(THE OLSTEIN FUNDS LOGO)
(The Olstein Financial Alert Fund Logo)
ANNUAL REPORT
August 31, 1998
(THE OLSTEIN FINANCIAL ALERT FUND LOGO)
President's Message September 1998
Dear Shareholder:
Let's explore the good news vs. the bad news. In 1997, the Olstein Financial
Alert Fund appreciated (good news). Year-to-date through August 31, 1998, the
Fund declined (bad news). The Fund owns securities that the Investment Manager,
Olstein & Associates, L.P., believes are undervalued (good news). The Fund
purchased some of these securities too early (bad news). The bottom line is we
believe the Fund owns a portfolio of undervalued securities that could provide a
unique opportunity for its shareholders to achieve long-term capital
appreciation over the next three to five years.
Let's face it, no one likes to see his or her investments selling below their
purchase price. Shareholders want their investment in the Fund to appreciate
daily. So do we! Our money is invested alongside yours. However, we doubt an
investment manager exists who can provide their clients with appreciation on a
daily basis.
FALSE EXPECTATIONS
False expectations are dangerous to your investment health. Although disdained,
volatility is a necessary evil that must be tolerated when committing to a
diversified, long-term equity portfolio. While this volatility can create
anxiety, it creates potential opportunities for future long-term capital
appreciation. A portfolio must be managed with one's head, not with one's
emotions. We believe that attempts to control volatility when buying securities
that are becoming undervalued in response to some type of pessimism surrounding
the company is virtually impossible. Non-recurring events that are not
predictable sometimes take the price of a stock far lower than even we imagine.
It may take some time to change the negative psychology surrounding a company.
However, value cannot exist unless there is some deviation between the market
price as assessed by Wall Street and our calculation of a company's private
market value.
The greed factor has motivated investors to become reckless, driving some
securities that have been market leaders to unrealistic levels. Mesmerized by
20% plus annual returns, investors have left the field of reality. An investor
might have asked, "Why should I earn 5% in a money market fund when I can get a
20% to 30% 'yield' in the stock market?" Periods of negative market psychology
produce sharp corrections, even in good stocks, and is a risk investors must
face at all times. The worst time to be short of cash is when the market is
falling and all of your money is invested in stocks. Thus, it is prudent for
safe money to be available for a rainy day so that short-term decisions and cash
emergencies are not detrimental to your long-term investment goals. The Fund
has always maintained cash positions to take advantage of deviations between our
calculation of a stock's private market value and its valuation by the
marketplace, which may be caused by non-recurring events.
We view cash and low-risk fixed income as an insurance policy to smooth out the
volatility that may occur in the equity market. A lower-risk fixed income
portfolio (which may include cash) may ease an investor's anxiety, thereby
reducing the likelihood of making short-term decisions that prevent our
investors from being right "over time" (three to five years) in their futile
attempt to be right "all of the time." Although the probability of fixed income
returns beating equity returns over three to five year periods is not high, the
fixed income portfolio increases the probability that shareholders will stay the
course.
TEMPORARY VS. PERMANENT LOSSES
It is important to understand that, in selecting stocks for the Fund's
portfolio, we cannot guarantee against the loss of capital. However, there is a
difference between a temporary loss of capital and a permanent loss of capital.
The Investment Manager defines temporary loss of capital as market fluctuations,
which generate unrealized losses in stocks owned by the Fund during the first
two years of ownership and are unrelated to valuation changes caused by
fluctuations in our cash flow expectations. Our long-term values are based on
an assessment of a company's expected cash earnings over a three-year time
period. Market psychology goes through schizophrenic changes in reaction to the
latest crisis or economic event, resulting in short-term price fluctuations in
individual securities that have no correlation to our long-term valuation of
companies. Investors are usually consumed by the events of the moment and
rarely look beyond their current feelings of either fear or jubilation. Value
needs time to emerge. We define permanent loss of capital as the probability
that a stock will be selling below its purchase price three years into the
future.
PATIENCE IS A VIRTUE
In our previous letter (June 30, 1998 shareholder letter) we discussed our
belief that Coca-Cola's stock price was overvalued, yet it has taken the Asian
crisis to shake the perception that Coca-Cola was immune to economic events, and
could grow at 18% annually forever. We stated that Coca-Cola is a great
company, but its stock price bore little resemblance to its ability to produce
earnings and/or cash flow for its investors. Members of the "Coca-Cola cult"
rebutted our arguments by stating that you never have to sell Coca-Cola because
of the dependability of its earning stream. Well, the reality has set in that
Coca-Cola is vulnerable and not growing at 18% per year, and not immune to
international problems. Many investors in Coca-Cola have seen their investment
decline 37% from its recent high of $89 per share on July 15, 1998. In our
opinion, Coca-Cola's stock is now beginning to reflect a better association
between its stock price and our assessment of its ability to produce cash flow.
In September 1993, in my quarterly newsletter to our private clients, we
concluded that, based on an analysis of financial statements, Intel was
significantly cheaper than Motorola. The purpose of the report was to
demonstrate our methodology for reaching purchase decisions. Over the ensuing
15 months, Intel's stock price barely moved, whereas Motorola's stock price
appreciated approximately 30%. If I could find the nearest rock to hide under,
I would have hibernated for the entire 15 months. As of today (five years
later), an investor in Intel would have multiplied his or her investment six
times, whereas Motorola has fallen below its September 1993 stock price.
Although our private clients experienced pain for 15 months, the market
eventually discounted the differences that we saw five years ago. Patience is
the greatest virtue a value investor can adopt.
Momentum investors and short-term traders have been controlling the markets for
the past few years, and price swings have been more dramatic. We believe the
current market volatility is going to eliminate a lot of momentum investors and
short-term traders. Perhaps the demise of momentum investors and short-term
traders will bring about a better relationship between a stock's price and our
calculation of its private market value, based on our assessment of a company's
ability to produce cash flow. We believe that our philosophy can thrive in an
environment that is based on reason as opposed to a gambling casino mentality.
REVIEW OF SELECTED PORTFOLIO HOLDINGS
The Internet revolution is upon us, creating tremendous need for increased
bandwidth, computer capability and related peripheral equipment. The Fund has
purchased companies that are expected to participate in the build-up of
infrastructure, which must take place worldwide, in order to accommodate the new
communication revolution. Many of these companies have been recently impacted
by the Asian crisis, creating an opportunity for the Fund to purchase these
stocks at what the Investment Manager believes are advantageous prices. The
companies selected for the Fund's portfolio have impeccable financial
statements, have experienced some recent earnings disappointments, generate
excess cash flow, and are selling at a discount to the Investment Manager's
calculation of private market value. Companies included in this group are:
Texas Instruments (a computer communications chip company), Seagate Technology
(a disk drive manufacturer) and Corning (fiber optics).
Another interesting area of value is the airline industry. Airline stocks
continue to sell at prices that are discounting a potential serious downturn
that has occurred in previous economic cycles. We believe that the airlines
have adopted more sound fiscal management and are no longer in a suicidal
expansion game. We believe that Delta Airlines and AMR Corp. are examples of
airline stocks that are undervalued, generating excess cash flow, and are
adequately capitalized to weather the next downturn if and when it develops.
The babyboomers are reaching the "motor home" age. We have invested in a
portfolio of undervalued motor home manufacturing companies (Winnebago
Industries, Inc., Coachmen Industries, Inc. and Thor Industries, Inc.), which
also generate excess cash flow and possess solid balance sheets.
New management has taken over at Reader's Digest Association, Inc. and is
expected to modernize its operations and take advantage of this underutilized
franchise. Currently, there is no debt, and we believe the company is capable
of generating excess cash flow. Reader's Digest stock, currently selling for
under $20 per share, is down from a high of $50 in 1996 and is selling at a
meaningful discount to our calculation of private market value.
We also do not believe that oil and steel prices, which have been negatively
affected by the Asian turmoil, will remain at these levels forever. Opportunity
exists to purchase stocks for the Fund's portfolio that should capitalize on
this temporary condition. Examples of these opportunities include:
Schlumberger, Tidewater, LTV, Rowan Drilling, and NSS Steel.
Other stocks of interest to the Investment Manager include Univision, the
leading Spanish language television broadcaster in the United States. Univision
represents an opportunity for the Fund to participate in the growth of the
Spanish speaking population in the United States. Cablevision Industries
represents an opportunity to participate in the Internet connectivity boom, and
we believe Cablevision is very close to generating excess cash flow not yet
realized by the marketplace.
BALANCE IS REQUIRED
During times of optimism (i.e., 5 months ago) the pundits were saying that
stocks were the only place to be. Now, during times of pessimism, these same
pundits are running for cover. In reality, balance is required. There are
three important points to remember:
1. Do not let stock market volatility knock you off your investment course.
2. Set risk by allocating your ratio of equities to fixed income (always
keep some "safe cash" available).
3. Stick to your equity philosophy, which is difficult to do when it is not
working (Worry about permanent loss of capital more than a possible
temporary loss of capital).
Adhering to your investment philosophy during times of negative market
psychology is important to your long-term investment health. Unfortunately,
your philosophy will probably not provide the desired results in the short-term
when fear and/or greed eliminate rational thinking from the marketplace. Yet,
this irrationality may set up meaningful opportunities for possible future
profits. We believe the conditions currently exist for our philosophy to
achieve the Fund's objective of long-term capital appreciation over the next
three to five years. Remember "pessimism" produces the prices that are
necessary for value to occur.
We appreciate your trust and welcome any comments you may have.
Sincerely,
/s/Robert A. Olstein
Robert A. Olstein
President
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT*<F1>
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 distributions were reinvested and no shares were
redeemed.)
VALUE OF SHARES OWNED,
NET ASSET VALUE IF INITIAL INVESTMENT
DATE PER SHARE DISTRIBUTIONS 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
6/30/98 13.75 18,468
9/30/98 11.54 15,499
*<F1> 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 September 30, 1998, assuming the deduction of the Fund's maximum CDSC
for redemptions at the end of the one year period (2.50%), was -12.41% and
15.56% 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.
COMPARISON OF THE CHANGE IN VALUE OF A HYPOTHETICAL $10,000 INVESTMENT FROM
THE FUND'S INCEPTION THROUGH THE FISCAL YEAR END OF 8/31/98. THE LINE CHART
DOES NOT REFLECT ANY APPLICABLE CDSC REDEMPTION FEES.
AVERAGE ANNUAL TOTAL RETURN
----------------------------
1 YEAR INCEPTION
------ ---------
Olstein Financial Alert*<F2> (11.58%) 13.73%
Lipper Index**<F3> (4.40%) 8.92%
S&P 500***<F4> 8.09% 20.34%
Date Olstein Financial Alert Fund S&P 500 Lipper Index
9/21/95 $10,000 $10,000 $10,000
8/31/96 11,222 11,353 10,770
8/31/97 16,116 15,968 13,457
8/31/98 14,612 17,260 12,865
*<F2> Assumes reinvestment of dividends and capital gains. Also includes
all expenses at the end of each period and reflects the deduction of
the appropriate CDSC as if an investor had redeemed at the end of the
one year period, and thus represents a "net return." 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.
**<F3> Lipper Index return does not reflect reinvested dividends and does not
reflect the deduction of any fees or expenses associated with
investment in the index, and thus represents a "gross return."
***<F4> 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."
Schedule of Investments August 31, 1998
Value
Shares (Note 2)
------ -------
COMMON STOCKS - 73.2%
AEROSPACE & AIRCRAFT - 0.5%
Lockheed Martin Corporation 12,500 $ 1,092,969
------------
AGRICULTURAL TECHNOLOGY - 1.3%
Pioneer Hi-Bred International, Inc. 82,000 2,767,500
------------
AIR TRANSPORTATION - 5.2%
AMR Corporation *<F5> 78,500 4,278,250
Delta Air Lines, Inc. (1)<F6> 61,700 6,293,400
------------
10,571,650
------------
AUTOS & TRUCKS - 1.1%
General Motors Corporation 18,000 1,039,500
Thor Industries, Inc. 58,900 1,211,131
------------
2,250,631
------------
BUILDING & HOUSING - 1.9%
Champion Enterprises, Inc. *<F5> 29,000 677,875
Skyline Corporation 34,600 977,450
Southdown, Inc. 51,900 2,192,775
------------
3,848,100
------------
BUSINESS MACHINES & SOFTWARE - 0.6%
Xerox Corporation 13,000 1,141,563
------------
CHEMICALS & ALLIED PRODUCTS - 0.4%
Brunswick Technologies, Inc. *<F5> 100,000 731,250
------------
COMMUNICATIONS & MEDIA - 0.8%
Univision Communications Inc. *<F5> 60,000 1,597,500
------------
COMPUTERS - 3.0%
Compaq Computer Corporation 60,000 1,676,250
Seagate Technology, Inc. *<F5> 260,000 4,550,000
------------
6,226,250
------------
ELECTRICAL EQUIPMENT - 7.1%
Applied Materials, Inc. *<F5> 62,500 1,535,156
KLA-Tencor Corporation *<F5> 156,000 3,315,000
Novellus Systems, Inc. *<F5> 132,500 3,527,813
Pittway Corporation - Class A 55,700 2,088,750
Veeco Instruments Inc. *<F5> 178,000 4,027,250
------------
14,493,969
------------
ELECTRONICS - 9.7%
Corning Inc. (1)<F6> 155,000 3,816,875
Dupont Photomasks, Inc. *<F5> 133,700 3,660,037
Optek Technology, Inc. *<F5> 125,000 2,117,188
Texas Instruments Incorporated 138,300 6,595,181
Varian Associates, Inc. 104,500 3,559,531
------------
19,748,812
------------
ENTERTAINMENT & LEISURE - 1.0%
Anchor Gaming 43,500 2,088,000
------------
FINANCIAL SERVICES - 2.3%
Donaldson, Lufkin & Jenrette, Inc. 16,000 560,000
The John Nuveen Company - Class A 36,100 1,231,912
Lehman Brothers Holdings Inc. 13,000 511,875
Merrill Lynch & Co., Inc. 8,500 561,000
Paine Webber Group Inc. 53,250 1,850,438
------------
4,715,225
------------
FOOD, BEVERAGES & TOBACCO - 3.7%
Philip Morris Companies Inc. (1)<F6> 161,000 6,691,562
J.M. Smucker Company - Class B 44,300 930,300
------------
7,621,862
------------
FURNITURE & FIXTURES - 2.9%
CompX International, Inc. 173,400 2,958,638
Ethan Allen Interiors Inc. 92,800 3,016,000
------------
5,974,638
------------
HEALTHCARE SERVICES & SUPPLIES - 0.8%
CONMED Corporation *<F5> 77,500 1,574,219
------------
METALS & MINERALS - 3.9%
Cleveland-Cliffs Inc. 28,800 1,051,200
Lawson Products, Inc. 78,000 1,691,625
LTV Corporation 605,000 3,289,687
NS Group, Inc. 332,300 1,973,031
------------
8,005,543
------------
OIL & GAS SERVICES - 1.3%
Tidewater Inc. 73,000 1,533,000
UTI Energy Corp. *<F5> 169,900 1,114,969
------------
2,647,969
------------
PAPER & FOREST PRODUCTS - 4.3%
Boise Cascade Corporation 181,000 4,423,188
Champion International Corporation 96,000 3,168,000
Weyerhaeuser Company 33,000 1,239,562
------------
8,830,750
------------
PRINTING & PUBLISHING - 3.1%
The Reader's Digest Association, Inc. - Class A 162,000 3,179,250
The Reader's Digest Association, Inc. - Class B 154,500 3,128,625
------------
6,307,875
------------
RAILROADS - 1.8%
Florida East Coast Industries, Inc. 108,000 2,524,500
The St. Joe Company 53,000 1,063,312
------------
3,587,812
------------
RETAIL - 2.6%
Sbarro, Inc. 75,000 1,485,938
Tiffany & Co. 103,400 3,845,187
------------
5,331,125
------------
SEMICONDUCTORS - 5.7%
Altera Corporation *<F5> 108,000 3,145,500
Lattice Semiconductor Corporation *<F5> 95,000 2,285,938
SDL, Inc. *<F5> 33,000 561,000
TriQuint Semiconductor, Inc. *<F5> 190,000 2,897,500
Xilinx, Inc. *<F5> 92,500 2,821,250
------------
11,711,188
------------
TELECOMMUNICATIONS - 0.9%
Sprint Corporation 28,000 1,877,750
------------
TELECOMMUNICATIONS EQUIPMENT - 1.7%
Superior TeleCom Inc. 91,000 3,469,375
------------
TEXTILES & APPAREL - 1.7%
Liz Claiborne, Inc. 120,200 3,425,700
------------
TRANSPORTATION EQUIPMENT - 1.3%
Coachmen Industries, Inc. 142,500 2,662,969
------------
TRAVEL & RECREATION - 2.6%
Hilton Hotels Corporation 112,700 2,338,525
Winnebago Industries, Inc. 282,600 2,967,300
------------
5,305,825
------------
TOTAL COMMON STOCKS (Cost $177,826,838) 149,608,019
------------
Principal
Amount
--------
SHORT-TERM INVESTMENTS - 17.1%
MUTUAL FUNDS - 0.5%
Firstar Institutional Money Market Fund $ 998,297 998,297
------------
U.S. GOVERNMENT AGENCY OBLIGATIONS - 16.6%
Federal Home Loan Bank:
5.23%, 9/02/1998 (2)<F7> 7,000,000 6,998,983
5.24%, 9/09/1998 (2)<F7> 12,900,000 12,884,979
Federal Farm Credit Bank:
5.24%, 9/01/98 5,200,000 5,200,000
5.37%, 9/04/98 (2)<F7> 6,800,000 6,797,008
Federal Agriculture Mortgage
5.34%, 9/08/1998 (1)<F6> 2,000,000 1,997,923
------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS 33,878,893
------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $34,877,190) 34,877,190
------------
TOTAL INVESTMENTS - 90.3%
(COST $212,704,028) $184,485,209
------------
SECURITIES SOLD SHORT - (3.0%)
(PROCEEDS $9,671,415) (6,193,199)
OTHER ASSETS, LESS
LIABILITIES - 12.7% 26,030,967
------------
NET ASSETS - 100.0% $204,322,977
------------
------------
*<F5> Non-income producing security.
(1)<F6> All or a portion of the securities have been designated as collateral
for open short positions.
(2)<F7> Securities designated for equity swap contract.
The accompanying notes are an integral part of the financial statements.
Schedule of Securities Sold Short August 31, 1998
Value
Shares (Note 2)
------ --------------
SECURITIES SOLD SHORT
COMMUNICATIONS & BROADCASTING
Tel-Save Holdings, Inc. 27,000 $ 405,000
----------
MANUFACTURING
Advanced Lighting Technologies, Inc. 14,000 227,500
Biomet, Inc. 16,500 443,438
Catalytica, Inc. 35,000 360,937
CopyTele, Inc. 20,000 30,000
Itron, Inc. 30,000 281,250
Roberts Pharmaceutical Corporation 19,000 325,375
Sunbeam Corporation 37,000 277,500
Zonagen, Inc. 16,000 235,000
Zoltek Companies, Inc. 17,500 227,500
----------
TOTAL MANUFACTURING 2,408,500
----------
SERVICES
Acxiom Corporation 24,000 481,500
American HomePatient, Inc. 20,000 122,500
Analytical Surveys, Inc. 13,000 201,500
Cerner Corporation 23,000 507,438
Complete Management, Inc. 33,300 47,869
Engineering Animation, Inc. 3,000 110,625
Integrated Health Services, Inc. 7,500 145,312
Open Market, Inc. 16,000 137,000
Pre-Paid Legal Services, Inc. 9,000 199,687
SS&C Technologies, Inc. 23,000 343,563
Sapient Corporation 14,500 566,406
Shared Medical Systems Corporation 7,000 373,625
----------
TOTAL SERVICES 3,237,025
----------
WHOLESALE & RETAIL TRADE
Boston Chicken, Inc. 40,500 39,234
Einstein/Noah Bagel Corp. 51,720 103,440
----------
TOTAL WHOLESALE & RETAIL TRADE 142,674
----------
TOTAL SECURITIES SOLD SHORT
(PROCEEDS $9,671,415) $6,193,199
----------
----------
The accompanying notes are an integral part of the financial statements.
Statement of Assets and Liabilities August 31, 1998
ASSETS:
Investments, at value (cost $212,704,028) $184,485,209
Cash 24,002
Receivable from broker for proceeds on securities sold short 9,793,891
Receivable for investments sold 31,794,917
Capital shares sold 147,004
Dividends and interest receivable 150,325
Other receivables 9,422
Organization costs, net of accumulated amortization 43,818
Other assets 27,673
------------
Total Assets 226,476,261
------------
LIABILITIES:
Securities sold short, at value (proceeds of $9,671,415) 6,193,199
Payable for securities purchased 12,243,393
Capital shares redeemed 2,861,796
12b-1 fee payable 422,604
Payable to Adviser 203,823
Accrued expenses and other liabilities 228,469
------------
Total Liabilities 22,153,284
------------
NET ASSETS $204,322,977
------------
------------
NET ASSETS CONSIST OF:
Capital stock 217,310,143
Accumulated undistributed net realized
gain on investments sold and securities sold short 11,753,437
Net unrealized appreciation (depreciation) on:
Investments (28,218,819)
Short positions 3,478,216
------------
Total Net Assets $204,322,977
------------
------------
Shares outstanding
(250,000,000 shares of $.001 par value authorized) 18,783,713
Net Asset Value and Offering Price Per Share $10.88
------
------
The accompanying notes are an integral part of the financial statements.
Statement of Operations
For the
Year Ended
August 31, 1998
---------------
INVESTMENT INCOME:
Interest income $2,522,875
Dividend income 1,882,298
------------
Total investment income 4,405,173
------------
EXPENSES:
Investment advisory fee 2,373,999
Distribution expense 2,373,999
Administration fee 169,932
Shareholder servicing and accounting costs 166,019
Custody fees 51,782
Federal and state registration 56,219
Professional fees 53,271
Reports to shareholders 18,950
Trustees' fees and expenses 16,681
Amortization of organization costs 25,444
Other 26,333
------------
Total expenses before dividends on short positions 5,332,629
Dividends on short positions 5,520
------------
Total expenses 5,338,149
------------
Net investment loss (932,976)
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain on:
Long transactions 24,306,352
Short transactions 719,783
Change in unrealized appreciation/depreciation on:
Investments (56,652,794)
Short positions 4,528,897
------------
Net realized and unrealized loss on investments (27,097,762)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(28,030,738)
------------
------------
The accompanying notes are an integral part of the financial statements.
Statements of Changes in Net Assets
For the For the
Year Ended Year Ended
August 31, 1998 August 31, 1997
--------------- ---------------
OPERATIONS:
Net investment loss $ (932,976) $ (612,622)
Net realized gain:
Long transactions 24,306,352 25,164,729
Short transactions 719,783 432,004
Change in unrealized
appreciation/depreciation on:
Investments (56,652,794) 26,645,062
Short positions 4,528,897 (1,170,245)
------------ ------------
Net increase (decrease) in
net assets resulting from operations (28,030,738) 50,458,928
DISTRIBUTIONS TO SHAREHOLDERS
FROM NET REALIZED GAINS (35,837,667) (10,206,993)
------------ ------------
Net increase in net assets from
Fund share transactions (Note 6) 92,589,749 26,344,944
------------ ------------
TOTAL INCREASE IN NET ASSETS 28,721,344 66,596,879
NET ASSETS:
Beginning of year 175,601,633 109,004,754
------------ ------------
End of year $ 204,322,977 $ 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+<F8>
Year Ended Year Ended through
August 31, 1998 August 31, 1997 August 31, 1996
---------------- --------------- -------------------
<S> <C> <C> <C>
NET ASSET VALUE - BEGINNING OF PERIOD $14.79 $11.21 $10.00
------- ------- -------
INVESTMENT OPERATIONS:
Net investment loss (0.06)1<F11> (0.05) (0.07)
Net realized and unrealized
gain (loss) on investments (0.95) 4.66 1.29
------- ------- -------
Total from investment operations (1.01) 4.61 1.22
------- ------- -------
DISTRIBUTIONS:
From net realized gain on investments (2.90) (1.03) (0.01)
------- ------- -------
NET ASSET VALUE - END OF PERIOD $10.88 $14.79 $11.21
------- ------- -------
------- ------- -------
TOTAL RETURN:++<F9> (9.33)% 43.61% 12.22%
Ratios (to average net assets)/Supplemental Data:
Expenses 2.25% 2.38% 2.43%*<F10>
Net investment loss (0.39)% (0.45)% (0.68)%*<F10>
Portfolio turnover rate 187.44% 164.92% 139.77%*<F10>
Net assets at end of period (000 omitted) $204,323 $175,602 $109,005
</TABLE>
+<F8> Commencement of Operations.
++<F9> Total returns do not reflect any deferred sales charge. The total
return for the period September 21, 1995 through August 31, 1996 has
not been annualized.
*<F10> Annualized.
1<F11> Net investment loss per share represents net investment loss divided by
the average shares outstanding throughout the period.
The accompanying notes are an integral part of the financial statements.
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 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, are determined in accordance with income tax
regulations, which may differ from generally accepted accounting
principles. Distributions are declared annually in December.
Deferred Organization Costs. Costs incurred by the Fund in connection with
its organization, aggregating $125,396, 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 costs 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 and dividends on short positions
are 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 $199,457 of interest earned on
receivables from brokers for proceeds on securities sold short.
3. PURCHASES AND SALES OF INVESTMENT SECURITIES. During the year ended August
31, 1998, purchases and sales of investment securities (excluding
securities sold short and short-term investments) aggregated as follows:
Purchases $394,146,296
Sales 347,058,431
The following balances for the Fund are as of August 31, 1998:
Cost for Net Tax Basis Tax Basis Gross Tax Basis Gross
Federal Income Unrealized Unrealized Unrealized
Tax Purposes Depreciation Appreciation Depreciation
------------ ------------ -------------- ---------------
$212,967,408 $(28,482,199) $2,771,340 $(31,253,539)
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, 1998, the Fund had 3.0% of its net assets
in short positions.
Equity Contracts. The Board of Trustees has authorized the Fund to enter
into an equity swap contract with a major broker/dealer which allows the
Fund to receive from the counterparty any appreciation and dividends paid
on a basket of securities and pay the counterparty LIBOR rate plus 75 basis
points based on the notional amount of the contract as well as any
depreciation on the respective basket of securities.
Fluctuations in the value of the open contract is recorded daily as net
unrealized gain or loss. The Fund will realize a gain or loss upon
termination or reset of the contract. This contract is scheduled to
terminate on November 5, 1998. However, either party may terminate the
contract earlier under certain conditions.
Credit risk may arise as a result of the failure of the counterparty to
comply with the terms of the contract. The Fund considers the
creditworthiness of each counterparty to a contract in evaluating potential
credit risk. The credit risk to the Fund is limited to the net unrealized
gain by counterparty, if any, on the contract. Additionally, risk may
arise from unanticipated movements in interest rates or in the value of the
underlying securities.
On August 31, 1998, the Fund entered into the following contract at the
close of trading with a major broker/dealer with a notional amount of
$25,709,531 consisting of the following basket of equity securities:
Security Shares Security Shares
-------- ------ -------- ------
Marine Drilling Co. 309,500 Quantum Corp. 285,000
AK Steel Holding 229,500 Reebok Intl. Ltd. 205,000
Brunswick Corp. 417,000 RadiSys Corp. 210,000
Teradyne Inc. 253,500
The Fund had short-term U.S. government obligations designated equal to, or
in excess of, the notional amount of its open contract.
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 year ended August 31, 1998, the Fund
incurred investment management fees of $2,373,999.
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. Olstein & Associates (the "Distributor")
has entered into a distribution and underwriting agreement with the Fund
dated August 18, 1995, under which the Distributor acts as underwriter 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 Distributor 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 year ended August 31, 1998, fees accrued by the Fund pursuant to the
12b-1 Plan were $2,373,999.
During the year ended August 31, 1998, the Fund paid total brokerage
commissions of $380,342 to affiliated broker dealers in connection with
purchases and sales of investment securities.
6. FUND SHARES. At August 31, 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 the Fund:
<TABLE>
Year Ended Year Ended
August 31, 1998 August 31, 1997
----------------------- -----------------------
Shares Amount Shares Amount
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C
Shares sold 6,685,402 $94,858,849 1,707,526 $21,552,725
Shares issued to shareholders in
reinvestment of distributions 2,833,901 35,338,744 873,315 10,182,852
Shares redeemed (2,610,356) (37,607,844) (432,096) (5,390,633)
----------- ----------- ----------- -----------
Net increase 6,908,947 $92,589,749 2,148,745 $26,344,944
----------- -----------
----------- -----------
SHARES OUTSTANDING:
Beginning of period 11,874,766 9,726,021
----------- -----------
End of period 18,783,713 11,874,766
----------- -----------
----------- -----------
</TABLE>
Report of 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, 1998, and the related statement of operations for
the year then ended, and the statements of changes in net assets and financial
highlights for the periods indicated therein. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned and securities sold short, as of August 31, 1998, 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of The
Olstein Financial Alert Fund at August 31, 1998, the results of its operations
for the year then ended, and the changes in its net assets and its financial
highlights for the periods indicated therein, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Milwaukee, Wisconsin
October 2, 1998
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
DISTRIBUTOR
-------------
Olstein & Associates, L.P.
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
111 East Kilbourn Avenue
Milwaukee, WI 53202
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
