<PAGE>
- BT INVESTMENT FUNDS -
------------------------------
INTERMEDIATE TAX FREE FUND
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ANNUAL REPORT
--------------
SEPTEMBER-1997
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INTERMEDIATE TAX FREE FUND
TABLE OF CONTENTS
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LETTER TO SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . .3
INTERMEDIATE TAX FREE 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
INTERMEDIATE TAX FREE 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
<PAGE>
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INTERMEDIATE TAX FREE FUND
LETTER TO SHAREHOLDERS
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We are pleased to present you with this annual report for the Intermediate Tax
Free Fund, providing a review of the market, the portfolio, and our outlook in
an easy-to-read, consolidated format. Also included is a complete financial
summary of the Fund's operations and a listing of the Portfolio's holdings.
The Intermediate Tax Free Fund (the "Fund") returned 7.43%* for the twelve
months ending September 30, 1997, as compared to 8.07% for the Lehman 7-Year
Government Obligations Index** and 7.22% for the Lipper Intermediate Municipal
Debt Average+. Since its inception on July 20, 1992, the Fund delivered a total
return of 32.56% cumulatively, or 5.57% annualized as of September 30, 1997.
For the 5-year period ended September 30, 1997, the Fund's annualized return was
5.80%.
MARKET ACTIVITY
During the first half of the Fund's fiscal year, interest rates rose as the
economy grew and anticipation of the Federal Reserve Board's rate hike was
widespread. Once the Federal Reserve Board finally took action on March 25th,
raising the Fed funds rate by 0.25% to 5.5%, and inflationary pressures remained
subdued, this directional trend reversed, and rates fell during the second six
months. In all, over the course of the year, intermediate tax free bond yields
fell by about 0.50%, and intermediate government bonds fell by about 0.60%.
Interestingly, yields actually rose right after the official rate hike, but as
the economy slowed, and the inflation picture, already quite benign, brightened
even further, yields began a slow descent from the end of April through
September.
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OBJECTIVE
Seeks high current income exempt from Federal taxes with moderate risk to
capital++.
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Municipal securities supply during the fourth quarter of 1996 was slightly lower
than usual, in large part due to the rising rates. However, over the first nine
months of 1997, supply, through both new issue volume and refunding bonds, was
running ahead, up approximately 18% over the same period one year ago, and the
demand side followed suit. In particular, the lower interest rates sparked a
number of refunding deals, as municipalities sought to take advantage of this
opportunity to lower their payments.
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INVESTMENT INSTRUMENTS
Diversified range of high grade intermediate term securities issued by states
and their political subdivisions, authorities, agencies and instrumentalities,
providing income exempt from Federal income taxes. The weighted average maturity
of securities will range from three to eight years.
- --------------------------------------------------------------------------------
Credit quality spreads narrowed during the fiscal year, as upgrades outnumbered
downgrades. This positive trend was, in large part, due to the better economy
boosting tax revenues, and thus putting more money in municipal coffers and
bettering their overall financial positions. The Taxpayer Relief Act of 1997,
signed into law by President Clinton on August 5, 1997, has, to date, had
minimal impact on the municipal securities market.
INVESTMENT REVIEW
The Fund outperformed its category average. The underperformance to its
benchmark can be attributed to our more conservative credit position. As credit
spreads narrowed, lower rated securities produced comparatively higher returns.
However, it is important to note that the Fund's prospectus mandates higher
credit quality standards than held by the benchmark. It is our belief that this
is the more prudent strategy over the long term.
Duration positioning also impacted performance. Anticipating the Federal
Reserve Board's action, our slightly shorter than Index duration, held
throughout the fiscal year's first six months, proved to be the primary driving
force of the Fund's outperformance for the month of March when rates rose. We
then extended duration in April and stayed slightly longer than the Index for
most of the second half of the year, based on our interest rate outlook. On
September 30, the Fund's duration stood at 6.2 years.
We continued to concentrate the Fund's purchases in high tax states.
Specifically, we increased the Fund's exposure to New York-issued securities to
approximately 31% of total assets as of September 30, 1997, as heavy supply led
to attractive yields there. We also added to the Fund's holdings in Michigan,
Connecticut, and California. We sold Arizona, North Carolina, and Illinois
bonds, due simply to the laws of supply and demand. As indicated in our last
report, we continue to buy when there is a particularly high supply and yield
spreads are wide and to sell when supply is low and yield spreads have narrowed.
In other words, when imbalances are created, so, too, are opportunities for the
Fund.
Maintaining our focus on high quality issues, we also sold some lower rated
credits. More than three-fourths of the Fund's holdings are, as of September
30, rated AAA. To this same end, we continued to sell bonds whose calls may get
in the way of performance and to purchase non-callable bonds, thereby improving
the overall call structure of the portfolio. The Fund ended the annual period
with 12% of its assets in cash, just slightly less than the 13% allocation held
at the end of March.
MANAGER OUTLOOK
For the near term, we anticipate maintaining the Fund's slightly longer than the
Index duration, as we believe that the outlook for inflation remains favorable,
that interest rates may fall further, and that the Federal Reserve Board will
not take official action in the coming months. Limited supply of new treasury
bonds also supports our slightly longer duration stance. At the same time,
however, we continue to believe that it will be difficult to sustain the pace of
economic growth seen over the past four quarters, without some resulting pickup
in inflation. Rising wage rates in response to the tight labor market
conditions are bound to put some pressure on profit margins, force
- -------------------
* Performance quoted represents past performance and is not indicative of
future results. 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 Lehman 7-Year Government Bond Obligations Index is composed of Agency
and Treasury securities with maturities of 7-8 years. 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 Services, Inc., as
falling into the respective categories indicated. These figures do not
reflect sales charges.
++ Income may be subject to the federal alternative minimum tax and state and
local taxes.
3
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INTERMEDIATE TAX FREE FUND
LETTER TO SHAREHOLDERS
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DIVERSIFICATION OF PORTFOLIO INVESTMENTS
By Sector as of September 30, 1997
(PERCENTAGES ARE BASED ON MARKET VALUE)
[CHART]
University Revenue........................................................... 5%
Environmental Control........................................................ 6%
Water Revenue................................................................ 6%
Sewer Revenue................................................................ 7%
Refunding Bonds.............................................................. 9%
Transportation.............................................................. 16%
Building Revenue............................................................. 4%
Power Revenue................................................................ 3%
Public Improvements.......................................................... 3%
Other....................................................................... 16%
General Obligations......................................................... 25%
prices higher, or both. As inflation picks up, interest rates are expected to
follow. Thus, looking ahead a bit longer-term to the first half of 1998, we
believe that interest rates may start to move back up again, possibly through
proactive action on the part of the Federal Reserve Board. We would likely
shorten the Portfolio's duration in response.
We expect that the Taxpayer Relief Act of 1997 will continue to have minimal
impact. Some restrictions on issuance have been eliminated through the Act,
which may lead to higher supply; liberalization of IRAs may lead to somewhat
decreased demand. However, it is other potential changes in the tax laws that
may be of greater concern going forward.
We will, of course, continue monitoring economic conditions and how they affect
the financial markets, as we seek to produce a yield greater than a tax free
money market fund with lower risk to principal than a longer term or lower
credit quality tax free bond fund.*
We value your ongoing support of the Intermediate Tax Free Fund and look forward
to continuing to serve your investment needs in the years ahead.
/s/ Gary Pollock
Gary Pollack
Portfolio Manager of the
Intermediate Tax Free Portfolio
September 30, 1997
- -------------------
* Unlike money market funds, the share value of the fund will fluctuate.
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PERFORMANCE COMPARISON
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE INTERMEDIATE TAX
FREE FUND AND THE LEHMAN 7-YEAR G.O. BOND INDEX SINCE JULY 31, 1992.
- --------------------------------------------------------------------------------
TOTAL RETURN FOR THE PERIOD
ENDED SEPTEMBER 30, 1997
One year Since 7/20/92*
7.43%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5.57%**
- -------------------
* 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.
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[GRAPH]
Intermediate Tax Lehman 7-Year G.O.
Bond Index - $13,715 Free Fund - $113,172
Jul-92 10000 10000
Sep-92 9937 9972
Dec-92 10088 10140
Mar-93 10377 10463
Jun-93 10656 10761
Sep-93 10960 11076
Dec-93 11089 11227
Mar-94 10667 10741
Jun-94 10726 10889
Sep-94 10787 10973
Dec-94 10667 10864
Mar-95 11255 11452
Jun-95 11533 11760
Sep-95 11779 12147
Dec-95 12130 12446
Mar-96 12018 12419
Jun-96 12084 12456
Sep-96 12261 12691
Dec-96 12535 13017
Mar-97 12499 12997
Jun-97 12855 13359
Sep-97 13172 13715
Past performance is not indicative of future performance.
4
<PAGE>
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INTERMEDIATE TAX FREE FUND
STATEMENT OF ASSETS AND LIABILITIES SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
ASSETS
Investment in Intermediate Tax Free Portfolio, at Value. . $18,382,877
Receivable for Shares of Beneficial Interest Subscribed. . 400,000
Prepaid Expenses and Other . . . . . . . . . . . . . . . 3,658
-----------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . 18,786,535
-----------
LIABILITIES
Due to Bankers Trust . . . . . . . . . . . . . . . . . . 2,817
Payable for Shares of Beneficial Interest Redeemed . . . 12,514
Dividends Payable. . . . . . . . . . . . . . . . . . . . 24,599
Accrued Expenses and Other . . . . . . . . . . . . . . . 14,204
-----------
Total Liabilities. . . . . . . . . . . . . . . . . . . . . 54,134
-----------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . $18,732,401
-----------
-----------
COMPOSITION OF NET ASSETS
Paid-in Capital. . . . . . . . . . . . . . . . . . . . . $18,089,310
Accumulated Net Realized Gain from Investment
Transactions . . . . . . . . . . . . . . . . . . . . . 24,772
Net Unrealized Appreciation on Investments . . . . . . . 618,319
-----------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . $18,732,401
-----------
-----------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
(net assets divided by shares outstanding). . . . . . . . $ 10.65
-----------
-----------
SHARES OUTSTANDING ($0.001 par value per share, unlimited
number of shares of beneficial interest authorized). . . 1,759,166
-----------
-----------
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STATEMENT OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
INVESTMENT INCOME
Income Allocated from Intermediate Tax Free
Portfolio, net . . . . . . . . . . . . . . . . . . . . $ 992,170
EXPENSES
Administration and Services Fees . . . . . . . . . . . . 85,690
Printing and Shareholder Reports . . . . . . . . . . . . 14,000
Registration Fees. . . . . . . . . . . . . . . . . . . . 10,959
Professional Fees. . . . . . . . . . . . . . . . . . . . 8,950
Trustees Fees. . . . . . . . . . . . . . . . . . . . . . 2,750
Miscellaneous. . . . . . . . . . . . . . . . . . . . . . 4,912
-----------
Total Expenses . . . . . . . . . . . . . . . . . . . . . 127,261
Less Expenses Absorbed by Bankers Trust. . . . . . . . . (41,571)
-----------
Net Expenses . . . . . . . . . . . . . . . . . . . . . 85,690
-----------
NET INVESTMENT INCOME. . . . . . . . . . . . . . . . . . . 906,480
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net Realized Gain from Investment Transactions . . . . . 692,946
Net Change in Unrealized Appreciation on Investments . . (90,804)
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS. . . . . . 602,142
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS . . . . . . . . $ 1,508,622
-----------
-----------
See Notes to Financial Statements on Page 7
5
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INTERMEDIATE TAX FREE FUND
STATEMENT OF CHANGES IN NET ASSETS
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<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED PERIOD JANUARY 1, 1996
SEPTEMBER 30, 1997 TO SEPTEMBER 30, 1996*
------------------ ----------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM:
OPERATIONS
Net Investment Income. . . . . . . . . . . . . . . . . . $ 906,480 $ 713,520
Net Realized Gain from Investment Transactions . . . . . 692,946 276,617
Net Change in Unrealized Appreciation on Investments . . (90,804) (754,829)
------------ ------------
Net Increase in Net Assets from Operations . . . . . . . . 1,508,622 235,308
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS
Net Investment Income. . . . . . . . . . . . . . . . . . (906,480) (713,520)
------------ ------------
CAPITAL TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
Proceeds from Sales of Shares. . . . . . . . . . . . . . 7,441,482 3,212,369
Dividend Reinvestments . . . . . . . . . . . . . . . . . 633,740 480,696
Cost of Shares Redeemed. . . . . . . . . . . . . . . . . (11,952,520) (3,420,402)
------------ ------------
Net Increase (Decrease) from Capital Transactions
in Shares of Beneficial Interest . . . . . . . . . . . . (3,877,298) 272,663
------------ ------------
TOTAL DECREASE IN NET ASSETS . . . . . . . . . . . . . . . (3,275,156) (205,549)
NET ASSETS
Beginning of Period. . . . . . . . . . . . . . . . . . . . 22,007,557 22,213,106
------------ ------------
End of Period. . . . . . . . . . . . . . . . . . . . . . . $ 18,732,401 $ 22,007,557
------------ ------------
------------ ------------
</TABLE>
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FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Contained below are selected data for a share outstanding, total investment
return, ratios to average net assets and other supplemental data for the
periods indicated for the Intermediate Tax Free Fund.
<TABLE>
<CAPTION>
FOR THE FOR THE PERIOD FOR THE YEARS ENDED DECEMBER 31,
YEAR ENDED JANUARY 1, 1996 TO --------------------------------
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996* 1995 1994 1993
------------------ ------------------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . $10.34 $10.56 $9.72 $10.54 $9.99
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income. . . . . . . . . . . . . 0.44 0.33 0.47 0.42 0.41
Net Realized and Unrealized Gain
(Loss) on Investments . . . . . . . . . . . 0.31 (0.22) 0.84 (0.82) 0.57
-------- -------- -------- -------- --------
Total Income (Loss) from Investment Operations . 0.75 0.11 1.31 (0.40) 0.98
-------- -------- -------- -------- --------
DISTRIBUTIONS TO SHAREHOLDERS
Net Investment Income. . . . . . . . . . . . . (0.44) (0.33) (0.47) (0.42) (0.41)
Net Realized Gain from Investment
Transactions. . . . . . . . . . . . . . . . -- -- -- -- (0.02)
-------- -------- -------- -------- --------
Total Distributions. . . . . . . . . . . . . . . (0.44) (0.33) (0.47) (0.42) (0.43)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . $10.65 $10.34 $10.56 $9.72 $10.54
-------- -------- -------- -------- --------
TOTAL INVESTMENT RETURN. . . . . . . . . . . . . 7.43% 4.09%** 13.71% (3.81)% 9.94%
SUPPLEMENTAL DATA AND RATIOS:
Net Assets, End of Period (000s omitted) . . . $18,732 $22,008 $22,213 $25,303 $31,709
Ratios to Average Net Assets:
Net Investment Income . . . . . . . . . . . 4.23% 4.25%** 4.58% 4.20% 3.88%
Expenses, Including Expenses of the
Intermediate Tax Free Portfolio . . . . . 0.85% 0.85%** 0.85% 0.85% 0.85%
Decrease Reflected in Above Expense
Ratio Due to Absorption of Expenses by
Bankers Trust . . . . . . . . . . . . . . 0.30% 0.38%** 0.28% 0.36% 0.35%
</TABLE>
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* The Board of Trustees approved the change of the fiscal year end from
December 31 to September 30.
** Annualized
See Notes to Financial Statements on Page 7
6
<PAGE>
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INTERMEDIATE TAX FREE FUND
NOTES TO FINANCIAL STATEMENTS
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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 Intermediate Tax Free 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 July 20, 1992.
The Fund invests substantially all of its assets in the Intermediate Tax Free
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 dividends daily and distribute monthly 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, $36,188 was reclassified from paid-in-capital as net
realized gain.
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 esimates.
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 0.40 of 1% of the Fund's average daily net assets.
For the year ended September 30, 1997, this fee aggregated $85,690.
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 0.40 of 1% of the
average daily net assets of the Fund, excluding expenses of the Portfolio and
0.85 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 $41,571.
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 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 PERIOD
YEAR ENDED JANUARY 1, 1996 TO
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996*
------------------ -------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
Sold 714,509 $ 7,499,515 305,971 $ 3,212,369
Reinvested 54,979 575,707 46,327 480,696
Redeemed (1,138,076) (11,952,520) (328,712) (3,420,402)
----------- ----------- ----------- -----------
Net Increase
(Decrease) (368,588) $(3,877,298) 23,586 $ 272,663
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
- -------------------
* The Board of Trustees approved the change of the fiscal year end from
December 31 to September 30.
7
<PAGE>
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INTERMEDIATE TAX FREE FUND
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Trustees and Shareholders of the BT Investment Funds:
We have audited the accompanying statement of assets and liabilities of the
Intermediate Tax Free 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 year then ended and the
nine month period ended September 30, 1996 and the financial highlights for the
year ended September 30, 1997, the period January 1, 1996 to September 30, 1996
and the years ended December 31, 1995, 1994 and 1993 . 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
Intermediate Tax Free 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 the year ended September 30, 1997 and the nine month period ended September
30, 1996, 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
<PAGE>
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INTERMEDIATE TAX FREE PORTFOLIO
SCHEDULE OF PORTFOLIO INVESTMENTS SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Description Value
- ------ ----------- -----
<S> <C> <C>
LONG-TERM MUNICIPAL BONDS - 86.99%
ARIZONA - 2.55%
$ 440,000 Arizona State Transportation Board Excise
Tax, 5.60%, 7/01/03. . . . . . . . . . . . . . . . $ 469,075
----------
CALIFORNIA - 7.18%
500,000 California State, 5.75%, 11/01/11 . . . . . . . . . . . 545,520
800,000 Sacramento County California Sanitation
District Finance Authority Revenue, 5.00%,
12/01/15 . . . . . . . . . . . . . . . . . . . . . 774,880
----------
1,320,400
----------
CONNECTICUT - 10.29%
500,000 Connecticut State Clean Water Fund
Revenue, 5.00%, 3/01/11. . . . . . . . . . . . . . 502,805
500,000 Connecticut State, Series A, 6.25%, 5/15/06 . . . . . . 560,050
275,000 Connecticut State Special Tax Obligations,
6.75%, 2/15/99 . . . . . . . . . . . . . . . . . . 283,500
500,000 Connecticut State Special Tax Obligations
Revenue, 5.90%, 9/01/05. . . . . . . . . . . . . . 545,835
----------
1,892,190
----------
DELAWARE - 3.05%
520,000 Delaware Transportation Authority, 6.10%,
7/01/02. . . . . . . . . . . . . . . . . . . . . . 559,806
----------
FLORIDA - 0.29%
50,000 Dade County, Florida Aviation Authority,
5.40%, 10/01/07. . . . . . . . . . . . . . . . . . 53,261
----------
INDIANA - 4.50%
500,000 Indiana Transportation Finance Authority
Highway Revenue, (AMBAC Insured),
Series B, 5.00%, 12/01/09. . . . . . . . . . . . . 502,945
300,000 Indiana University Revenues, 6.60%, 8/01/01 . . . . . . 324,141
----------
827,086
----------
MAINE - 2.87%
500,000 Maine Municipal Bond, Series B, (MBIA
Insured), 5.375%, 11/01/05 . . . . . . . . . . . . 527,280
----------
MASSACHUSETTS - 9.95%
500,000 Massachusetts Bay Transportation Authority
General Transportation System, Series A,
5.40%, 3/01/08 . . . . . . . . . . . . . . . . . . 528,130
500,000 Massachusetts State Consumer Loan,
Series A, 5.50%, 11/01/08. . . . . . . . . . . . . 533,790
775,000 Massachusetts State Special Obligation
Revenue Consumer Loan, Series A,
5.00%, 6/01/14 . . . . . . . . . . . . . . . . . . 766,739
----------
1,828,659
----------
MICHIGAN - 6.87%
500,000 Kent County Michigan Refuse Disposal
Systems, Series A, 5.00%, 11/01/07 . . . . . . . . 515,975
500,000 Michigan State Building Authority, (AMBAC
Insured), 6.00%, 10/01/02. . . . . . . . . . . . . 537,895
200,000 Michigan State Housing Development
Authority, 6.30%, 12/01/03 . . . . . . . . . . . . 208,776
----------
1,262,646
----------
NEBRASKA - 1.73%
300,000 Nebraska Public Power District Revenue,
5.70%, 1/01/05 . . . . . . . . . . . . . . . . . . 317,289
----------
NEVADA - 2.90%
$ 500,000 Clark County, Nevada Highway Improvement
Revenue, (AMBAC Insured), 5.70%, 7/01/03 . . . . . 532,945
----------
NEW JERSEY - 1.30%
225,000 New Jersey State Turnpike Authority, 6.00%,
1/01/05. . . . . . . . . . . . . . . . . . . . . . 239,247
----------
NEW YORK - 21.35%
700,000 New York City, New York, G.O., Series E,
6.00%, 8/01/07 . . . . . . . . . . . . . . . . . . 770,966
500,000 New York State Dormitory Authority Revenue
Cons City University System, (FGIC
Insured), 5.75%, 7/01/13 . . . . . . . . . . . . . 540,790
500,000 New York State Dormitory Authority, Series E,
5.25%, 8/15/08 . . . . . . . . . . . . . . . . . . 518,860
500,000 New York State Dormitory Authority Revenue
New York University, (MBIA Insured),
Series A, 6.00%, 7/01/06 . . . . . . . . . . . . . 551,445
500,000 New York State Environment Facility Corp.,
5.75%, 6/15/10 . . . . . . . . . . . . . . . . . . 538,335
500,000 New York State Environmental Facilities
Corp. Pollution Control Revenue State Water
Revolving Fund, Series C, 5.05%, 12/15/10. . . . . 505,735
500,000 New York State Local Government Assistance
Corp., Series E, 5.25%, 4/01/16. . . . . . . . . . 499,410
----------
3,925,541
----------
TENNESSEE - 0.06%
10,000 Shelby County, Tennessee Public
Improvement, Series B, 5.25%, 11/01/06 . . . . . . 10,531
----------
TEXAS - 8.62%
175,000 Garland, Texas Independent School District,
6.40%, 2/15/98 . . . . . . . . . . . . . . . . . . 175,355
500,000 Texas State, Series A, 6.00%, 10/01/06. . . . . . . . . 554,625
300,000 Texas Water Resources Finance Authority
Revenue, 7.30%, 8/15/04. . . . . . . . . . . . . . 313,737
500,000 University of Texas, Series A, 6.50%, 8/15/01 . . . . . 541,260
----------
1,584,977
----------
VIRGINIA - 2.34%
400,000 Arlington County Virginia, 5.50%, 8/01/05 . . . . . . . 429,420
----------
WISCONSIN - 1.14%
200,000 Wisconsin State Transportation, 6.00%,
7/01/00. . . . . . . . . . . . . . . . . . . . . . 209,570
----------
TOTAL LONG-TERM MUNICIPAL BONDS (Cost $15,371,187) . . . . . . . . . . . . 15,989,923
----------
FLOATING RATE DEMAND NOTES - 12.78%
FLORIDA - 0.54%
100,000 Palm Beach County Florida Water & Sewer
Revenue, 5.00%, 10/01/11 . . . . . . . . . . . . . 100,000
----------
NEW YORK - 12.24%
600,000 New York City Water Authority, 3.65%, 6/15/25 . . . . . 600,000
200,000 New York, New York, G.O., 5.00%, 8/15/19. . . . . . . . 200,000
200,000 New York, New York, G.O., 5.00%, 8/15/18. . . . . . . . 200,000
200,000 New York, New York, G.O., 3.10%, 8/01/16. . . . . . . . 200,000
200,000 New York, New York, G.O., 5.00%, 8/15/21. . . . . . . . 200,000
150,000 New York, New York, G.O., 5.00%, 8/15/21. . . . . . . . 150,000
100,000 New York, New York, G.O., 5.00%, 8/01/23. . . . . . . . 100,000
</TABLE>
See Notes to Financial Statements on Page 13
9
<PAGE>
- --------------------------------------------------------------------------------
INTERMEDIATE TAX FREE PORTFOLIO
SCHEDULE OF PORTFOLIO INVESTMENTS SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Description Value
- ------ ----------- -----
<S> <C> <C>
$ 400,000 New York State Energy Research &
Development Authority, Pollution Control
Revenue, 3.25%, 6/01/29. . . . . . . . . . . . . . $ 400,000
200,000 New York State Energy Research &
Development Authority, Pollution Control
Revenue, 5.55%, 7/01/15. . . . . . . . . . . . . . 200,000
-----------
2,250,000
-----------
TOTAL FLOATING RATE DEMAND NOTES (Cost $2,350,000) . . . . . . . . . . . . 2,350,000
-----------
TOTAL INVESTMENTS (Cost $17,721,187) . . . . . . 99.77% $18,339,923
Other Assets in Excess of Liabilities. . . . . . 0.23% 43,097
------- -----------
Net Assets . . . . . . . . . . . . . . . . . . . 100.00% $18,383,020
------- -----------
------- -----------
</TABLE>
- -------------------------
The following abbreviations are used in portfolio descriptions:
AMBAC -- American Municipal Bond Assurance Corporation
FGIC -- Financial Guaranty Insurance Corporation
GO -- General Obligation
MBIA -- Municipal Bond Insurance Corporation
See Notes to Financial Statements on Page 13
10
<PAGE>
- --------------------------------------------------------------------------------
INTERMEDIATE TAX FREE PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
ASSETS
Investments, at Value (Cost of $17,721,187). . . . . . . $ 18,339,923
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . 589,654
Receivable for Securities Sold . . . . . . . . . . . . . 510,551
Interest Receivable. . . . . . . . . . . . . . . . . . . 224,908
------------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . 19,665,036
------------
LIABILITIES
Due to Bankers Trust . . . . . . . . . . . . . . . . . . 6,399
Payable for Securities Purchased . . . . . . . . . . . . 1,266,310
Accrued Expenses and Other . . . . . . . . . . . . . . . 9,307
------------
Total Liabilities. . . . . . . . . . . . . . . . . . . . . 1,282,016
------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . $ 18,383,020
------------
------------
COMPOSITION OF NET ASSETS
Paid-in Capital. . . . . . . . . . . . . . . . . . . . . $ 17,764,284
Net Unrealized Appreciation on Investments . . . . . . . 618,736
------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . $ 18,383,020
------------
------------
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
INVESTMENT INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . $ 1,088,843
EXPENSES
Advisory Fees. . . . . . . . . . . . . . . . . . . . . . 85,925
Administration and Services Fees . . . . . . . . . . . . 10,741
Professional Fees and Other. . . . . . . . . . . . . . . 20,499
Trustees Fees. . . . . . . . . . . . . . . . . . . . . . 2,100
------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . 119,265
Less Expenses Absorbed by Bankers Trust. . . . . . . . . (22,599)
------------
Net Expenses. . . . . . . . . . . . . . . . . . . . . 96,666
------------
NET INVESTMENT INCOME. . . . . . . . . . . . . . . . . . . 992,177
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net Realized Gain from Investment Transactions . . . . . 692,950
Net Change in Unrealized Appreciation on Investments . . (90,805)
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS. . . . . . 602,145
------------
NET INCREASE IN NET ASSETS FROM OPERATIONS . . . . . . . . $ 1,594,322
------------
------------
See Notes to Financial Statements on Page 13
11
<PAGE>
- --------------------------------------------------------------------------------
INTERMEDIATE TAX FREE PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FOR THE PERIOD
YEAR ENDED JANUARY 1, 1996 TO
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996*
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM:
OPERATIONS
Net Investment Income. . . . . . . . . . . . . . . . . . $ 992,177 $ 780,710
Net Realized Gain from Investment Transactions . . . . . 692,950 276,619
Net Change in Unrealized Appreciation on Investments . . (90,805) (754,832)
------------ ------------
Net Increase in Net Assets from Operations . . . . . . . . 1,594,322 302,497
------------ ------------
CAPITAL TRANSACTIONS
Proceeds from Capital Invested . . . . . . . . . . . . . 7,698,778 3,694,217
Value of Capital Withdrawn . . . . . . . . . . . . . . . (12,929,481) (4,230,017)
------------ ------------
Net Decrease in Net Assets from Capital Transactions . . . (5,230,703) (535,800)
------------ ------------
TOTAL DECREASE IN NET ASSETS . . . . . . . . . . . . . . . (3,636,381) (233,303)
------------ ------------
NET ASSETS
Beginning of Period. . . . . . . . . . . . . . . . . . . . 22,019,401 22,252,704
------------ ------------
End of Period. . . . . . . . . . . . . . . . . . . . . . . $ 18,383,020 $ 22,019,401
------------ ------------
------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Contained below are selected supplemental data and ratios to average net assets
for the periods indicated for the Intermediate Tax Free Portfolio.
<TABLE>
<CAPTION>
FOR THE FOR THE PERIOD FOR THE YEARS ENDED,
YEAR ENDED JANUARY 1, 1996 TO ----------------------------
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996* 1995 1994 1993
------------------ ------------------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL DATA AND RATIOS:
Net Assets, End of Period (000s omitted) . . . $18,383 $22,019 $22,253 $25,326 $31,745
Ratios to Average Net Assets:
Net Investment Income . . . . . . . . . . . 4.62% 4.64%** 4.97% 4.58% 4.29%
Expenses. . . . . . . . . . . . . . . . . . 0.45% 0.45%** 0.45% 0.45% 0.45%
Decrease Reflected in Above Expense
Ratio Due to Absorption of Expenses by
Bankers Trust . . . . . . . . . . . . . . 0.11% 0.14%** 0.08% 0.14% 0.18%
Portfolio Turnover Rate. . . . . . . . . . . . 171% 130% 95% 118% 40%
</TABLE>
* The Board of Trustees approved the change of the fiscal year end from
December 31 to September 30.
** Annualized
See Notes to Financial Statements on Page 13
12
<PAGE>
- --------------------------------------------------------------------------------
INTERMEDIATE TAX FREE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
A. ORGANIZATION
The Intermediate Tax Free 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 December 11, 1991
as an unincorporated trust under the laws of New York and commenced operations
on July 20, 1992. 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 are carried at fair market value as determined by an
independent pricing service at the end of each business day. 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. Securities
for which quotations are not available are stated 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. 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. 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. 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 0.05 of 1% of the Portfolio's average daily
net assets. For the year ended September 30, 1997, this fee aggregated $10,741.
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 0.40 of 1% of the
Portfolio's average daily net assets. For the year ended September 30, 1997,
this fee aggregated $85,925.
Bankers Trust has voluntarily undertaken to waive and reimburse expenses of the
Portfolio to the extent necessary, to limit all expenses to 0.45 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 $22,599.
Certain trustees and officers of the Portfolio are also directors, officers
and/or employees of Edgewood. 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.
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
$31,512,166 and $33,723,484, respectively.
For federal income tax purposes, the tax basis of investments held at September
30, 1997 was $17,721,187. The aggregate gross unrealized appreciation for all
investments was $619,222, and the aggregate gross unrealized depreciation for
all investments was $486.
13
<PAGE>
- --------------------------------------------------------------------------------
INTERMEDIATE TAX FREE PORTFOLIO
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Trustees and Holders of Beneficial Interest of the Intermediate Tax Free
Portfolio:
We have audited the accompanying statement of assets and liabilities, including
the schedule of portfolio investments, of the Intermediate Tax Free Portfolio 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 year then ended and the
nine month period ended September 30, 1996 and the financial highlights for the
year ended September 30, 1997, the period January 1, 1996 to September 30, 1996
and the years ended December 31, 1995, 1994 and 1993. 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
Intermediate Tax Free Portfolio as of September 30, 1997, the results of its
operations for the year then ended, the changes in its net assets for the year
ended September 30, 1997 and the nine month period ended September 30, 1996, 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
<PAGE>
This page intentionally left blank.
15
<PAGE>
BT INVESTMENT FUNDS
INTERMEDIATE TAX FREE 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.
