THE OLSTEIN FINANCIAL ALERT FUND
PRESIDENT'S MESSAGE
- ---------------------------------------------------------------------------
DEAR SHAREHOLDER:
It has been almost a year since the inception of The Olstein Financial
Alert Fund (the "Fund"). Although it is tempting to focus on the Fund's
eleven-month performance, to do so goes against the basic tenet of our
longer-term philosophy. The Fund's investment philosophy is based on a
belief that investment performance conclusions should be reached over 3-5
year time periods. Investment analysts, including the Fund's investment
manager, Olstein & Associates, L.P (the "Manager") can provide little
expertise in terms of short-term price predictions for individual stocks or
the stock market in general. In fact, the Manager's methodology of buying
pessimism often results in short-term periods of lagging performance in
order to reach long-term capital gains objectives. Thus, we have become
more comfortable with client "hand holding" during periods of under-
performance rather than blowing our horn during short-term periods of
positive performance. Outlined below are some practical examples of the
Fund's investment philosophy over the past year.
BUYING PESSIMISM:
Wet Seal, Inc. was the Fund's largest percentage winner last year. During
four years of lean times and a poor business climate in the junior apparel
market, Wet Seal was able to generate excess cash flow and remain
conservatively financed with a large cash position and no debt. The
company operated at an almost break-even level while its competitors were
going bankrupt or reporting significant losses. In April 1995, Wet Seal
seized upon a major opportunity when it purchased Contempo Casuals from
Neiman Marcus for $1 million worth of Wet Seal stock. The Manager
calculated that Contempo would add approximately $230 million to Wet Seal's
$130 million sales base and offered significant potential for cost saving
by eliminating duplication. By analyzing Wet Seal's business performance
and financial information under difficult business conditions, the Manager
reached very positive conclusions about the quality of management. The
negativity surrounding the poor business climate in which Wet Seal operated
enabled the Fund to purchase the company at what the Manager believed was a
bargain price. When Wet Seal's business turned, the Fund was able to sell
its last shares at 350% above the purchase price.
It is a portfolio manager's job to be right over time, not all the time.
Portfolio managers are often pressured by their clients to provide
instantaneous gratification and to be right all the time. Ironically, the
analytical community's quest to be right all the time creates the
volatility and opportunities on which The Olstein Financial Alert Fund
thrives.
For example, the Fund recently made a significant commitment to the airline
industry, in particular, to Delta, Continental and United. The Manager
believes that the industry is entering into a prolonged period of cyclical
growth and that these companies are poised for potentially higher returns.
The Manager's inferential analysis of such airlines' financial statements
also indicates the potential for a prolonged period of excess cash flow.
In addition, the Manager believes that the conscious decision by airline
management to keep fleet capacity additions well within projected cash
flows may give the airlines pricing flexibility such as they have not
enjoyed during the past 30 years.
In the last few weeks, airline stock prices have declined due to increased
fuel prices, security concerns and quarterly earnings projections, all of
which the Manager views as short-term negative developments. While many
industry analysts lower expectations upon short-term negative developments
1
THE OLSTEIN FINANCIAL ALERT FUND
PRESIDENT'S MESSAGE -- CONTINUED
- ---------------------------------------------------------------------------
so as not to appear incorrect in the short term to institutional investors,
we believe that a portfolio manager should value companies and not attempt
to predict stock price movements over 90 day periods. In response to what
the Manager perceives as stock price movements created by analysts who
express opinions about 30-90 day time periods, the Manager adds to the
Fund's positions as stocks deviate further away from the Manager's
valuations and correspondingly reduces the Fund's percentage commitment to
individual securities as their prices gravitate toward the Manager's
valuations. Buying the pessimism that creates value is a lonely and
contrary thing to do. Instead of paying high prices for companies that are
currently providing investors with immediate excitement, publicity and
gratification, the Manager is willing to go through long, dark periods with
individual securities which are out of fashion, but are conservatively
financed, produce excess cash flow and represent good businesses selling at
a discount. In the Manager's opinion, buying pessimism represents a lower
risk methodology of achieving capital gains objectives. The Manager
believes that, despite short-term concerns, the airlines should be better
able to absorb normal cyclical fluctuations in their costs because of their
newly found pricing flexibility, and thus, the Manager is adding to the
Fund's airline holdings.
MOMENTUM INVESTORS:
Although the Manager's investment philosophy does not incorporate reacting
to predictions of broad stock market movements, current themes and fads
engulfing Wall Street are monitored. The Manager is concerned about the
momentum investors who have become fashionable over the past 5 years but
have yet to experience a prolonged period of negative market psychology.
There is a large population of newly-born bull market portfolio managers
running mutual funds who are buying momentum stocks and so-called concept
stocks. Momentum investors have created pockets of overvaluation in small
capitalization growth stocks and so-called concept stocks. In cases where
the financial statements indicate that a company is selling above the
Manager's calculation of private market value and there is some doubt as to
the financial statement's portrayal of economic reality, a small short sale
position may be established to allow the Fund to potentially realize a
profit should the company's stock price fall to the Manager's calculation
of private market value.+ For example, the Fund currently has a small
short position in America Online, as the Manager believes that the
company's method of accounting for marketing costs is not realistically
portraying the basic earnings power of the company. Momentum investors
have also made it more difficult to find undervalued securities, but until
these opportunities present themselves, the Fund will hold cash equivalents
(currently 15% of the Fund's assets).
The Manager does not want the Fund's shareholders to infer that any market
predictions are being made. A company by company orientation is used.
Should negative market psychology develop in general or in individual
securities which results in conservatively financed companies becoming
undervalued, the Manager will purchase these companies, despite the
negative psychology surrounding them.
STOCKS WITHIN OUR VALUE PARAMETERS:
Listed below are examples of unfashionable stocks currently falling into
the Manager's value parameters (WE RECOMMEND THAT YOU REVIEW THE ATTACHED
SCHEDULE OF INVESTMENTS TO DETERMINE THE ACTUAL PERCENTAGES OF THE FUND'S
PORTFOLIO REPRESENTED BY THESE SECURITIES):
SILICON VALLEY GROUP, INC., NOVELLUS SYSTEMS, INC. AND KLA INSTRUMENTS -
(semi-conductor equipment companies). Wall Street is concerned about an
earnings downturn lasting until 1998. We are impressed by their low
+ Short selling is a technique that may be considered speculative and
involves risk beyond the initial capital necessary to secure each
transaction. Please refer to the Fund's Prospectus for complete
information.
2
THE OLSTEIN FINANCIAL ALERT FUND
PRESIDENT'S MESSAGE -- CONTINUED
- ---------------------------------------------------------------------------
valuations, their high levels of cash, and their technological support to
semi-conductor companies which are experiencing a temporary setback during
what we believe is a sustained period of cyclical growth. Silicon Valley
Group is being capitalized in the market place at $500 million. Silicon
Valley has cash of $300 million and has stockholders such as Intel,
Motorola and Texas Instruments, Inc. who apparently believe in Silicon
Valley's technology. Similarly, cash represents 25% of the market
capitalization of companies such as Novellus Systems and KLA Instruments.
FLEETWOOD ENTERPRISES, INC. - (a manufacturer of mobile homes and
recreation vehicles). The population in the 45 to 64 year old category,
the prime purchasers of mobile and motor homes, is predicted to grow 47% in
the next 15 years compared to 1% for the remainder of the population.
Fleetwood is a leader in its field, generates excess cash each year, has no
debt, and just recently showed confidence in its future by tendering for
20% of its outstanding shares. Wall Street is concerned about a short-term
drop in backlogs and the recent selling of 2 million shares back to the
company by its 71 year-old Chairman for estate purposes. The Manager
believes that the company has an outstanding future and is selling at a 25%
discount to the Manager's calculation of private market value.
GENERAL MOTORS, CORP. - The Manager believes that the automobile company,
which generates excess cash flow, is being re-engineered by a bright
innovative management team. GM's Hughes subsidiary, which includes its
satellite, aerospace and DirecTV units, are worth $20 per GM share and
could be spun off shortly. The Manager also believes that the segments of
GM are being undervalued by the market because analysts are too focused on
daily automotive sales, the next recession, and strike talk.
BOWNE & CO., INC. - The company is the oldest and largest financial
printer in the U.S. and generates excess cash flow each year, has $35
million of excess cash sitting on its balance sheet and has earnings power,
which the Manager believes is above Wall Street's expectations. Wall
Street is worried about Bowne's past dependence on the printing derived
from Initial Public Offerings (IPO's). However, the Manager believes the
company has diversified into mutual fund printing and other high-end
corporate market endeavors which should soften Bowne's cyclicality. We
believe Wall Street again is too bearish and is not zeroing in on the fact
that Bowne is currently selling at a discount to the Manager's calculation
of private market value even under a no growth assumption.
MORE THAN PERFORMANCE STATISTICS:
We are pleased to report that the Fund had an aggregate return of 12.22%
since September 21, 1995 (the date the Fund commenced operations).* In our
Semi-Annual report, we based the comparison of the Fund's performance
against the Value Line Index, an unweighted index composed of over 1,700
stocks in the Value Line Investment Survey. However, over the past year we
have found that because the Standard & Poor's 500 Composite Index (S&P 500)
is used as a standard in the mutual fund industry for performance
statistics, many of our shareholders have indicated that they prefer the
S&P 500 as a basis of comparison. In response to this request from our
shareholders, we have chosen to use the S&P 500 as the comparative bench-
mark for measuring the Fund's relative performance. The S&P 500 is a
capitalization weighted index of five hundred larger capitalized stocks
designed to measure performance of the broad domestic economy through
changes in the aggregate market value of five hundred stocks representing
all major industries. Because the S&P 500 is a weighted index, the Manager
also thought it would be more informative to provide an unweighted index of
* Past performance is not necessarily indicative of future results
Investment returns and principal values may fluctuate, so that, when
redeemed, shares may be worth more or less than their original cost.
3
THE OLSTEIN FINANCIAL ALERT FUND
PRESIDENT'S MESSAGE -- CONTINUED
- ---------------------------------------------------------------------------
mutual fund performance which consists of the average return of the 30
largest capital appreciation funds, rather than compare the Fund to the
unweighted Value Line Index. Lipper Analytical Services, the mutual fund
rating company which computes this index, classifies the Fund as a capital
appreciation fund. Below is a chart that represents the performance of the
Fund, the Lipper Capital Appreciation Funds Index, and the S&P 500 since
the Fund's inception on September 21, 1995.
[GRAPH]
Sep-95 Aug-96
------ ------
S&P 500 Index $10,000 $11,426
Lipper Index $10,000 $10,834
Olstein Financial
Alert Fund $10,000 $11,183
AGGREGATE RETURN
INCEPTION
Olstein Financial Alert(1) 12.22%
Lipper Index 8.34%
S&P 500(2) 14.25%
1 Includes all expenses and/or charges, and thus represents a "net return."
Total return assumes reinvestment of dividends and capital gains. Past
performance is not necessarily indicative of future results. Investment
returns and principal values may fluctuate, so that, when redeemed,
shares may be worth more or less than their original cost.
2 S&P 500 return is adjusted upward to reflect reinvested dividends, but
does not reflect the deduction of any fees or expenses associated with
investment in the index, and thus represents a "gross return."
4
THE OLSTEIN FINANCIAL ALERT FUND
PRESIDENT'S MESSAGE -- CONTINUED
- ---------------------------------------------------------------------------
Performance statistics are seductive because they provide one of the few
objective elements for selecting investment vehicles. However, the Manager
believes that investors should also consider the risks taken by the
portfolio manager rather than focusing solely on returns. The Manager does
not subscribe to the more conventional measurement of risk that is based
purely on the price volatility of a stock. The Manager measures portfolio
risk by assessing the probability of the individual companies within the
portfolio losing more than 20% of their market value over three- to five-
year time periods. In assessing the probability of loss, a company's
financial strength, its ability to produce excess cash flow, the QUALITY OF
EARNINGS and the Manager's confidence in the predictability of earnings
based on the company's unique business fundamentals are analyzed. Losses
penalize returns more than profits help. A portfolio manager who shows an
increase of 80% in one year and loses 50% in the next year has lost 10% of
his shareholders' capital.
The cornerstone of The Olstein Financial Alert Fund's philosophy continues
to be that long term capital gains objectives may be achieved by avoiding
serious errors rather than taking the risk to find big winners. The Fund's
Manager is dedicated to looking into and behind the numbers contained in a
company's publicly available financial statements which may be
contradicting Wall Street's predictions and valuations. A thorough
analysis of these numbers should give the Fund an edge in either avoiding
potential losers or selecting stocks where stock market valuations are
below the Manager's calculation of private market values.
We look forward to continuing a close shareholder relationship and
encourage any questions or feedback.
Sincerely,
/s/ Robert A. Olstein
Robert A. Olstein
President
October 24, 1996
5
THE OLSTEIN FINANCIAL ALERT FUND
SCHEDULE OF INVESTMENTS AUGUST 31, 1996
- ----------------------------------------------------------------------------
VALUE
SHARES (NOTE 2)
------ --------
COMMON STOCK - 84.6%
COMMUNICATIONS & BROADCASTING - 1.0%
BET Holdings, Inc. (A Shares)*.......... 41,500 $ 1,063,437
-----------
FINANCE & INSURANCE - 5.1%
INSURANCE CARRIERS - 2.7%
MGIC Investment Corp.................... 25,000 1,584,375
Vesta Insurance Group, Inc.............. 33,500 1,293,938
-----------
2,878,313
-----------
STATE & NATIONAL BANKS - 2.4%
JSB Financial, Inc...................... 80,000 2,650,000
-----------
TOTAL FINANCE & INSURANCE......................... 5,528,313
-----------
MANUFACTURING - 63.0%
CHEMICALS & ALLIED PRODUCTS - 7.7%
Arcadian Corporation.................... 23,000 506,000
Century Aluminum Company................ 45,000 720,000
First Mississippi Corp.................. 68,000 1,827,500
IMC Global Inc.......................... 16,000 688,000
Learonal, Inc........................... 107,300 2,333,775
RPM, Inc................................ 77,000 1,232,000
Terra Industries, Inc................... 80,900 1,071,925
-----------
8,379,200
-----------
COMPUTER & OFFICE EQUIPMENT - 7.9%
Caere Corp.*............................ 28,140 252,381
Compaq Computer Corporation*............ 10,000 566,250
Intel Corp.............................. 20,500 1,636,156
International Business Machines
Corp.................................... 6,000 686,250
LSI Logic Corp.*........................ 150,000 3,281,250
LAM Research Corp.*..................... 25,000 590,625
Xerox Corp.............................. 29,000 1,591,375
-----------
8,604,287
-----------
FOOD & BEVERAGE - 0.6%
Canandaigua Wine Company*............... 30,000 690,000
-----------
FURNITURE & FIXTURES - 1.1%
Ethan Allen Interiors, Inc.............. 46,000 1,230,500
-----------
GLASS, CONCRETE & OTHER PRODUCTS - 2.9%
Centex Construction Products,
Inc.................................... 90,000 1,327,500
Giant Cement Holding, Inc.*............. 50,000 693,750
Southdown, Inc.......................... 50,000 1,162,500
-----------
3,183,750
-----------
VALUE
SHARES (NOTE 2)
------ --------
IRON & STEEL - 1.0%
Kentucky Electric Steel, Inc.*.......... 151,900 $ 1,082,288
-----------
MISC. ELECTRICAL MACHINERY, EQUIP. & SUPPLIES - 9.0%
AVX Corp................................ 82,600 1,548,750
Amphenol Corp. (A Shares)*.............. 81,000 1,589,625
Applied Materials, Inc.*................ 19,000 460,750
Park Electrochemical Corp............... 116,000 2,102,500
Silicon Valley Group, Inc.*............. 47,000 851,875
Teradyne, Inc.*......................... 70,000 1,085,000
Texas Instruments, Inc.................. 37,500 1,753,125
Varian Associates....................... 10,000 456,250
-----------
9,847,875
-----------
MISC. INDUSTRIAL MACHINERY & EQUIP. - 2.0%
Novellus Systems, Inc.*................. 21,500 811,625
Simpson Manufacturing
Company*............................. 71,800 1,364,200
-----------
2,175,825
-----------
MISCELLANEOUS MANUFACTURING INDUSTRIES - 3.1%
Chase Brass Industries, Inc.*........... 25,200 425,250
Kysor Industrial, Corp.................. 46,100 1,181,312
Pittway Corporation..................... 9,100 410,637
Pittway Corporation (A Shares).......... 17,900 841,300
Steel of West Virginia, Inc.*........... 82,500 536,250
-----------
3,394,749
-----------
PAPER & PAPER PRODUCTS - 0.8%
Boise Cascade Corp...................... 25,000 843,750
-----------
PHARMACEUTICAL PREPARATIONS - 3.3%
American Home Products Corp............. 14,000 829,500
Merck & Co., Inc........................ 20,000 1,312,500
Pharmacia & Upjohn, Inc................. 21,500 903,000
Warner-Lambert Co....................... 10,000 595,000
-----------
3,640,000
-----------
PRECISION INSTRUMENTS & MEDICAL SUPPLIES - 1.5%
KLA Instruments*........................ 40,000 790,000
Nellcor Puritan Bennet, Inc.*........... 33,000 849,750
-----------
1,639,750
-----------
PRINTING & PUBLISHING - 1.4%
Bowne & Co., Inc........................ 76,800 1,526,400
-----------
TELECOMMUNICATIONS EQUIPMENT - 1.4%
Adaptec, Inc.*.......................... 14,000 698,250
Rogers Corp.*........................... 30,700 767,500
-----------
1,465,750
-----------
The accompanying notes are an integral part of the financial statements.
6
THE OLSTEIN FINANCIAL ALERT FUND
SCHEDULE OF INVESTMENTS - CONTINUED AUGUST 31, 1996
- ----------------------------------------------------------------------------
VALUE
SHARES (NOTE 2)
------ --------
TEXTILES & APPAREL - 3.6%
Barry (R.G.) Corp.*..................... 55,125 $ 757,969
Liz Claiborne, Inc...................... 34,000 1,181,500
Quiksilver, Inc.*....................... 85,000 1,997,500
-----------
3,936,969
-----------
TRANSPORTATION - 8.8%
Continental Airlines, Inc.
(B Shares)*............................. 139,000 3,144,875
Delta Air Lines, Inc..................... 44,500 3,153,938
Florida East Coast Industries, Inc....... 20,305 1,652,319
UAL Corp.*.............................. 34,500 1,656,000
-----------
9,607,132
-----------
TRANSPORTATION EQUIPMENT - 6.9%
Coachmen Industries, Inc................ 28,600 532,675
Echlin, Inc............................. 43,900 1,338,950
Fleetwood Enterprises, Inc.............. 105,000 2,913,750
General Motors Corp..................... 10,404 517,599
Harley-Davidson, Inc.................... 22,400 918,400
Monaco Coach Corp.*..................... 25,000 331,250
TRW Inc................................. 4,500 416,250
Winnebago Industries, Inc............... 64,900 527,313
-----------
7,496,187
-----------
TOTAL MANUFACTURING............................... 68,744,412
-----------
MINING - 0.9%
Giant Industries Inc.................... 63,300 949,500
-----------
SERVICES - 10.7%
AMUSEMENT & RECREATION SERVICES - 2.4%
Bally Entertainment Corporation*........ 55,200 1,504,200
Walt Disney Co.......................... 19,500 1,111,500
-----------
2,615,700
-----------
BUSINESS SERVICES - 4.8%
Hvide Marine, Inc....................... 30,000 356,250
Kelly Services, Inc., Class A........... 24,000 684,000
The Olsten Corp......................... 15,000 418,125
Sotheby's Holdings, Inc. (A Shares)..... 241,995 3,750,922
-----------
5,209,297
-----------
COMPUTER SERVICES - 1.3%
Santa Cruz Operation, Inc.*............. 216,300 1,487,063
-----------
MEDICAL & HEALTH SERVICES - 2.0%
Healthcare Compare Corp.*............... 50,000 2,137,500
-----------
VALUE
SHARES (NOTE 2)
------ --------
PERSONAL SERVICES - 0.2%
Hilton Hotels Corp...................... 2,500 $ 267,187
-----------
TOTAL SERVICES.................................... 11,716,747
-----------
WHOLESALE & RETAIL TRADE - 3.9%
MISCELLANEOUS RETAIL STORES - 0.8%
Home Shopping Network, Inc.*............ 80,300 863,225
-----------
RETAIL APPAREL & ACCESSORY STORES - 1.7%
Kenneth Cole Productions, Inc.*......... 95,000 1,852,500
-----------
RETAIL DEPARTMENT STORES - 0.9%
Strawbridge & Clothier (A Shares)....... 55,200 993,600
-----------
RETAIL EATING & DRINKING PLACES - 0.5%
Buffets Inc.*........................... 20,500 281,875
Hometown Buffet Inc.*................... 16,000 248,000
-----------
529,875
-----------
TOTAL WHOLESALE & RETAIL TRADE.................... 4,239,200
-----------
TOTAL COMMON STOCK
(COST $90,603,981)............................... 92,241,609
-----------
MUTUAL FUNDS - 0.9%
Scudder Managed Cash Fund
(COST $940,961)........................ 940,961 940,961
-----------
PAR VALUE
(000) (NOTE 2)
U.S. GOVERNMENT AGENCY ----- --------
OBLIGATIONS - 14.8%
Federal Home Loan Banks, 5.17%,
09/04/96............................... $1,505 $ 1,504,352
Federal Home Loan Banks, 5.19%,
09/05/96............................... 3,750 3,747,837
Federal National Mortgage Assoc.,
5.22%, 09/06/96........................ 6,225 6,220,487
Federal National Mortgage Assoc.,
5.23%, 09/12/96........................ 4,695 4,687,497
-----------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(COST $16,160,173).............................. 16,160,173
-----------
The accompanying notes are an integral part of the financial statements.
7
THE OLSTEIN FINANCIAL ALERT FUND
SCHEDULE OF INVESTMENTS - CONTINUED AUGUST 31, 1996
- ----------------------------------------------------------------------------
PAR VALUE
(000) (NOTE 2)
------ --------
COMMERCIAL PAPER - 0.8%
American Express, 5.25%, 09/03/96
(COST $886,738)......................... $887 $ 886,738
-----------
SHARES
TOTAL INVESTMENTS ------
(COST $108,591,853) - 101.1%......................... 110,229,481
-----------
DEPOSITS WITH BROKERS &
CUSTODIAN BANK FOR
SECURITIES SOLD SHORT - 1.4%
Cash.................................... 75,942
General Motors Corp.
(COST $1,321,116)...................... 29,596 1,472,401
-----------
1,548,343
-----------
RECEIVABLES FROM BROKERS FOR
SECURITIES SOLD SHORT - 1.5%......................... 1,607,902
-----------
SECURITIES SOLD SHORT
(PROCEEDS $1,607,902) - (1.4)%........................ (1,488,338)
-----------
OTHER ASSETS AND LIABILITIES,
NET - (2.6)%......................................... (2,892,634)
-----------
NET ASSETS - 100.0%................................... $109,004,754
============
*Non-income producing security.
The accompanying notes are an integral part of the financial statements.
8
THE OLSTEIN FINANCIAL ALERT FUND
SCHEDULE OF SECURITIES SOLD SHORT AUGUST 31, 1996
- ----------------------------------------------------------------------------
VALUE
SHARES (NOTE 2)
------ --------
SCHEDULE OF SECURITIES
SOLD SHORT - (1.4)%
FINANCE - (0.1)%
Olympic Financial Ltd................... 2,000 $ 49,000
-----------
MANUFACTURING - (0.3)%
Carrington Laboratories, Inc............ 2,000 47,000
Copytele, Inc........................... 7,500 46,875
Hondo Oil and Gas Co.................... 10,000 152,500
Summit Technology, Inc.................. 5,000 33,125
-----------
TOTAL MANUFACTURING............................... 279,500
-----------
SERVICES - (0.7)%
America Online, Inc..................... 5,000 151,250
Discovery Zone, Inc..................... 32,900 12,338
Medaphis Corp........................... 12,000 151,500
Organogenesis, Inc...................... 7,300 126,837
Orthodontic Centers of America,
Inc..................................... 5,000 188,750
Stratosphere Corporation................ 30,000 60,000
Wellcare Management Group............... 10,500 106,313
-----------
TOTAL SERVICES.................................... 796,988
-----------
WHOLESALE & RETAIL TRADE - (0.3)%
Circuit City Stores, Inc................ 4,500 141,750
Foxmeyer Health Corporation............. 45,900 183,600
Today's Man. Inc........................ 25,000 37,500
-----------
TOTAL WHOLESALE & RETAIL TRADE.................... 362,850
-----------
TOTAL SECURITIES SOLD SHORT
(PROCEEDS $1,607,902)........................... $1,488,338
===========
The accompanying notes are an integral part of the financial statements.
9
THE OLSTEIN FINANCIAL ALERT FUND
STATEMENT OF ASSETS AND LIABILITIES AUGUST 31, 1996
- --------------------------------------------------------------------------
ASSETS:
Investments in securities (identified cost
$108,591,853) (Note 2).............................. $110,229,481
Deposits with brokers and custodian bank for
securities sold short (Note 3)...................... 1,548,343
Receivable from brokers for securities sold short..... 1,607,902
Dividends and interest receivable..................... 117,131
Receivable for investments sold....................... 155,645
Unamortized organization costs........................ 101,691
------------
Total assets...................................... 113,760,193
------------
LIABILITIES:
Securities sold short (proceeds: $1,607,902)
(Note 3)............................................ 1,488,338
Payable for investments purchased..................... 2,814,074
Due to Investment Manager (Note 4).................... 91,897
Other accrued expenses (Note 4)....................... 285,188
Other liabilities..................................... 75,942
------------
Total liabilities................................. 4,755,439
------------
NET ASSETS............................................ $109,004,754
============
NET ASSETS CONSIST OF:
Accumulated net investment loss....................... $(606,294)
Net unrealized appreciation of investments
(Note 3)............................................ 1,788,913
Net unrealized appreciation on securities
sold short.......................................... 119,564
Accumulated net realized gain......................... 9,251,179
Accumulated net realized gain from securities
sold short.......................................... 75,942
Shares of beneficial interest......................... 9,726
Additional paid-in capital............................ 98,365,724
------------
NET ASSETS, for 9,726,021 shares outstanding.......... $109,004,754
============
NET ASSET VALUE and redemption price per share
($109,004,754 / 9,726,021 outstanding shares
of beneficial interest, $0.001 par value)........... $11.21
======
The accompanying notes are an integral part of the financial statements.
10
THE OLSTEIN FINANCIAL ALERT FUND
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------
FOR THE PERIOD
SEPTEMBER 21, 1995+
THROUGH
AUGUST 31, 1996
-----------------
INVESTMENT INCOME:
Income:
Dividends......................................... $862,683
Interest.......................................... 693,034
------------
1,555,717
------------
EXPENSES:
Management fee (Note 4)............................. 887,728
Distribution expenses (Note 4)...................... 887,728
Custodian fee (Note 4).............................. 32,328
Transfer Agent fee (Note 4)......................... 36,229
Administration fee (Note 4)......................... 105,817
Accounting fee (Note 4)............................. 44,252
Trustees' fees and expenses (Note 4)................ 13,000
Amortization of organizational expenses............. 23,705
Legal............................................... 21,500
Audit............................................... 12,100
Shareholders report fees............................ 17,976
Registration fees................................... 44,045
Dividend expense for securities sold short.......... 135
Miscellaneous....................................... 35,468
------------
Total expenses........................................ 2,162,011
------------
Net investment loss................................... (606,294)
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investment transactions...... 9,352,900
Net realized gain on securities sold short........ 75,942
Net unrealized appreciation of investments........ 1,788,913
Net unrealized appreciation on securities
sold short...................................... 119,564
------------
Net gain on investments............................. 11,337,319
------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS.......................................... $ 10,731,025
============
+ Commencement of Operations.
The accompanying notes are an integral part of the financial statements.
11
THE OLSTEIN FINANCIAL ALERT FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------
FOR THE PERIOD
SEPTEMBER 21, 1995+
THROUGH
AUGUST 31, 1996
-----------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment loss................................. $(606,294)
Net realized gain on investment transactions........ 9,352,900
Net realized gain on securities sold short.......... 75,942
Net unrealized appreciation of investments.......... 1,788,913
Net unrealized appreciation on securities
sold short........................................ 119,564
------------
Net increase in net assets resulting from
operations........................................ 10,731,025
------------
Distributions to shareholders from:
Net realized capital gains ($0.011 per share)....... (101,721)
------------
Increase in net assets from Fund share transactions
(Note 5)............................................ 98,275,450
------------
Increase in net assets................................ 108,904,754
NET ASSETS:
Beginning of period................................. 100,000
------------
End of period....................................... $109,004,754
============
+ Commencement of Operations.
The accompanying notes are an integral part of the financial statements.
12
THE OLSTEIN FINANCIAL ALERT FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------
The following table includes selected data for a share outstanding for
the Fund throughout the period and other performance information derived
from the financial statements. It should be read in conjunction with
the financial statements and notes thereto.
FOR THE PERIOD
SEPTEMBER 21, 1995+
THROUGH
AUGUST 31, 1996
-------------------
NET ASSET VALUE - BEGINNING OF PERIOD $10.00
------
Investment Operations:
Net investment loss..................... (0.07)
Net realized and unrealized gain
on investments......................... 1.29
------
Total from investment operations..... 1.22
------
DISTRIBUTIONS:
From net realized gain on investments... (0.01)
------
Total distributions............... (0.01)
------
NET ASSET VALUE - END OF PERIOD.......... $11.21
======
TOTAL RETURN++........................... 12.22%
Ratios (to average net assets)/Supplemental Data:
Expenses............................... 2.43%*
Net investment loss.................... (0.68)%*
Portfolio turnover rate.................. 139.77%*
Average commission rate paid............. $0.0592
Net assets at end of period
(000 omitted).......................... $109,005
+ Commencement of Operations.
++ The total return for the period has not been annualized and does not
reflect any deferred sales charge.
* Annualized.
The accompanying notes are an integral part of the financial statements.
13
THE OLSTEIN FINANCIAL ALERT FUND
NOTES TO FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
1.DESCRIPTION OF THE FUND. The Olstein Financial Alert Fund (the "Fund")
is the first series of The Olstein Funds (the "Trust"), a Delaware
business trust organized on March 31, 1995. The Fund is registered
under the Investment Company Act of 1940, as amended (the "1940 Act"),
as an open-end diversified management investment company. The primary
investment objective of the Fund is long-term capital appreciation with
a secondary objective of income. The Fund commenced investment
operations on September 21, 1995.
2.SIGNIFICANT ACCOUNTING POLICIES. The following is a summary of the
significant accounting policies of the Fund:
SECURITY VALUATION. The Fund's securities, except short-term
investments with remaining maturities of 60 days or less, are valued at
their market value as determined by their last sale price in the
principal market in which these securities are normally traded. Lacking
any sales, the security will be valued at the mean between the closing
bid and ask price. Short-term investments with remaining maturities of
60 days or less are valued at amortized cost, which approximates market
value, unless the Fund's Board of Trustees determines that this does not
represent fair value. The value of all other securities is determined
in good faith under the direction of the Board of Trustees.
FEDERAL INCOME TAXES. The Fund intends to qualify for treatment as a
"regulated investment company" under Subchapter M of the Internal
Revenue Code of 1986 and to distribute all of its taxable income to its
shareholders. Therefore, no federal income tax provision has been
provided.
DISTRIBUTIONS TO SHAREHOLDERS. Distributions of net investment income
and net realized gains will be made annually in December. An additional
distribution may be made to the extent necessary to avoid the payment of
a 4% excise tax.
DEFERRED ORGANIZATION COSTS. Costs incurred by the Fund in connection
with its organization have been deferred and are being amortized using
the straight-line method over a five-year period beginning on the date
that the Fund commenced operations. In the event that any of the
initial shares of the Fund are redeemed during the amortization period
by any holder thereof, the redemption proceeds will be reduced by any
unamortized organization expenses in the same proportion as the number
of initial shares being redeemed bears to the number of initial shares
outstanding at the time of such redemption.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS. The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
OTHER. Investment security transactions are accounted for on a trade
date basis. The Fund uses the specific identification method for
determining realized gain or loss on investments for both financial and
federal income tax reporting purposes.
3.PURCHASES AND SALES OF INVESTMENT SECURITIES. During the period ended
August 31, 1996, purchases and sales of investment securities (excluding
securities sold short and short-term investments) aggregated as follows:
Purchases......................... $131,386,240
Sales............................. 106,905,193
14
THE OLSTEIN FINANCIAL ALERT FUND
NOTES TO FINANCIAL STATEMENTS - CONTINUED
- ---------------------------------------------------------------------------
The following balances for the Fund are as of August 31, 1996:
COST FOR NET TAX BASIS TAX BASIS GROSS TAX BASIS GROSS
FEDERAL INCOME UNREALIZED UNREALIZED UNREALIZED
TAX PURPOSES APPRECIATION APPRECIATION DEPRECIATION
-------------- -------------- -------------- --------------
$111,392,334 $309,548 $7,620,459 $7,310,911
SHORT SALES. Short sales are transactions in which the Fund sells a
security it does not own, in anticipation of a decline in the market
value of that security. To complete such a transaction, the Fund must
borrow the security to deliver to the buyer upon the short sale; the
Fund then is obligated to replace the security borrowed by purchasing it
in the open market at some later date. The Fund will incur a loss if
the market price of the security increases between the date of the short
sale and the date on which the Fund replaces the borrowed security. The
Fund will realize a gain if the security declines in value between those
dates. All short sales must be fully collateralized. The Fund
maintains the collateral in a segregated account consisting of cash,
U.S. Government securities or other liquid assets sufficient to
collateralize the market value of its short positions. The Fund limits
the value of short positions to 25% of the Fund's net assets. At August
31, 1996, the Fund had 1.4% of its net assets in short positions. For
the period ended August 31, 1996, the cost of investments purchased to
cover short sales and the proceeds from those investments sold short
were $3,096,971 and $3,172,913, respectively.
4.INVESTMENT MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES. The
Fund employs Olstein & Associates, L.P. ("Olstein & Associates" or the
"Investment Manager") as the investment manager. Pursuant to an
investment management agreement with the Fund, the Investment Manager
selects investments and supervises the assets of the Fund in accordance
with the investment objective, policies and restrictions of the Fund,
subject to the supervision and direction of the Board of Trustees. For
its services, the Investment Manager is paid a monthly fee at the annual
rate of 1.00% of the Fund's average daily net assets. For the period
ended August 31, 1996, the Fund incurred investment management fees of
$887,728.
Rodney Square Management Corp. ("Rodney Square"), a wholly owned
subsidiary of Wilmington Trust Company ("WTC"), which is wholly owned by
Wilmington Trust Corporation, a publicly held bank holding company,
serves as Administrator to the Fund pursuant to an Administration
Agreement with the Trust on behalf of the Fund. As Administrator, Rodney
Square is responsible for services such as budgeting, maintaining
federal and state registration for the Fund's shares, financial
reporting, compliance monitoring and corporate management. For the
services provided, Rodney Square receives a monthly administration fee
at an annual rate based upon the average daily net assets of the Fund as
follows: 0.15% of average daily net assets up to $50 million (subject
to a minimum annual fee of $50,000); 0.10% of average daily net assets
over $50 million up to $100 million; 0.07% of average daily net assets
over $100 million up to $200 million; and 0.05% of average daily net
assets over $200 million. The administration fee paid to Rodney Square
for the period ended August 31, 1996 amounted to $105,817.
Rodney Square also serves as Transfer and Dividend Paying Agent for the
Fund pursuant to a Transfer Agent Agreement with the Trust dated August
18, 1995. WTC serves as Custodian of the assets of the Trust.
Rodney Square Distributors, Inc. ("RSD"), a wholly owned subsidiary of
WTC, and Olstein & Associates (together the "Distributors") have entered
into a distribution and underwriting agreement with the Fund dated
August 18, 1995, under which the Distributors act as co-underwriters to
engage in activities designed to assist the Fund in securing purchasers
15
THE OLSTEIN FINANCIAL ALERT FUND
NOTES TO FINANCIAL STATEMENTS - CONTINUED
- ---------------------------------------------------------------------------
for its shares. The Fund has adopted a Shareholder Servicing and
Distribution Plan pursuant to Rule 12b-1 under the 1940 Act (the "12b-1
Plan"). Amounts paid under the 12b-1 Plan may compensate the
Distributors or others for the activities in the promotion and
distribution of the Fund's shares and for shareholder servicing. The
total amount which the Fund will pay under the 12b-1 Plan is 1.00% per
annum of the Fund's average daily net assets. For the period ended
August 31, 1996, fees paid by the Fund pursuant to the 12b-1 Plan
amounted to $887,728.
Rodney Square determines the net asset value per share of the Fund and
provides accounting services to the Fund pursuant to an Accounting
Services Agreement with the Fund. For the accounting services provided,
Rodney Square receives an annual fee of $40,000, plus an amount based on
the average daily net assets of the Fund as follows: 0.03% of average
daily net assets over $50 million up to $100 million; 0.02% of average
daily net assets over $100 million up to $250 million; and 0.01% of
average daily net assets of the Fund over $250 million.
Certain trustees and officers of the Trust are also officers of the
Trust's Investment Manager. Such trustees and officers are paid no fees
by the Trust for serving as trustees or officers of the Trust.
During the period September 21, 1995 (Commencement of Operations)
through August 31, 1996, the Fund paid total brokerage commissions of
$67,434 to affiliated broker dealers in connection with purchases and
sales of investment securities.
5.Fund Shares. At August 31, 1996, there was an unlimited number of
shares of beneficial interest, $0.001 par value, authorized. The
following table summarizes the activity in shares of the Fund:
FOR THE PERIOD
SEPTEMBER 21,1995+
THROUGH AUGUST 31, 1996
-----------------------
SHARES AMOUNT
------ ------
Shares sold.......................... 10,157,265 $103,041,971
Shares issued to shareholders in
reinvestment of distributions....... 9,956 101,256
Shares redeemed...................... (451,200) (4,867,777)
---------- ------------
Net increase......................... 9,716,021 $ 98,275,450
============
Shares outstanding:
Beginning of period.................. 10,000
----------
End of period........................ 9,726,021
==========
+ Commencement of Operations.
16
THE OLSTEIN FINANCIAL ALERT FUND
REPORT OF INDEPENDENT AUDITORS
- ---------------------------------------------------------------------------
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Shareholders and Trustees of The Olstein Financial Alert Fund:
We have audited the accompanying statement of assets and liabilities,
including the schedules of investments and securities sold short, of The
Olstein Financial Alert Fund as of August 31, 1996, and the related
statements of operations and changes in net assets, and financial
highlights for the period September 21, 1995 (Commencement of Operations)
through August 31, 1996. These financial statements and financial
highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of August 31, 1996 by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position
of The Olstein Financial Alert Fund at August 31, 1996, the results of its
operations, the changes in its net assets, and its financial highlights for
the period September 21, 1995 (Commencement of Operations) through August
31, 1996, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Baltimore, Maryland
September 27, 1996
17
THE OLSTEIN FINANCIAL ALERT FUND
TAX INFORMATION
- ------------------------------------------------------------------------
During the period ended August 31, 1996, the Fund paid a distribution of
$0.011 per share from net short-term capital gains.
In January 1997, shareholders of the Fund will receive Federal income
tax information on all distributions paid to their accounts in the
calendar year 1996. Please consult a tax advisor if you have any
questions about federal or state income tax laws, or how to prepare your
tax return.
18
<PAGE>
[Outside cover -- divided into two sections]
TRUSTEES THE
------------------ [OLSTEIN LOGO]
Robert A. Olstein, Chairman FUNDS
Neil C. Clarfeld
Fred W. Lange
John Lohr
D. Michael Murray
Erik K. Olstein
Lawrence K. Wein
INVESTMENT MANAGER
--------------------------
Olstein & Associates, L.P.
4 Manhattanville Road
Purchase, New York 10577
(914) 397-7565
THE
DISTRIBUTORS [OLSTEIN LOGO]
-------------------- FINANCIAL
Rodney Square Distributors, Inc. ALERT
(Subsidiary of Wilmington Trust Company) FUND
&
Olstein & Associates, L.P.
SHAREHOLDER SERVICES
----------------------------
Rodney Square Management Corporation
(Subsidiary of Wilmington Trust Company)
CUSTODIAN
---------------
Wilmington Trust Company
LEGAL COUNSEL
---------------------
Stradley, Ronon, Stevens & Young, LLP
INDEPENDENT AUDITORS ANNUAL REPORT
-------------------------- AUGUST 31, 1996
Ernst & Young LLP
THIS REPORT IS SUBMITTED FOR THE GENERAL
INFORMATION OF THE SHAREHOLDERS OF THE FUND.
THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS IN THE FUND UNLESS
PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
OS06 10/96
