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FLAG INVESTORS
FLAG
INVESTORS
INTERNATIONAL
FUND
ANNUAL REPORT
OCTOBER 31, 1998
<PAGE>
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
Dear Shareholders:
International equity market performance has been extremely volatile over
the past six months. After rising modestly through July, the combination of
increased stress on the world's financial systems, signs of weakening economic
activity, and a delayed response by political leaders produced a sharp swing in
investor sentiment, which sent the EAFE Index down 15.1% in August and
September. Finally, in October, interest rate cuts by the Federal Reserve Bank
in the U.S. and their European counterparts generated another reversal, and the
Index rebounded 10.4%. Over the entire period, the EAFE Index declined 5.0%. On
a regional basis, European equities fell 3.6%, while the Pacific markets
produced a 5.8% loss.
During the same six month period the Flag Investors International Fund
declined by 6.7%, which was greater than the Index's loss. The primary reasons
for the underperformance against the index were lower than Index exposure in
some of the stronger performing European markets and an absence of lower quality
Asian stocks, which rallied sharply in September and October. Over the past
year, the Fund's total return was 5.3%, compared to a 9.6% rise in EAFE.
At the moment, investors have retained their renewed enthusiasm for
equities and the markets have continued to rally into November. Valuations in
Europe, where over 70% of the Fund's assets are invested, have again become
relatively expensive, despite two concerns. First, the outlook for corporate
earnings remains troublesome, and higher uncertainty warrants lower valuations.
Second, low interest rates reflect at least some possibility of spreading
deflation, which would be negative for equities were it to materialize. In
seeking to moderate the associated risk, we emphasize attractively valued
securities
1
<PAGE>
LETTER TO SHAREHOLDERS
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in the European portion of the portfolio, and have maintained a significant
exposure (24%) to Australia and Asia, where several valuation measures are
relatively inexpensive. As a consequence, we believe this strategy will continue
to generate attractive long term returns.
Sincerely,
/s/ Andrew B. Williams
- ----------------------
Andrew B. Williams
Portfolio Manager
November 19, 1998
2
<PAGE>
TEN LARGEST HOLDINGS
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Percent of
Company Net Assets
- --------------------------------------------------------------------------------
1. Nokia Corp., ADR 3.1%
Nokia Oyj is an international telecommunications company. The
Company develops and manufactures mobile phones, networks and
systems for cellular and fixed networks.
2. Acom Co., Ltd 3.0%
One of the largest consumer lending companies in Japan.
3. Lend Lease Corp. Ltd. 3.0%
One of the leading financial services groups in Australia with
businesses of property services and construction.
4. Tomkins PLC 2.8%
U.K.-based conglomerate involved in the manufacture of fluid
controls, industrial products, food, garden and leisure products.
5. Assicurazioni Generali 2.8%
Italy's largest insurer, offers life and non-life insurance and
reinsurance in some 40 countries through 101 insurance companies.
6. Scottish Power PLC 2.8%
An integrated electric utility that generates, transmits and
supplies electricity throughout Scotland and parts of England.
7. WH Smith Class A 2.7%
A book, newspaper, music and hardware retailer.
8. Veba AG 2.7%
An electrical energy service provider in Germany that also
operates chemical, oil and telecommunications subsidiaries.
9. SCOR SA 2.6%
Through its subsidiaries, provides treaty and facultative
reinsurance on a worldwide basis to property-casualty and life
insurers.
10. Repsol SA 2.5%
A holding company which explores for, develops and produces
petroleum products
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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, and investor's shares may be worth more or less than their original
cost when redeemed.
4
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
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In the printed version of the document, a line graph appears which depicts
the following plot points:
Change in Value of a $10,000 Investment*
November 18, 1986--October 31, 1998
Flag Investors International Morgan Stanley Capital
11/86 9550 10000
10-87 10324 12621
10/88 11997 15799
10/89 14066 17085
10/90 13133 14895
10/91 12719 15930
10/92 10964 13824
10/93 15706 19003
10/94 17927 20920
10/95 16261 20843
10/96 18234 23025
10/97 21422 24091
10/98 21532 26416
Average Annual Total Return*
- --------------------------------------------------------------------------------
Periods Ended 10/31/98 1 Year 5 Years 10 Years Since Inception**
- --------------------------------------------------------------------------------
Class A Shares .51% 6.51% 6.02% 7.04%
- --------------------------------------------------------------------------------
* 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, Australia, 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
futures results. Investment return and principal value may fluctuate, so
that an investor's shares, when redeemed, may be worth more or less than
their original cost.
** 11/18/86.
5
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
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Statement of Net Assets October 31, 1998
No. of Percent of
Shares Security Value Net Assets
- --------------------------------------------------------------------------------
COMMON STOCK -- 95.6%?
UNITED KINGDOM -- 21.4%
12,500 Allied Zurich PLC* $ 147,913 1.2%
9,300 BOC Group PLC 136,042 1.1
12,500 British American Tobacco* 111,615 0.9
15,000 British Petroleum Co 221,305 1.8
60,000 British Steel PLC 102,430 0.9
36,562 BTR PLC 63,795 0.5
25,000 Caradon PLC 51,885 0.4
14,000 De La Rue PLC 40,888 0.4
38,750 Iceland Group PLC 127,442 1.1
20,000 Johnson Matthey PLC 112,640 0.9
84,000 Mirror Group Newspapers PLC 204,560 1.7
10,000 Rio Tinto PLC 121,762 1.0
35,100 Scottish Power PLC 344,257 2.8
25,000 Tate & Lyle PLC 143,624 1.2
75,000 Tomkins PLC 345,828 2.8
36,000 WH Smith Class A 330,790 2.7
----------- -----
2,606,776 21.4
JAPAN -- 19.2%
6,600 Acom Co., Ltd 370,556 3.0
6,000 Aoyama Trading Co., Ltd. 148,771 1.2
5,000 Canon Inc. 95,084 0.8
10,000 Chugai Pharmaceutical Co. 91,419 0.8
50 East Japan Railway Co. 297,973 2.5
20,000 Fuji Heavy Industry 100,043 0.8
4,000 Fuji Photo Film - Ord 147,305 1.2
4,000 Honda Motor Co. 120,742 1.0
12,000 Kao Corp. 244,243 2.0
2,000 Nintendo Corp. Ltd. 170,073 1.4
2,000 Rohm Company 177,663 1.5
1,600 Sony Corp. 102,113 0.8
5,000 Takefuji Corp. 267,788 2.2
----------- -----
2,333,773 19.2
6
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
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Statement of Net Assets October 31, 1998
No. of Percent of
Shares Security Value Net Assets
- --------------------------------------------------------------------------------
COMMON STOCK -- continued
GERMANY -- 10.0%
5,500 Bayer AG $ 222,016 1.8%
3,000 Deutsche Bank AG 194,213 1.6
3,600 Deutsche Telekom AG 197,533 0.8
4,000 Hoechst AG 167,150 1.4
3,400 Siemens AG 206,846 1.7
6,000 Veba AG 329,826 2.7
----------- -----
1,217,584 10.0
FRANCE -- 9.1%
2,258 Elf Aquitaine 261,697 2.1
2,356 Lafarge SA 241,205 2.0
3,872 Lagardere Groupe 156,052 1.3
2,000 Pernod-Ricard 133,381 1.1
5,600 SCOR SA 321,586 2.6
----------- -----
1,113,921 9.1
SPAIN -- 6.8%
10,000 Dragados & Construcciones SA 298,258 2.4
6,000 Repsol SA 301,600 2.5
1,700 Telefonica de Espana ADR 232,794 1.9
----------- -----
832,652 6.8
ITALY -- 6.3%
9,631 Assicurazioni Generali 345,774 2.8
121,520 Bennetton Group SpA 204,020 1.7
30,665 Telecom Italia SpA 222,251 1.8
----------- -----
772,045 6.3
AUSTRALIA -- 5.0%
100,000 Fosters Brewing Group* 245,232 2.0
16,634 Lend Lease Corp., Ltd. 366,369 3.0
----------- -----
611,601 5.0
7
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
- --------------------------------------------------------------------------------
Statement of Net Assets October 31, 1998
No. of Percent of
Shares Security Value Net Assets
- --------------------------------------------------------------------------------
COMMON STOCK -- concluded
FINLAND -- 3.1%
4,000 Nokia AB - Series A ADR $ 372,250 3.1%
----------- -----
NETHERLANDS -- 3.0%
4,900 Akzo Nobel 190,623 1.6
9,456 Algemene Bank Nederland 177,344 1.4
----------- -----
367,967 3.0
SWEDEN -- 3.0%
11,000 Astra AB 173,256 1.4
5,000 SKF AB - B Shares 57,538 0.5
6,000 Volvo AB - B 129,990 1.1
----------- -----
360,784 3.0
NORWAY -- 2.3%
4,300 Kvaerner AS 93,549 0.8
4,300 Norsk Hydro 188,274 1.5
----------- -----
281,823 2.3
BELGIUM -- 2.1%
700 Electrabel, SA* 257,970 2.1
----------- -----
DENMARK -- 1.6
2,500 Uni-Danmark A/S 190,779 1.6
----------- -----
NEW ZEALAND -- 1.2%
28,000 Telecom Corp New Zealand 114,793 1.0
5,000 Tranz Rail Holdings 126,562 0.2
----------- -----
141,355 1.2
PORTUGAL -- 1.0%
5,000 Electricidade 125,855 1.0
----------- -----
SINGAPORE -- 0.5%
10,000 Singapore Airlines Ltd. F 61,633 0.5
----------- -----
Total Common Stock
(Cost $9,497,855) 11,648,768 95.6
----------- -----
8
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
- --------------------------------------------------------------------------------
Statement of Net Assets October 31, 1998
No. of Percent of
Shares Security Value Net Assets
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 3.7
$455 Goldman Sachs & Co., 5.25%
Dated 10/30/98 to be repurchased
on 11/02/98, collateralized by U.S.
Treasury Notes with a market value
of $464,102.76.
(Cost $455,000) $ 455,000 3.7%
----------- -----
Total Investments in Securities
(Cost $9,952,855)** 12,103,768 99.3
Other Assets in Excess of Liabilities 83,188 0.7
----------- -----
Net Assets $12,186,956 100.0%
=========== =====
Net Asset Value and Redemption Price Per Share
($12,186,956 / 719,333 shares outstanding) $16.94
======
Maximum Offering Price Per Share
($16.94 / 0.955) $17.74
======
- ----------
* Non-income producing security.
** Cost for federal tax purposes is $10,192,648.
See Notes to Financial Statements
9
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
- --------------------------------------------------------------------------------
Statement of Operations
<TABLE>
<CAPTION>
For the
Year Ended
October 31,
- ------------------------------------------------------------------------------------
<S> <C>
1998
Investment Income:
Dividends ........................................................ $ 294,725
Interest ......................................................... 20,698
Less: Foreign taxes withheld .................................. (33,349)
---------
Total income ............................................ 282,074
---------
Expenses:
Investment advisory fee .......................................... 98,993
Professional fee ................................................. 110,377
Distribution fee ................................................. 32,998
Accounting fee ................................................... 27,558
Printing and postage ............................................. 25,206
Registration fees ................................................ 24,658
Transfer agent fee ............................................... 19,096
Custodian fee .................................................... 19,091
Miscellaneous .................................................... 13,467
---------
TOTAL EXPENSES .......................................... 371,444
Less: Fees waived ................................................ (172,249)
---------
Net expenses ............................................ 199,195
---------
Net investment income ............................................ 82,879
---------
Net realized and unrealized gain/(loss) on investments:
Net realized gain from security transactions ..................... 813,915
Net realized foreign exchange loss ............................... (61,533)
Change in unrealized appreciation/depreciation
of investments ................................................ (99,666)
Change in unrealized appreciation/depreciation on translation
of assets and liabilities, excluding investments denominated in
foreign currencies ............................................ 2,524
---------
Net gain on investments ................................. 655,240
---------
Net increase in net assets resulting from operations ................ $ 738,119
=========
</TABLE>
Statements of Changes in Net Assets
10
<PAGE>
<TABLE>
<CAPTION>
FLAG INVESTORS INTERNATIONAL FUND
- ----------------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Years Ended October 31,
- ----------------------------------------------------------------------------------------
<S> <C> <C>
1998 1997
Increase/(Decrease) in Net Assets:
Operations:
Net investment income ........................... $ 82,879 $ 165,758
Net realized gain from security transactions and
foreign exchange transactions ................ 752,382 1,730,841
Change in unrealized appreciation/depreciation
of investments ............................... (99,666) 348,203
Change in unrealized appreciation/depreciation
on translation of other assets and liabilities
denominated in foreign currencies ............ 2,524 (438)
------------ ------------
Net increase in net assets resulting
from operations .............................. 738,119 2,244,364
------------ ------------
Dividends to Shareholders from:
Net investment income and short-term gains ...... (82,879) (165,758)
Distributions in excess of net investment
income and short-term gains .................. (127,834) (94,471)
------------ ------------
Total distributions ............................. (210,713) (260,229)
Capital Share Transactions:
Proceeds from sale of 61,500 and
83,957 shares, respectively .................. 1,076,733 1,258,732
Value of 11,538 and 15,155 shares issued in
reinvestment of dividends, respectively ...... 182,302 223,079
Cost of 208,269 and 155,119 shares
repurchased, respectively .................... (3,581,124) (2,414,563)
------------ ------------
Total decrease in net assets derived
from capital share transactions .............. (2,322,089) (932,752)
------------ ------------
Total increase/(decrease) in net assets ......... (1,794,683) 1,051,383
Net Assets:
Beginning of year ............................... 13,981,639 12,930,256
------------ ------------
End of year ..................................... $ 12,186,956 $ 13,981,639
============ ============
Distributions in excess of net investment income ... $ (192,053) $ 437
============ ============
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
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Financial Highlights
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
For the
Year Ended
October 31,
- -------------------------------------------------------------------------
<S> <C>
1998
Per Share Operating Performance:
Net asset value at beginning of year .................... $ 16.36
-------
Income from Investment Operations:
Net investment income ................................... 0.08
Net realized and unrealized gain/(loss) on investments(1) 0.76
-------
Total from Investment Operations ........................ 0.84
Less Distributions:
Distributions from net investment income
and short-term gains .................................... (0.10)
Distributions in excess of net investment income
and short-term gains .................................... (0.16)
-------
Total distributions ..................................... (0.26)
-------
Net asset value at end of year .......................... $ 16.94
=======
Total Return(2) ............................................ 5.25%
Ratios to Average Daily Net Assets:
Expenses(3) ............................................. 1.50%
Net investment income(4) ................................ 0.62%
Supplemental data:
Net assets at end of year (000) ......................... $12,187
Portfolio turnover rate ................................. 27%
</TABLE>
- ----------
(1) The years ended October 31, 1998, 1997, 1996, 1995 and 1994 include net
realized currency gain/(loss).
(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 2.78%, 2.24%, 2.30%, 2.17% and
1.97% for the years ended October 31, 1998, 1997, 1996, 1995 and 1994,
respectively.
(4) Without the waiver of advisory fees (Note 2), the ratio of net investment
income to average daily net assets would have been (0.67)%, 0.44%, 1.10%,
0.02% and 0.28% for the years ended October 31, 1998, 1997, 1996, 1995 and
1994, respectively.
12
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended October 31,
- ------------------------------------------------------------ ----------------------------------------------------
<S> <C> <C> <C> <C>
1997 1996 1995 1994
Per Share Operating Performance:
Net asset value at beginning of year .................... $ 14.20 $ 12.69 $ 13.97 $ 13.05
------- ------- ------- -------
Income from Investment Operations:
Net investment income ................................... 0.11 0.26 0.09 0.18
Net realized and unrealized gain/(loss) on investments(1) 2.34 1.28 (1.37) 1.58
------- ------- ------- -------
Total from Investment Operations ........................ 2.45 1.54 (1.28) 1.76
Less Distributions:
Distributions from net investment income
and short-term gains .................................... (0.18) (0.03) -- (0.84)
Distributions in excess of net investment income
and short-term gains .................................... (0.11) -- -- --
------- ------- ------- -------
Total distributions ..................................... (0.29) (0.03) -- (0.84)
------- ------- ------- -------
Net asset value at end of year .......................... $ 16.36 $ 14.20 $ 12.69 $ 13.97
======= ======= ======= =======
Total Return(2) ............................................ 17.48% 12.13% (9.16)% 13.98%
Ratios to Average Daily Net Assets:
Expenses(3) ............................................. 1.50% 1.50% 1.50% 1.50%
Net investment income(4) ................................ 1.18% 1.91% 0.68% 0.75%
Supplemental data:
Net assets at end of year (000) ......................... $13,982 $12,930 $12,483 $15,487
Portfolio turnover rate ................................. 21% 13% 35% 43%
</TABLE>
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 commenced
operations on November 18, 1986 is a Maryland Corporation. The Fund is
registered under the Investment Company Act of 1940 as a diversified, open-end
management investment 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 not readily available, 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
<PAGE>
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 gain or loss on 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 Statemnents (continued)
Note 2--Investment Advisory Fees, Transactions with Affiliates and Other Fees
Investment Company Capital Corp. ("ICC"), an indirect subsidiary of Bankers
Trust 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 and reimburse expenses 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, 1998, ICC
waived fees of $98,993 and reimbursed expenses of $73,256. At October 31, 1998,
the Fund was owed $34,417 from the advisor for waived advisory fees of $7,400
and reimbursed expenses of $27,017. ICC paid Glenmede $73,399 for subadvisory
services for the year ended October 31, 1998.
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 $27,558 for accounting services for the year ended
October 31, 1998. At October 31, 1998, accrued accounting services fees amounted
to $2,233.
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 $19,096 for
transfer agent services for the year ended October 31, 1998. At October 31,
1998, the Fund owed $3,865 in transfer agent fees.
Effective June 16, 1998, Bankers Trust Company became the Fund's custodian.
Prior to June 16, 1998, Mellon Trust served as the Fund's custodian. From June
16, 1998 to October 31, 1998, the Fund paid $8,008 in custody fees.
As compensation for providing distribution services, the Fund pays ICC
Distributors, Inc. ("ICC Distributors"), 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. The Fund paid $32,998 for distribution services for the year ended
October 31, 1998. At October 31, 1998, the Fund owed $2,467 in distribution
fees.
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, 1998 was $982, and the accrued liability was $489.
16
<PAGE>
FLAG INVESTORS INTERNATIONAL FUND
- --------------------------------------------------------------------------------
NOTE 3--Capital Share Transactions
The Fund is authorized to issue up to 9 million shares of $.001 par value
capital stock (8 million Flag Investors Class A and 1 million undesignated).
NOTE 4--Investment Transactions
Excluding short-term and U.S. government obligations, purchases of
investment securities aggregated $3,461,505 and sales of investment securities
aggregated $6,119,807 for the year ended October 31, 1998.
On October 31, 1998, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $3,134,217 and
aggregate gross unrealized depreciation for all securities in which there is an
excess of tax cost over value was $983,304.
NOTE 5--Foreign Investment Risk
Foreign investments involve substantial and different risks than
investments in companies in the United States. In general, less information is
publicly available about foreign companies than is available about companies in
the United States. Most foreign companies are not subject to uniform audit and
financial reporting standards, practices and requirements comparable to those in
the United States.
Foreign stock markets are generally not as developed or efficient as those
in the United States. In most foreign markets volume and liquidity are less than
in the United States and, at times, volatility of price can be greater than in
the United States. Fixed commissions on foreign stock exchanges are generally
higher than the negotiated commissions on U.S. exchanges. There is generally
less government supervision and regulation of foreign stock exchanges, brokers
and companies than in the United States. The settlement periods for foreign
securities, which are often longer than those for securities of U.S. issuers,
may affect portfolio liquidity.
Although the Fund intends to invest in securities of companies and
governments of developed, stable nations, there is also the possibility of
adverse changes in investment or exchange control regulations, expropriation or
confiscatory taxation, limitations on the removal of funds or other assets,
political or social instability, or diplomatic developments which could
adversely affect investments, assets or securities transactions of the Fund in
some foreign countries.
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FLAG INVESTORS INTERNATIONAL FUND
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Notes to Financial Statements (concluded)
NOTE 6--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 $64,656 have been reclassified from the
accumulated net realized loss from security and foreign exchange transactions to
distributions in excess of net investment income. These reclassifications have
no effect on net assets or net asset values per share.
On October 31, 1998, there was a tax capital loss carryforward of
approximately $1,774,000, of which $1,185,000 expires in 2000 and $589,000 in
2001. This carryforward will be used to offset future net capital gains.
NOTE 7--Net Assets
On October 31, 1998, net assets consisted of:
Paid-in capital ............................................ $ 11,998,931
Distribution in excess of net investment income ............ (192,053)
Accumulated net realized loss from security and
foreign exchange transactions ........................... (1,774,119)
Unrealized appreciation of investments ..................... 2,150,913
Unrealized translation gain ................................ 3,284
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$ 12,186,956
============
NOTE 8--Personal Income Tax Information for the Shareholder (Unaudited)
The following information summarizes all distributions paid by the Fund
during the taxable period ended October 31, 1998.
Domestic Ordinary Income ................................... $ 28,367
Foreign Source Income ...................................... 182,346
--------
Total Ordinary Income ................................... 210,713
========
Long-Term Capital Gains .................................... --
Total Distributions ..................................... 210,713
========
Foreign Tax Paid or Withheld ............................... $ 45,153
========
The foreign taxes paid or withheld represent taxes incurred by the Fund on
interest and dividends received by the Fund from foreign sources. Foreign taxes
paid or withheld should be included in taxable income with an offsetting
deduction from gross income or as a credit for taxes paid to foreign
governments. You should consult your tax advisor regarding the appropriate
treatment of foreign taxes paid.
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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 accompanying statements of net assets of Flag Investors
International Fund, Inc. as of October 31, 1998, 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
the 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 as of
October 31, 1998 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
International Fund, Inc. as of October 31, 1998, 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 30, 1998
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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 SCOTT J. LIOTTA
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
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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>
[LOGO]
FLAG INVESTORS
Growth
Flag Investors Emerging Growth Fund
Flag Investors Equity Partners Fund
Flag Investors International Fund
Specialty
Flag Investors Real Estate Securities Fund
Flag Investors Communications 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
Current Income
Flag Investors Cash Reserve Prime Shares
P.O. Box 515
Baltimore, Maryland 21203
800-767-FLAG
Distributed by:
ICC DISTRIBUTORS, INC.
INTLANN
