THE
(OLSTEIN LOGO)
FUNDS
THE
(OLSTEIN LOGO)
FINANCIAL ALERT
FUND
SEMI-ANNUAL REPORT
February 28, 1998
THE (OLSTEIN LOGO) FINANCIAL ALERT FUND
President's Message
- -------------------------------------------
Dear Shareholder:
We are pleased to report that The Olstein Financial Alert Fund's total return
for the six months ended February 27, 1998 was 21.51%.* <F1> But rest assured,
while we are pleased with this performance, we are not resting on our laurels,
and continue positioning the Fund's portfolio in an attempt to achieve our
objective of long-term capital appreciation over 3 to 5 year periods.
As of February 27, 1998, the Fund held approximately 25% of its assets in short-
term U.S. Government backed obligations ("cash equivalents"). Such a strategy
should not be construed as a market call. The Fund's position in cash
equivalents has been generated by the continued application of our philosophy of
only buying stocks that are trading at a discount to our calculation of a
company's private market value. Just as important, we must identify (and sell)
stocks that have reached or exceeded our calculation of the company's private
market value. The current volatile environment in the equity markets forces us
to buy and sell stocks in weeks and months, as opposed to holding positions for
longer periods. We refuse to hold shares in "great" companies selling at prices
that have no correlation to their ability to return cash to shareholders. We
prefer to hold cash equivalents, rather than rely on the greater fool theory of
momentum investors, who hope to sell overpriced stocks to other investors.
As you may know, during the week of March 30, 1998, CNBC's Squawk Box show aired
a five part series hosted by David Faber titled, "Olstein's Top Investment
Misconceptions." The series also featured film clips of the Fund's offices and
was presented in a professional, yet light and breezy format.
We believe it is important for you - our shareholders - to understand why some
of the basic tenets of Wall Street, which are accepted as universal truths, are
not shared by your Fund's Investment Manager. Many investors have been blinded
by the unprecedented returns of the past six years. We would like you to "buy"
into our investment process, not just the returns or the stocks we own.
We trust you will find the following "Investments Misconceptions" thought-
provoking and helpful in gaining further insight into our investment process:
MISCONCEPTION #1: Taxation takes precedence over investment decisions
Investment decisions must take priority over tax decisions. The presentation of
after-tax mutual fund returns by the mutual fund rating services are too
simplistic and meaningless. If a stock has increased in value from $50 per
share to $75 per share within 6 months and we think the stock is not worth more
than $75 per share, it would take only a 5-point decline to negate the tax rate
advantages of waiting for long-term gains (holding period one year/tax savings
equal to 20% of profit). In addition, there may be opportunity costs from not
being able to employ the money in a better risk/reward stock.
Knowing when to sell is more important to long-term performance than the
unwillingness to pay taxes. It is more important to sell when a stock becomes
overpriced because large losses hurt investment returns more than large gains
help. Oxford Health Plans once sold at $85 per share; as of April 2, 1998, it
was selling for $18 per share. The good news for the investor who bought Oxford
at $50 per share, watched the stock go to $85 per share, and currently owns it
at $17 per share, is that no taxes are owed.** <F2> The bad news is that the
Oxford investor is moving out of his or her Park Avenue apartment. To quote Roy
Neuberger, the 95 year-old investment legend from Neuberger Berman, "It may be
the greatest company in the world, but if it gets overpriced, sell it. It is,
after all, just a sheet of paper. Reluctance to part with a stock, either
because of sentiment or an unwillingness to pay a capital gains tax, can be
costly."
MISCONCEPTION #2: High portfolio turnover is negative
The Olstein Financial Alert Fund's management team believes that low portfolio
turnover in the volatile markets of today represents more risk. Good companies
can be bad stocks when they become overpriced and as such, should be sold. An
80% investment gain in year one, and a 50% loss on that same investment in year
2 will result in a net loss of 10% on the initial investment. In essence, large
percentage declines negatively impact long-term performance more than a
comparable positive percentage increase. In today's volatile markets, stocks
sometimes experience moves in 2 weeks that previously took 2 years. Thus, the
high price volatility in today's marketplace dictates high portfolio turnover,
especially when such volatility carries individual stocks within our portfolio
to prices that create unfavorable risk/reward ratios. Overpriced securities
represent high-risk vehicles even if they are good companies.
MISCONCEPTION #3: The relative price/earnings ratio of one company to another
is meaningful
A stock cannot be considered cheap because it sells at a price/earnings ratio
discount to the overall market or another stock. If the initial stock serving
as the basis of comparison is overvalued, all future comparisons to that
security are meaningless.
Who says the stock market averages have the appropriate price/earnings ratio or
are priced at appropriate levels? If Coca-Cola is selling at 35 times earnings,
is Anheuser-Busch cheap at 24 times earnings? Maybe Coca-Cola is very
overpriced and Anheuser-Busch is less overpriced. Is your $100 cat worth a $90
dog? The only comparison that should be made is the cash earnings yields of
stocks (the reciprocal of the price/earnings ratio adjusted for actual cash
flow), versus low-risk 3 - 5 year U.S. Treasury security yields.
MISCONCEPTION #4: Index investing is low risk
Many people believe an index is unsinkable. The Titanic voyage was also low
risk, until the ship struck an iceberg. Autopilot is OK, but radar is necessary
to warn you of danger.
In the opinion of The Olstein Financial Alert Fund's management team, programmed
equity investing, by its very nature, represents a form of high risk. An index
fund is not capable of stopping momentum decisions, overpaying for the
individual components of the index, or holding cash when the odds are against
you because undervalued opportunities do not exist. In addition, periods of
negative market psychology can create extraordinary downside momentum and create
large tax bills as stock positions within the index fund are liquidated which
were purchased many years ago at lower prices.
Investing is an art, not a science. Any attempt to make investing a science
according to some pre-ordained formula increases risk. Autopilot investing
discourages independent thinking and safety valves when economic or market
conditions change that may effect the future of the companies included as part
of the indexed portfolio. Thus, we believe formula investing increases risk.
MISCONCEPTION #5: Diversifying equity investment objectives (large cap, small
cap, sector, etc.) decreases risk
The Olstein Financial Alert Fund's management team believes categorizing
investments according to company size or the variability of earnings (cyclical
versus growth) is performance-limiting. Even if General Motors is severely
undervalued, a small cap fund is prohibited from purchasing the stock. We don't
understand the reasoning behind this limitation. We believe that value
opportunities can occur everywhere, and investors should be in vehicles that
enable them to select investments by valuation opportunities rather than
hypothetical categories. Selecting stocks according to their size is the
equivalent of selecting investment advisors by their height.
MISCONCEPTION #6: Fee levels are the most important aspects in selecting money
managers
We believe money managers should be selected on the basis of many factors:
a) Discipline and compatibility to an investor's own philosophy
b) Attitude toward risk
c) Independent thinking
d) Unencumbered decision making
e) Flexibility
f) Performance after fees
g) Fees
Fees are tiebreakers and should be looked upon as similar to gas mileage when
selecting a car. Only when two cars are equal does a purchaser look at gas
mileage to help determine which one to select. Everyone has to report numbers
after fees and, thus, fees are already considered when analyzing performance.
MISCONCEPTION #7: Paying attention to stock market averages is relevant to
investing
Stock market averages, such as the S&P 500 Index, are nothing more than a
portfolio of America's largest companies selected by executives at the Standard
& Poor's Corporation and defined as a proxy for the market. There are
significant performance deviations between individual components within the
average. For example, Eastman Kodak's stock price has declined over the past
year, whereas the S&P index has had a material upswing. A portfolio heavily
weighted with Eastman Kodak would have performed poorly in the face of the large
increase in the S&P index.
Looking at averages as relevant to your investment health is like saying, on
average, only 2% of bungee cord jumpers die. Therefore, it is pretty safe to
jump. Looking at the bungee average has little relevance to your future health,
if you are one of the 2% critically injured. Averages are an attempt to give
order to a business that we believe is a market of stocks as opposed to a stock
market.
The real concern for investors are periods of negative market psychology during
which most stocks decline with little attention paid to the valuation or the
quality of the company. However, attempts at predicting the psychology of the
crowd in order to profit therefrom have had little success over long periods of
time.
MISCONCEPTION #8: Handicapping earnings vs. analyst estimates is helpful
Wide swings in the price of individual securities take place when companies miss
an analyst's earnings estimate by sometimes as little as one penny per share.
Companies are usually penalized by severe price declines in reaction to earnings
reports that failed to meet analysts' estimates. Instead of the company
suffering, perhaps the analyst should be fired for relying on such discrete
measurements as being meaningful, and missing what is relevant to determining
the value of the company. Investors searching for above-average long-term
returns should ignore the quarterly mating dance between management and
analysts.
In football, each game is a discrete event. The championship goes to the team
winning the most games over the season, not of the team scoring the most
touchdowns. Each game is separate, and, cumulative touchdowns don't count at
the end of the season. On the other hand, corporate earnings are not discrete.
They are continuous. A dollar of profit in one quarter is as good as the next,
and what really counts is total wealth creation over many periods. Yet,
analysts and investors place irrational importance on achieving discrete
thresholds. A great example -- many people who purchase a stock at $100 and now
believe it does not have much potential, would sell if the stock was $100, but
not sell if the stock was $99.
MISCONCEPTION #9: Volatility represents risk
Volatility represents opportunity, not risk. A stock that is volatile provides
a buying opportunity for potentially large capital gains, when the volatility
takes the price of the stock below our calculation of private market value. The
stock can be sold when its volatility carries the price above our calculation of
private market value. The Olstein Financial Alert Fund's management team seeks
to take advantage of the volatility that carries the prices of the securities we
have thoroughly analyzed and valued to significant deviations above and below
our values. We know our values and they don't change rapidly.
We define "risk" as more than stock volatility. We believe that intrinsic risk
is determined by a company's financial strength, its ability to produce excess
cash flow, the quality of earnings and our confidence in the predictability of
the earnings based on a company's unique business fundamentals. We are not
swayed by conventional measurements of risk (Beta = degree of volatility).
However, the probability that an individual stock could lose more than 20% of
its value over 3-5 year periods (permanent loss of capital as opposed to
temporary loss) is weighed heavily. Portfolio risk should be judged on a a
stock-by-stock basis.
MISCONCEPTION #10: Speaking to management enhances the investment process
Wall Street analysts filter down information from the management of the company
that they follow. In order to maintain a friendly relationship and stay "tuned
in" as a respected source on a company, it is difficult for the analyst to reach
negative conclusions that contradict management's optimism. An industry analyst
can ill afford to lose contact with the management of a significant company
within an industry the analyst follows.
Minimizing errors is more helpful to long-term investment returns than picking
winners. The Olstein Financial Alert Fund believes long-term performance is
highly correlated with error avoidance. Throughout my thirty-year career, I
have yet to find a company's management that warned investors in the early
stages of problems that, if not solved, could cause their stock to decline.
Looking behind the financial statements is more valuable than talking to
management. Many times, signs of impending problems can be inferred through
the analysis of a company's financial statements. We also believe that the
financial statements provide a valuable clue as to the capabilities and veracity
of management. Talking to management is an overrated function of the investment
process. We'd rather spend two hours with an annual report looking behind the
numbers than listening to company propaganda.
MISCONCEPTION #11: International investing provides diversification
We have yet to find a proven correlation with regard to opposite movements of
domestic markets and overseas markets. Investing overseas involves
understanding foreign accounting, foreign currency fluctuations and government
structures that add additional risk factors but offer little diversification or
protection. Our position: stay away from investing in overseas markets, unless
you can find locals whom you can rely upon for a thorough understanding of local
politics, accounting principles, currency interactions, and other criteria.
MISCONCEPTION #12: Analysts offer unbiased opinions
Most large research departments are attached to firms with significant
investment banking departments that can place restrictions on independent
opinions, especially of a negative nature. Sometimes, regulatory restrictions
during an investment banking transaction prevent the brokerage firm's research
department from issuing recommendations or estimates pertaining to the company
involved in the investment banking transaction. Unfortunately, investment
banking relationships and their high fees take precedence over truly independent
research. In addition, analysts do not want to lose contact with management who
may apply tremendous pressure to suppress negative research that could effect
the price of their company's stock. There have been many incidents of
repercussions to analysts as a result of company pressure to suppress negative
opinions.
In closing, we believe that it is important to share with you why we don't
necessarily subscribe to much of the "conventional wisdom" espoused by the
investment community. It is not always easy to go against the crowd, especially
when the momentum created by crowd psychology can result in periods of
underperformance. However, our main concern is protecting our shareholders from
the permanent loss of capital rather than reacting to short-term fluctuations
which may produce temporary loss of capital and short-term periods of
underperformance. Thus, The Olstein Financial Alert Fund is only interested in
attracting shareholders who believe in our long-term approach of looking behind
the numbers, and desire performance over time rather than "all the time."
Your continued trust is appreciated.
Sincerely,
/s/ Robert A. Olstein
Robert A. Olstein
President
*<F1>PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. This total return does
not include the Fund's maximum Contingent Deferred Sales Charge ("CDSC") of
2.50% which would be charged if a shareholder redeemed within one year of
purchase. The Fund's average annual total return for the one year period and
since inception through February 27, 1998, assuming the deduction of the Fund's
maximum CDSC for redemptions at the end of one year was 41.69% and 31.65%
respectively. Investment returns and principal value may fluctuate, so that
when redeemed, shares may be worth more or less than their original cost. This
letter must be preceded or accompanied by a current prospectus. Please review
the prospectus prior to investing in the Fund.
**<F2>The prices/quotes contained herein have been obtained from sources
believed to be reliable. Errors and omissions excepted.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT***<F3>
This table displays, on a quarterly basis, the Fund's net asset value per share,
distributions, and the value of $10,000 invested in the Fund at the time of its
inception. (Assumes all dividends were reinvested and no shares were redeemed.)
Value of Shares Owned,
Net Asset Value If Initial Investment
Date Per Share Dividends was $10,000
----- -------------- ---------- -----------------------
9/21/95 $10.00 $10,000
9/30/95 10.01 10,010
12/31/95 10.25 $0.011 10,261
3/31/96 10.87 10,882
6/30/96 11.45 11,462
9/30/96 11.70 11,713
12/31/96 11.71 1.032 12,760
3/31/97 12.23 13,327
6/30/97 13.40 14,602
9/30/97 15.83 17,250
12/31/97 12.81 2.900 17,205
3/31/98 14.78 19,851
***<F3>PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. The above chart
assumes no redemptions. Redemptions may be subject to a Contingent Deferred
Sales Charge (CDSC) if made within two years of the investment of such funds.
The Fund's average annual return for the one year period and since inception
through March 31, 1998, assuming the deduction of the Fund's maximum CDSC for
redemptions at the end of the one year period (2.50%), was 45.23% and 31.15%
respectively. Investment returns and principal values may fluctuate, so that,
when redeemed, shares may be worth more or less than their original cost. This
letter must be preceded or accompanied by a current prospectus. Please review
the prospectus prior to investing in the Fund.
Schedule of Investments February 28, 1998 (Unaudited)
- --------------------------------------------------------------------------------
Shares or
Principal Value
Amount (Note 2)
------ -------
COMMON STOCKS - 74.4%#<F4>
AIR TRANSPORTATION - 3.2%#<F4>
AMR Corporation *<F5> 34,500 $4,366,406
Delta Air Lines, Inc. (1)<F6> 34,800 3,934,575
------------
8,300,981
------------
AUTOS & TRUCKS - 3.0%# <F4>
General Motors Corporation (1)<F6> 82,500 5,687,344
Thor Industries, Inc. 47,800 1,906,025
------------
7,593,369
------------
BUILDING & HOUSING - 1.3%#<F4>
Champion Enterprises, Inc. *<F5> 84,500 2,123,062
Skyline Corporation 36,000 1,149,750
------------
3,272,812
------------
BUSINESS MACHINES & SOFTWARE - 1.6%#<F4>
Xerox Corporation 47,500 4,212,656
------------
BUSINESS SERVICES - 3.0%#<F4>
Catalina Marketing Corporation *<F5> 14,500 700,531
Hvide Marine, Inc. - Class A *<F5> 225,000 4,275,000
Sotheby's Holdings, Inc. (1)<F6> 128,800 2,616,250
------------
7,591,781
------------
CHEMICALS & ALLIED PRODUCTS - 0.8%#<F4>
Brunswick Technologies, Inc. *<F5> 107,400 1,718,400
LeaRonal Inc. 11,250 318,516
------------
2,036,916
------------
COMMUNICATIONS & MEDIA - 0.5%#<F4>
Meredith Corporation 30,500 1,309,594
------------
COMPUTERS - 4.5%#<F4>
Quantum Corporation *<F5> 180,000 4,522,500
Seagate Technology, Inc. *<F5> 289,500 7,038,469
------------
11,560,969
------------
ELECTRICAL EQUIPMENT - 8.2%#<F4>
Aavid Thermal Technologies,
Inc. *<F5> 25,800 886,875
Andrea Electronics *<F5> 113,500 1,688,312
Applied Materials, Inc. *<F5> 20,000 736,250
KLA-Tencor Corporation *<F5> 59,000 2,723,219
Novellus Systems, Inc. *<F5> 95,500 4,578,031
Silicon Valley Group, Inc. *<F5> 113,000 3,079,250
Teradyne, Inc. *<F5> 97,500 4,600,781
Veeco Instruments Inc. *<F5> 80,000 2,770,000
------------
21,062,718
------------
ELECTRONICS - 7.0%# <F4>
Corning Inc. (1)<F6> 64,000 2,600,000
Dupont Photomasks, Inc. *<F5> 94,300 4,149,200
Texas Instruments Incorporated 155,000 8,970,625
Woodhead Industries, Inc. 114,600 2,177,400
------------
17,897,225
------------
ENTERTAINMENT & LEISURE - 2.4%#<F4>
Brunswick Corporation (1)<F6> 192,800 6,121,400
------------
FINANCIAL SERVICES - 1.4%#<F4>
Hambrecht & Quist Group *<F5> 25,000 803,125
Lehman Brothers Holdings Inc. 15,000 945,938
Paine Webber Group Inc. 42,750 1,795,500
------------
3,544,563
------------
FOOD, BEVERAGES & TOBACCO - 4.8%#<F4>
Philip Morris Companies Inc. 250,000 10,859,375
J.M. Smucker Company -
Class B 56,100 1,458,600
------------
12,317,975
------------
FURNITURE & FIXTURES - 0.6%#<F4>
La-Z-Boy Incorporated 29,200 1,399,775
------------
HEALTH CARE SERVICES & SUPPLIES - 0.7%#<F4>
Capital Senior Living
Corporation *<F5> 139,000 1,780,937
------------
HOUSEHOLD PRODUCTS - 0.7%#<F4>
Premark International, Inc. 57,000 1,774,125
------------
INDUSTRIAL MACHINERY & EQUIPMENT - 0.3%#<F4>
LSI Industries, Inc. 41,700 839,213
------------
INSURANCE - 2.3%#<F4>
Aetna Inc. 33,000 2,883,375
Lawyers Title Corporation *<F5> 71,700 3,127,913
------------
6,011,288
------------
MACHINERY - AGRICULTURE & AUTOMOTIVE - 0.3%#<F4>
Gehl Company *<F5> 35,200 743,600
------------
METALS & MINERALS - 2.0%# <F4>
Cleveland-Cliffs Inc. 25,000 1,284,375
LTV Corporation 215,700 2,601,881
Steel of West Virginia, Inc. *<F5> 143,900 1,295,100
------------
5,181,356
------------
OIL & GAS SERVICES - 2.0%#<F4>
Marine Drilling Companies, Inc. *<F5>85,000 1,524,688
Maverick Tube Corporation *<F5> 4,450 86,497
Rowan Companies, Inc. *<F5> 124,000 3,495,250
------------
5,106,435
------------
PAPER & FOREST PRODUCTS - 1.6%#<F4>
Boise Cascade Corporation 123,000 4,097,437
------------
PRINTING & PUBLISHING - 5.5%#<F4>
Bowater Incorporated 102,900 5,093,550
Bowne & Co., Inc. 6,000 254,250
The Reader's Digest Association,
Inc. - Class A 169,500 4,502,344
The Reader's Digest Association,
Inc. - Class B 154,500 4,248,750
------------
14,098,894
------------
PRODUCTION - 1.6%#<F4>
Raychem Corporation 97,000 4,213,438
------------
RAILROADS - 1.1%#<F4>
Florida East Coast Industries, Inc. 27,000 2,943,000
------------
RETAIL - 3.5%#<F4>
Claire's Stores, Inc. 20,000 360,000
Costco Companies, Inc. *<F5> 45,000 2,199,375
Lund International
Holdings, Inc. *<F5> 120,150 1,561,950
Tandy Corporation 20,000 890,000
Tiffany & Co. 82,000 3,854,000
------------
8,865,325
------------
SAVINGS & LOAN - 0.4%#<F4>
JSB Financial, Inc. 20,600 1,108,537
------------
SEMICONDUCTORS - 1.3%#<F4>
TriQuint Semiconductor, Inc. *<F5> 140,500 3,389,563
------------
TELECOMMUNICATIONS - 1.4%#<F4>
Sprint Corporation 55,000 3,630,000
------------
TELECOMMUNICATIONS EQUIPMENT - 1.4%#<F4>
C-COR Electronics, Inc. *<F5> 97,500 1,425,937
Superior TeleCom Inc. 55,875 2,182,617
------------
3,608,554
------------
TEXTILES & APPAREL - 4.0%#<F4>
Liz Claiborne, Inc. 166,500 8,325,000
Quiksilver, Inc. *<F5> 64,500 1,902,750
------------
10,227,750
------------
TRANSPORTATION EQUIPMENT - 1.1%#<F4>
Coachmen Industries, Inc. 94,500 2,699,156
------------
TRAVEL & RECREATION - 0.9%#<F4>
Hilton Hotels Corporation 75,200 2,241,900
------------
TOTAL COMMON STOCKS
(Cost $160,955,481) 190,783,242
------------
SHORT-TERM INVESTMENTS - 23.2%#<F4>
MUTUAL FUNDS - 0.4%#<F4>
Firstar Institutional Money
Market Fund 1,168,246 1,168,246
------------
U.S. GOVERNMENT AGENCY
OBLIGATIONS - 22.8%#<F4>
Federal Home Loan Bank:
5.54%, 3/02/1998 6,000,000 5,999,249
5.30%, 3/06/1998 9,800,000 9,792,786
5.30%, 3/11/1998 9,200,000 9,186,456
Federal Home Loan
Mortgage Corporation:
5.28%, 3/03/1998 8,000,000 7,997,653
5.30%, 3/04/1998 6,000,000 5,997,644
5.42%, 3/05/1998 10,000,000 9,994,122
5.32%, 3/09/1998 (1)<F6> 2,000,000 1,997,636
Federal National
Mortgage Association
5.61%, 3/10/1998 7,500,000 7,490,006
------------
TOTAL U.S. GOVERNMENT
AGENCY OBLIGATIONS 58,455,552
------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $59,623,798) 59,623,798
------------
TOTAL INVESTMENTS - 100.0%
(COST $220,579,279) $250,407,040
------------
------------
#<F4> Calculated as a percentage of net assets.
*<F5> Non-income producing security.
(1)<F6>All or a portion of the securities have been committed as collateral for
open short positions.
The accompanying notes are an integral part of the financial statements.
Schedule of Securities Sold Short February 28, 1998 (Unaudited)
- --------------------------------------------------------------------------------
Value
Shares (Note 2)
------- -------
SECURITIES SOLD SHORT
COMMUNICATIONS & BROADCASTING
Tel-Save Holdings, Inc. 12,000 $ 332,250
------------
FINANCE & INSURANCE
United Wisconsin Services, Inc. 14,000 434,000
------------
MANUFACTURING
CopyTele, Inc. 20,000 49,375
Itron, Inc. 15,300 323,212
Medicis Pharmaceutical
Corporation - Class A 11,300 485,194
VIVUS, Inc. 12,000 139,500
Zonagen, Inc. 15,000 276,563
Zoltek Companies, Inc. 3,000 109,500
------------
TOTAL MANUFACTURING 1,383,344
------------
SERVICES
Advanced Health Corporation 12,000 177,000
Aspen Technology, Inc. 9,000 357,750
Complete Management, Inc. 20,000 221,250
Coventry Corporation 16,500 267,094
Foundation Health Systems,
Inc. - Class A 17,000 470,687
PHP Healthcare Corporation 24,100 369,031
Pegasystems Inc. 27,000 573,750
Pre-Paid Legal Services, Inc. 17,000 716,125
------------
TOTAL SERVICES 3,152,687
------------
WHOLESALE & RETAIL TRADE
Einstein/Noah Bagel Corp. 17,200 84,925
------------
TOTAL SECURITIES SOLD SHORT
(Proceeds $5,052,126) $ 5,387,206
------------
------------
The accompanying notes are an integral part of the financial statements.
Statement of Assets and Liabilities February 28, 1998 (Unaudited)
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (cost $220,579,279) $250,407,040
Cash 244,810
Receivable from broker for proceeds on securities sold short 4,936,340
Receivable for investments sold 8,841,117
Capital shares sold 266,179
Dividends and interest receivable 174,705
Other receivables 47,448
Organizational expenses, net of accumulated amortization 56,645
Other assets 31,698
------------
Total Assets 265,005,982
------------
LIABILITES:
Securities sold short, at value (proceeds of $5,052,126) 5,387,206
Payable for securities purchased 2,340,426
Capital shares redeemed 11,643
Payable to Adviser 187,366
Accrued expenses and other liabilities 535,925
------------
Total Liabilities 8,462,566
------------
NET ASSETS 256,543,416
------------
------------
NET ASSETS CONSIST OF:
Capital stock 199,320,479
Accumulated undistributed net realized
gain on investments sold and
securities sold short 27,730,256
Net unrealized appreciation (depreciation) on:
Investments 29,827,761
Short positions (335,080)
------------
Total Net Assets $256,543,416
------------
------------
Shares outstanding (250,000,000 shares of $.001
par value authorized) 17,598,381
Net Asset Value, Redemption Price and Offering Price Per Share $14.58
------
------
The accompanying notes are an integral part of the financial statements.
Statement of Operations Six Months Ended February 28, 1998 (Unaudited)
- --------------------------------------------------------------------------------
For the
Six Months Ended
February 28, 1998
-----------------
(Unaudited)
INVESTMENT INCOME:
Interest income $ 1,048,930
Dividend income on long positions 882,249
------------
Total investment income 1,931,179
------------
EXPENSES:
Investment advisory fee 1,068,741
Administration fee 94,793
Shareholder servicing and accounting costs 66,393
Custody fees 28,972
Federal and state registration 30,600
Professional fees 25,553
Distribution expense 1,068,741
Reports to shareholders 5,000
Directors' fees and expenses 7,861
Amortization of organizational expenses 12,618
Other 12,164
------------
Total expenses 2,421,436
------------
Net investment loss (490,257)
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) on:
Long transactions 40,945,561
Short transactions (385,326)
Change in unrealized appreciation (depreciation) on:
Investments 1,393,786
Short positions 715,601
------------
Net realized and unrealized gain on investments 42,669,622
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $42,179,365
------------
------------
The accompanying notes are an integral part of the financial statements.
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the For the
Six Months Ended Year Ended
February 28, 1998 August 31, 1997
------------ ------------
(Unaudited)
OPERATIONS:
Net investment loss $ (490,257) $ (612,622)
Net realized gain (loss):
Long transactions 40,945,561 25,164,729
Short transactions (385,327) 432,004
Change in unrealized appreciation
(depreciation) on:
Investments 1,393,786 26,645,062
Short positions 715,601 (1,170,245)
------------ ------------
Net increase in net assets
resulting from operations 42,179,365 50,458,928
DISTRIBUTIONS TO SHAREHOLDERS FROM
NET REALIZED GAIN (35,837,667) (10,206,993)
------------ ------------
Net increase in net assets from
Fund share transactions (Note 6) 74,600,085 26,344,944
------------ ------------
TOTAL INCREASE IN NET ASSETS 80,941,783 66,596,879
NET ASSETS:
Beginning of period 175,601,633 109,004,754
------------ ------------
End of period (including undistributed
net investment loss
of $(490,257) and $(612,622),
respectively) $ 256,543,416 $ 175,601,633
------------ ------------
------------ ------------
The accompanying notes are an integral part of the financial statements.
Financial Highlights
- --------------------------------------------------------------------------------
The following table includes selected data for a share outstanding for the Fund
throughout each period and other performance information derived from the
financial statements. It should be read in conjunction with the financial
statements and notes thereto.
<TABLE>
For the Period
For the For the September 21, 1995+<F7>
Six Months Ended Year Ended through
February 28, 1998 August 31, 1997 August 31, 1996
----------------- ---------------- ----------------
(Unaudited)
<S> <C> <C> <C>
NET ASSET VALUE - BEGINNING OF PERIOD $14.79 $11.21 $10.00
------- ------- -------
INVESTMENT OPERATIONS:
Net investment loss (0.03) (0.05) (0.07)
Net realized and unrealized gain on
investments 2.72 4.66 1.29
------- ------- -------
Total from investment operations 2.69 4.61 1.22
------- ------- -------
DISTRIBUTIONS:
From net realized gain on investments (2.90) (1.03) (0.01)
------- ------- -------
NET ASSET VALUE - END OF PERIOD $14.58 $14.79 $11.21
------- ------- -------
------- ------- -------
TOTAL RETURN:++<F8> 21.51% 43.61% 12.22%
Ratios (to average net assets)/Supplemental Data:
Expenses 2.27%*<F9> 2.38% 2.43%*<F9>
Net investment loss (0.46)%*<F9> (0.45)% (0.68)%*<F9>
Portfolio turnover rate 84.13% 164.92% 139.77%*<F9>
Average commission rate paid $0.0597 $0.0581 $0.0592
Net assets at end of period (000 omitted) $256,543 $175,602 $109,005
+<F7> Commencement of Operations.
++<F8>Total returns do not reflect any deferred sales charge. The total
returns for the periods, September 21, 1995 through August 31, 1996 and six
months ended February 28, 1998, have not been annualized.
*<F9> Annualized.
The accompanying notes are an integral part of the financial statements.
</TABLE>
Notes to Financial Statements (Unaudited)
- -------------------------------------------------------------------------------
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 continue 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, if any, will be made annually in December. Additional
distributions may be made to the extent necessary.
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 affect the
reported amounts of assets and liabilities and disclosures 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. Dividend income is recognized on the ex-dividend date or as
soon as information is available to the Fund and interest income is recognized
on an accrual basis. Investment income includes $58,146 of interest earned on
receivables from brokers for proceeds on securities sold short.
3. PURCHASES AND SALES OF INVESTMENT SECURITIES. During the six months ended
February 28, 1998, purchases and sales of investment securities (excluding
securities sold short and short-term investments) aggregated as follows:
Purchases $159,686,371
Sales 146,841,117
The following balances for the Fund are as of February 28, 1998:
Cost for Net Tax Basis Tax Basis Gross Tax Basis Gross
Federal Income Unrealized Unrealized Unrealized
Tax Purposes Appreciation Appreciation Depreciation
-------------- ------------- -------------- --------------
$220,704,401 $29,702,639 $32,666,219 $(2,963,580)
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 February 28, 1998, the Fund had
2.1% of its net assets in short positions. For the six months ended February
28, 1998, the cost of investments purchased to cover short sales and the
proceeds from those investments sold short were $7,675,906 and $8,111,096,
respectively.
4. INVESTMENT MANAGEMENT FEE AND OTHER AGREEMENTS. 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 six months ended
February 28, 1998, the Fund incurred investment management fees of $1,068,741.
Firstar Trust Company, a subsidiary of Firstar Corporation, a publicly held
bank holding company, serves as custodian, transfer agent, administrator and
accounting services agent for the Fund.
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.
5. SERVICE AND DISTRIBUTION PLAN. Rodney Square Distributors, Inc. ("RSD"), a
wholly owned subsidiary of Wilmington Trust Company, 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 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-l 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 six months ended February 28, 1998, fees accrued by
the Fund pursuant to the 12b-1 Plan were $1,068,741.
During the six months ended February 28, 1998, the fund paid total brokerage
commissions of $174,503 to affiliated broker dealers in connection with
purchases and sales of investment securities.
6. FUND SHARES. At February 28, 1998, there was an unlimited number of shares
of beneficial interest, $0.001 par value, authorized. The following table
summarizes the activity in shares of Fund:
Six Months Ended Year Ended
February 28, 1998 August 31, 1997
--------------------- -------------------
(unaudited)
Shares Amount Shares Amount
-------- -------- -------- --------
Shares sold 4,581,133 $64,895,981 1,707,526 $21,552,725
Shares issued to share-
holders in reinvestment
of distributions 2,833,901 35,338,744 873,315 10,182,852
Shares redeemed (1,691,419)(25,634,640) (432,096) (5,390,633)
----------- ----------- ---------- -----------
Net increase 5,723,615 $74,600,085 2,148,745 $26,344,944
----------- -----------
----------- -----------
SHARES OUTSTANDING:
Beginning of period 11,874,766 9,726,021
----------- -----------
End of period 17,598,381 11,874,766
----------- -----------
----------- -----------
TRUSTEES
---------------------
Robert A. Olstein, Chairman
Neil C. Klarfeld
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
DISTRIBUTORS
--------------------------
Olstein & Associates, L.P.
& Rodney Square Distributors, Inc.
ADMINISTRATOR, TRANSFER AGENT,
DIVIDEND PAYING AGENT, SHAREHOLDER
SERVICING AGENT & CUSTODIAN
------------------------------------
Firstar Trust Company
615 East Michigan Street
P.O. Box 701
Milwaukee, WI 53201
LEGAL COUNSEL
----------------
Stradley, Ronon, Stevens & Young, LLP
2600 One Commerce Square
Philadelphia, PA 19103-7098
INDEPENDENT AUDITORS
-----------------------
Ernst & Young LLP
2001 Market Street
PHILADELPHIA, PA 19103
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.
TOLL FREE TELEPHONE NUMBER:
(800) 799-2113
