O BT INVESTMENT FUNDS O
INTERNATIONAL SMALL COMPANY
EQUITY FUND
ANNUAL REPORT
SEPTEMBER O 1998
<PAGE>
INTERNATIONAL SMALL COMPANY EQUITY FUND
Table of Contents
Letter to Shareholders 3
International Small Company Equity 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 9
International Small Company Equity Portfolio
Schedule of Portfolio Investments 10
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 16
--------------
The Fund is not insured by the FDIC and is not a deposit,
obligation of or guaranteed by Bankers Trust Company. The
Fund is subject to investment risks, including possible
loss of principal amount invested.
--------------
2
<PAGE>
INTERNATIONAL SMALL COMPANY EQUITY FUND
Letter to Shareholders
We are pleased to present you with this first annual report for the
International Small Company Equity Fund (the "Fund"), providing a review of the
markets, the Portfolio, and our outlook. Included are a complete financial
summary of the Fund's operations and a listing of the Portfolio's holdings. The
Fund has not been in operation for a full twelve months, thus, while this is an
annual report, market activity and investment performance is being reported for
the life of the Fund as of September 30, 1998.
MARKET ACTIVITY
Smaller companies, both in the U.S. and internationally, have had an extremely
difficult period, as several factors have impacted performance.
o The crisis in Asia began to impact the rest of the world, as fresh concerns of
contagion to Latin America came to the fore as did strong evidence that both
European and U.S. corporate earnings and economic growth were slowing.
o As investors saw their highly leveraged emerging market exposures lose value,
their appetite for risk decreased dramatically. This resulted in a global
credit crunch.
o Commensurate with this was a fear that central banks around the world were not
doing enough to stimulate growth and alleviate the credit crunch.
o Russia's financial collapse was added to investors' list of troublesome events
in August.
Together, these factors kept a premium on larger capitalization equities'
liquidity and perceived safety, to the clear detriment of smaller companies. We
saw significant stock price corrections on very low volumes, driving stocks to
levels well below their fundamental value.
INVESTMENT REVIEW
The Fund underperformed its benchmark and its category average for a number of
reasons.
o Many of the stocks in our portfolio are towards the small to medium sized
range of companies within the small company universe, and the drive toward the
more liquid stocks has punished these smaller of the small cap stocks more
significantly.
o Some of the stocks in the portfolio have a restructuring investment theme;
some have no earnings yet. In volatile times like these, companies undergoing
change and stocks without visible earnings tend to have greater difficulty. On
the other hand, they also have greater potential reward.
o The stocks had generally performed better in the period leading up to this
third calendar quarter, and therefore there were profits to be taken.
o The stocks in our portfolio tend to have a higher beta, a common measure of a
stock's relative volatility, than the market, and therefore the movements in
the portfolio are more exaggerated on both the upside and the downside of
market activity.
Still, the Fund did benefit from its significant exposure to European smaller
companies and its relatively low exposure to markets in Asia.
- --------------------------------------------------------------------------------
Periods ended September 30, 1998 Cumulative Total Returns
- --------------------------------------------------------------------------------
Past 3 months
and since inception
- --------------------------------------------------------------------------------
BT Investment International
Small Company Equity Fund*
(inception 6/30/98) -19.70%
Salomon Brothers Extended
Market Index Ex US** -15.13%
Lipper International Small Cap Average*** -17.02%
- --------------------------------------------------------------------------------
MANAGER OUTLOOK
As we look ahead for the near term, we believe there will be continued
volatility in the marketplace while global events run their course. This will
likely mean that larger cap stocks will continue to be favored over small cap
stocks, as investors seek their liquidity, visibility, and perceived quality.
However, over the longer term, we do think that the outlook for small caps may
be improving.
o It is becoming clear that the earnings of larger cap multinationals are coming
under pressure due to the sharp slowdown in the emerging markets, which these
companies have relied on for earnings growth. Small caps, in contrast, tend to
rely on their innovative, new products for sales growth and tend to be more
domestically focused.
o There is now outstanding value within the international small cap area, with
many companies now trading at relative levels not seen for a very long time.
In European markets, for example, small cap stocks are trading at 10-25%
discounts to their large cap brethren and yet are growing at rates 10-20%
higher. This opportunity has clearly been created by the current market
turmoil.
o As investors have been spooked by volatile markets, investment company cash
in-flows seem to have abruptly stopped. This may mean that investment managers
will begin to focus on the better relative value small caps currently offer as
ompared to large caps, rather than only on the stocks that track the indices.
Ten Largest Stock Holdings
MDIS Group PLC Northern Leisure PLC
Tullow Oil PLC Poligrafici Editoriale SPA
Expand Bank Sarasin et Cie
NCL Holdings ASA Micro Focus Group PLC
Kewill Systems PLC Enator AB
- ---------------
* 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.
** 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.
3
<PAGE>
INTERNATIONAL SMALL COMPANY EQUITY FUND
Letter to Shareholders
Diversification of Portfolio Investments
By Sector as of September 30, 1998
(percentages are based on market value)
[PIE CHART APPEARS HERE; SEE VALUES BELOW]
Hong Kong 1% Italy 5%
Great Britain 39% Netherlands 2%
Germany 12% Norway 6%
France 12% Spain 2%
Sweden 7%
Switzerland 10%
Ireland 1%
Austria 1%
Denmark 2%
Given this outlook, there are a couple of sectors of particular interest to
us--outsourcing and education.
o As companies have to restructure and improve profitability, they will likely
continue to outsource non-core activities such as information technology
services and contract manufacturing.
o There are, we believe, two growth drivers within the education sector. One is
that more people want to use their brains to move forward in a knowledge-based
economy. In a slowing economy, in particular, competition for jobs will
increase, so there will be a need to upgrade employee skills. The second
growth driver is the shift from the public sector to the private sector, an
especially strong trend in the international markets. This industry also has
exceptional earnings visibility.
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. At Bankers Trust we are disciplined in our "growth at a reasonable price"
(GARP) investment process. We:
o focus on individual companies that offer compelling valuations relative to
their growth rates, a strengthening competitive position and a sound
historical management strategy
o focus on companies that are in industries experiencing sharp growth, such as
those offering services to the telecommunications industry, enterprise
resource planning companies and outsourcing companies
o use extensive fundamental research to identify attractive investment
opportunities in unrecognized value companies and sectors internationally
o exploit the gap between perception and reality of a company's true business
value as a potential source of value for the Fund's investors
o use the volatility of the marketplace to our investors' advantage by
initiating or adding to positions on weakness
o use asset allocation, country selection, and currency selection primarily as
risk management tools.
We will continue to monitor economic conditions and their effect on financial
markets as we seek long-term capital appreciation.
We value your support of the International Small Company Equity Fund and look
forward to serving your investment needs in the years ahead.
/s/ Monik Kotecha
_________________
Monik Kotecha
Portfolio Manager of the
International Small Company Equity Portfolio
September 30, 1998
4
<PAGE>
INTERNATIONAL SMALL COMPANY EQUITY FUND
Statement of Assets and Liabilities September 30, 1998
<TABLE>
<S><C>
Assets
Investment in International Small Company Equity Portfolio, at Value $ 59,340
Receivable for Shares of Beneficial Interest Subscribed 1,500
Receivable from Bankers Trust 2,092
Prepaid Expenses and Other 13,903
---------
Total Assets 76,835
---------
Liabilities
Accrued Expenses and Other 16,064
---------
Total Liabilities 16,064
---------
Net Assets $ 60,771
=========
Composition of Net Assets
Paid-in Capital $ 73,645
Undistributed Net Investment Income 773
Undistributed Net Realized Gain from Investment, Foreign Currency and Forward Foreign
Currency Transactions 206
Net Unrealized Depreciation on Investment, Foreign Currency and Forward
Foreign Currency Contracts (13,853)
---------
Net Assets $ 60,771
=========
Net Asset Value, Offering and Redemption Price Per Share (net assets divided by shares outstanding) $ 8.03
=========
Shares Outstanding ($0.001 par value per share, unlimited number of shares of beneficial interest authorized) 7,570
=========
</TABLE>
Statement of Operations For the period June 30, 1998* through September 30, 1998
<TABLE>
<S><C>
Investment Income
Income Allocated from International Small Company Equity Portfolio, net $ 98
----------
Expenses
Administration and Services Fees 87
Printing and Shareholder Reports 8,550
Registration Fees 2,007
Professional Fees 5,650
Trustee Fees 846
Miscellaneous 996
----------
Total Expenses 18,136
Less Expenses Absorbed by Bankers Trust (18,059)
----------
Net Expenses 77
----------
Net Investment Income 21
----------
Realized and Unrealized Gain (Loss) on Investment, Foreign Currency,
and Forward Foreign Currency Contracts
Net Realized Gain from:
Investment Transactions 357
Foreign Currency Transactions 472
Forward Foreign Currency Transactions 49
Net Change in Unrealized Appreciation/Depreciation on Investment, Foreign Currency,
and Forward Foreign Currency Contracts (13,853)
----------
Net Realized and Unrealized Loss on Investment, Foreign Currency
and Forward Foreign Currency Contracts (12,975)
----------
Net Decrease in Net Assets from Operations $ (12,954)
==========
</TABLE>
- ---------------
* Commencement of operations
See Notes to Financial Statements on Pages 7 and 8
5
<PAGE>
INTERNATIONAL SMALL COMPANY EQUITY FUND
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the period
June 30, 1998* through
September 30, 1998
------------------------
<S><C>
Increase (Decrease) in Net Assets from:
Operations
Net Investment Income $ 21
Net Realized Gain from Investment, Foreign Currency and Forward
Foreign Currency Transactions 878
Net Change in Unrealized Appreciation/Depreciation on Investment,
Foreign Currency and Forward Foreign Currency Contracts (13,853)
---------
Net Decrease in Net Assets from Operations (12,954)
---------
Capital Transactions in Shares of Beneficial Interest
Proceeds from Sales of Shares 119,497
Cost of Shares Redeemed (45,772)
---------
Total Increase from Capital Transactions in Shares of Beneficial Interest 73,725
---------
Total Increase in Net Assets 60,771
Net Assets
Beginning of Period --
---------
End of Period (Including undistributed net income of $773 at September 30,1998) $ 60,771
=========
</TABLE>
- ---------------
* Commencement of operations
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 period
indicated for the International Small Company Equity Fund.
<TABLE>
<CAPTION>
For the period
June 30, 1998** through
September 30, 1998
------------------------
<S><C>
Per Share Operating Performance:
Net Asset Value, Beginning of Period $ 10.00
-----------
Income from Investment Operations
Net Investment Income 0.00(+)
Net Realized and Unrealized Gain (Loss) on Investment, Foreign Currency, and
Forward Foreign Currency Contracts (1.97)
-----------
Total Loss from Investment Operations (1.97)
-----------
Net Asset Value, End of Period $ 8.03
===========
Total Investment Return (19.70)%
Supplemental Data and Ratios:
Net Assets, End of Period (000s omitted) $61
Ratios to Average Net Assets:
Net Investment Income* 0.22%
Expenses, Including Expenses of the Institutional Small Company Equity Portfolio* 1.90%
Decrease Reflected in Above Expense Ratio Due to Absorption of Expenses by Bankers Trust* 210.17%
</TABLE>
- ---------------
* Annualized
** Commencement of operations
(+) Less than .01 per share
See Notes to Financial Statements on Pages 7 and 8
6
<PAGE>
INTERNATIONAL SMALL COMPANY EQUITY 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 Massachusetts business trust
under the laws of the Commonwealth of Massachusetts. International Small Company
Equity 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 June 30, 1998. The Fund invests substantially all of its assets in the
International Small Company Equity 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 14% of the
Portfolio.
The financial statements of the Portfolio, including the Schedule of Portfolio
Investments, are contained elsewhere in this report and should be read in
conjunction with the Fund's financial statements.
B. Valuation of securities
The valuation of securities by portfolio is discussed in note 1B to the
portfolio's Notes to Financial Statements, which have been included elsewhere in
this report.
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 annually 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 also be made annually.
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. Therefore, no federal
income tax provision is required. The Fund may periodically make
reclassifications among certain of its capital accounts as a result of
differences in the characterization and allocation of certain income and capital
gains determined annually in accordance with federal tax regulations which may
differ from generally accepted accounting principles.
F. Other
The Trust accounts separately for the assets, liabilities, and operations of
each Fund. Expenses directly attributable to the Fund are charged to that Fund,
while expenses which are attributable to the Trusts are allocated among the
Funds. Investment transactions are accounted for on a trade date basis. Realized
gains and losses are determined on an 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 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 .90% of the Fund's average daily net assets.
Bankers Trust has voluntarily undertaken to waive its fees and reimburse
expenses of the Fund, to the extent necessary, to limit all expenses to 0.80% of
the average daily net assets of the Fund, excluding expenses of the Portfolio
and 1.90% of the average daily net assets of the Fund, including expenses of the
Portfolio.
The Trust has entered into a distribution agreement with ICCDistributors, Inc.
("ICC") under which ICCwill 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 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 the 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 period ended September 30, 1998.
7
<PAGE>
INTERNATIONAL SMALL COMPANY EQUITY FUND
Notes to Financial Statements
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:
For the period
June 30, 1998
(Commencement of Operations)
to September 30, 1998
----------------------------
Shares Amount
-------- --------
Sold 12,360 $119,497
Reinvested -- --
Redeemed (4,790) (45,772)
------ --------
Net Increase 7,570 $ 73,725
====== ========
Note 4--Risks of Investing in International Small Company Stocks
Historically, medium- and small-capitalization stocks have been more volatile in
price than the larger-capitalization stocks included in the S&P500. Among the
reasons for the greater volatility of these securities are the less certain
growth prospects of smaller firms, the lower degree of liquidity in the markets
for such stocks, and the greater sensitivity of medium- and small-size companies
to changing economic conditions. In addition to exhibiting greater volatility,
medium and small-size company stocks may fluctuate independently of larger
company stocks. Medium- and small-size stocks may decline in price as large
company stocks rise, or rise in price as large company stocks decline.
8
<PAGE>
INTERNATIONAL SMALL COMPANY EQUITY FUND
Report of Independent Accountants
To the Trustees of BT Investment Funds and Shareholders of International Small
Company Equity 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
International Small Company Equity Fund (one of the funds comprising
BTInvestment 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 the period June 30, 1998 (commencement of operations)
through September 30, 1998, 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 audit. We conducted our audit 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 audit, which included
confirmation of securities at September 30, 1998 by correspondence with the
transfer agent, provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Baltimore, Maryland
November 6, 1998
9
<PAGE>
INTERNATIONAL SMALL COMPANY EQUITY PORTFOLIO
Schedule of Portfolio Investments September 30, 1998
Shares Description Value
- ------ ----------- -----
COMMON STOCKS - 78.88%
Denmark - 1.25%
90 Carli Gry International A/S $ 5,273
--------
France - 9.68%
154 Assystem SA 4,427
1,536 Bertin Et Cie SA (a) (b) 5,485
90 Cie Generale de Geophysique (a) 5,303
233 Cofidur 4,007
376 Expand 14,433
60 Groupe GTM 5,356
654 Immobiliere et Hoteliere SA (a) (b) 1,996
--------
41,007
--------
Germany - 9.62%
7 Bien-Haus AG 2,221
150 Boewe Systec AG 5,388
319 Graphisoft NV (a) 5,080
181 Kampa-Haus AG 4,660
30 Muehlbauer Holdings AG & Co. (a) 2,532
58 Rinol AG 1,579
191 Sauer Inc. 1,429
26 Singulus Technologies AG (a) 2,577
152 Teldafax AG (a) 6,142
1,250 Wuensche AG 9,130
--------
40,738
--------
Great Britain - 31.05%
3,975 Easynet Group PLC (a) 7,257
430 Eidos PLC (a) 4,983
3,620 Fife Indmar PLC 4,702
19,284 Industrial Control Services Group PLC (b) 7,041
982 Infobank International Holdings PLC (a) 650
740 JBA Holdings PLC 3,518
750 Kewill Systems PLC 12,769
29,240 MDIS Group PLC (a) 24,952
1,932 Micro Focus Group PLC 9,515
6,213 Northern Leisure PLC 10,815
3,340 Nursing Home Properties PLC 9,076
3,090 Quarto Group, Inc. (b) 3,516
8,640 Southhampton Leisure Holdings PLC 7,263
19,342 Tullow Oil PLC (a) 22,993
1,202 World Telecom PLC 2,520
--------
131,570
--------
Hong Kong - 0.70%
2,000 ASM Pacific Technology Ltd. 505
6,000 Founder Hong Kong Ltd. 1,045
1,200 Hong Kong Aircraft Engineering
Company Ltd. 1,425
--------
2,975
--------
Ireland - 0.45%
132 Saville Systems PLC ADR 1,914
--------
Italy - 4.07%
2,206 Beghelli SPA (a) 4,796
4,031 Poligrafici Editoriale SPA 10,058
1,570 Stefanel SPA (a) 2,377
--------
17,231
--------
Netherlands - 1.75%
240 GTI Holding NV 7,390
--------
Norway - 4.50%
400 Det Sondenfjelds-Norske Dampskibsselskab $ 4,922
6,342 NCL Holdings ASA 14,152
--------
19,074
--------
Spain - 2.04%
164 Banco Pastor SA 8,664
--------
Sweden - 5.45%
400 Enator AB 9,284
755 Modern Times Group MTG AB (a) 8,472
311 OM Gruppen AB 5,354
--------
23,110
--------
Switzerland - 8.32%
8 Bank Sarasin et Cie 9,570
23 Cicorel Holding AG (a) 5,035
6 Liechtenstein Global Trust AG 5,959
20 Publigroupe SA 4,988
4 Saurer AG 2,044
35 Unigestion Holdings 1,776
2 Verwaltungs-und Privat-Bank 5,872
--------
35,244
--------
Total Common Stocks (Cost $444,764) 334,190
--------
PREFFERED STOCK - 0.66%
Austria - 0.66%
135 Baumax Aktiengesellschaft 2,815
--------
Total Preferred Stock (Cost $2,560) 2,815
--------
Total Investments (Cost $447,324) 79.54% $337,005
Other Assets in Excess of Liabilities 20.46% 86,686
------ --------
Net Assets 100.00% $423,691
====== ========
- ---------------
(a) Non-Income Producing Security
(b) Illiquid Security
The following abbreviations are used in the portfolio descriptions:
ADR--American Depository Receipt
Industry Diversification (as a percentage of Total Investments):
(Unaudited)
Banks 7.15%
Building & Construction 6.29%
Commercial Services 1.74%
Computer Services and Software 23.46%
Consumer Goods 4.98%
Electrical 0.75%
Electronics 2.92%
Engineering 3.02%
Entertainment 1.19%
Financial Services 3.36%
Investment Companies 3.22%
Leisure Related 9.56%
Machinery 0.61%
Manufacturing 0.63%
Marketing 1.48%
Oil Related 9.85%
Paper & Forest Products 1.60%
Printing & Publishing 4.03%
Retail 1.43%
Telecommunications 2.57%
Television 6.80%
Other* 3.36%
------
100.00%
======
* No one industry represents more than 1% of Portfolio holdings.
See Notes to Financial Statements on Pages 13, 14 and 15
10
<PAGE>
INTERNATIONAL SMALL COMPANY EQUITY PORTFOLIO
Statement of Assets and Liabilities September 30, 1998
<TABLE>
<S><C>
Assets
Investments, at value (cost of $447,324) $ 337,005
Cash 111,409
Dividends and Interest Receivable 2,413
Receivable for Foreign Taxes Withheld 169
Receivable from Bankers Trust, net 53,412
Unrealized Appreciation on Forward Foreign Currency Contracts 3,187
----------
Total Assets 507,595
----------
Liabilities
Payable for Securities Purchased 51,913
Unrealized Depreciation on Forward Foreign Currency Contracts 9,084
Accrued Expenses and Other 22,907
----------
Total Liabilities 83,904
----------
Net Assets $ 423,691
==========
Composition of Net Assets
Paid-in Capital $ 538,745
Net Unrealized Depreciation on Investments, Foreign Currencies and Forward
Foreign Currency Contracts (115,054)
----------
Net Assets $ 423,691
==========
</TABLE>
- ---------------
* Includes foreign cash of $82,777 with a cost of $81,425
Statement of Operations For the period June 30, 1998* through September 30, 1998
<TABLE>
<S><C>
Investment Income
Dividends (net of foreign withholding tax of $456) $ 2,660
Interest 114
Other Income 1,012
----------
Total Investment Income 3,786
----------
Expenses
Advisory fees 1,115
Administration and Services Fees 152
Professional Fees 22,200
Trustees Fees 632
Miscellaneous 36
----------
Total Expenses 24,135
Less Expenses Absorbed by Bankers Trust (23,020)
----------
Net Expenses 1,115
----------
Net Investment Income 2,671
----------
Realized and Unrealized Gain (Loss) on Investments, Foreign Currencies and
Forward Foreign Currency Contracts
Net Realized Gain from:
Investment Transactions 2,972
Foreign Currency Transactions 6,782
Forward Foreign Currency Transactions 225
Net Change in Unrealized Appreciation/Depreciation on Investments, Foreign
Currencies and Forward Foreign Currency Contracts (115,054)
----------
Net Realized and Unrealized Loss on Investments, Foreign Currencies, and
Forward Foreign Currency Contracts (105,075)
----------
Net Decrease in Net Assets from Operations $ (102,404)
==========
</TABLE>
- ---------------
* Commencement of operations
See Notes to Financial Statements on Pages 13, 14 and 15
11
<PAGE>
INTERNATIONAL SMALL COMPANY EQUITY PORTFOLIO
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the period
June 30, 1998* through
September 30, 1998
----------------------
<S><C>
Increase in Net Assets from:
Operations
Net Investment Income $ 2,671
Net Realized Gain from Investment, Foreign Currency and Forward
Foreign Currency Transactions 9,979
Net Change in Unrealized Appreciation/Depreciation on Investments, Foreign Currencies and
Forward Foreign Currency Contracts (115,054)
---------
Net Decrease in Net Assets from Operations (102,404)
---------
Capital Transactions
Proceeds from Capital Invested 576,584
Value of Capital Withdrawn (50,489)
---------
Net Increase in Net Assets from Capital Transactions 526,095
---------
Total Increase in Net Assets 423,691
Net Assets
Beginning of Period --
---------
End of Period $ 423,691
=========
</TABLE>
- -------------
* Commencement of operations
Financial Highlights
Contained below are selected ratios to average net assets and other supplemental
data for the period indicated for the International Small Company Equity
Portfolio.
<TABLE>
<CAPTION>
For the period
June 30, 1998** through
September 30, 1998
-----------------------
<S><C>
Supplemental Data and Ratios:
Net Assets, End of Period (000s omitted) $424
Ratios to Average Net Assets:
Net Investment Income* 2.63%
Expenses* 1.10%
Decrease Reflected in Above Expense Ratio Due to Absorption of Expenses by Bankers Trust* 22.70%
Portfolio Turnover Rate 11%
</TABLE>
- ---------------
* Annualized
** Commencement of operations
See Notes to Financial Statements on Pages 13, 14 and 15
12
<PAGE>
INTERNATIONAL SMALL COMPANY EQUITY PORTFOLIO
Notes to Financial Statements
Note 1--Organization and Significant Accounting Policies
A. Organization
The International Small Company Equity 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 is a subtrust or "series" of
BTInvestment Portfolios. The BT Investment Portfolios were organized as a master
trust fund on October 8, 1997 under the laws of the State of New York and
commenced operations on June 30, 1998. 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 the
security traded on that exchange prior to the time when the Portfolio assets are
valued. Short-term debt securities are valued 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 Interest Income
Security transactions are accounted for on a trade date basis. Dividend income,
less foreign taxes withheld, if any, is recorded on the ex-dividend date or upon
receipt of ex-dividend notification in the case of certain foreign securities.
Interest income is recorded on the accrual basis and includes amortization of
premium and discount on investments. Expenses are recorded as incurred. 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 security and foreign currency 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 Advisers, 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. Foreign Currency Transactions
The books and records of the Portfolio are maintained in U.S. dollars. All
assets and liabilities initially expressed in foreign currencies are converted
into U.S. dollars at prevailing exchange rates. Purchases and sales of
investment securities, dividend and interest income, and certain expenses are
translated at the rates of exchange prevailing on the respective dates of such
transactions.
F. Forward Foreign Currency Contracts
The Portfolio may enter into forward foreign currency contracts for the purpose
of settling specific purchases or sales of securities denominated in a foreign
currency or with respect to the Portfolio's investments. The net U.S. dollar
value of foreign currency underlying all contractual commitments held by the
Portfolio and the resulting unrealized appreciation or depreciation are
determined using prevailing exchange rates. With respect to forward foreign
currency contracts, losses in excess of amounts recognized in the Statement of
Assets and Liabilities may arise due to changes in the value of the foreign
currency or if the counterparty does not perform under the contract.
G. Option Contracts
Upon the purchase of a put option or a call option by a 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 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.
H. Futures Contracts
The Portfolio may enter into financial futures contracts which are contracts to
buy a standard quantity of securities at a specified price on a future date. The
Portfolio is required to make initial margin deposits either in cash or
securities in an amount equal to a certain percentage of the contract amount.
Variation margin payments are made or received by the Portfolio each day,
dependent on the daily fluctuations in the value of the underlying security, and
are recorded for financial statement purposes as unrealized gains or losses by
the Portfolio.
Futures contracts are valued at the settlement price established each day by the
board of trade or exchange on which they are traded.
I. Federal Income Taxes
The Portfolio is a partnership under Internal Revenue Code. Therefore, no
federal income tax provision is necessary.
J. 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 0.15% of the Portfolio's average daily net
assets.
13
<PAGE>
INTERNATIONAL SMALL COMPANY EQUITY PORTFOLIO
Notes to Financial Statements
The Portfolio has entered into an Advisory Agreement with Bankers Trust. Under
this Advisory Agreement, the Portfolio pays Bankers Trust an advisory fee
computed daily and paid monthly at an annual rate of 1.10% of the Portfolio's
average daily net assets.
Bankers Trust has voluntarily undertaken to waive its fees and reimburse
expenses of the Portfolio, to the extent necessary, to limit all expenses to
1.10% 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.
The Portfolio is a participant with other affiliated entities in a revolving
credit facility ("the revolver") and a discretionary demand line of credit
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 0.45%. 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
$478,148 and $33,795 respectively.
For federal income tax purposes, the tax basis of investments held at September
30, 1998 was $447,657. The aggregate gross unrealized appreciation for all
investments was $2,211 and the aggregate gross unrealized depreciation for all
investments was $112,863.
14
<PAGE>
INTERNATIONAL SMALL COMPANY EQUITY PORTFOLIO
Notes to Financial Statements
Note 4--Open Forward Foreign Currency Contracts
As of September 30, 1998, the International Small Company Equity Portfolio had
the following open forward foreign currency contracts outstanding:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Net Unrealized
Appreciation
Contracts to Deliver In Exchange For Settlement Date Value (US$) (Depreciation) (US$)
- ------------------------------------------------------------------------------------------------------
Sales
- ------------------------------------------------------------------------------------------------------
<S><C>
CHF 51,840 USD 36,662 03/03/99 38,132 (1,470)
DEM 5,876 ITL 5,810,000 10/01/98 1 1
DEM 38,199 GBP 13,000 11/20/98 (908) (908)
DEM 50,101 GBP 17,000 11/20/98 (1,276) (1,276)
DEM 25,384 GBP 9,000 11/20/98 10 10
DEM 13,000 USD 7,794 12/16/98 7,820 (26)
DKK 50,000 USD 7,862 10/29/98 7,881 (19)
GBP 10,000 USD 17,090 10/20/98 16,982 108
GBP 10,000 USD 16,650 10/20/98 16,984 (334)
GBP 45,789 USD 73,629 11/20/98 77,640 (4,011)
ITL 7,001,757 USD 4,079 10/02/98 4,241 (162)
ITL 2,261,757 USD 1,366 10/16/98 1,370 (4)
NOK 88,550 DEM 20,000 10/16/98 (2) (2)
SEK 70,000 USD 8,866 10/19/98 8,926 (60)
SEK 81,531 USD 10,000 10/19/98 10,386 (386)
SEK 21,735 USD 2,651 10/19/98 2,768 (117)
SEK 80,000 USD 10,030 10/19/98 10,191 (161)
- ------------------------------------------------------------------------------------------------------
Total Sales (8,817)
- ------------------------------------------------------------------------------------------------------
Purchases
- ------------------------------------------------------------------------------------------------------
CHF 51,840 DEM 62,640 12/26/98 196 196
DEM 174,781 USD 103,091 12/16/98 105,137 2,046
GBP 10,000 USD 17,109 10/01/98 16,982 (127)
GBP 14,881 USD 25,000 10/20/98 25,274 274
ITL 3,530,000 USD 2,120 10/02/98 2,138 18
ITL 1,210,000 USD 722 10/02/98 732 10
ITL 2,261,757 USD 1,365 10/02/98 1,370 5
SEK 195,884 USD 25,000 10/19/98 24,979 (21)
SEK 103,266 USD 12,661 10/19/98 13,154 493
SEK 10,000 USD 1,260 10/19/98 1,274 14
SEK 15,000 USD 1,899 10/19/98 1,911 12
- ------------------------------------------------------------------------------------------------------
Total Purchases 2,920
- ------------------------------------------------------------------------------------------------------
Net Depreciation (5,897)
- ------------------------------------------------------------------------------------------------------
</TABLE>
CHF -- Swiss Franc
DEM -- German Deutschemark
DKK -- Danish Krone
GBP -- British Pound
ITL -- Italian Lira
NOK -- Norwegian Krone
SEK -- Swedish Krona
USD -- U.S. Dollar
Note 5--Risks of Investing in International Small Company Stocks
Historically, medium- and small-capitalization stocks have been more volatile in
price than the larger-capitalization stocks included in the S&P 500. Among the
reasons for the greater volatility of these securities are the less certain
growth prospects of smaller firms, the lower degree of liquidity in the markets
for such stocks, and the greater sensitivity of medium- and small-size companies
to changing economic conditions. In addition to exhibiting greater volatility,
medium and small-size company stocks may fluctuate independently of larger
company stocks. Medium- and small-size stocks may decline in price as large
company stocks rise, or rise in price as large company stocks decline.
15
<PAGE>
INTERNATIONAL SMALL COMPANY EQUITY PORTFOLIO
Report of Independent Accountants
To the Trustees of BT Investment Portfolios and Holders of Beneficial Interest
of the International Small Company Equity Portfolio:
In our opinion, the accompanying statement of assets and liabililties, including
the portfolio of investments, 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 International Small Company
Equity Portfolio (one of the portfolios comprising BTInvestment Portfolios,
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 the period June 30, 1998 (commencement of operations) through September 30,
1998, 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 audit. We conducted our audit 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 audit, which included confirmation of securities at
September 30, 1998 by correspondence with the custodian and brokers, provides a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Baltimore, Maryland
November 6, 1998
16
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BT INVESTMENT FUNDS
INTERNATIONAL SMALL COMPANY EQUITY 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 must be preceded or
accompanied by a current prospectus for the Fund.
---------------
BT Investment International Small Company Equity CUSIP #055922686
STA808200 (9/98)
