-----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, BDdsAnIiu3uERYGBHj2poNiHC434G1PPmuYiHQWLVxaZNwke6hQdOeyjhwwAtmEo uU8OevIxHJJQ4WBZbujL6w== 0001047469-97-006999.txt : 19971209 0001047469-97-006999.hdr.sgml : 19971209 ACCESSION NUMBER: 0001047469-97-006999 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971208 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: SEC FILE NUMBER: 811-04760 FILM NUMBER: 97733638 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 N-30D - BT INVESTMENT FUNDS - -------------- SMALL CAP FUND -------------- ANNUAL REPORT -------------- SEPTEMBER-1997 - -------------------------------------------------------------------------------- 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 . . . . . . . . . . . . . . . . . . 14 2 - -------------------------------------------------------------------------------- SMALL CAP FUND LETTER TO SHAREHOLDERS - -------------------------------------------------------------------------------- We are pleased to present you with this annual report for the 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 17.90%* for the twelve months ended September 30, 1997, as compared to 33.19% for the Russell 2000 Index**, 23.26% for the Russell 2000 Growth Index**, and 29.79% for the Lipper Small Cap Growth Average+. Since its inception on October 21, 1993, the Fund delivered a total return of 175.71% cumulatively, or 29.34% annualized, as of September 30, 1997. MARKET ACTIVITY As indicated in our last report, the six months ended March 31, 1997 were characterized by a prolonged correction in the small cap growth arena, as investors' concerns regarding inflation, corporate earnings, the direction of interest rates, and market valuation levels dominated. The Federal Reserve Board finally raised the fed funds rate by 0.25% on March 25, 1997, and although investors continued to focus on larger capitalization and more value-oriented stocks the following few weeks, the stage was set for a more positive outlook for small caps. - -------------------------------------------------------------------------------- OBJECTIVE Seeks to provide long-term capital growth by investing primarily in equity securities of smaller companies. Current income is a secondary goal.++ - -------------------------------------------------------------------------------- For the period from May through September 1997, small cap stocks outperformed both the midcap and large cap segments of the market, and within the small cap sector, growth outperformed value. Small cap stocks benefited from several factors. First, our research showed that earnings growth remained strong for small cap companies throughout the period of small cap underperformance. Second, valuations of small cap companies were at compelling levels in the spring, and at their lowest levels in over four years when measured by the relative price/earnings ratio of the Russell 2000 Index versus the S&P 500 Index**. Third, investor sentiment, which had been negative towards small cap stocks for about seven months through April 1997, turned positive. Investors breathed a sigh of relief at the belief that with inflation under control, economic growth strong but not accelerating, and one interest rate increase undertaken, 1997 would not be a repeat of 1994 when the Federal Reserve Board raised interest rates numerous times. Other factors that should serve as positive influences on the small cap market include the recently passed Taxpayer Relief Act of 1997, which provides capital gains tax relief, and the strong dollar, which affects smaller U.S. companies to a much lesser extent than it does larger multinational corporations. - -------------------------------------------------------------------------------- INVESTMENT INSTRUMENTS Generally common stocks of smaller U.S. corporations and, to a lesser extent, foreign corporations. - -------------------------------------------------------------------------------- INVESTMENT REVIEW While the Fund's relative performance was hampered by its investment style during the first seven months of the fiscal year, it was, likewise, helped significantly by a return to growth style investing in the remaining months of the year. Relative sector positioning and effective stock picking added value during the second half of the year as well. More specifically, the Fund benefited from an overweight position in technology, which was one of the best performing sectors for the year, as well as overweight positions in producer durables and energy, sectors that also performed strongly. Stock picking also benefited the Fund through the small cap growth recovery in the latter part of the year, as various sectors, such as healthcare and consumer discretionary, showed great volatility, and yet the stocks within the Fund's portfolio performed well. - -------------------------------------------------------------------------------- TEN LARGEST STOCK HOLDINGS E*Trade Group, Inc. Friede Goldman International, Inc. Safeskin Corp. Patterson Energy, Inc. Halter Marine Group, Inc. P-Com, Inc. Asyst Technologies Vivus, Inc. Systems & Computer Technology Corp. Windmere-Durable Holdings, Inc. - -------------------------------------------------------------------------------- Over the past year, we implemented a number of new investment themes. One theme that has significantly contributed to the success of the Fund is called "Energizing the Globe." This theme includes investments in beneficiaries of a number of positive trends in the energy area, including: the growing use of such technology as 3D seismic to find oil and gas more economically and in areas of the world where it was uneconomical to explore previously; leaner and more cost conscious companies than in the past; and a positive supply/demand situation worldwide both for crude oil and natural gas. In addition, we recently added a new theme named "Consolidating America." Investment opportunities in this area are benefiting from being consolidators in fragmented industries, where smaller companies are increasingly unable to compete with larger companies on the basis of management, information systems, and capital. MANAGER OUTLOOK The fundamentals for growth stock investing remain positive, and, over the longer term, it has been shown that investors will pay for reasonably priced earnings growth. Earnings growth in the small cap growth area continues to be strong, while valuations remain reasonable. Investor sentiment regarding these stocks also continues to be favorable. We are encouraged that small cap growth stocks have exhibited strong performance over the last five months. However, it is important to take a long-term view when investing in the aggressive growth segment of the market, as returns can be volatile in the shorter term. - --------- * Performance quoted represents past performance and is not indicative of future performance. Investment return and principal value will fluctuate, so that an investor's shares, when redeemed, may be worth more or less than their original cost. ** The Russell 2000 Index represents the U.S. small capitalization market. The Russell 2000 Growth Index is comprised of securities with a greater than average growth orientation. The S&P 500 Index emphasizes large capitalization stocks. Indexes are unmanaged, and investments cannot be made in an index. + Lipper figures represent the average of the total returns reported by all of the mutual funds designated by Lipper Analytical Sevices, Inc. as falling into the respective categories indicated. These figures do not reflect sales charges. ++ In view of the long term capital growth objective of the Fund and the smaller size of the companies in which it invests, the risks of investment in the Fund may be greater than in the general equity markets. 3 - -------------------------------------------------------------------------------- SMALL CAP FUND LETTER TO SHAREHOLDERS - -------------------------------------------------------------------------------- DIVERSIFICATION OF PORTFOLIO INVESTMENTS By Theme as of September 30, 1997 (PERCENTAGES ARE BASED ON MARKET VALUE) [PIE CHART] Move to Outsourcing 5% Our Strengthening Financial Structure 5% Managing the Information Age 5% Productivity Enhancement 5% New Healthcare Paradigm 6% The Ubiquitous Semiconductor 6% New Consumer 7% Telecommunications 8% Client Server Computing 5% Consolidating America 4% America's Changing Leisure Time 4% Other 30%+ Energizing the Globe 10% Over the long term, the performance of small cap stocks has outpaced the returns of large company stocks, fixed income investments, and inflation++. In addition, we have found that small cap companies have provided good long-term investment opportunities due to their ability to provide products and services in changing economic and corporate environments. We remain disciplined in our investment process, and we continue to focus on companies that offer compelling valuations relative to their earnings growth rates as well as on companies that have strong, consistent revenue and earnings growth. We continue to use extensive fundamental research, as well as our thematic approach and database screening process, to identify attractive investment opportunities in unrecognized growth companies and sectors. We also continue to strictly adhere to our sell discipline to help mitigate risk and to use the volatility of the marketplace to our investors' advantage by initiating or adding to positions on weakness. We will continue to monitor economic conditions and their effect on financial markets, as we seek long-term capital growth. We value your ongoing support of the Small Cap Fund and look forward to serving your investment needs in the years ahead. /s/ Mary P. Dugan /s/ Timothy Woods Mary P. Dugan and Timothy Woods Portfolio Managers of the SMALL CAP PORTFOLIO September 30, 1997 - ---------- + Includes cash and themes with weightings of less than 4%. ++ Source: -C-Stocks, Bonds, Bills, and Inflation 1996 Yearbook-TM-, Ibbotson Associates, Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield). Used with permission. All rights reserved. Data from 1926-1995. Past performance is no guarantee of future results. - -------------------------------------------------------------------------------- PERFORMANCE COMPARISON - -------------------------------------------------------------------------------- COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE SMALL CAP FUND AND THE RUSSELL 2000 INDEX SINCE OCTOBER 31, 1993. - -------------------------------------------------------------------------------- TOTAL RETURN FOR THE PERIOD ENDED SEPTEMBER 30, 1997 One Year Since 10/21/93* 17.90% 29.34%** - ---------- * The Fund's inception date. ** Annualized. Investment return and principal value may fluctuate so that shares, when redeemed, may be worth more or less than their original cost. - -------------------------------------------------------------------------------- [GRAPH] Small Cap Fund - $27,217 Russell 2000 Index - $18,602 ------------------------ ---------------------------- Oct-93 10000 10000 Dec-93 10326 10002 Mar-94 10375 9735 Jun-94 9951 9354 Sep-94 11451 10004 Dec-94 12320 9819 Mar-95 14107 10272 Jun-95 15903 11236 Sep-95 18263 12345 Dec-95 19536 12613 Mar-96 21049 13256 Jun-96 23181 13919 Sep-96 23074 13967 Dec-96 20884 14693 Mar-97 17517 13933 Jun-97 20917 16192 Sep-97 27217 18602 Past performance is not indicative of future performance. 4
- ------------------------------------------------------------------------------------------------------------------------------- SMALL CAP FUND STATEMENT OF ASSETS AND LIABILITIES SEPTEMBER 30, 1997 - ------------------------------------------------------------------------------------------------------------------------------- ASSETS Investment in Small Cap Portfolio, at Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $285,878,325 Receivable for Shares of Beneficial Interest Subscribed. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,638,687 Prepaid Expenses and Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,127 ----------- Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 288,523,139 ----------- LIABILITIES Due to Bankers Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130,374 Payable for Shares of Beneficial Interest Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,047,107 Accrued Expenses and Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,450 ----------- Total Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,200,931 ----------- NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $286,322,208 ----------- ----------- COMPOSITION OF NET ASSETS Paid-in Capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $193,320,147 Accumulated Net Realized Gain from Investment Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . 10,427,817 Net Unrealized Appreciation on Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82,574,244 ----------- NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $286,322,208 ----------- ----------- NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE (net assets divided by shares outstanding). . . . . . . $ 23.68 ----------- ----------- SHARES OUTSTANDING ($0.001 par value per share, unlimited number of shares of beneficial interest authorized). . 12,089,943 ----------- ----------- - ------------------------------------------------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 1997 - ------------------------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME Loss Allocated from Small Cap Portfolio, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (478,543) ----------- EXPENSES Administration and Services Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,273,452 Printing and Shareholder Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,500 Registration Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,181 Professional Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,495 Trustees Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,750 Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,711 ----------- Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,324,089 Less Expenses Absorbed by Bankers Trust. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (50,637) ----------- Net Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,273,452 ----------- NET INVESTMENT LOSS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,751,995) ----------- REALIZED AND UNREALIZED GAIN ON INVESTMENTS Net Realized Gain from Investment Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,511,447 Net Change in Unrealized Appreciation on Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,305,688 ----------- NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,817,135 NET INCREASE IN NET ASSETS FROM OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40,065,140 ----------- -----------
See Notes to Financial Statements on Page 7 5
- -------------------------------------------------------------------------------------------------------------------------------- SMALL CAP FUND STATEMENT OF CHANGES IN NET ASSETS - -------------------------------------------------------------------------------------------------------------------------------- FOR THE FOR THE YEAR ENDED YEAR ENDED SEPTEMBER 30, 1997 SEPTEMBER 30, 1996 ------------------ ------------------ INCREASE (DECREASE) IN NET ASSETS FROM: OPERATIONS Net Investment Loss. . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,751,995) $ (1,380,737) Net Realized Gain from Investment Transactions . . . . . . . . . . . . . 21,511,447 4,946,585 Net Change in Unrealized Appreciation on Investments . . . . . . . . . . 20,305,688 38,472,178 ------------------ ------------------ Net Increase in Net Assets from Operations . . . . . . . . . . . . . . . . 40,065,140 42,038,026 ------------------ ------------------ DISTRIBUTIONS TO SHAREHOLDERS Net Realized Gain from Investment Transactions . . . . . . . . . . . . . (13,993,488) (10,302,003) ------------------ ------------------ CAPITAL TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST Proceeds from Sales of Shares. . . . . . . . . . . . . . . . . . . . . . 248,556,213 249,711,457 Dividend Reinvestments . . . . . . . . . . . . . . . . . . . . . . . . . 10,338,678 7,579,445 Cost of Shares Redeemed. . . . . . . . . . . . . . . . . . . . . . . . . (240,880,564) (169,725,477) ------------------ ------------------ NET INCREASE FROM CAPITAL TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST . 18,014,327 87,565,425 ------------------ ------------------ TOTAL INCREASE IN NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . 44,085,979 119,301,448 NET ASSETS Beginning of Year. . . . . . . . . . . . . . . . . . . . . . . . . . . . 242,236,229 122,934,781 ------------------ ------------------ End of Year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 286,322,208 $ 242,236,229 ------------------ ------------------ ------------------ ------------------ - -------------------------------------------------------------------------------------------------------------------------------- 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 FOR THE YEARS ENDED OCTOBER 21, 1993 SEPTEMBER 30, (COMMENCEMENT OF --------------------------------- OPERATIONS) TO 1997 1996 1995 SEPTEMBER 30, 1994 ------ ------ ------ ------------------ PER SHARE OPERATING PERFORMANCE: NET ASSET VALUE, BEGINNING OF PERIOD. . . . . . . . . $21.66 $18.50 $11.60 $10.00 ------ ------ ------ ------ INCOME FROM INVESTMENT OPERATIONS Net Investment Loss . . . . . . . . . . . . . . . . (0.14) (0.12) (0.04) (0.03) Net Realized and Unrealized Gain on Investments . . 3.58 4.65 6.94 1.63 ------ ------ ------ ------ Total Income from Investment Operations . . . . . . . 3.44 4.53 6.90 1.60 ------ ------ ------ ------ DISTRIBUTIONS TO SHAREHOLDERS Net Realized Gain from Investment Transactions. . . (1.42) (1.37) -- -- ------ ------ ------ ------ NET ASSET VALUE, END OF PERIOD. . . . . . . . . . . . $23.68 $21.66 $18.50 $11.60 ------ ------ ------ ------ TOTAL INVESTMENT RETURN . . . . . . . . . . . . . . . 17.90% 26.41% 59.48% 17.06%* SUPPLEMENTAL DATA AND RATIOS: Net Assets, End of Period (000s omitted). . . . . . $286,322 $242,236 $122,935 $21,332 Ratios to Average Net Assets: Net Investment Loss . . . . . . . . . . . . . . . (0.89)% (0.70)% (0.46)% (0.58)%* Expenses, Including Expenses of the Small Cap Portfolio . . . . . . . . . . . . . . . . . . . 1.25% 1.25% 1.25% 1.25%* Decrease Reflected in Above Expense Ratio Due to Absorption of Expenses by Bankers Trust . . . . 0.03% 0.22% 0.34% 0.86%*
- ---------- * Annualized See Notes to Financial Statements on Page 7 6 - -------------------------------------------------------------------------------- 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, 1997, the Fund's investment was approximately 100% 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 Portfolio. All of the net investment income and realized and 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 applicable to regulated investment companies and to distribute substantially all of its taxable income to shareholders. 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, 1997, $1,493,436 was reclassified from accumulated net realized gain to net realized depreciation and $1,751,995 was reclassified from undistributed net investment loss 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. Actual results could differ from those estimates. 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, 1997, this fee aggregated $1,273,452. The Trust entered into a Distribution Agreement with Edgewood Services, Inc. ("Edgewood"). Under the Distribution Agreement with the Trust, pursuant to Rule 12b-1 of the Act, Edgewood 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, 1997, 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, 1997, expenses of the Fund have been reduced by $50,637. Certain trustees and officers of the Fund are also directors, officers and/or employees of Edgewood. 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, 1997, 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, 1997 SEPTEMBER 30, 1996 ------------------------------------------------------------------ SHARES AMOUNT SHARES AMOUNT ---------- ------------ ---------- ------------ Sold 13,234,894 $248,556,213 12,796,190 $249,711,457 Reinvested 571,830 10,338,678 439,133 7,579,445 Redeemed (12,902,495) (240,880,564) (8,695,218) (169,725,477) ---------- ------------ ---------- ------------ Net Increase 904,229 $ 18,014,327 4,540,105 $ 87,565,425 ---------- ------------ ---------- ------------ ---------- ------------ ---------- ------------
7 - -------------------------------------------------------------------------------- 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, 1997, and the related statement of operations for the year then ended, the statement of changes in net assets for the each of the two years in the period then ended and the financial highlights for the years ended September 30, 1997, 1996 and 1995 and 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, 1997 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, 1997, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for the periods referred to above, in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. Kansas City, Missouri November 5, 1997 8 - -------------------------------------------------------------------------------- SMALL CAP PORTFOLIO SCHEDULE OF PORTFOLIO INVESTMENTS SEPTEMBER 30, 1997 - -------------------------------------------------------------------------------- Shares Description Value ------ ----------- ----- COMMON STOCK - 90.72% AMERICA'S CHANGING LEISURE TIME - 4.16% 44,800 800-JR CIGAR, Inc. (a) . . . . . . . . . . . . . $ 1,568,000 79,800 Broderbund Software, Inc. (a). . . . . . . . . . 2,713,200 43,000 CapStar Hotel Co. (a). . . . . . . . . . . . . . 1,443,187 41,500 Cinar Films, Inc. (a). . . . . . . . . . . . . . 1,582,188 57,025 Papa John's International, Inc. (a). . . . . . . 1,949,542 55,500 Signature Resorts, Inc. (a). . . . . . . . . . . 2,636,250 ----------- 11,892,367 ----------- AMERICA'S EDUCATIONAL CRISIS - 1.23% 79,400 Advantage Learning Systems, Inc. (a) . . . . . . 2,004,850 57,000 Edutrek International, Inc. (a). . . . . . . . . 1,517,625 ----------- 3,522,475 ----------- AMERICA'S INDUSTRIAL RENAISSANCE - 2.60% 53,600 BE Aerospace, Inc. (a) . . . . . . . . . . . . . 1,929,600 61,800 DT Industries, Inc.. . . . . . . . . . . . . . . 2,039,400 71,800 Halter Marine Group, Inc. (a). . . . . . . . . . 3,473,325 ----------- 7,442,325 ----------- CLIENT-SERVER COMPUTING - 4.74% 65,400 Apex PC Solutions, Inc. (a). . . . . . . . . . . 2,477,025 34,300 Citrix Systems, Inc. (a) . . . . . . . . . . . . 1,726,791 30,900 HNC Software, Inc. (a) . . . . . . . . . . . . . 1,228,275 14,000 Network Solutions, Inc.. . . . . . . . . . . . . 304,500 41,600 Siebel Systems, Inc. (a) . . . . . . . . . . . . 1,770,600 76,600 Systems & Computer Technology Corp. (a). . . . . 3,451,787 148,700 Xionics Document Technologies, Inc. (a). . . . . 2,583,663 ----------- 13,542,641 ----------- CONSOLIDATING AMERICA - 3.95% 75,500 Fine Host Corp. (a). . . . . . . . . . . . . . . 2,925,625 94,400 HA-LO Industries, Inc. (a) . . . . . . . . . . . 2,702,200 37,200 Ivex Packaging Corp. . . . . . . . . . . . . . . 595,200 74,300 JLK Direct Distribution, Inc.-Cl. A (a). . . . . 2,224,356 66,200 Morningstar Group, Inc. (a). . . . . . . . . . . 2,846,600 ----------- 11,293,981 ----------- ENERGIZING THE GLOBE - 10.08% 21,300 Cliffs Drilling Co. (a). . . . . . . . . . . . . 1,483,012 57,500 Friede Goldman International, Inc. (a) . . . . . 3,450,000 87,300 Hanover Compressor Co. (a) . . . . . . . . . . . 2,138,850 81,100 Marine Drilling Cos., Inc (a). . . . . . . . . . 2,534,375 92,400 Newfield Exploration Co. (a). . . . . . . . . . 2,592,975 70,600 Oceaneering International, Inc. (a). . . . . . . 1,681,163 64,400 Patterson Energy, Inc. (a) . . . . . . . . . . . 3,372,950 65,100 Pride International, Inc. (a). . . . . . . . . . 2,213,400 78,700 Stone Energy Corp. (a) . . . . . . . . . . . . . 2,646,287 53,900 Tuboscope Vetco International Corp. (a). . . . . 1,691,112 50,100 UTI Energy Corp. . . . . . . . . . . . . . . . . 1,978,950 62,600 Varco International, Inc. (a). . . . . . . . . . 3,036,100 ----------- 28,819,174 ----------- ENVIRONMENTAL CRISIS - 1.94% 112,400 Eastern Environmental Services, Inc. (a) . . . . 2,866,200 68,200 Newpark Resources, Inc. (a). . . . . . . . . . . 2,681,113 ----------- 5,547,313 ----------- FLOURISHING IN THE MANAGED CARE ENVIRONMENT - 1.78% 85,400 FPA Medical Management, Inc. (a) . . . . . . . . 2,935,625 48,700 Pediatrix Medical Group, Inc. (a). . . . . . . . 2,148,888 ----------- 5,084,513 ----------- LIFE ON THE NET - 3.90% 59,000 Excite, Inc. (a) . . . . . . . . . . . . . . . . 1,679,656 107,600 E*TRADE Group, Inc. (a). . . . . . . . . . . . . 5,057,200 83,300 Harbinger Corp. (a). . . . . . . . . . . . . . . 3,030,038 42,800 ONSALE, Inc. (a) . . . . . . . . . . . . . . . . 1,380,300 ----------- 11,147,194 ----------- LIFE SCIENCES REVOLUTION - 3.46% 48,100 Agouron Pharmaceuticals, Inc. (a). . . . . . . . 2,314,812 80,000 CYTYC Corp. (a). . . . . . . . . . . . . . . . . 2,010,000 60,300 Parexel International Corp. (a). . . . . . . . . 2,381,850 85,100 Vivus, Inc. (a). . . . . . . . . . . . . . . . . 3,191,250 ----------- 9,897,912 ----------- MANAGING THE INFORMATION AGE - 5.21% 99,200 Adflex Solutions (a) . . . . . . . . . . . . . . 2,418,000 8,800 Box Hill Systems Corp. (a) . . . . . . . . . . . 154,000 73,600 Complete Business Solutions, Inc. (a). . . . . . 2,097,600 72,000 Computer Task Group, Inc.. . . . . . . . . . . . 3,019,500 62,400 JDA Software Group, Inc. (a) . . . . . . . . . . 2,277,600 56,200 Transaction Systems Architects, Inc.-Cl. A (a) . 2,283,125 60,350 Veritas Software Corp. (a) . . . . . . . . . . . 2,651,628 ----------- 14,901,453 ----------- MOVE TO OUTSOURCING - 4.78% 75,800 Eagle USA Airfreight, Inc. (a) . . . . . . . . . 2,539,300 46,900 Hagler Bailly, Inc. (a). . . . . . . . . . . . . 1,190,088 54,000 Hall, Kinion & Associates, Inc. (a). . . . . . . 1,140,750 48,500 MAXIMUS, Inc. (a). . . . . . . . . . . . . . . . 1,403,469 31,000 Metzler Group, Inc. (a). . . . . . . . . . . . . 1,243,875 80,300 SIPEX Corp. (a). . . . . . . . . . . . . . . . . 2,549,525 67,200 StaffMark, Inc. (a). . . . . . . . . . . . . . . 2,562,000 64,500 Syntel, Inc. (a) . . . . . . . . . . . . . . . . 1,023,937 ----------- 13,652,944 ----------- NEW CONSUMER - 7.01% 123,800 Avis Rent-a-Car, Inc. (a). . . . . . . . . . . . 2,955,725 72,700 Claire's Stores, Inc.. . . . . . . . . . . . . . 1,626,663 86,500 Gadzooks, Inc. (a) . . . . . . . . . . . . . . . 1,816,500 148,400 Helen of Troy Ltd. (a) . . . . . . . . . . . . . 2,930,900 66,200 Kellwood Co. . . . . . . . . . . . . . . . . . . 2,345,963 60,800 Nautica Enterprises, Inc. (a). . . . . . . . . . 1,710,000 28,700 St. John Knits, Inc. . . . . . . . . . . . . . . 1,289,706 133,800 Windmere-Durable Holdings, Inc.. . . . . . . . . 3,186,112 86,600 Wolverine WorldWide, Inc.. . . . . . . . . . . . 2,186,650 ----------- 20,048,219 ----------- NEW HEALTHCARE PARADIGM - 6.12% 97,300 Columbia Laboratories, Inc. (a). . . . . . . . . 1,800,050 61,995 Concentra Managed Care, Inc. (a) . . . . . . . . 2,189,198 59,100 IDX Systems Corp. (a). . . . . . . . . . . . . . 2,042,644 50,600 Monarch Dental Corp. (a) . . . . . . . . . . . . 1,087,900 87,600 Ocular Sciences, Inc. (a). . . . . . . . . . . . 2,025,750 80,100 Safeskin Corp. (a) . . . . . . . . . . . . . . . 3,554,438 53,300 Total Renal Care Holdings (a). . . . . . . . . . 2,665,000 119,100 Warner Chilcott Laboratories, ADR (a). . . . . . 2,114,025 ----------- 17,479,005 ----------- OUR STRENGTHENING FINANCIAL STRUCTURE - 5.09% 30,200 CMAC Investment Corp.. . . . . . . . . . . . . . 1,619,475 78,800 Frontier Insurance Group, Inc. . . . . . . . . . 2,994,400 51,333 Legg Mason, Inc. . . . . . . . . . . . . . . . . 2,707,833 45,000 Mutual Risk Management Ltd.. . . . . . . . . . . 2,286,563 See Notes to Financial Statements on Page 13 9 - -------------------------------------------------------------------------------- SMALL CAP PORTFOLIO SCHEDULE OF PORTFOLIO INVESTMENTS SEPTEMBER 30, 1997 - -------------------------------------------------------------------------------- Shares Description Value ------ ----------- ----- 80,450 Raymond James Financial, Inc.. . . . . . . . . . $ 2,896,200 35,800 Vesta Insurance Group, Inc.. . . . . . . . . . . 2,040,600 ----------- 14,545,071 ----------- PRODUCTIVITY ENHANCEMENT - 5.21% 78,000 Asyst Technologies (a) . . . . . . . . . . . . . 3,463,688 49,900 Brooks Automation, Inc. (a). . . . . . . . . . . 1,914,912 55,600 Burr-Brown Corp. (a) . . . . . . . . . . . . . . 1,855,650 54,200 Quickresponse Services, Inc. (a) . . . . . . . . 1,856,350 43,000 Saville Systems Plc (a). . . . . . . . . . . . . 3,020,750 66,900 Visio Corp. (a). . . . . . . . . . . . . . . . . 2,793,075 ----------- 14,904,425 ----------- RETURN TO HOME OWNERSHIP - 0.82% 34,300 Ethan Allen Interiors, Inc.. . . . . . . . . . . 1,063,300 68,100 Furniture Brands International, Inc. (a) . . . . 1,285,388 ----------- 2,348,688 ----------- REVALUATION OF REAL ESTATE - 0.16% 12,000 CCA Prison Realty Trust. . . . . . . . . . . . . 453,000 ----------- STORES OF VALUE - 3.25% 60,900 Brylane, Inc. (a). . . . . . . . . . . . . . . . 2,793,787 39,500 Knoll, Inc. (a). . . . . . . . . . . . . . . . . 1,323,250 41,100 Proffitt's, Inc. (a) . . . . . . . . . . . . . . 2,435,175 73,500 The Men's Wearhouse, Inc. (a). . . . . . . . . . 2,737,875 ----------- 9,290,087 ----------- TELECOMMUNICATIONS - 8.10% 91,600 Allen Telecommunications, Inc. (a) . . . . . . . 2,610,600 75,000 Davox Corp. (a). . . . . . . . . . . . . . . . . 2,512,500 67,200 Digital Microwave Corp. (a). . . . . . . . . . . 3,007,200 145,900 DSP Communications, Inc. (a) . . . . . . . . . . 3,054,781 53,600 Level One Communications, Inc. (a) . . . . . . . 2,157,400 138,400 P-COM, Inc. (a). . . . . . . . . . . . . . . . . 3,312,950 55,500 REMEC, Inc. (a). . . . . . . . . . . . . . . . . 2,025,750 55,700 Sawtek, Inc. (a) . . . . . . . . . . . . . . . . 2,576,125 82,500 STAR Telecommunications, Inc. (a). . . . . . . . 1,897,500 ----------- 23,154,806 ----------- THE GREYING OF AMERICA - 0.80% 40,100 Sofamor/Danek Group, Inc. (a). . . . . . . . . . 2,290,713 ----------- THE UBIQUITOUS SEMICONDUCTOR - 6.33% 48,900 ANADIGICS, Inc. (a). . . . . . . . . . . . . . . 2,411,381 34,100 Lattice Semiconductor Corp. (a). . . . . . . . . 2,220,762 44,100 Photronics, Inc. (a) . . . . . . . . . . . . . . 2,670,806 52,500 PRI Automation, Inc. (a) . . . . . . . . . . . . 3,071,250 61,200 Triquint Semiconductor, Inc. (a) . . . . . . . . 2,229,975 33,600 Uniphase Corp. (a) . . . . . . . . . . . . . . . 2,671,200 80,900 VLSI Technology, Inc. (a). . . . . . . . . . . . 2,806,219 ----------- 18,081,593 ----------- TOTAL COMMON STOCK (Cost $178,555,638) . . . . . . . . . . . . 259,339,899 ----------- SHORT TERM INSTRUMENT - 8.96% MUTUAL FUNDS - 8.96% 25,623,353 BT Institutional Cash Management Fund (Cost $25,623,353). . . . . . . . . . . . . . . $ 25,623,353 ----------- TOTAL INVESTMENTS (Cost $204,178,991). . . . . 99.68% 284,963,252 Other Assets in Excess of Liabilities. . . . . 0.32% 915,097 ------ ----------- NET ASSETS . . . . . . . . . . . . . . . . . . 100.00% $285,878,349 ------ ----------- ------ ----------- - ---------- (a) Non-Income Producing Security See Notes to Financial Statements on Page 13 10 - -------------------------------------------------------------------------------- SMALL CAP PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES SEPTEMBER 30, 1997 - -------------------------------------------------------------------------------- ASSETS Investments, at Value (Cost of $204,178,991) . . . . . . . . $ 284,963,252 Receivable for Securities Sold . . . . . . . . . . . . . . . 4,987,014 Dividends and Interest Receivable. . . . . . . . . . . . . . 108,110 Prepaid Expenses . . . . . . . . . . . . . . . . . . . . . . 77 ----------- Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . 290,058,453 ----------- LIABILITIES Due to Bankers Trust . . . . . . . . . . . . . . . . . . . . 120,028 Payable for Securities Purchased . . . . . . . . . . . . . . 4,042,812 Accrued Expenses and Other . . . . . . . . . . . . . . . . . 17,264 ----------- Total Liabilities. . . . . . . . . . . . . . . . . . . . . . . 4,180,104 ----------- NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . $ 285,878,349 ----------- ----------- COMPOSITION OF NET ASSETS Paid-in Capital. . . . . . . . . . . . . . . . . . . . . . . $ 205,094,088 Net Unrealized Appreciation on Investments . . . . . . . . . 80,784,261 ----------- NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . $ 285,878,349 ----------- ----------- - -------------------------------------------------------------------------------- STATEMENT OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 1997 - -------------------------------------------------------------------------------- INVESTMENT INCOME Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . $ 122,443 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . 577,482 ---------- TOTAL INVESTMENT INCOME. . . . . . . . . . . . . . . . . . . . 699,925 ---------- EXPENSES Advisory Fees. . . . . . . . . . . . . . . . . . . . . . . . 1,278,294 Administration and Services Fees . . . . . . . . . . . . . . 196,661 Professional Fees. . . . . . . . . . . . . . . . . . . . . . 25,600 Trustees Fees. . . . . . . . . . . . . . . . . . . . . . . . 2,100 Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . 3,072 ---------- Total Expenses . . . . . . . . . . . . . . . . . . . . . . . 1,505,727 Less Expenses Absorbed by Bankers Trust. . . . . . . . . . . (325,723) ---------- Net Expenses . . . . . . . . . . . . . . . . . . . . . . . 1,180,004 ---------- NET INVESTMENT LOSS. . . . . . . . . . . . . . . . . . . . . . (480,079) ---------- REALIZED AND UNREALIZED GAIN ON INVESTMENTS Net Realized Gain from Investment Transactions . . . . . . . 21,635,104 Net Change in Unrealized Appreciation on Investments . . . . 19,884,098 ---------- NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS. . . . . . . . 41,519,202 ---------- NET INCREASE IN NET ASSETS FROM OPERATIONS . . . . . . . . . . $ 41,039,123 ---------- ---------- See Notes to Financial Statements on Page 13 11
- -------------------------------------------------------------------------------------------------------------- SMALL CAP PORTFOLIO STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------------------------------------- FOR THE FOR THE YEAR ENDED YEAR ENDED SEPTEMBER 30, 1997 SEPTEMBER 30, 1996 ------------------ ------------------ INCREASE (DECREASE) IN NET ASSETS FROM: OPERATIONS Net Investment Loss. . . . . . . . . . . . . . . . . . . . . . $ (480,079) $ (95,874) Net Realized Gain from Investment Transactions . . . . . . . . 21,635,104 4,944,264 Net Change in Unrealized Appreciation on Investments . . . . . 19,884,098 38,597,216 ----------------- ----------------- Net Increase in Net Assets from Operations . . . . . . . . . . . 41,039,123 43,445,606 ----------------- ----------------- CAPITAL TRANSACTIONS Proceeds from Capital Invested . . . . . . . . . . . . . . . . 256,648,577 259,905,685 Value of Capital Withdrawn . . . . . . . . . . . . . . . . . . (257,424,442) (181,564,152) ----------------- ----------------- Net Increase (Decrease) in Net Assets from Capital Transactions. (775,865) 78,341,533 ----------------- ----------------- TOTAL INCREASE IN NET ASSETS . . . . . . . . . . . . . . . . . . 40,263,258 121,787,139 NET ASSETS Beginning of Year. . . . . . . . . . . . . . . . . . . . . . . . 245,615,091 123,827,952 ----------------- ----------------- End of Year. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 285,878,349 $ 245,615,091 ----------------- ----------------- ----------------- ----------------- - --------------------------------------------------------------------------------------------------------------- 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 FOR THE YEARS ENDED OCTOBER 21, 1993 SEPTEMBER 30, (COMMENCEMENT ------------------------------ OF OPERATIONS) TO 1997 1996 1995 SEPTEMBER 30, 1994 ------ ------ ------ ------------------ SUPPLEMENTAL DATA AND RATIOS: Net Assets, End of Period (000s omitted) . . . . . . $285,878 $245,615 $123,828 $21,328 Ratios to Average Net Assets: Net Investment Income (Loss) . . . . . . . . . . . (0.24)% (0.05)% 0.19% 0.07%* Expenses . . . . . . . . . . . . . . . . . . . . . 0.60% 0.60% 0.60% 0.60%* Decrease Reflected in Above Expense Ratio Due to Absorption of Expenses by Bankers Trust. . . . . 0.17% 0.17% 0.19% 0.38%* Portfolio Turnover Rate. . . . . . . . . . . . . . 188% 159% 161% 154% Average Commission Per Share** . . . . . . . . . . $0.0568 $0.0478
- ---------- * Annualized ** For fiscal years beginning on or after September 1, 1995, the Portfolio is required to disclose its average commission rate per share for security trades on which commissions are charged. See Notes to Financial Statements on Page 13 12 - -------------------------------------------------------------------------------- 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 by 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. However, in the event of default or bankruptcy by the seller, realization and/or retention of the collateral may be subject to legal proceedings. 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 and 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. Actual results could differ from those estimates. 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, 1997, this fee aggregated $196,661. 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, 1997, this fee aggregated $1,278,294. 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, 1997, expenses of the Portfolio have been reduced by $325,723. Certain trustees and officers of the Portfolio are also directors, officers and/or employees of Edgewood Services, Inc. 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, 1997, the Portfolio paid brokerage commissions of $344,478. 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, 1997 were $356,915,555 and $375,205,835, respectively. For federal income tax purposes, the tax basis of investments held at September 30, 1997 was $204,768,569. The aggregate gross unrealized appreciation for all investments was $80,459,053 and the aggregate gross unrealized depreciation for all investments was $264,370. 13 - -------------------------------------------------------------------------------- SMALL CAP PORTFOLIO REPORT OF INDEPENDENT ACCOUNTANTS - -------------------------------------------------------------------------------- To the Trustees and Holders of Beneficial Interest of BT Investment Portfolios: 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, 1997, 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 the years ended September 30, 1997, 1996 and 1995 and 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, 1997 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 Portfolio of BT Investment Portfolios as of September 30, 1997, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for the periods referred to above, in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. Kansas City, Missouri November 5, 1997 14 This page intentionally left blank. 15 BT INVESTMENT FUNDS SMALL CAP FUND INVESTMENT ADVISER OF THE PORTFOLIO AND ADMINISTRATOR BANKERS TRUST COMPANY 130 Liberty Street New York, NY 10006 DISTRIBUTOR EDGEWOOD SERVICES, INC. Clearing Operations P.O. Box 897 Pittsburgh, PA 15230-0897 CUSTODIAN AND TRANSFER AGENT BANKERS TRUST COMPANY 130 Liberty Street New York, NY 10006 INDEPENDENT ACCOUNTANTS COOPERS & LYBRAND L.L.P. 1100 Main Street, Suite 900 Kansas City, MO 64105 COUNSEL WILLKIE FARR & GALLAGHER 153 East 53rd Street New York, NY 10022 ------------------------- For information on how to invest, shareholder account information and current price and yield information, please contact your relationship manager or the BT Mutual Fund Service Center at (800) 730-1313. ------------------------- STA498200 (11/97) -----END PRIVACY-ENHANCED MESSAGE-----