Management Vice President Company Vincent P. Corti, 46 1994 Vice President-- Fund Business Management Secretary Group, Capital Research and Management Company Thomas M. Rowland, 61 1998 Senior Vice President, Capital Research and Treasurer Management Company; Director, American Funds Service Company/5/ R. Marcia Gould, 48 1993 Vice President -- Fund Business Management Assistant Treasurer Group, Capital Research and Management Company Anthony W. Hynes, Jr., 40 1998 Vice President-- Fund Business Management Assistant Treasurer Group, Capital Research and Management Company
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 are elected on an annual basis. /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) and Anchor Pathway Fund, which serve as the underlying investment vehicles 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 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/ James B. Lovelace is the son of Jon B. Lovelace, Jr. OFFICES OFFICES OF THE FUND AND OF THE 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 JPMorgan Chase Bank 270 Park Avenue New York, NY 10017-2070 COUNSEL O'Melveny & Myers LLP 400 South Hope Street Los Angeles, CA 90071-2899 INDEPENDENT ACCOUNTANTS PricewaterhouseCoopers LLP 350 South Grand Avenue Los Angeles, CA 90071-3405 PRINCIPAL UNDERWRITER American Funds Distributors, Inc. 333 South Hope Street Los Angeles, CA 90071-1406 There are several ways to invest in The Investment Company of America. Class A shares are subject to a 5.75% maximum up-front sales charge that declines for accounts 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 0.80% 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 0.86% 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 0.11%) 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. FOR INFORMATION ABOUT YOUR ACCOUNT OR ANY OF THE FUND'S SERVICES, OR FOR A PROSPECTUS FOR ANY OF THE AMERICAN FUNDS, PLEASE CONTACT YOUR FINANCIAL ADVISER. YOU MAY ALSO CALL AMERICAN FUNDS SERVICE COMPANY AT 800/421-0180 OR VISIT US AT AMERICANFUNDS.COM ON THE WORLD WIDE WEB. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE YOU INVEST OR SEND MONEY. This report is for the information of shareholders of The Investment Company of America, 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, 2003, 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 termSM 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 20 million shareholders. OUR UNIQUE COMBINATION OF STRENGTHS INCLUDES THESE FIVE FACTORS: o A LONG-TERM, VALUE-ORIENTED APPROACH Rather than follow fads, we rely on our own research to find well-managed companies. 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 Nearly 70% of the portfolio counselors who serve American Funds were in the investment business before the sharp stock market decline of 1987 and some experienced the 1970s bear market. 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 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 FundSM SMALLCAP World Fund(R) GROWTH-AND-INCOME FUNDS Emphasis on long-term growth and dividends through stocks American Mutual Fund(R) Capital World Growth and Income FundSM Fundamental InvestorsSM The Investment Company of America(R) Washington Mutual Investors FundSM EQUITY-INCOME FUNDS Emphasis on above-average income and growth through stocks and/or bonds Capital Income Builder(R) The Income Fund of America(R) BALANCED FUND Emphasis on long-term growth and current income through stocks and bonds American Balanced Fund(R) BOND FUNDS Emphasis on current income through bonds American High-Income TrustSM The Bond Fund of AmericaSM Capital World Bond Fund(R) Intermediate Bond Fund of America(R) U.S. Government Securities FundSM 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 AmericaSM 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) MONEY MARKET FUNDS Seeking stable monthly income through money market instruments The Cash Management Trust of America(R) The Tax-Exempt Money Fund of AmericaSM The U.S. Treasury Money Fund of AmericaSM THE CAPITAL GROUP COMPANIES American Funds Capital Research and Management Capital International Capital Guardian Capital Bank and Trust Lit. No. ICA-011-0203 Litho in USA BDC/GRS/6050 Printed on recycled paper -----END PRIVACY-ENHANCED MESSAGE-----