-----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, AcNhFh9hg7biTcD7f8SspsptBbtuQjD0pms9p8nCC4hTRKIjRvFfawqQGyy91FY4 175NGr6M9hu8CcCuTNKUQQ== 0000797657-96-000006.txt : 19961203 0000797657-96-000006.hdr.sgml : 19961203 ACCESSION NUMBER: 0000797657-96-000006 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961129 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BT INVESTMENT FUNDS CENTRAL INDEX KEY: 0000797657 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-04760 FILM NUMBER: 96674405 BUSINESS ADDRESS: STREET 1: FEDERATED INVESTORS TOWERS CITY: PITTSBURGH STATE: PA ZIP: 15222-3770 BUSINESS PHONE: 412881401 FORMER COMPANY: FORMER CONFORMED NAME: BT TAX FREE INVESTMENT TRUST DATE OF NAME CHANGE: 19880530 N-30D 1 BT INVESTMENT FUNDS Small Cap Fund ANNUAL REPORT SEPTEMBERo1996 Small Cap Fund Table of Contents Letter to Shareholders 3 Small Cap Fund Statement of Assets and Liabilities 5 Statement of Operations 5 Statement of Changes in Net Assets 6 Financial Highlights 6 Notes to Financial Statements 7 Report of Independent Accountants 8 Small Cap Portfolio Schedule of Portfolio Investments 9 Statement of Assets and Liabilities 11 Statement of Operations 11 Statement of Changes in Net Assets 12 Financial Highlights 12 Notes to Financial Statements 13 Report of Independent Accountants 15 Small Cap Fund Letter to Shareholders We are pleased to present you with this annual report for the BT Investment Small Cap Fund, providing a review of the market, the portfolio, and our outlook as well as a complete financial summary of the Fund's operations and a listing of the Portfolio's holdings. The Small Cap Fund (the "Fund") had a total return of 26.41% for the twelve months ending September 30, 1996, as compared to 13.13% for the Russell 2000 Index and 18.40% for the Lipper Small Cap Growth Average. Since its inception on October 21, 1993, the Fund has returned 133.85%, cumulatively. MARKET ACTIVITY In general, the last twelve months were a period of strong market performance. It was also a time of economic uncertainty, market confusion, and major shifts in investor psychology. In the first six months, signs of an economic slowdown and the Federal Reserve Board's decision not to lower interest rates raised fears that the economy might be heading for a recession and that companies' earnings growth would decelerate or possibly even decline. In this environment, the health care, energy, and financial services sectors performed well. Economically sensitive sectors, such as producer durables, technology, and consumer staples, underperformed. Smaller companies, viewed as more vulnerable to economic slowdowns, underperformed both middle and large capitalization companies for this period. The prospect of relatively controlled economic growth led to a stock market rally through most of the second calendar quarter, with small stocks outperforming large and middle capitalization companies. This also caused the better performing sectors of the market to change rapidly, with more economically sensitive areas, such as consumer cyclicals, leading the way. Later in the second quarter, investor sentiment changed course again, with worries about accelerating economic growth, higher inflation, and the possibility of a Federal Reserve Board interest rate hike. This resulted in a sharp mid-summer sell-off in the equity markets; small cap stocks took the largest beating. We firmly believe that this was a correction in a bull market rather than a negative indicator. In fact, this correction lasted for less time than did the three previous small cap corrections since 1990. The equity markets recovered significantly in August and September, with the technology, consumer staples, and financial sectors showing the most strength. Small cap stocks were very resilient, with the majority of companies reporting earnings that either met or exceeded expectations. INVESTMENT REVIEW The Fund outperformed its benchmark and its category average both since inception and for the twelve month period. For the annual period, most of the outperformance can be attributed to specific stock selection. As for sector allocation, the Fund benefitted from its overweightings in health care and the consumer area. However, the Fund had low exposure to other leading sectors, such as energy and financial services. We continue to be overweighted in technology, which, though lackluster for the year, has recently begun to outperform. Our disciplined investment process allowed us to initiate or add to positions in companies with strong prospects whose stocks may be hurt temporarily by the market's volatility. For example, we added to our investment in Pediatrix Medical, a physician practice management company focused on neonatology. As investors sold growth stocks from May to July, the stock dropped sharply. We believed Pediatrix's position as the industry leader had not changed. After the market correction, the stock, in fact, recovered, and its growth prospects remain bright. For the last twelve months, we initiated a number of new investment themes. For example, Life on the Net seeks companies integral to the use of the Internet and corporate intranets. The Life Sciences Revolution theme exploits small biotechnology companies moving from the development stage into production with their drugs. We also increased the Fund's presence in the New Consumer, America's Changing Leisure Time and Stores of Value themes when it became apparent the consumer was beginning to spend again. Objective Seeks to provide long-term capital growth by investing primarily in equity securities of smaller companies. Current income is a secondary goal. Investment Instruments Generally common stocks of smaller U.S. corporations and, to a lesser extent, foreign corporations. Ten Largest Stock Holdings Transaction Systems Architects Nautica Enterprises, Inc. National Data Corp. Dollar Tree Stores, Inc. Pediatrix Medical Group Rational Software Papa John's International Legato Systems Sitel Corp. Saville Systems Plc. Small Cap Fund Letter to Shareholders Diversification of Portfolio Investments-See Appendix By Theme as of September 30, 1996 (percentages are based on market value) Move to Outsourcing 7% New Consumer 6% Telecommunications 7% Stores of Value 7% Productivity Enhancements 6% Client Server Computing 10% Flourishing in the Managed Care Environment 8% Managing the Info Age 10% New Healthcare Paradigm 11% Other 28% MANAGER OUTLOOK Bankers Trust is forecasting moderate growth in the economy, relatively stable interest rates, and only slightly higher inflation. In this environment, small cap stocks should continue to do well. More specifically, as earnings for large cap stocks begin to slow with increasing global competition and the slowing of a multiyear period of restructurings and resulting margin expansion, small caps should outperform as their higher relative earnings growth is rewarded. We believe, too, that we are still in an upward phase in this latest small cap cycle, which started in late 1990. Despite robust earnings, the price/earnings (P/E) multiples in the small cap sector remain very compelling both compared to historical levels and as the P/E multiples remain at a discount to their larger cap counterparts. We expect some ongoing market volatility. We will, of course, continue monitoring economic conditions and how they affect the financial markets, as we seek long-term capital growth with current income as a secondary objective. Mary Dugan and Tim Woods Portfolio Managers of the Small Cap Portfolio September 30, 1996 Performance Comparison-see Appendix Comparison of Change in Value of a $10,000 Investment in the BT Investment Small Cap Fund and the Russell 2000 Index since October 31, 1993. Total Return Ended September 30, 1996 One Year Since 10/21/93* 26.41% 133.85% * The Fund's inception date. Investment return and principal value may fluctuate so that shares, when redeemed, may be worth more or less than their original cost. BT Small Cap $23,074 Russell 2000 Index $13,967 Oct-93 10000 10000 Dec-93 10326 10005 Mar-94 10375 9739 Jun-94 9951 9360 Sep-94 11451 10010 Dec-94 12320 9823 Mar-95 14107 10276 Jun-95 15903 11238 Sep-95 18263 12316 Dec-95 19535 12612 Mar-96 21049 13256 Jun-96 23181 13919 Sep-96 23074 13967 Past performance is not indicative of future performance. Small Cap Fund Statement of Assets and Liabilities September 30, 1996 Assets Investment in Small Cap Portfolio, at Value $ 242,809,448 Receivable for Shares of Beneficial Interest Subscribed 245,188 Prepaid Expenses and Other 12,276 Total Assets 243,066,912 Liabilities Due to Bankers Trust 145,195 Payable for Shares of Beneficial Interest Redeemed 610,097 Accrued Expenses and Other 75,391 Total Liabilities 830,683 Net Assets ($0.001 par value per share, unlimited number of shares of beneficial interest authorized) $ 242,236,229 Composition of Net Assets Paid-in Capital $ 177,057,815 Accumulated Net Realized Gain from Investments 4,403,294 Net Unrealized Appreciation on Investments 60,775,120 Net Assets, September 30, 1996 $ 242,236,229 Net Asset Value , Offering and Redemption Price Per Share (net assets divided by shares outstanding) $ 21.66 Shares Outstanding 11,185,714 Statement of Operations For the year ended September 30, 1996 Investment Income Loss Allocated from Small Cap Portfolio, net $ (94,845) Expenses Administration and Services 1,285,892 Shareholder Reports 26,845 Registration 66,249 Professional 11,840 Trustees 2,855 Miscellaneous 2,171 Total Expenses 1,395,852 Less: Expenses Absorbed by Bankers Trust (109,960) Net Expenses 1,285,892 Net Investment Loss (1,380,737) Realized and Unrealized Gain on Investments Net Realized Gain from Investment Transactions 4,946,585 Net Change in Unrealized Appreciation on Investments 38,472,178 Net Realized and Unrealized Gain on Investments 43,418,763 Net Increase in Net Assets from Operations $ 42,038,026 See Notes to Financial Statements on Page 7 Small Cap Fund Statement of Changes in Net Assets For the For the year ended year ended September 30, 1996 September 30, 1995 Increase (Decrease) in Net Assets from: Operations Net Investment Loss $ (1,380,737) $ (274,306) Net Realized Gain from Investment Transactions 4,946,585 11,205,495 Net Change in Unrealized Appreciation on Investments 38,472,178 19,127,778 Net Increase in Net Assets from Operations 42,038,026 30,058,967 Distributions to Shareholders Net Realized Gain from Investment Transactions (10,302,003) - Capital Transactions in Shares of Beneficial Interest Proceeds from Sales of Shares 249,711,457 90,112,541 Dividend Reinvestments 7,579,445 - Cost of Shares Redeemed (169,725,477) (18,568,384) Net Increase from Capital Transactions in Shares of Beneficial Interest 87,565,425 71,544,157 Total Increase in Net Assets 119,301,448 101,603,124 Net Assets Beginning of Year 122,934,781 21,331,657 End of Year $ 242,236,229 $ 122,934,781 Financial Highlights Contained below are selected data for a share outstanding, total investment return, other supplemental data and ratios to average net assets for the periods indicated for the Small Cap Fund. For the Period October 21, 1993 For the year ended (Commencement September 30, of Operations) to 1996 1995 September 30, 1994 Per Share Operating Performance: Net Asset Value, Beginning of Period $18.50 $11.60 $10.00 Income from Investment Operations Net Investment Loss (0.12) (0.04) (0.03) Net Realized and Unrealized Gain on Investments 4.65 6.94 1.63 Total from Investment Operations 4.53 6.90 1.60 Distributions to Shareholders Net Realized Gain from Investment Transactions (1.37) - - Net Asset Value, End of Period $21.66 $18.50 $11.60 Total Investment Return 26.41% 59.48% 17.06%* Supplemental Data and Ratios: Net Assets, End of Period (000's omitted) $242,236 $122,935 $21,332 Ratios to Average Net Assets: Net Investment Loss (0.70)% (0.46)% (0.58)%* Expenses, including Expenses of the Small Cap Portfolio 1.25% 1.25% 1.25%* Decrease Reflected in Above Expense Ratio Due to Absorption of Expenses by Bankers Trust 0.22% 0.34% 0.86%* * Annualized See Notes to Financial Statements on Page 7 Small Cap Fund Notes to Financial Statements Note 1-Organization and Significant Accounting Policies A. Organization BT Investment Funds (the "Trust") is registered under the Investment Company Act of 1940 (the "Act"), as amended, as an open-end management investment company. The Trust was organized on July 21, 1986, as a business trust under the laws of the Commonwealth of Massachusetts. The Small Cap Fund (the "Fund") is one of the funds offered to investors by the Trust. The Fund commenced operations and began offering shares of beneficial interest on October 21, 1993. The Fund invests substantially all of its assets in the Small Cap Portfolio (the "Portfolio"). The Portfolio is an open-end management investment company registered under the Act. The Fund seeks to achieve its investment objective by investing all of its investable assets in the Portfolio. The value of such investment in the Portfolio reflects the Fund's proportionate interest in the net assets of the Portfolio. At September 30, 1996, the Fund's investment was 98.86% of the Portfolio. The financial statements of the Portfolio, including the Schedule of Portfolio Investments, are contained elsewhere in this report. B. Investment Income The Fund earns income, net of expenses, daily on its investment in the Small Cap Portfolio. All of the net investment income and realized an unrealized gains and losses from the security transactions of the Portfolio are allocated pro rata among the investors in the Portfolio at the time of such determination. C. Dividends It is the Fund's policy to declare and distribute dividends quarterly to shareholders from net investment income, if any. Dividends and distributions payable to shareholders are recorded by the Fund on the ex-dividend date. Distributions of net realized short-term and long-term capital gains, if any, earned by the Fund will be made annually to the extent they are not offset by any capital loss carryforwards. D. Federal Income Taxes It is the Fund's policy to comply with the requirements of the Internal Revenue Code. Therefore, no federal income tax provision is required. The Fund may periodically make reclassifications among certain of its capital accounts as a result of the timing and characterization of certain income and capital gains distributions determined annually in accordance with federal tax regulations which may differ from generally accepted accounting principles. For the year ended September 30, 1996, $1,380,737 of accumulated net investment loss was reclassified to paid-in-capital. E. Other The Trust accounts separately for the assets, liabilities, and operations of the Fund. Expenses directly attributable to the Fund are charged to that Fund, while expenses which are attributable to all of the Trust's funds are allocated among them. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts in the financial statements. Note 2-Fees and Transactions with Affiliates The Fund has entered into an Administration and Services Agreement with Bankers Trust Company ("Bankers Trust"). Under this Administration and Services Agreement, Bankers Trust provides administrative, custody, transfer agency and shareholder services to the Fund in return for a fee computed daily and paid monthly at an annual rate of 0.65 of 1% of the Fund's average daily net assets. For the year ended September 30, 1996, this fee aggregated $1,285,892. On September 30, 1996, the Trust entered into a Distribution Agreement with Edgewood Services, Inc. (`Edgewood''). Prior to September 30, Signature Broker-Dealer Services, Inc. (`Signature'') was the Trust's distributor. Under the Distribution Agreement with the Trust, pursuant to Rule 12b-1 of the 1940 Act, Edgewood, and previously Signature, may seek reimbursement, at an annual rate not exceeding 0.20 of 1% of the Fund's average daily net assets, for expenses incurred in connection with any activities primarily intended to result in the sale of the Fund's shares. For the year ended September 30, 1996, there were no reimbursable expenses incurred under this agreement. Bankers Trust has voluntarily undertaken to waive and reimburse expenses of the Fund, to the extent necessary, to limit all expenses to 0.65 of 1% of the average daily net assets of the Fund, excluding expenses of the Portfolio and 1.25 of 1% of the average daily net assets of the Fund, including expenses of the Portfolio. For the year ended September 30, 1996, expenses of the Fund have been reduced by $109,960. The Fund is subject to such limitations as may from time to time be imposed by the Blue Sky laws of states in which of the Fund sells its shares. Currently, the most restrictive jurisdiction imposes expense limitations of 2.50% of the first $30,000,000 of the average daily net assets, 2.00% of the next $70,000,000, and 1.50% of any excess over $100,000,000. Certain trustees and officers of the Fund are also directors, officers and/or employees of Edgewood and/or Signature. None of the trustees so affiliated received compensation for services as trustee of the Fund. Similarly, none of the Fund's officers received compensation from the Fund. Note 3-Shares of Beneficial Interest At September 30, 1996, there were an unlimited number of shares of beneficial interest authorized. Transactions in shares of beneficial interest were as follows: For the For the year ended year ended September 30, 1996 September 30, 1995 Shares Amount Shares Amount Sold 12,796,190 $249,711,457 6,022,926 $90,112,541 Reinvested 439,133 7,579,445 - - Redeemed (8,695,218) (169,725,477) (1,216,232) (18,568,384) Net Increase 4,540,105 $87,565,425 4,806,694 $71,544,157 Small Cap Fund Report of Independent Accountants To the Trustees and Shareholders of BT Investment Funds: We have audited the accompanying statement of assets and liabilities of the Small Cap Fund (one of the Funds comprising BT Investment Funds) as of September 30, 1996, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended and the financial highlights for each of the two years in the period then ended and for the period October 21, 1993 (commencement of operations) to September 30, 1994. 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 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 September 30, 1996 by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Small Cap Fund of BT Investment Funds as of September 30, 1996, the results of its operations, the changes in its net assets and the financial highlights for the periods referred to above, in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. Kansas City, Missouri October 29, 1996 Small Cap Portfolio Schedule of Portfolio Investments Shares Description Value Common Stocks - 96.21% America's Changing Leisure Time - 5.64% 71,800 Applebees International, Inc. $ 1,902,700 31,900 Cinar Films, Inc. (a) 831,394 32,800 Interstate Hotels (a) 906,100 82,650 Papa John's International (a) 4,339,125 101,925 Regal Cinemas, Inc. (a) 2,548,125 144,200 Sodak Gaming, Inc. (a) 3,316,600 13,844,044 America's Industrial Renaissance - 0.74% 64,600 Greenwich Air Services 1,808,800 Client Server Computing - 9.81% 5,000 BT Group Plc., ADR (a) 235,000 17,100 Citrix Systems, Inc. (a) 876,375 36,300 Clarify, Inc. (a) 2,250,600 78,600 Indus Group, Inc. (a) 1,572,000 53,300 Industri-Matematik International Corp. (a) 659,587 115,200 Rational Software (a) 3,931,200 30,600 SS&C Technologies (a) 309,825 49,000 Sapient Corp. (a) 2,180,500 77,800 Structural Dynamics Research (a) 1,857,475 92,400 Systemsoft Corp. (a) 3,164,700 40,200 Veritas Software (a) 2,844,150 153,300 Versant Object Technology Corp. (a) 3,640,875 38,200 Xionics Document Technologies, Inc. (a) 573,000 24,095,287 Flourishing In the Managed Care Environment - 8.18% 36,800 CRA Managed Care (a) 1,987,200 102,500 FPA Medical Management Inc. (a) 2,703,437 74,100 Henry Schein, Inc. (a) 2,852,850 116,400 Multicare Companies, Inc. (a) 2,531,700 40,400 NCS HealthCare, Inc. (a) 1,267,550 103,700 OccuSystems, Inc. (a) 3,111,000 47,300 Perclose, Inc. (a) 1,052,425 87,100 Renal Treatment Centers, Inc. (a) 2,896,075 39,100 Target Therapeutics (a) 1,671,525 20,073,762 Interactive Media - 3.82% 62,900 Inso Corp. (a) 3,412,325 64,500 The Providence Journal Company Cl. A (a) 1,894,687 51,000 Universal Outdoor Holdings, Inc. (a) 1,843,200 63,900 VideoServer, Inc. (a) 2,220,525 9,370,737 Life On the Net - 5.32% 79,800 Legato Systems, Inc. (a) 3,790,500 14,900 Security Dynamics Tech, Inc. (a) 1,069,075 62,500 Technology Modeling Association, Inc. (a) 812,500 113,400 Transaction Systems Architects (a) 4,791,150 58,400 VeriFone, Inc. (a) 2,613,400 13,076,625 Life Sciences Revolution - 4.47% 67,500 Agouron Pharmaceuticals (a) 2,944,687 85,100 Endovascular Technologies (a) 1,021,200 68,000 Human Genome Sciences (a) 2,567,000 39,500 Idexx Laboratories Corp. (a) 1,787,375 53,200 Martek Biosciences Corp. (a) 1,330,000 47,600 Spine-Tech, Inc. (a) 1,332,800 10,983,062 Shares Description Value Managing the Information Age - 10.19% 35,800 Abacus Direct Corp. (a) $ 751,800 65,500 CCC Information Services Group (a) 1,375,500 126,100 Cheyenne Software, Inc. (a) 2,711,150 43,200 DSP Communications (a) 2,413,800 68,200 IDX Systems (a) 2,387,000 57,600 Metromail Corp. (a) 1,245,600 104,800 National Data Corp. 4,571,900 62,865 Pure Atria Corp. (a) 2,373,154 93,800 Sitel Corp. (a) 4,174,100 66,500 Visio Corp. (a) 3,025,750 25,029,754 Move to Outsourcing - 6.96% 42,600 Affiliated Computer Services (a) 2,502,750 81,200 Atlantic Southeast Airlines 1,786,400 84,500 Career Horizons, Inc. (a) 3,284,937 58,600 CoreStaff, Inc. (a) 1,567,550 101,500 HPR, Inc. (a) 1,624,000 57,000 MSC Industrial Direct (a) 2,030,625 61,800 Norrell Corp. 1,946,700 32,100 Pharmaceutical Product Development (a) 866,700 38,900 The Vincam Group, Inc. (a) 1,487,925 17,097,587 New Consumer - 6.30% 57,600 Blyth Industries, Inc. (a) 2,793,600 26,700 Boston Beer Company, Inc. (a) 517,313 19,400 Gargoyles, Inc. (a) 412,250 127,900 Nautica Enterprises, Inc. (a) 4,124,775 72,000 USA Detergents, Inc. (a) 2,862,000 70,400 Urban Outfitters, Inc. (a) 1,636,800 54,800 West Marine, Inc. (a) 1,808,400 46,400 Williams-Sonoma, Inc. (a) 1,316,600 15,471,738 New Health Care Paradigm - 11.21% 30,500 ABR Information Services, Inc. (a) 2,196,000 48,400 American Homepatient, Inc. (a) 1,076,900 33,000 Amerisource Health Corp. CI. A (a) 1,468,500 50,100 Applied Analytical Industries, Inc. (a) 1,139,775 33,900 Express Scripts (a) 1,228,875 90,800 Gulf South Medical Supply (a) 2,338,100 127,500 Mariner Health Group (a) 1,960,313 91,200 Pediatrix Medical Group (a) 4,571,400 113,200 Physician Sales & Service (a) 2,660,200 44,900 Rexall Sundown, Inc. (a) 1,638,850 82,900 Ro Tech Medical Corp. (a) 1,367,850 133,100 TheraTx, Inc. (a) 1,580,562 63,900 Total Renal Care Holdings (a) 2,540,025 83,700 Transition Systems (a) 1,757,700 27,525,050 Productivity Enhancement - 5.79% 58,000 Catalina Marketing Corp. (a) 3,088,500 22,900 Quick Response Services, Inc. (a) 853,025 20,600 Remedy Corp. (a) 1,648,000 103,500 Saville Systems Plc. (a) 3,648,375 81,100 Sawtek, Inc. (a) 2,108,600 16,400 Symbol Technologies (a) 754,400 44,900 Whittman-Hart, Inc. (a) 2,121,525 14,222,425 Return to Home Ownership - 0.28% 22,400 Ethan Allen, Inc. 697,200 See Notes to Financial Statements on Pages 13 and 14 Small Cap Portfolio Schedule of Portfolio Investments September 30, 1996 Shares Description Value Stores of Value - 6.63% 73,000 Cost Plus, Inc. (a) $ 1,688,125 105,700 Dollar Tree Stores Inc. (a) 4,069,450 21,400 Hot Topic, Inc. (a) 502,900 52,700 Just For Feet (a) 2,641,588 83,100 Petco Animal Supplies (a) 2,264,475 81,900 The Men's Wearhouse (a) 2,047,500 85,900 US Office Products Co. (a) 3,081,663 16,295,701 Telecommunications - 6.64% 4,900 Advanced Fibre Communication (a) 122,500 44,000 Aspect Telecommunication Corp. (a) 2,739,000 54,500 CSG Systems International, Inc. (a) 1,103,625 71,500 Digital Microwave Corp. (a) 1,644,500 78,000 ICG Communications, Inc. (a) 1,638,000 67,600 Lightbridge Inc. (a) 794,300 43,600 Orckit Communications, Ltd. (a) 801,150 95,800 P-COM, Inc. (a) 2,371,050 50,000 Premisys Communications (a) 1,837,500 86,400 Verilink Co. (a) 2,116,800 25,800 Westell Technologies, Inc. (a) 1,141,650 16,310,075 The Greying of America - 3.11% 51,200 ESC Medical Systems Ltd. (a) 1,638,400 90,250 Genesis Health Ventures Inc. (a) 2,538,281 Shares Description Value 59,700 Sofamor Danek Group, Inc. (a) $ 1,843,238 58,000 Sunrise Assisted Living (a) 1,624,000 7,643,919 The Ubiquitous Semiconductor- 1.12% 46,200 Microchip Technology (a) 1,726,725 59,200 USCS International, Inc. (a) 1,036,000 2,762,725 Total Common Stocks (Cost $175,410,470) $ 236,308,491 Principal Amount SHORT-TERM INVESTMENTS - 5.37% U.S. Treasury Bills - 5.37% $ 3,105,000 5.12%, 10/24/96 3,095,168 10,190,000 5.00%, 12/05/96 10,099,482 Total Short Term Investments (Cost $13,192,508) $ 13,194,650 Total Investments (Cost $188,602,978) - 101.58% $ 249,503,141 Liabilities in Excess of Other Assets - (1.58%) (3,888,050) Net Assets - 100.00% $ 245,615,091 (a) Non-Income Producing Security See Notes to Financial Statements on Pages 13 and 14 Small Cap Portfolio Statement of Assets and Liabilities September 30, 1996 Assets Investments, at Value (Cost of $188,602,978) $ 249,503,141 Cash 174,574 Receivable for Securities Sold 599,261 Dividends and Interest Receivable 2,163 Prepaid Expenses and Other 165 Total Assets 250,279,304 Liabilities Due to Bankers Trust 147,607 Payable for Securities Purchased 4,498,328 Accrued Expenses and Other 18,278 Total Liabilities 4,664,213 Net Assets $ 245,615,091 Composition of Net Assets Paid-in Capital $ 184,714,928 Net Unrealized Appreciation on Investments 60,900,163 Net Assets, September 30, 1996 $ 245,615,091 Statement of Operations For the year ended September 30, 1996 Investment Income Dividends $ 55,426 Interest 1,042,653 Total Investment Income 1,098,079 Expenses Advisory 1,293,449 Administration and Services 198,992 Professional 27,045 Trustees 2,718 Miscellaneous 2,925 Total Expenses 1,525,129 Less: Expenses Absorbed by Bankers Trust (331,176) Net Expenses 1,193,953 Net Investment Loss (95,874) Realized and Unrealized Gain on Investments Net Realized Gain from Investment Transactions 4,944,264 Net Change in Unrealized Appreciation on Investments 38,597,216 Net Realized and Unrealized Gain on Investments 43,541,480 Net Increase in Net Assets from Operations $ 43,445,606 See Notes to Financial Statements on Pages 13 and 14 Small Cap Portfolio Statement of Changes in Net Assets For the For the year ended year ended September 30, 1996 September 30, 1995 Increase (Decrease) in Net Assets from: Operations Net Investment Income (Loss) $ (95,874) $ 114,355 Net Realized Gain from Investments 4,944,264 11,205,496 Net Change in Unrealized Appreciation on Investments 38,597,216 19,127,783 Net Increase in Net Assets from Operations 43,445,606 30,447,634 Capital Transactions Proceeds from Capital Invested 259,905,685 89,963,488 Value of Capital Withdrawn (181,564,152) (17,910,681) Net Increase in Net Assets from Capital Transactions 78,341,533 72,052,807 Total Increase in Net Assets 121,787,139 102,500,441 Net Assets Beginning of Year 123,827,952 21,327,511 End of Year $ 245,615,091 $ 123,827,952 Financial Highlights Contained below are selected supplemental data and ratios to average net assets for the periods indicated for the Small Cap Portfolio. For the period October 21, 1993 For the year ended ( Commencement September 30, of Operations) to 1996 1995 September 30, 1994 Supplemental Data and Ratios: Net Assets, End of Period (000's omitted) $ 245,615 $ 123,828 $ 21,328 Ratios to Average Net Assets: Net Investment Income (Loss) (0.05)% 0.19% 0.07%* Expenses 0.60% 0.60% 0.60%* Decrease Reflected in Above Expense Ratios Due to Absorption of Expenses by Bankers Trust 0.17% 0.19% 0.38%* Portfolio Turnover Rate 159% 161% 154% Average Commission Per Share** $ 0.048 * Annualized. ** For fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per share for security trades on which commissions are charged. See Notes to Financial Statements on Pages 13 and 14 Small Cap Portfolio Notes to Financial Statements Note 1-Organization and Significant Accounting Policies A. Organization The Small Cap Portfolio (the `Portfolio'') is registered under the Investment Company Act of 1940 (the `Act''), as amended, as an open-end management investment company. The Portfolio was organized on August 6, 1993 as an unincorporated trust under the laws of New York and commenced operations on October 21, 1993. The Declaration of Trust permits the Board of Trustees (the `Trustees'') to issue beneficial interests in the Portfolio. B. Security Valuation The Portfolio's investments listed or traded on National Stock Exchanges or other domestic or foreign exchanges are valued based on the closing price of a security traded on that exchange prior to the time when the Portfolio assets are valued. Short-term obligations with remaining maturities of 60 days or less are valued at amortized cost. Other short-term debt securities are valued on a mark- to-market basis until such time as they reach a remaining maturity of 60 days, whereupon they will be valued at amortized cost using their value on the 61st day. All other securities and other assets are valued at their fair value as determined in good faith under procedures established by and under the general supervision of the Trustees. C. Security Transactions and Investment Income Security transactions are accounted for on a trade date basis. Dividend income is recorded on the ex-dividend date. Interest income is recorded on the accrual basis and includes amortization of premium and discount on investments. Realized gains and losses from securities transactions are recorded on the identified cost basis. All of the net investment income and realized and unrealized gains and losses from the securities transactions of the Portfolio are allocated pro rata among the investors in the Portfolio at the time of such determination. D. Repurchase Agreements The Portfolio may enter into repurchase agreements with financial institutions deemed to be creditworthy by the Portfolio's Investment Adviser, subject to the seller's agreement to repurchase such securities at a mutually agreed upon price. Securities purchased subject to repurchase agreements are deposited with the Portfolio's custodian and pursuant to the terms of the repurchase agreement must have an aggregate market value greater than or equal to the repurchase price plus accrued interest at all times. If the value of the underlying securities falls below the value of the repurchase price plus accrued interest, the Portfolio will require the seller to deposit additional collateral by the next business day. If the request for additional collateral is not met, or the seller defaults on its repurchase obligation, the Portfolio maintains the right to sell the underlying securities at market value and may claim any resulting loss against the seller. E. Federal Income Taxes It is the Portfolio's policy to comply with the requirements of the Internal Revenue Code. Therefore, no federal income tax provision is required. F. Option Contracts The Portfolio may enter into Option Contracts. Upon the purchase of a put option or a call option by the Portfolio, the premium paid is recorded as an investment, the value of which is marked-to-market daily to reflect the current market value. When a purchased option expires, the Portfolio will realize a gain or loss in the amount of the cost of the option. When the Portfolio enters into a closing sale transaction, the Portfolio will realize a gain or loss depending on whether the sale proceeds from the closing sale transaction are greater or less than the cost of the option. When the Portfolio exercises a put option, it realizes a gain or loss from the sale of the underlying security and the proceeds from such sale will be decreased by the premium originally paid. When the Portfolio exercises a call option, the cost of the security which the Portfolio purchases upon exercise will be increased by the premium originally paid. G. Other The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts in the financial statements. Note 2-Fees and Transactions with Affiliates The Portfolio has entered into an Administration and Services Agreement with Bankers Trust Company (`Bankers Trust''). Under this Administration and Services Agreement, Bankers Trust provides administrative, custody, transfer agency and shareholder services to the Portfolio in return for a fee computed daily and paid monthly at an annual rate of 0.10 of 1% of the Portfolio's average daily net assets. For the year ended September 30, 1996, this fee aggregated $198,992. The Portfolio has entered into an Advisory Agreement with Bankers Trust. Under this Advisory Agreement, Bankers Trust manages the Portfolio in accordance with the Portfolio's investment objective and stated investment policies in return for a fee computed daily and paid monthly at an annual rate of 0.65 of 1% of the Portfolio's average daily net assets. For the year ended September 30, 1996, this fee aggregated $1,293,449. Bankers Trust has voluntarily undertaken to waive and reimburse expenses of the Portfolio to the extent necessary, to limit all expenses to 0.60 of 1% of the average daily net assets of the Portfolio. For the year ended September 30, 1996, expenses of the Portfolio have been reduced by $331,176. Small Cap Portfolio Notes to Financial Statements On September 30, 1996, the Trust entered into a Distribution Agreement with Edgewood Services, Inc. (`Edgewood''). Prior to September 30, Signature Broker- Dealer Services, Inc. (`Signature'') was the Trust's Distributor. Certain trustees and officers of the Portfolio are also directors, officers and/or employees of Edgewood and/or Signature. None of the trustees so affiliated received compensation for services as trustee of the Portfolio. Similarly, none of the Portfolio's officers received compensation from the Portfolio. For the year ended September 30, 1996, Small Cap Portfolio paid brokerage commissions of $238,160. Note 3-Purchases and Sales of Investment Securities The aggregate cost of purchases and proceeds from sales of investments, other than short-term obligations, for the year ended September 30, 1996 were $369,914,922 and $289,341,209, respectively. For federal income tax purposes, the tax basis of investments held at September 30, 1996 was $190,666,888. The aggregate gross unrealized appreciation for all investments was $63,846,863 and the aggregate gross unrealized depreciation for all investments was $5,010,610. Small Cap Portfolio Report of Independent Accountants To the Trustees and Holders of Beneficial Interest of the Small Cap Portfolio: We have audited the accompanying statement of assets and liabilities, including the schedule of portfolio investments, of the Small Cap Portfolio (one of the Portfolios comprising BT Investment Portfolios) as of September 30, 1996, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended and the financial highlights for each of the two years in the period then ended and for the period October 21, 1993 (commencement of operations) to September 30, 1994. These financial statements and financial highlights are the responsibility of the Portfolio'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 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 September 30, 1996 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, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Small Cap Portfolio as of September 30, 1996, the results of its operations, the changes in its net assets and the financial highlights for the periods referred to above, in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. Kansas City, Missouri October 29, 1996 BT INVESTMENT FUNDS Small Cap Fund \For shareholder account information and current price and yield quotations, shareholders may call their relationship manager or servicing agent. Prospectuses containing more extensive information regarding the BT Investment Funds may be obtained by calling or writing to Investors Fiduciary Trust Company or Edgewood Services,Inc., the primary Servicing Agent and Distributor, respectively, of BT Investment Funds: BT Pyramid Mutual Funds DST Systems, Inc. 210 West 10th St. Kansas City, MO 64105 BT Investment Funds Edgewood Securities, Inc. Clearing Operations P.O. Box 897 Pittsburgh, PA 15230-0897 You may write to the Small Cap Fund at the following address: BT Investment Funds Clearing Operations P.O. Box 897 Pittsburgh, PA 15230-0897 Small Cap Fund Appendix Pie Chart- Page 4 The graphic representation here displayed consists of a pie chart representing the Diversification of Portfolio Investments by Theme in the Small Cap Portfolio as of September 30, 1996. Each slice of the pie represents an investment Theme and is sized according to the percentage of the Fund's investment in that Theme. The Themes of investments and their percentages, starting at the top of the pie and moving clockwise, are: Other- 28%; New Healthcare Paradigm-11%; Managing the Info Age-10%; Flourishing in the Managed Care Environment-8%; Client Server Computing-10%; Productivity Enhancements-6%; Stores of Value-7%; Telecommunications-7%; New Consumer-6%; Move to Outsourcing-7%. Line Graph-Page 4 The graphic representation here displayed consists of a boxed legend in the upper left-hand corner of the corresponding line graph. The solid black line represents BT Investment Small Cap Fund (the `Fund''); the dashed line represents the Russell 2000 Index. The graph represents a comparison of change in value of a $10,000 investment in the Fund and in the Russell 2000 Index begining October 31, 1993. The `y'' axis reflects quarterly computation periods from October 1993 to September 1996. The `x'' axis reflects investment values in $2,000 increments ranging from $8,000 to $24,000. -----END PRIVACY-ENHANCED MESSAGE-----