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FLAG
INVESTORS
INTERNATIONAL
FUND
ANNUAL REPORT
OCTOBER 31, 1997
<PAGE>
REPORT HIGHLIGHTS
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o Asian markets were weak due to currency devaluations and slowing economic
growth.
o The Fund outperformed the Morgan Stanley Capital International Europe,
Australasia Far East(R) (EAFE) Index for the six- and 12-month periods as a
result of favorable country and currency selection.
o The portfolio continues to have a relatively high weighting in European
stocks.
<PAGE>
LETTER TO SHAREHOLDERS
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Dear Shareholders:
Just when we believed the tenth anniversary of the 1987 crash would drift
quietly by, the markets started to gyrate wildly in late October. Investors were
buffeted by dramatic currency devaluations in many Asian countries, a sudden 25%
drop in the Hong Kong stock market and increased uncertainty about the economic
outlook. During the most recent six-month period, the Pacific region declined
1.3%. Europe, which was not entirely immune from the volatility in Asia, still
produced the highest return (+12.7%) of any specific region. The entire
capitalization-weighted EAFE Index generated a 3.0% total return for the
six-month period.
During the same period, the Fund generated a 10.1% total return, which
exceeded the EAFE Index by approximately 7.1%. The primary reason for the
favorable comparison was country selection. The Fund was underexposed in the
Japanese market and had only minimal holdings in the rest of the weak Asian
markets. Instead, the portfolio enjoyed relatively high exposure to the strong
European markets. Stock selection was also helpful, especially in Japan, where
many of the Fund's holdings reacted favorably to earnings gains resulting from
the yen's weakness.
In the past 12 months, the EAFE Index gained 4.6%, while the Fund generated
a 17.5% total return. The favorable Fund performance over the past year resulted
from an underweighted exposure in the weak Japanese and Asian equity markets,
high exposure in Europe and effective stock selection.
1
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LETTER TO SHAREHOLDERS (CONCLUDED)
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The recent setback in international equity prices has significantly reduced
the price risk in most markets. Stock market corrections are usually triggered
by an increase in bond yields, but the correction in late October occurred while
interest rates actually declined globally. While the events in Asia will slow
growth in 1998, the other effect will be to reduce potential inflationary
pressures, which should keep interest rates stable. At the same time, an ongoing
economic expansion in most regions, coupled with lower equity valuations, should
provide an effective background for further stock appreciation.
Sincerely,
/s/ John W. Church, Jr. /s/ Andrew B. Williams
- ------------------------- ---------------------------
John W. Church, Jr. Andrew B. Williams
President Executive Vice President
November 21, 1997
2
<PAGE>
TEN LARGEST HOLDINGS
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Percent of
Company Net Assets
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1. LEND LEASE CORP., LTD. 3.9%
One of the leading financial services groups in Australia with businesses
of property services and construction.
2. OY NOKIA AB--SERIES A ADR 3.8%
An international telecommunications company that manufactures mobile
phones, networks and systems for cellular and fixed networks around the
world.
3. DRAGADOS & CONSTRUCCIONES SA 3.6%
Civil engineering and construction company in Spain.
4. TELECOM ITALIA SpA 2.9%
Provider of telecommunications services in Italy through the company's
nationwide fixed network facilities.
5. SCOTTISH POWER PLC 2.9%
An integrated electric utility that generates, transmits and supplies
electricity throughout Scotland and parts of England.
6. TOMKINS PLC 2.9%
U.K.-based conglomerate involved in the manufacture of fluid controls,
industrial products, food, garden and leisure products.
7. HONDA MOTOR CO. 2.9%
Developer, manufacturer and distributor of motorcycles, automobiles and
other power products. The company's manufacturing facilities are located
around the world, and their products are distributed to consumers in about
150 countries.
8. ROHM COMPANY 2.8%
Japan-based manufacturer of sophisticated semiconductor devices for
specialized applications such as telecommunications.
9. ACOM CO., LTD. 2.6%
One of the largest consumer lending companies in Japan.
10. VEBA AG 2.4%
An electrical energy service provider in Germany that also operates
chemical, oil and telecommunications subsidiaries.
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3
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
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ADDITIONAL PERFORMANCE INFORMATION
The shareholder letter included in this report contains statistics designed
to help you evaluate the performance of your Fund's management. To further
assist in this evaluation, the Securities and Exchange Commission (SEC) requires
that we include, on an annual basis, a line graph comparing the Fund's
performance to that of an appropriate market index. This graph must measure the
growth of a $10,000 hypothetical investment from the Fund's inception on
November 18, 1986 through the most recent fiscal year-end and must reflect the
impact of the Fund's total expenses and its currently effective 4.50% maximum
sales charge.
While the following chart is required by SEC rules, such comparisons are of
limited utility since the index shown is not adjusted for sales charges and
ongoing management, distribution and operating expenses applicable to the Fund.
An investor who wished to replicate the total return of the index would have had
to own the securities that it represents. Acquiring these securities would
require a considerable amount of money and would incur expenses that are not
reflected in the index results.
The SEC also requires that we report the Fund's total return, according to
a standardized formula, for various time periods through the end of the most
recent calendar quarter. The SEC total return figures differ from those we
reported because the time periods may be different and because the SEC
calculation includes the impact of the currently effective 4.50% maximum sales
charge. These total returns correspond to those experienced by individual
shareholders only if their shares were purchased on the first day of each time
period and the maximum sales charge was paid. Any performance figures shown are
for the full period indicated. Since investment return and principal value will
fluctuate, an investor's shares may be worth more or less than their original
cost when redeemed.
4
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FLAG INVESTORS INTERNATIONAL FUND
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CHANGE IN VALUE OF A $10,000 INVESTMENT*
NOVEMBER 18, 1986-OCTOBER 31, 1997
[Graph appears here-see plot points below]
Morgan Stanley
Capital
International
Flag Investors Europe, Australasia,
International Far East(R)
Fund (EAFE) Index
-------------- --------------------
11/86 $ 9,550 $10,000
10/97 10,324 12,621
10/88 11,997 15,799
10/89 14,066 17,085
10/90 13,133 14,895
10/91 12,719 15,930
10/92 10,964 13,824
10/93 15,706 19,003
10/94 17,927 20,920
10/95 16,261 20,843
10/96 18,234 23,025
10/97 21,422 24,091
AVERAGE ANNUAL TOTAL RETURN*
Periods Ended 9/30/97 1 Year 5 Years 10 Years Since Inception**
- --------------------------------------------------------------------------------
Class A Shares 19.99% 14.34% 4.72% 7.93%
................................................................................
* These figures assume the reinvestment of dividends and capital gains
distributions and include the Fund's 4.50% maximum sales charge. The Morgan
Stanley Capital International Europe, Australasia, Far East(R) (EAFE) Index
is an unmanaged index that is widely recognized as an indicator of general
international equity performance. Past performance is not an indicator of
future results.
** 11/18/86.
5
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
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STATEMENT OF NET ASSETS OCTOBER 31, 1997
No. of Value Percent of
Shares Security (Note 1) Net Assets
- --------------------------------------------------------------------------------
COMMON STOCK -- 97.1%
AUSTRALIA -- 5.3%
100,000 Foster's Brewing Group $ 189,081 1.4%
26,634 Lend Lease Corp., Ltd. 543,140 3.9
--------- ----
732,221 5.3
CANADA -- 1.4%
3,000 Magna International Inc. - Class A 197,625 1.4
--------- ----
FINLAND -- 3.8%
6,000 Oy Nokia AB - Series A ADR 529,500 3.8
--------- ----
FRANCE -- 6.6%
2,258 Elf Aquitaine SA* 278,785 2.0
4,356 Lafarge SA* 271,469 1.9
3,872 Lagardere Groupe 111,078 0.8
5,600 SCOR SA 264,361 1.9
--------- ----
925,693 6.6
GERMANY -- 6.4%
5,000 Deutsche Bank AG 329,591 2.4
3,600 Deutsche Telecom AG 67,296 0.5
4,000 Hoechst AG 153,365 1.1
6,000 Veba AG 336,825 2.4
--------- ----
887,077 6.4
ITALY -- 7.8%
9,631 Assicurazioni Generali* 215,001 1.6
22,152 Benetton Group SpA 322,057 2.3
18,800 Instituto Bancario SpA 142,428 1.0
66,665 Telecom Italia SpA 417,172 2.9
--------- ----
1,096,658 7.8
JAPAN -- 25.1%
6,600 Acom Co., Ltd. 362,306 2.6
5,000 Amway Japan Ltd. 131,415 0.9
2,000 Aoyama Trading Co., Ltd. 53,730 0.4
10,000 Canon, Inc. 242,868 1.7
50 East Japan Railway Co. 243,284 1.7
25,000 Hitachi Ltd. 192,340 1.4
12,000 Honda Motor Co. 404,225 2.9
6
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
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No. of Value Percent of
Shares Security (Note 1) Net Assets
- --------------------------------------------------------------------------------
COMMON STOCK -- continued
JAPAN -- CONCLUDED
20,000 Kao Corp. $ 279,464 2.0%
1,500 Kyocera Corp. ADR 174,938 1.3
2,000 Nintendo Corp. Ltd. 173,002 1.2
26,000 Nishimatsu Construction Co. 127,589 0.9
4,000 Rohm Company 395,908 2.8
25,000 Sekisui Chemicals Corp. 196,914 1.4
7,000 Sharp Corp. 54,437 0.4
20,000 Toda Construction Co. 100,973 0.7
28,000 Toshiba Corp. 126,923 0.9
10,000 Yamanouchi Pharmaceutical 246,195 1.9
---------- ----
3,506,511 25.1
MALAYSIA -- 1.1%
94,666 Malaysian International
Shipping Corp. Berhad `F' 158,295 1.1
---------- ----
MEXICO -- 2.2%
33,750 Cemex. S.A. de C.V. - Series `B'* 147,757 1.1
8,000 TV Azteca S.A. 153,000 1.1
---------- ----
300,757 2.2
NETHERLANDS -- 1.4%
9,456 ABN-AMRO Holding N.V. 189,917 1.4
---------- ----
NEW ZEALAND -- 0.5%
5,000 Tranz Rail Holdings ADR 67,500 0.5
---------- ----
NORWAY -- 3.3%
4,300 Kvaerner AS 220,536 1.6
4,300 Norsk Hydro 235,830 1.7
---------- ----
456,366 3.3
PORTUGAL -- 0.6%
5,000 Electricidade de Portugal 86,075 0.6
---------- ----
SINGAPORE -- 0.4%
10,000 Singapore Airlines Ltd. F 74,968 0.4
---------- ----
7
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
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STATEMENT OF NET ASSETS (CONCLUDED) OCTOBER 31, 1997
No. of Value Percent of
Shares Security (Note 1) Net Assets
- --------------------------------------------------------------------------------
COMMON STOCK -- concluded
SPAIN -- 5.4%
25,000 Dragados & Construcciones SA $ 506,003 3.6%
6,000 Repsol SA 251,115 1.8
---------- ----
757,118 5.4
SWEDEN -- 3.1%
11,000 Astra AB 170,054 1.2
5,000 SKF AB-- B Shares 115,946 0.8
6,000 Volvo AB-- B Shares 156,727 1.1
---------- ----
442,727 3.1
UNITED KINGDOM -- 22.7%
25,000 B.A.T. Industries PLC 219,137 1.6
16,149 The Boots Co. PLC 235,923 1.7
45,000 BTR PLC 153,145 1.1
25,000 Dalgety PLC 102,766 0.7
14,000 De La Rue PLC 99,861 0.7
43,750 Iceland Group PLC 87,906 0.6
84,000 Mirror Group Newspapers PLC 277,783 2.0
25,000 National Power PLC 207,416 1.5
25,000 Reed International PLC 245,718 1.8
10,000 RTZ Corp. PLC 129,599 0.9
22,967 Safeway PLC 149,786 1.1
55,100 Scottish Power PLC 410,093 2.9
40,000 Smith (WH) Group PLC - Class A 253,169 1.8
25,000 Tate & Lyle PLC 190,254 1.4
80,000 Tomkins PLC 408,218 2.9
---------- ----
3,170,774 22.7
Total Common Stock
(Cost $11,326,242) 13,579,782 97.1
---------- ----
8
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
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Value Percent of
Par (000) Security (Note 1) Net Assets
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PREFERRED STOCK -- 0.1%
HONG KONG -- 0.1%
$16 Dairy Farm International
Holdings Ltd., Cvt.
(Cost $16,000) $ 13,039 0.1%
----------- -----
TOTAL INVESTMENT IN SECURITIES
(Cost $11,342,242)** 13,592,821 97.2
OTHER ASSETS IN EXCESS OF LIABILITIES, NET 388,818 2.8
----------- -----
NET ASSETS $13,981,639 100.0%
=========== =====
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE
($13,981,639 / 854,564 shares outstanding) $16.36
======
MAXIMUM OFFERING PRICE PER SHARE
($16.36 / 0.955) $17.13
======
- ----------
* Non-income producing security.
** Aggregate cost for federal tax purposes was $11,550,031.
See Notes to Financial Statements.
9
FLAG INVESTORS INTERNATIONAL FUND
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STATEMENT OF OPERATIONS
For the
Year Ended
October 31,
- --------------------------------------------------------------------------------
1997
Investment Income (Note 1):
Dividends $ 398,934
Interest 22,372
Less:Foreign taxes withheld (45,153)
----------
Total income 376,153
----------
Expenses:
Investment advisory fee (Note 2) 105,195
Legal 43,115
Distribution fee (Note 2) 35,065
Audit 28,499
Accounting fee (Note 2) 28,220
Custodian fee 24,853
Transfer agent fee (Note 2) 18,380
Printing and postage 12,544
Registration fees 11,651
Miscellaneous 5,950
Directors' fees 657
----------
Total expenses 314,129
Less: Fees waived (Note 2) (103,734)
----------
Net expenses 210,395
----------
Net investment income 165,758
----------
Net realized and unrealized gain/(loss) on investments:
Net realized gain from security transactions 1,797,921
Net realized foreign exchange loss (67,080)
Change in unrealized appreciation or depreciation
of investments 348,203
Change in unrealized appreciation or depreciation on translation
of assets and liabilities, excluding investments, denominated in
foreign currencies (438)
----------
Net gain on investments 2,078,606
----------
Net increase in net assets resulting from operations $2,244,364
==========
See Notes to Financial Statements.
10
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
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STATEMENT OF CHANGES IN NET ASSETS
For the Year Ended October 31,
- --------------------------------------------------------------------------------
1997 1996
Increase/(Decrease) in Net Assets:
Operations:
Net investment income $ 165,758 $ 250,800
Net realized gain from security transactions and
foreign exchange transactions 1,730,841 571,223
Change in unrealized appreciation or depreciation
of investments 348,203 656,848
Change in unrealized appreciation or depreciation
on translation of other assets and liabilities
denominated in foreign currencies (438) (3,773)
---------- ----------
Net increase in net assets resulting
from operations 2,244,364 1,475,098
---------- ----------
Dividends to Shareholders from:
Net investment income and short-term gains (165,758) (28,072)
Distributions in excess of net investment
income and short-term gains (94,471) --
---------- ----------
Total distributions (260,229) (28,072)
Capital Share Transactions (Note 3):
Proceeds from sale of 83,957 and
107,997 shares, respectively 1,258,732 1,494,406
Value of 15,155 and 1,596 shares issued in
reinvestment of dividends, respectively 223,079 22,601
Cost of 155,119 and 182,530 shares
repurchased, respectively (2,414,563) (2,516,921)
---------- ----------
Total decrease in net assets derived
from capital share transactions (932,752) (999,914)
---------- ----------
Total increase in net assets 1,051,383 447,112
Net Assets:
Beginning of year 12,930,256 12,483,144
----------- -----------
End of year $13,981,639 $12,930,256
=========== ===========
Undistributed net investment income $ 437 $ 625,259
=========== ===========
See Notes to Financial Statements.
11
FLAG INVESTORS INTERNATIONAL FUND
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FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
For the
Year Ended
October 31,
- --------------------------------------------------------------------------------
1997
Per Share Operating Performance:
Net asset value at beginning of year $ 14.20
-------
Income from Investment Operations:
Net investment income 0.11
Net realized and unrealized gain/(loss) on investments(1) 2.34
-------
Total from Investment Operations 2.45
Less Distributions:
Distributions from net investment income and short-term gains (0.18)
Distributions in excess of net investment income
and short-term gains (0.11)
-------
Total distributions (0.29)
-------
Net asset value at end of year $ 16.36
=======
Total Return(2) 17.48%
Ratios to Average Daily Net Assets:
Expenses(3) 1.50%
Net investment income(4) 1.18%
Supplemental Data:
Net assets at end of year (000) $13,982
Portfolio turnover rate 21%
Average commissions per share(5) $0.0405
- ----------
(1) The years ended October 31, 1997, 1996, 1995 and 1994 include net realized
currency gain/(loss). Realized currency gain/(loss) is included in net
investment income for the year ended October 31, 1993.
(2) Total return excludes the effect of sales charge.
(3) Without the waiver of advisory fees (Note 2), the ratio of expenses to
average daily net assets would have been 2.24%, 2.30%, 2.17%, 1.97% and
2.13% for the years ended October 31, 1997, 1996, 1995, 1994 and 1993,
respectively.
(4) Without the waiver of advisory fees (Note 2), the ratio of net investment
income to average daily net assets would have been 0.44%, 1.10%, 0.02%,
0.28% and 1.28% for the years ended October 31, 1997, 1996, 1995, 1994 and
1993, respectively.
(5) Disclosure of average commissions per share is effective beginning in fiscal
year 1996.
12
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
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<TABLE>
<CAPTION>
For the Year Ended October 31,
- -------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993
<S> <C>
Per Share Operating Performance:
Net asset value at beginning of year $ 12.69 $ 13.97 $ 13.05 $ 9.11
------- ------- ------- ------
Income from Investment Operations:
Net investment income 0.26 0.09 0.18 0.49
Net realized and unrealized gain/(loss) on investments(1) 1.28 (1.37) 1.58 3.45
------- ------- ------- ------
Total from Investment Operations 1.54 (1.28) 1.76 3.94
Less Distributions:
Distributions from net investment income and short-term gains (0.03) -- (0.84) --
Distributions in excess of net investment income
and short-term gains -- -- -- --
------- ------- ------- -------
Total distributions (0.03) -- (0.84) --
------- ------- ------- -------
Net asset value at end of year $ 14.20 $ 12.69 $ 13.97 $ 13.05
======= ======= ======= =======
Total Return(2) 12.13% (9.16)% 13.98% 43.25%
Ratios to Average Daily Net Assets:
Expenses(3) 1.50% 1.50% 1.50% 1.50%
Net investment income(4) 1.91% 0.68% 0.75% 1.91%
Supplemental Data:
Net assets at end of year (000) $12,930 $12,483 $15,487 $15,008
Portfolio turnover rate 13% 35% 43% 48%
Average commissions per share(5) $0.0201 -- -- --
</TABLE>
See Notes to Financial Statements.
13
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
NOTE 1--Significant Accounting Policies
Flag Investors International Fund, Inc. (the "Fund"), which was organized
as a Massachusetts business trust September 3, 1986 and reorganized as a
Maryland Corporation on August 16, 1993, commenced operations November 18, 1986.
The Fund is registered under the Investment Company Act of 1940 as a
diversified, open-end investment management company. Its objective is to seek
long-term growth of capital primarily through investment in a diversified
portfolio of marketable equity securities of issuers located outside of the
United States.
The Fund consists of one share class, Class A Shares, which is subject to a
4.50% maximum front-end sales charge and a 0.25% distribution fee.
When preparing the Fund's financial statements, management makes estimates
and assumptions to comply with generally accepted accounting principles. These
estimates affect 1) the assets and liabilities that we report at the date of the
financial statements; 2) the contingent assets and liabilities that we disclose
at the date of the financial statements; and 3) the revenues and expenses that
we report for the period. Our estimates could be different from the actual
results. The Fund's significant accounting policies are:
A. SECURITY VALUATION--The Fund values a portfolio security that is
primarily traded on a national exchange by using the last price
reported for the day. When the security is listed on more than one
exchange, the Fund uses the last price on the exchange where the
security is primarily traded. If there are no sales or the security is
not traded on a listed exchange, the Fund values the security at the
last bid price in the over-the-counter market. When a market quotation
is unavailable, the Investment Advisor determines a fair value using
procedures that the Board of Directors establishes and monitors. The
Fund values short-term obligations with maturities of 60 days or less
at amortized cost.
B. REPURCHASE AGREEMENTS--The Fund may enter into tri-party repurchase
agreements with broker-dealers and domestic banks. A repurchase
agreement is a short-term investment in which the Fund buys a debt
security that the broker agrees to repurchase at a set time and price.
The third party, which is the broker's custodial bank, holds the
collateral in a separate account until the repurchase agreement
matures. The agreement ensures that the collateral's market value,
including any accrued interest, is sufficient if the broker defaults.
The Fund's access to the collateral may be delayed or limited if the
broker defaults and the value of the collateral declines or if the
broker enters into an insolvency proceeding.
14
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FLAG INVESTORS INTERNATIONAL FUND
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NOTE 1--concluded
C. FOREIGN CURRENCY TRANSLATION--The Fund's books and records are
maintained in U.S. dollars. Transactions denominated in foreign
currencies are recorded in the Fund's records at the effective
exchange rate when earned or incurred. Asset and liability accounts
that are denominated in foreign currencies are adjusted to reflect the
current exchange rate. Transaction gains or losses that are a result
of changes in the exchange rate during the reporting period or upon
settlement of the foreign currency transactions are reported in
realized and unrealized gain/(loss) on investments for the current
period.
The Fund is authorized to enter into forward foreign exchange
contracts as a hedge against either specific transactions or portfolio
positions. These contracts are not reflected in the Fund's financial
statements. However, the net income or loss from these contracts is
recorded from the contract's inception date. Premiums or discounts are
amortized over the life of the contracts.
D. FEDERAL INCOME TAXES--The Fund determines its distributions according
to income tax regulations, which may be different from generally
accepted accounting principles. As a result, the Fund occasionally
makes reclassifications within its capital accounts to reflect income
and gains that are available for distribution under income tax
regulations.
The Fund is organized as a regulated investment company. As long
as it maintains this status and distributes to its shareholders
substantially all of its taxable net investment income and net
realized capital gains, it will be exempt from most, if not all,
federal income and excise taxes. As a result, the Fund has made no
provisions for federal income taxes.
E. SECURITY TRANSACTIONS, INVESTMENT INCOME, DISTRIBUTIONS AND OTHER--The
Fund uses the trade date to account for security transactions and the
specific identification method for financial reporting and income tax
purposes to determine the cost of investments sold or redeemed.
Interest income is recorded on an accrual basis and includes the pro
rata scientific method for amortization of premiums and accretion of
discounts when appropriate. Dividend income and distributions to
shareholders are recorded on the ex-dividend date.
15
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--Investment Advisory Fees, Transactions with Affiliates and Other Fees
Investment Company Capital Corp. ("ICC"), an indirect subsidiary of Bankers
Trust New York Corporation, is the Fund's investment advisor and The Glenmede
Trust Company ("Glenmede") is the Fund's subadvisor. As compensation for
advisory services, the Fund pays ICC an annual fee based on the Fund's average
daily net assets. This fee is calculated daily and paid monthly at the annual
rate of 0.75%. As compensation for subadvisory services, ICC pays Glenmede an
annual fee based on the Fund's average daily net assets. This fee is calculated
monthly and paid quarterly at the annual rate of 0.55%.
ICC has agreed to waive up to all of its fees if necessary so that the
Fund's total operating expenses are no more than 1.50% of the Fund's average
daily net assets. For the year ended October 31, 1997, ICC waived fees of
$103,734. ICC paid Glenmede $77,150 for subadvisory services for the year ended
October 31, 1997.
Certain officers and directors of the Fund are also officers or directors
of the Fund's investment advisor or subadvisor.
As compensation for its accounting services, the Fund pays ICC an annual
fee that is calculated daily and paid monthly from the Fund's average daily net
assets. The Fund paid ICC $28,220 for accounting services for the year ended
October 31, 1997.
As compensation for its transfer agent services, the Fund pays ICC a per
account fee that is calculated and paid monthly. The Fund paid ICC $18,380 for
transfer agent services for the year ended October 31, 1997.
As compensation for providing distribution services, the Fund pays ICC
Distributors, Inc. ("ICC Distributors"), a member of the Forum Financial Group
of companies, an annual fee that is calculated daily and paid monthly at an
annual rate equal to 0.25% of the Fund's average daily net assets. Prior to
September 1, 1997, Alex. Brown & Sons Incorporated served as the Fund's
distributor for the same compensation and on substantially the same terms as ICC
Distributors. The Fund paid $35,065 for distribution services for the year ended
October 31, 1997.
16
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
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NOTE 2--concluded
The Fund's complex offers a retirement plan for eligible Directors. The
actuarially computed pension expense allocated to the Fund for the year ended
October 31, 1997 was $705, and the accrued liability was $2,011.
NOTE 3--CAPITAL SHARE TRANSACTIONS
The Fund is authorized to issue up to 10 million shares of $.001 par value
capital stock.
NOTE 4--Investment Transactions
Excluding short-term and U.S. government obligations, purchases of
investment securities aggregated $2,820,683 and sales of investment securities
aggregated $4,153,426 for the year ended October 31, 1997.
On October 31, 1997, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $3,044,446 and
aggregate gross unrealized depreciation for all securities in which there is an
excess of tax cost over value was $1,001,656.
NOTE 5--Federal Income Tax Information
Generally accepted accounting principles require that certain components of
net assets be reclassified to reflect permanent differences between financial
reporting and tax purposes. Accordingly, permanent book/tax differences related
to foreign exchange losses of $530,352 have been reclassified from the
accumulated net realized loss from security and foreign exchange transactions to
undistributed net investment income. These reclassifications have no effect on
net assets or net asset values per share.
On October 31, 1997, there was a tax capital loss carryforward of
approximately $2,588,000, of which $1,999,000 expires in 2000 and $589,000 in
2001. This carryforward will be used to offset future net capital gains.
17
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
NOTE 6--Net Assets
On October 31, 1997, net assets consisted of:
Paid-in capital $14,321,020
Undistributed net investment income 437
Accumulated net realized loss from security and
foreign exchange transactions (2,591,157)
Unrealized appreciation of investments 2,250,579
Unrealized translation gain 760
-----------
$13,981,639
===========
NOTE 7--Personal Income Tax Information for the Shareholder (Unaudited)
The following information summarizes all per share distributions paid by
the Fund during the taxable period ending October 31, 1997.
Total Foreign
Record Payable Ordinary Taxes Paid Long-Term
Date Date Income or Withheld Capital Gains
---- ---- ------ ----------- -------------
12/20/96 12/30/96 $0.29 $0.05 None
All of the foreign taxes paid or withheld represent taxes incurred by the
Fund on dividends received by the Fund from foreign sources.
18
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
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INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Flag Investors International Fund, Inc.:
We have audited the statement of net assets of the Flag Investors
International Fund, Inc. as of October 31, 1997, and the related statements of
operations for the year then ended and changes in net assets for each of the
years in the two-year period then ended, and the financial highlights for each
of the years in the five-year period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at October
31, 1997 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Flag Investors
InternationalFund, Inc. as of October 31, 1997, the results of its operations,
the changes in its net assets and the financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Princeton, New Jersey
November 21, 1997
19
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
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DIRECTORS AND OFFICERS
TRUMAN T. SEMANS
Chairman
JAMES J. CUNNANE JOHN W. CHURCH, JR.
Director President
RICHARD T. HALE ANDREW B. WILLIAMS
Director Executive Vice President
JOHN F. KROEGER JOSEPH A. FINELLI
Director Treasurer
LOUIS E. LEVY AMY M. OLMERT
Director Secretary
EUGENE J. MCDONALD LAURIE D. COLLIDGE
Director Assistant Secretary
CARL W. VOGT, ESQ.
Director
INVESTMENT OBJECTIVE
A mutual fund seeking long-term growth of capital primarily through investment
in a diversified portfolio of marketable equity securities of issuers located
outside of the United States.
20
<PAGE>
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This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by an effective prospectus.
For more complete information regarding any of the Flag Investors Funds,
including charges and expenses, obtain a prospectus from your investment
representative or directly from the Fund at 1-800-767-FLAG. Read it carefully
before you invest.
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<PAGE>
[FLAG INVESTORS LOGO APPEARS HERE]
FLAG INVESTORS
GROWTH
Flag Investors Emerging Growth Fund
Flag Investors Equity Partners Fund
Flag Investors International Fund
EQUITY INCOME
Flag Investors Real Estate Securities Fund
Flag Investors Telephone Income Fund
BALANCED
Flag Investors Value Builder Fund
INCOME
Flag Investors Short-Intermediate Income Fund
Flag Investors Total Return U.S. Treasury Fund Shares
TAX-FREE INCOME
Flag Investors Managed Municipal Fund Shares
Flag Investors Maryland Intermediate Tax-Free Income Fund
CURRENT INCOME
Flag Investors Cash Reserve Prime Shares
P.O. Box 515
Baltimore, Maryland 21203
800-767-FLAG
Distributed by:
ICC DISTRIBUTORS, INC.
