o BT INVESTMENT FUNDS o
SMALL CAP FUND
ANNUAL REPORT
----------------
SEPTEMBER o 1998
<PAGE>
SMALL CAP FUND
Table of Contents
- --------------------------------------------------------------------------------
Letter to Shareholders 3
Small Cap Fund
Statement of Assets and Liabilities 6
Statement of Operations 6
Statements of Changes in Net Assets 7
Financial Highlights 7
Notes to Financial Statements 8
Report of Independent Accountants 9
Tax Information 9
Small Cap Portfolio
Schedule of Portfolio Investments 10
Statement of Assets and Liabilities 12
Statement of Operations 12
Statements of Changes in Net Assets 13
Financial Highlights 13
Notes to Financial Statements 14
Report of Independent Accountants 15
--------------
The Fund is not insured by the FDIC and is not a deposit,
obligation of or guaranteed byBankers Trust Company. The
Fund is subject to investment risks, including possible
loss of principal amount invested.
--------------
2
<PAGE>
SMALL CAP FUND
Letter to Shareholders
- --------------------------------------------------------------------------------
We are pleased to present you with this annual report for the Small Cap Fund
(the "Fund"), providing a review of the markets, 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.
MARKET ACTIVITY
Overall, the twelve months ended September 30, 1998 were a period of significant
volatility for small capitalization growth stocks. While equities in general
were on a roller coaster during the year, the small cap sector was impacted the
most, as concerns roiling the markets in the first half only heightened in the
second.
At the start of the fourth quarter of 1997, small cap growth stocks began to
weaken, following a five month period during which they had outperformed both
the midcap and large cap segments of the market. The effects of the Asian
financial crises began to spread. Small cap growth stocks came under pressure,
as U.S. investors sought both to lock in gains with year end profit taking and
to discount the expected negative impact these crises would have on the earnings
growth of companies with significant exposure to Asia--especially the technology
stocks. In addition, in their search for perceived "safe havens" and liquidity,
investors tended to turn their focus to more value-oriented stocks and large cap
names.
As the first quarter of 1998 progressed, investor sentiment toward small cap
growth stocks improved for a number of reasons:
o The impact of the Asian crisis appeared clearer and somewhat measurable, and
there was a lack of any significant negative news announcements.
o The earnings growth of small cap companies continued to be strong. Even the
earnings growth of many companies with international exposure was sustained as
a result of strong growth in the U.S. and Europe despite Asian difficulties.
o Those companies that were more negatively impacted by Asian issues had already
lowered expectations enough that investors were no longer as concerned about
these effects or worried about further disappointing earnings surprises.
o Relative valuations of small stocks were significantly reduced and reached
levels approaching those of the spring of 1997 at which point they were at a
four year low.
o Stable to rising overall market levels following a volatile fourth calendar
quarter for all equity markets helped settle investors' desire for "safe
havens" and more liquid names and served to boost sentiment surrounding small
cap stocks.
As a result, small cap growth stocks' performance improved, and this sector
participated with other segments of the stock market in a robust rally.
Underlying all these reasons and continuing into the second quarter of 1998 were
sustained strong U.S. economic conditions, few signs of inflation, and stable
interest rates.
Renewed fears of a Federal Reserve Board interest rate increase and continued
financial troubles in Asian countries turned investor sentiment negative and
drove the market lower as the second calendar quarter progressed. With these
renewed concerns came a clear bias toward liquidity and thus larger cap stocks.
Ironically, the earnings growth outlook for larger cap stocks was reduced during
the first half of the calendar year, creating a notable gap as compared to the
still robust earnings growth outlook for smaller growth companies. Indeed, this
combination of small cap underperformance and better earnings growth outlook
created a widening and compelling valuation gap.
The third calendar quarter witnessed a continuation of market volatility,
highlighted by several factors: o Russia's financial collapse and fresh concerns
of contagion to Latin America from Asia's ongoing financial crisis were added to
investors' list of troublesome events.
o There was renewed focus on slowing growth in U.S. corporate earnings and in
the overall economy, as problems largely confined to high technology and basic
industries were anticipated to spread to major global consumer companies, as
evidenced by announcements of weakening results by Coca Cola and Gillette.
o Acknowledging the weakening global environment and its potential impact on the
U.S. economy, the Federal Reserve Board lowered the fed funds rate by 0.25% on
September 29th and now seems focused on preventing a credit crunch as seen
earlier in the decade.
o News of major U.S. and European financial institutions' direct exposure to
emerging markets and their secondary exposure to hedge funds that aggressively
place leverage bets abroad began to spread.
Together, these factors kept a premium on larger caps' liquidity and perceived
safety. This investor sentiment dominated, despite a strong second quarter
earnings reporting season out of the small cap sector in July. Small cap
companies continued to exhibit superior earnings growth and relatively
attractive valuations throughout. In fact, small cap relative P/E ratios as
compared to large cap P/E ratios are currently at their lowest level in over a
quarter of a century.
Ten Largest Stock Holdings
Parexel International Corp. Legato Systems, Inc.
-----------------------------------------------------------------
Superior Consulting Holdings Advantage Learning Systems
-----------------------------------------------------------------
Wind River Systems, Inc. HNC Software, Inc.
-----------------------------------------------------------------
Medimmune, Inc. Mutual Risk Management, Ltd.
-----------------------------------------------------------------
Sipex Corporation CSG Systems International, Inc.
-----------------------------------------------------------------
INVESTMENT REVIEW
The Fund's relative performance was hampered overall by its growth-oriented
investment style, as the market punished small cap growth stocks more than any
other segment of the market. The only exception to this trend during this fiscal
year was in the first calendar quarter, when a return to growth style investing
helped the Fund. Strong specific stock selection drove the Fund's outperformance
not only in the first calendar quarter, but also in the second.
3
<PAGE>
SMALL CAP FUND
Letter to Shareholders (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Periods ended September 30, 1998 Cumulative Total Returns Average Annual Total Returns
- ------------------------------------------------------------------------------------------------
<S><C>
Past 1 Past 3 Since Past 1 Past 3 Since
year years inception year years inception
- ------------------------------------------------------------------------------------------------
BT Investment Small Cap Fund* -28.38% 6.73% 97.45% -28.38% 2.20% 14.76%
(inception 10/21/93)
- ------------------------------------------------------------------------------------------------
Russell 2000 Index** -19.02% 22.03% 50.63% -19.02% 6.86% 8.69%
- ------------------------------------------------------------------------------------------------
Russell 2000 Growth Index** -24.83% 4.41% 31.21% -24.83% 1.45% 5.68%
- ------------------------------------------------------------------------------------------------
Lipper Small Cap Growth Average*** -20.60% 21.70% 56.13% -20.60% 6.45% 9.24%
- ------------------------------------------------------------------------------------------------
</TABLE>
Relative sector positioning had a mixed effect on performance. For example, in
the fourth quarter of 1997, the Fund was underweight in the outperforming
value-oriented sectors of utilities, financial services, and consumer staples
and was overweight in the poorly performing growth-oriented technology sector.
However, that same strategy worked to the Fund's favor in the next quarter, when
technology was among the best performing sectors, as was the consumer
discretionary sector.
In the second half of the fiscal year, the ups and downs within small cap
equities continued. In the quarter ending June 30th, the Fund was positively
impacted by overweight positions in the consumer discretionary, technology, and
autos & transportation sectors. Stock selection also contributed to the Fund's
outperformance for the quarter. Moving to an underweight position in energy
benefited the Fund in the quarter ended September 30th, but underweight
positions in the better performing, more value-oriented utilities, consumer
staples, and financial services sectors hurt performance.
While this has clearly been a difficult year for small cap growth stocks and for
the Fund, it is well worth noting that for the life of the Fund, its performance
is well ahead of both its benchmarks and its Lipper category average. We intend
to maintain our long-term investment strategies.
MANAGER OUTLOOK
Although we expect future periods of volatility in the marketplace while global
economic events run their course, we remain optimistic regarding small cap
stocks in general. Small cap fundamentals remain strong, earnings growth
superior, and relative valuations attractive. In particular, the companies in
the Fund's portfolio are, overall, experiencing strong fundamental growth in
earnings, are largely reliant upon the domestic economy for growth, and are
expressing upbeat outlooks for the coming year.
Over the longer term, it has been shown that investors will pay for reasonably
priced earnings growth. It is important to remember that investors should take a
long-term view when investing in this segment of the market, as returns can be
volatile in the short term.
Given the recent high volatility in the stock market, it is also important to
keep in mind that at Bankers Trust we remain disciplined in our process, and we
continue to:
o focus on companies that offer compelling valuations relative to their growth
rates
o focus on companies that have strong, consistent earnings and revenue growth
o use extensive fundamental research--as well as our thematic approach and
screening process--to identify attractive investment opportunities in
unrecognized growth companies and sectors
o strictly adhere to our sell discipline to help mitigate risk, and
o 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.
/s/ Timothy Woods
_______________________________
/s/ Mary P. Dugan
_______________________________
Timothy Woods and Mary P. Dugan
Portfolio Managers of the Small Cap Portfolio
September 30, 1998
- --------------
* Performance quoted represents past 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 is an unmanaged, market value weighted index, which
measures performance of the 2,000 companies that are between the 1,000th and
3,000th largest in the market. Indices 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.
4
<PAGE>
SMALL CAP FUND
Letter to Shareholder
- --------------------------------------------------------------------------------
Diversification of Portfolio Investments
By Theme as of September 30, 1998
(percentages are based on market value)
[PIE CHART APPEARS HERE -- PLOT POINTS BELOW]
Our Strengthening Life Sciences Revolution 4%
Financial Structure 7%
Cash 10%
New Health Care
Paradigm 8% Telecommunications 4%
New Consumer 3% Other 19%(+)
Move to The Ubiquitous
Outsourcing 6% Semiconductor 8%
Managing the America's Changing
Information Age 13% Leisure Time 3%
Life on the Net 6% Client Server Computing 6%
America's Industrial
Renaissance 3%
(+) Includes themes with weightings of less than 3%.
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, 1998
One Year Since 10/21/93*
-28.38% 14.76%**
* 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 APPEARS HERE -- PLOT POINTS BELOW]
SMALL CAP RUSSELL
FUND 2000 INDEX
$19,745 $15,063
OCT-93 10,000 10,000
DEC-93 10,326 10,002
MAR-94 10,375 9,735
JUN-94 9,951 9,354
SEP-94 11,451 10,004
DEC-94 12,320 9,819
MAR-95 14,107 10,272
JUN-95 15,903 11,236
SEP-95 18,263 12,345
DEC-95 19,536 12,613
MAR-96 21,049 13,256
JUN-96 23,181 13,919
SEP-96 23,074 13,967
DEC-96 20,884 14,693
MAR-97 17,517 13,933
JUN-97 20,917 16,192
SEP-97 27,217 18,602
DEC-97 23,940 17,980
MAR-98 26,987 19,788
JUN-98 19,745 15,063
SEP-98 19,745 15,063
Past performance is not indicative of future performance.
5
<PAGE>
SMALL CAP FUND
Statement of Assets and Liabilities September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S><C>
Assets
Investment in Small Cap Portfolio, at Value $ 173,271,361
Receivable for Shares of Beneficial Interest Subscribed 162,381
Prepaid Expenses and Other 15,743
--------------
Total Assets 173,449,485
--------------
Liabilities
Due to Bankers Trust, net 83,368
Payable for Shares of Beneficial Interest Redeemed 1,037,141
Accrued Expenses and Other 18,917
--------------
Total Liabilities 1,139,426
--------------
Net Assets $ 172,310,059
==============
Composition of Net Assets
Paid-in Capital $ 178,500,313
Accumulated Net Realized Loss from Investment Transactions (14,926,427)
Net Unrealized Appreciation on Investment 8,736,173
--------------
Net Assets $ 172,310,059
==============
Net Asset Value, Offering and Redemption Price Per Share (net assets divided by shares outstanding) $ 14.96
==============
Shares Outstanding ($0.001 par value per share, unlimited number of shares of beneficial interest authorized) 11,514,530
==============
</TABLE>
Statement of Operations For the year ended September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S><C>
Investment Income
Expenses in Excess of Income Allocated from Small Cap Portfolio, net $ (523,926)
--------------
Expenses
Administration and Services Fees 1,518,290
Printing and Shareholder Reports 40,298
Trustees Fees 3,073
Professional Fees and Other 18,458
--------------
Total Expenses 1,580,119
Less Expenses Absorbed by Bankers Trust (61,829)
--------------
Net Expenses 1,518,290
--------------
Expenses in Excess of Investment Income (2,042,216)
--------------
Realized and Unrealized Gain (Loss) on Investments
Net Realized Gain from Investment Transactions 3,536,499
Net Change in Unrealized Appreciation/Depreciation on Investment (73,838,071)
--------------
Net Realized and Unrealized Loss on Investment (70,301,572)
--------------
Net Decrease in Net Assets from Operations $ (72,343,788)
==============
</TABLE>
See Notes to Financial Statements on Page 8
6
<PAGE>
SMALL CAP FUND
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the For the
year ended year ended
September 30, 1998 September 30, 1997
------------------ ------------------
<S><C>
Increase (Decrease) in Net Assets from:
Operations
Expenses in Excess of Investment Income $ (2,042,216) $ (1,751,995)
Net Realized Gain from Investment Transactions 3,536,499 21,511,447
Net Change in Unrealized Appreciation/Depreciation on Investment (73,838,071) 20,305,688
-------------- --------------
Net Increase (Decrease) in Net Assets from Operations (72,343,788) 40,065,140
-------------- --------------
Distributions to Shareholders
Net Realized Gain from Investment Transactions (11,612,132) --
In Excess of Net Realized Gains from Investment Transactions (13,960,209) (13,993,488)
-------------- --------------
Total Distributions (25,572,341) (13,993,488)
-------------- --------------
Capital Transactions in Shares of Beneficial Interest
Proceeds from Sales of Shares 299,805,325 248,556,213
Dividend Reinvestments 17,676,714 10,338,678
Cost of Shares Redeemed (333,578,059) (240,880,564)
-------------- --------------
Net Increase (Decrease) from Capital Transactions in Shares of Beneficial Interest (16,096,020) 18,014,327
-------------- --------------
Total Increase (Decrease) in Net Assets (114,012,149) 44,085,979
Net Assets
Beginning of Year 286,322,208 242,236,229
-------------- --------------
End of Year $ 172,310,059 $ 286,322,208
============== ==============
</TABLE>
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 Small Cap Fund.
<TABLE>
<CAPTION>
For the period
For the years ended October 21, 1993
September 30, (Commencement of
------------------------------------------------- Operations) to
1998 1997 1996 1995 September 30, 1994
-------- -------- -------- -------- ------------------
<S><C>
Per Share Operating Performance:
Net Asset Value, Beginning of Period $ 23.68 $ 21.66 $ 18.50 $ 11.60 $10.00
-------- -------- -------- -------- -------
Income fromInvestment Operations
Expenses in Excess of Investment Income (0.18) (0.14) (0.12) (0.04) (0.03)
Net Realized and Unrealized Gain (Loss)
on Investment (6.24) 3.58 4.65 6.94 1.63
-------- -------- -------- -------- -------
Total Income (Loss) from Investment Operations (6.42) 3.44 4.53 6.90 1.60
-------- -------- -------- -------- -------
Distributions to Shareholders
Net Realized Gain from Investment Transactions (1.04) (1.42) (1.37) -- --
In Excess of Net Realized Gains (1.26) -- -- -- --
-------- -------- -------- -------- -------
Total Distributions (2.30) (1.42) (1.37) -- --
-------- -------- -------- -------- -------
Net Asset Value, End of Period $ 14.96 $ 23.68 $ 21.66 $ 18.50 $11.60
======== ======== ======== ======== =======
Total Investment Return (28.38)% 17.90% 26.41% 59.48% 17.06%*
Supplemental Data and Ratios:
Net Assets, End of Period (000s omitted) $172,310 $286,322 $242,236 $122,935 $21,332
Ratios to Average Net Assets:
Expenses in Excess of Income (0.87)% (0.89)% (0.70)% (0.46)% (0.58)%*
Expenses, Including Expenses of the
Small Cap Portfolio 1.25% 1.25% 1.25% 1.25% 1.25%*
Decrease Reflected in Above Expense Ratio Due
to Absorption of Expenses by Bankers Trust 0.19% 0.03% 0.22% 0.34% 0.86%*
</TABLE>
- --------------
* Annualized
See Notes to Financial Statements on Page 8
7
<PAGE>
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, 1998, 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. Valuation
Valuation of securities by the Portfolio is discussed in Note 1B of the
Portfolio's Notes to Financial Statements.
C. 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.
D. Distributions
It is the Fund's policy to declare and distribute dividends quarterly to
shareholders from net investment income. 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.
E. 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. The Fund has
deferred post October capital losses of $14,786,627 to the next year.
F. 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
the Funds. Investment transactions are accounted for on the trade date basis.
Realized gains and losses are determined on the identified cost basis.
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 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 .65% of
the Fund's average daily net assets.
Bankers Trust has voluntarily undertaken to waive and reimburse expenses of the
Fund, to the extent necessary, to limit all expenses to .65% of the average
daily net assets of the Fund, excluding expenses of the Portfolio, and 1.25% of
the average daily net assets of the Fund, including expenses of the Portfolio.
The Trust has entered into a distribution agreement with ICC Distributors, Inc.
("ICC") under which ICC will serve as distributor for shares sold on behalf of
the Fund.
The Fund is a participant with other affiliated entities in a revolving credit
facility (the "revolver") and a discretionary demand line of credit facility,
collectively (the "credit facilities") in the amounts of $50,000,000 and
$100,000,000, respectively. A commitment fee of .07% per annum on the average
daily amount of the available commitment is payable on a calendar quarter basis,
and apportioned equally among all participants. Amounts borrowed under the
credit facilities will bear interest at a rate per annum equal to the Federal
Funds Rate plus .45%. No amounts were drawn down or outstanding under the credit
facilities as of and for the year ended September 30, 1998.
Note 3--Shares of Beneficial Interest
At September 30, 1998, there were an unlimited number of shares of beneficial
interest authorized. Transactions in shares of beneficial interest were as
follows:
<TABLE>
<CAPTION>
For the For the
year ended year ended
September 30, 1998 September 30, 1997
---------------------------- ----------------------------
Shares Amount Shares Amount
------------ -------------- ------------ --------------
<S><C>
Sold 15,646,669 $ 299,805,325 13,234,894 $ 248,556,213
Reinvested 1,021,185 17,676,714 571,830 10,338,678
Redeemed (17,243,267) (333,578,059) (12,902,495) (240,880,564)
------------ -------------- ------------ --------------
Net Increase
(Decrease) (575,413) $ (16,096,020) 904,229 $ 18,014,327
============ ============== ============ ==============
</TABLE>
8
<PAGE>
SMALL CAP FUND
Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Trustees of BT Investment Funds and the Shareholders of
BT Small Cap Fund:
In our opinion, the accompanying statement of assets and liabilities and the
related statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
the Small Cap Fund (one of the Funds comprising BT Investment Funds, hereafter
referred to as the "Fund") at September 30, 1998, and the results of its
operations, the changes in its net assets and the financial highlights for each
of the fiscal periods presented, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at September 30, 1998 by correspondence with the
transfer agent, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Baltimore, MD
November 6, 1998
Tax Information (Unaudited) For the Year Ended September 30, 1998
- --------------------------------------------------------------------------------
The Fund paid long term capital gains during the year ending 9/30/98 in the
amount of $9,587,686. In addition, of the ordinary distributions made during the
year ending 9/30/98, $0.02 per share qualify for the dividends received
deduction available to corporate shareholders.
9
<PAGE>
SMALL CAP PORTFOLIO
Schedule of Portfolio Investments September 30, 1998
- --------------------------------------------------------------------------------
Shares Description Value
- ------ ----------- -----
COMMON STOCK - 88.61%
America's Changing Leisure Time - 3.10%
106,500 Bob Evans Farms, Inc. $ 2,123,344
76,700 Cinar Films, Inc. - Class B * 1,375,806
41,300 Family Golf Centers, Inc. * 733,075
79,300 O'Charleys, Inc. * 802,913
24,600 Travel Services International, Inc. * 333,637
-------------
5,368,775
-------------
America's Educational Crisis - 2.77%
69,800 Advantage Learning Systems, Inc. * 2,652,400
139,600 School Specialty, Inc. * 2,146,350
-------------
4,798,750
-------------
America's Industrial Renaissance - 3.00%
65,400 ASA Holdings, Inc. 2,321,700
132,000 Interface Flooring Systems, Inc. - Class A 1,584,000
68,000 SkyWest, Inc. 1,300,500
-------------
5,206,200
-------------
Client Server Computing - 6.08%
74,800 Apex PC Solutions, Inc. * 1,467,950
63,200 HNC Software, Inc. * 2,567,500
95,100 Software AG Systems, Inc. * 1,616,700
63,200 Wind River Systems, Inc. * 2,986,200
77,200 Xircom, Inc. * 1,891,400
-------------
10,529,750
-------------
Consolidating America - 2.63%
43,500 Heftel Broadcasting Corporation - Class A * 1,642,125
109,400 Integrated Electric Services, Inc. * 1,627,325
88,600 Ivex Packaging Corporation * 1,284,700
-------------
4,554,150
-------------
Energizing the Globe - 2.73%
51,000 Basin Exploration, Inc. * 844,688
72,500 Newfield Exploration Company * 1,631,250
71,800 Stone Energy Corporation * 2,252,725
-------------
4,728,663
-------------
Environmental Crisis - 2.34%
51,500 American Disposal Services, Inc. * 2,005,281
145,600 Catalytica, Inc. * 2,056,600
-------------
4,061,881
-------------
Flourishing in the Managed Care Environment - 3.04%
48,900 Annuity and Life Re (Holdings), Ltd. * 965,775
48,400 Pediatrix Medical Group, Inc. * 2,171,950
68,600 Trigon Healthcare, Inc. * 2,126,600
-------------
5,264,325
-------------
Life on the Net - 5.57%
35,300 CMG Information Services, Inc. * 1,879,725
93,600 E*Trade Group, Inc. * 1,749,150
48,900 Excite, Inc. * 1,995,731
32,300 Exodus Communications, Inc. * 787,313
39,400 Preview Travel, Inc. * 719,050
55,500 Sportsline USA, Inc. * 967,781
118,300 USWeb Corporation * 1,545,294
-------------
9,644,044
-------------
Life Sciences Revolution - 3.61%
44,600 Medimmune, Inc. * 2,887,850
86,200 PAREXEL International Corporation * 3,361,800
-------------
6,249,650
-------------
Shares Description Value
- ------ ----------- -----
Managing the Information Age - 12.80%
40,300 Abacus Direct Corporation * $ 2,055,300
35,300 Complete Business Solutions, Inc. * 1,014,875
66,800 Fundtech Ltd. * 718,100
85,200 Information Management Resources, Inc. * 2,108,700
51,700 Legato Systems, Inc. * 2,656,087
98,800 Smart Modular Technology, Inc. * 2,031,575
72,900 Superior Consultant Holdings Corporation * 3,171,150
51,300 Syntel, Inc. * 1,141,425
70,300 Tier Technologies, Inc. - Class B * 1,159,950
59,400 Transaction Systems Architects, Inc. -
Class A * 2,108,700
35,500 VERITAS Software Corporation * 1,961,375
111,300 Whittman-Hart, Inc. * 2,045,137
-------------
22,172,374
-------------
Move to Outsourcing - 5.58%
52,000 G & K Services, Inc. - Class A 2,437,500
110,200 Gentex Corporation * 1,653,000
76,400 HA-LO Industries, Inc. * 2,234,700
78,650 INSpire Insurance Solutions, Inc. * 1,858,106
43,200 Metzler Group, Inc. * 1,479,600
-------------
9,662,906
-------------
New Consumer - 3.31%
41,000 AnnTaylor Stores Corporation * 832,813
125,000 Gerber Childrenswear, Inc. * 992,187
113,900 Helen of Troy, Ltd. * 2,206,813
96,950 THQ, Inc. * 1,696,625
-------------
5,728,438
-------------
New Health Care Paradigm - 8.27%
35,700 Amerisource Health, Inc. - Class A * 1,943,419
49,700 Healthcare Financial Partners, Inc. * 2,087,400
46,700 Medicis Pharmaceutical Corporation -
Class A * 1,850,487
99,500 Priority Healthcare Corporation - Class B* 2,276,063
88,050 Renal Care Group, Inc. * 2,256,281
66,500 Safeskin Corporation * 2,098,906
76,033 Total Renal Care Holdings, Inc. * 1,824,792
-------------
14,337,348
-------------
Our Strengthening Financial Structure - 6.98%
28,800 Centura Banks, Inc. 1,810,800
85,700 Financial Federal Corporation 1,880,044
83,066 Legg Mason, Inc. 2,185,674
30,937 Metris Companies, Inc. 1,442,461
71,800 Mutual Risk Management, Ltd. 2,539,925
101,300 Philadelphia Consolidated Holdings, Inc. 2,241,263
-------------
12,100,167
-------------
Productivity Enhancement - 1.77%
65,673 Dura Automotive Systems, Inc. * 1,699,289
56,800 Visio Corporation * 1,366,750
-------------
3,066,039
-------------
Special Situations - 1.03%
85,800 Universal Foods Corporation 1,791,075
-------------
Stores of Value - 2.07%
66,000 Duane Reade, Inc. * 2,503,875
99,000 Fingerhut Companies, Inc. 1,089,000
-------------
3,592,875
-------------
See Notes to Financial Statements on Page 14
10
<PAGE>
SMALL CAP PORTFOLIO
Schedule of Portfolio Investments September 30, 1998
- --------------------------------------------------------------------------------
Shares Description Value
- ------ ----------- -----
Telecommunications - 3.51%
63,900 Carrier Access Corporation * $ 1,142,213
51,600 COM21, Inc. * 922,350
56,800 CSG Systems International, Inc. * 2,513,400
35,600 Excel Switching Corporation * 841,050
60,200 Worldport Communications, Inc. * 665,962
-------------
6,084,975
-------------
The Revaluation of Real Estate - 0.67%
45,600 Trammell Crow Company * 1,162,800
-------------
The Ubiquitous Semiconductor - 7.75%
63,400 Jabil Circuit, Inc. * 2,203,150
74,100 Micrel, Inc. * 1,963,650
70,300 Novellus Systems, Inc. * 1,845,375
37,800 QLogic Corporation * 2,466,450
35,600 Rambus, Inc. * 2,278,400
105,300 SIPEX Corporation * 2,671,987
-------------
13,429,012
-------------
Total Common Stock (Cost $146,566,484) 153,534,197
-------------
Shares Description Value
- ------ ----------- -----
SHORT TERM INSTRUMENT - 9.86%
Mutual Fund
17,080,440 BT Institutional Cash Management Fund
(Cost $17,080,440) $ 17,080,440
-------------
Total Investments (Cost $163,646,924) 98.47% $170,614,637
Other Assets Less Liabilities 1.53% 2,656,742
------- -------------
Net Assets 100.00% $173,271,379
======= =============
- --------------
* Non-Income Producing Security
See Notes to Financial Statements on Page 14
11
<PAGE>
SMALL CAP PORTFOLIO
Statement of Assets and Liabilities September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S><C>
Assets
Investments, at Value (Cost of $163,646,924) $170,614,637
Cash 74,094
Receivable for Securities Sold 4,865,267
Dividends Receivable 60,855
-------------
Total Assets 175,614,853
-------------
Liabilities
Due to Bankers Trust 78,677
Payable for Securities Purchased 2,238,991
Accrued Expenses and Other 25,806
-------------
Total Liabilities 2,343,474
-------------
Net Assets $173,271,379
=============
Composition of Net Assets
Paid-in Capital $166,303,666
Net Unrealized Appreciation on Investments 6,967,713
-------------
Net Assets $173,271,379
=============
</TABLE>
Statement of Operations For the year ended September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S><C>
Investment Income
Dividends $ 879,964
-------------
Expenses
Advisory Fees 1,520,784
Administration and Services Fees 233,967
Professional Fees 33,764
Trustees Fees 2,641
Miscellaneous 260
-------------
Total Expenses 1,791,416
Less Expenses Absorbed by Bankers Trust (387,616)
-------------
Net Expenses 1,403,800
-------------
Expenses in Excess of Investment Income (523,836)
-------------
Realized and Unrealized Gain (Loss) on Investments
Net Realized Gain from Investment Transactions 3,536,500
Net Change in Unrealized Appreciation/Depreciation on Investments (73,816,547)
-------------
Net Realized and Unrealized Loss on Investments (70,280,047)
-------------
Net Decrease in Net Assets from Operations $(70,803,883)
=============
</TABLE>
See Notes to Financial Statements on Page 14
12
<PAGE>
SMALL CAP PORTFOLIO
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the For the
year ended year ended
September 30, 1998 September 30, 1997
------------------ ------------------
<S><C>
Increase (Decrease) in Net Assets from:
Operations
Expenses in Excess of Investment Income $ (523,836) $ (480,079)
Net Realized Gain from Investment Transactions 3,536,500 21,635,104
Net Change in Unrealized Appreciation/Depreciation on Investments (73,816,547) 19,884,098
-------------- --------------
Net Increase (Decrease) in Net Assets from Operations (70,803,883) 41,039,123
-------------- --------------
Capital Transactions
Proceeds from Capital Invested 320,120,726 256,648,577
Value of Capital Withdrawn (361,923,813) (257,424,442)
-------------- --------------
Net Decrease in Net Assets from Capital Transactions (41,803,087) (775,865)
-------------- --------------
Total Increase (Decrease) in Net Assets (112,606,970) 40,263,258
Net Assets
Beginning of Year 285,878,349 245,615,091
-------------- --------------
End of Year $ 173,271,379 $ 285,878,349
============== ==============
</TABLE>
Financial Highlights
- --------------------------------------------------------------------------------
Contained below are selected ratios to average net assets and other supplemental
data for the periods indicated for the Small Cap Portfolio.
<TABLE>
<CAPTION>
For the period
October 21, 1993
For the years ended September 30, (Commencement of
----------------------------------------------- Operations) to
1998 1997 1996 1995 September 30, 1994
-------- -------- -------- -------- ------------------
<S><C>
Supplemental Data and Ratios:
Net Assets, End of Period (000s omitted) $173,271 $285,878 $245,615 $123,828 $21,328
Ratios to Average Net Assets:
Net Investment Income (Expenses in
Excess of Investment Income) (0.22)% (0.24)% (0.05)% 0.19% 0.07%*
Expenses 0.60% 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% 0.17% 0.19% 0.38%*
Portfolio Turnover Rate 182% 188% 159% 161% 154%
</TABLE>
- --------------
* Annualized
See Notes to Financial Statements on Page 14
13
<PAGE>
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 debt securities are valued on at market value until such time
as they reach a remaining maturity of 60 days, whereupon they are 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 and expenses are recorded
on the accrual basis. Interest income 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 Advisor, 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
The Portfolio is considered a Partnership under the Internal Revenue Code.
Therefore, no federal income tax provision is necessary.
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 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 .10% of the Portfolio's average daily net assets.
The Portfolio has entered into an Advisory Agreement with Bankers Trust. Under
this 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 .65% of the Portfolio's
average daily net assets.
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 the
average daily net assets of the Portfolio.
The Portfolio may invest in the BT Institutional Cash Management Fund ("the
Fund"), an open-end management investment company managed by Bankers Trust
Company ("the Company"). The Fund is offered as a cash management option to the
Portfolio and other accounts managed by the Company. Distributions from the Fund
to the Portfolio as of September 30, 1998 amounted to $600,602 and are included
in dividend income.
The Portfolio is a participant with other affiliated entities in a revolving
credit facility (the "revolver") and a discretionary demand line of credit
facility, collectively (the "credit facilities") in the amounts of $50,000,000
and $100,000,000, respectively. A commitment fee of .07% per annum on the
average daily amount of the available commitment is payable on a calendar
quarter basis, and apportioned equally amongst all participants. Amounts
borrowed under the credit facilities will bear interest at a rate per annum
equal to the Federal Funds Rate plus .45%. No amounts were drawn down or
outstanding under the credit facilities as of and for the year ended September
30, 1998.
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, 1998 were
$397,846,050 and $433,371,704, respectively.
The tax basis of investments held at September 30, 1998 was $164,340,280. The
aggregate gross unrealized appreciation for all investments was $17,786,048 and
the aggregate gross unrealized depreciation for all investments was $11,511,691.
14
<PAGE>
SMALL CAP PORTFOLIO
Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Trustees and Holders of Beneficial Interest of Small Cap
Portfolio:
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Small Cap Portfolio (hereafter
referred to as the "Portfolio") at September 30, 1998, and the results of its
operations, the changes in its net assets and the financial highlights for each
of the fiscal periods presented, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Portfolio's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at September 30, 1998 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Baltimore, MD
November 6, 1998
15
<PAGE>
BT INVESTMENT FUNDS
SMALL CAP FUND
Investment Advisor and Administrator of the Portfolio
BANKERS TRUST COMPANY
130 Liberty Street
New York, NY 10006
Distributor
ICC DISTRIBUTORS, INC.
P.O. Box 7558
Portland, ME 04112-9892
Custodian and Transfer Agent
BANKERS TRUST COMPANY
130 Liberty Street
New York, NY 10006
Independent Accountants
PRICEWATERHOUSECOOPERS LLP
250 West Pratt Street
Baltimore, MD 21201
Counsel
WILLKIE FARR & GALLAGHER
787 7th Avenue
New York, NY 10019
-------------
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. This report must be preceded or
accompanied by a current prospectus for the Fund.
-------------
BT Investment Small Cap CUSIP #055922769
STA498200 (9/98)
