THE
OLSTEIN
FUNDS
THE
OLSTEIN
FINANCIAL
ALERT
FUND
SEMI-ANNUAL REPORT
February 28, 1999
THE OLSTEIN FINANCIAL ALERT FUND
President's Message April 1999
HOW CAN VALUE BE VALUE IF IT IS VALUED?
---------------------------------------
Dear Shareholders:
Recently, newspapers and periodicals have questioned whether or not it is time
to abandon the investment discipline of "value." The articles question whether
investors still care about value, and make statements such as "growth is more
valuable than value" and "value mutual funds are out of style." These statements
are not only contradictory, but show a complete misunderstanding of the
definition of value. By definition, value stocks are always out of favor. To
understand how value stocks are created, let's examine how the dynamics of the
current marketplace can create value for the Fund's portfolio.
Many mutual funds that invest in large capitalization, growth, and Internet-
related stocks are currently receiving a lot of press coverage extolling their
meteoric returns. Yet, there is little coverage of the risks taken in order to
achieve such high returns. There is also very little press coverage as to what
happened to the followers of previous manias that have since proven to be only
short-term fads. Human nature tends to be attracted to what is currently
working, trendy and getting the media coverage. Returns on stocks currently in
the investment spotlight are driven higher and higher by additional investors
seeking their fortune, with little regard for the underlying fundamentals or for
the risks taken. As always, when conclusions are reached that a particular
investment discipline is the only way to go (e.g., indexing, large
capitalization growth stocks and Internet companies), the mass acceptance of
that conclusion leads to classic cases of overvaluation that can eventually
result in serious corrections and investor disenchantment.
ROAD RAGE INVESTING
Throughout my 30 years on Wall Street, I have seen many short-term investment
fads come and go. In the early 1970's they said, "you can't lose with the
pollution stocks." In the mid 1970's, many investors believed that the large
capitalization stocks were finished. The 1980's saw a craze in oil and gambling
stocks. The biotech stocks were hot in the early 1990's. During each of these
periods, these shortsighted conclusions were correct. Many investors try to
chase the latest fads in pursuit of short-term investment returns. As the mass
of investors pour money into the stocks currently creating instantaneous
gratification, money is withdrawn from those stocks currently in the investment
doghouse. As such, some of these stocks can be incorrectly priced due to either
short-term problems or mistaken perceptions. The aforementioned switching
process creates potential value stocks. Similar to road rage in rush hour
traffic, the vehicle that constantly switches to the lane currently moving
rarely gets to its destination any faster than the other vehicles, yet increases
the risk of an accident. Only after an accident occurs does one wonder if
arriving a few minutes earlier was worth the accident. Investment rage
(switching to the latest fad) may produce the same results as road rage, an
exercise in futility, at the possible expense of great risk.
To repeat, anyone who writes that value is out of favor does not understand how
value is created. Stocks are priced in the short run by investor perceptions.
When these perceptions are wrong, stocks can become overvalued or undervalued.
However, for long periods of time, there can be a disassociation between
perception and reality, both on the upside and downside. The Olstein Financial
Alert Fund seeks to take advantage of deviations between investor perceptions
(as represented by the current stock price) and reality (the current discounted
value of a company's excess cash flow over future periods).
VALUING A COMPANY
We value a company on its ability to produce excess cash above that which is
required to run the business. A stock can be priced for just so long based on
the number of eyes watching, hits on a website, number of subscribers, market
share or multiples of revenue. All of these factors are important to future
cash flow production, but eventually the final arbiter is the actual cash
produced, not what was expected. One cannot spend earnings before expenses.
Market share must be convertible into cash flow. At some future date, you must
produce cash to repay debt and reward investors, or the stock price will not
hold up. The only caveat to this theory is when management and Wall Street
bankers, through convincing sales techniques, are able to sell investors on the
concept that tomorrow is always around the corner. Investors expecting large
future returns on unrealistic perceptions and expectations end up financing
continuing cash deficits that never end. Eventually reality sets in, with
potentially devastating effects on the last investors holding the bag.
Momentum investors and short-term investors play positive perceptions,
regardless of whether or not these perceptions are in accord with economic
reality. On the contrary, value investors seek to take advantage of the prices
created by investors' unwarranted short-term pessimism. The current investment
rage is the Internet and large capitalization growth stocks, which are expected
to grow forever. I believe the Internet and related technologies are a real,
new, powerful paradigm, producing a major economic revolution. However, some of
the perceptions and valuations of the companies associated with the Internet and
related companies are not in accord with their ability to produce earnings. We
believe investors, in most cases, are confusing the expansion of an industry
with profitable growth. Internet commerce currently represents a minute portion
of the domestic economy, yet the valuations being placed on companies even
remotely associated with Internet commerce are at unprecedented levels.
Even so-called "value funds," in order to become a top relative performance
fund, are stretching the definition of value. Justifying America Online (AOL)
as a value play is a stretch of one's imagination, yet several "value funds"
owned AOL in 1998 and continue to own it in 1999. Although AOL is a leading
Internet company, it is difficult to imagine it as a value play with a current
price/earnings ratio in excess of 400 times earnings and potential competition
on the horizon (cable television Internet access, etc). AOL currently has a
market capitalization larger than IBM. Remember, a good company does not
necessarily make a good investment.
In a March 25, 1999 Wall Street Journal article entitled "Reality Check," Bill
-------------------
Gates, the Chairman of Microsoft, said the following about Internet stocks:
1. Barriers to entering the Internet business are so low that new
competitors will constantly emerge to drive down prices and profits.
2. Internet stocks in the aggregate are overvalued.
3. While companies such as Amazon.com are performing a great service to the
world by enabling users to gain access to goods and services more quickly
and cheaply than ever before, he doubts that very many of them will prove
sufficiently profitable in the long run to justify their current lofty
valuations.
PERFORMANCE OVER THREE TO FIVE YEAR PERIODS
Although the press finds it convenient to categorize mutual funds, we do not
consider the Olstein Financial Alert Fund to be a mid-cap fund, a growth fund,
nor a conventional value fund. We measure our performance over 3 to 5 year
periods and regard short-term performance measurements as random. Our
philosophy is best described as an opportunistic, or eclectic value fund.
o We study financial statements and rarely talk to management (who has an
interest in putting their best foot forward).
o We value companies based on our estimate of future cash flow, and seek to
take advantage of a deviation between perception (as represented by the
current stock price) and reality (discounted future cash flow).
o We purchase companies, regardless of their size, whose discounted excess
cash flow, in our opinion, is not being properly valued.
o Cash flow is the common denominator, not the size of the company or what
business or industry the company operates in. Only categories that say
something about price and value are important to making investment
decisions, and there is no average or group measure to determine whether
a stock is worth its price.
o We do not believe in measuring value relative to another stock or an
overall market index, which itself may be overvalued. Our definition of
value does not discriminate according to industry, market capitalization,
sector; or whether a company is classified as growth or cyclical.
Estimates of future excess cash flow and other fundamental factors
determine value. A company's growth characteristics are a component of
our valuation.
o We believe there is no clear demarcation between growth and value. A
company's ability or inability to grow is an integral part of our
valuation formula.
Analyzing companies to determine value involves many hours of hard work. We
perform an inferential investigative analysis of financial statements in order
to determine value. We assess downside risk before considering upside potential
and view companies with unrealistic accounting and financial risk (negative cash
flow) as unworthy candidates for the Fund's portfolio. In the majority of
cases, value is created by stocks whose fundamentals are out of step with
current investment philosophy or the company is experiencing what we believe are
temporary problems. It usually takes time for investment perceptions to change.
Thus, patience may be required in order to realize the benefits of our
investment strategy.
WHERE ARE WE FINDING VALUE?
We currently see value in some of the oil service stocks. We believe that the
drop in the price of oil over the past year has been overdone, creating
opportunities in oil service stocks that have declined precipitously during this
time period. Approximately 8% of the Fund's portfolio is invested in a
diversified group of oil service stocks with strong balance sheets. Santa Fe
International (an offshore driller), Tidewater (boats servicing oil rigs) and
UTI Energy (domestic on-shore gas rigs) are three companies that we believe are
selling below the salvage value of their boats and rigs, have little or no debt,
and have positive cash flow (despite the current negative conditions in the oil
industry). The economic fundamentals are in place (e.g., cutting production,
scaling back capital expenditures and the potential turnaround in Asia) to
create a more favorable environment for the price of oil, and hopefully the
Fund's oil service portfolio.
We have previously written to you about the graying of the baby boomers, which
should produce favorable demographics for producers of modular and motor homes.
Thor Industries, Coachmen Industries and Winnebago represent approximately 3% of
the Fund's holdings. All of these companies have no debt, positive cash flow
and sell at low multiples of earnings.
We do believe in the future of the Internet. We are investing in the future of
the Internet by purchasing companies providing the hardware and technology to
allow the Internet to expand, or companies that provide unique entertainment and
content to the Internet community. We believe that Intel, Texas Instruments,
Adobe Systems, Reader's Digest and Penton Media each generate positive cash
flow, have strong balance sheets and are less volatile than many of the momentum
driven Internet stocks.
The Fund has also found value in some of the more mundane (by today's standards)
sectors such as lumber, paper and cement companies. The Fund currently has
positions in companies such as Champion International, Boise Cascade and
Louisiana Pacific. Our investment in Southdown (a cement producer) is a play on
the repair and upgrading of the U.S. infrastructure. Each of these companies
generate excess cash flow and have conservative balance sheets.
Finally, the Fund's investment in Oxford Health Plans is an example of how a
company that we believed was previously overvalued became a value play when
investor perception turned negative. We were negative on Oxford when its stock
was trading at over $70 per share two years ago. But now, we believe that the
restructuring and refinancing action taken by new management has created an
opportunity for the Fund to purchase a stock that was trading at a substantial
discount to our calculation of its private market value. We looked behind the
numbers of the refinanced and restructured health care provider and found what
we believe could be an outstanding turnaround candidate.
VALUE IS NEVER OUT OF STYLE
Sooner or later all investors confront questions about their strategies. No
system makes money in all market environments. It is important to look at long-
term performance and not react to short-term fluctuations of other investors
temporarily outperforming you. Performance is important, but so is the risk
taken to achieve the performance. We are finding value in some of the stocks
currently out of the investment mainstream, which has resulted in the Fund's
cash position declining from a peak of approximately 25% in January to our
current level of approximately 12%.
In conclusion, value is never out of style. We find the statement, "Value is
out" to be amusing and misinformed. We are going to wait out those investors
chasing overvalued growth stocks and gambling on "dot coms." It is critical that
one assesses risk before chasing the highest short-term returns. To buy at the
prices we are willing to pay, we have to go where the crowd isn't, be patient
and wait for our values to be realized. We believe that this discipline is the
key to achieving our objective of long term capital appreciation.
We "value" our shareholders and look forward to your comments.
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 dividends were reinvested and no shares were redeemed.)
<TABLE>
VALUE OF SHARES VALUE OF SHARES
NET ASSET OWNED, IF NET ASSET OWNED, IF
VALUE PER INITIAL INVESTMENT VALUE PER INITIAL INVESTMENT
DATE SHARE DIVIDENDS WAS $10,000 DATE SHARE DIVIDENDS WAS $10,000
---- -------- --------- ------------------ ----- -------- ---------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
9/21/95 $10.00 $10,000 6/30/97 $13.40 $14,602
9/30/95 10.01 10,010 9/30/97 15.83 17,250
12/31/95 10.25 $0.011 10,261 12/31/97 12.81 $2.900 17,205
3/31/96 10.87 10,882 3/31/98 14.78 19,851
6/30/96 11.45 11,462 6/30/98 13.75 18,468
9/30/96 11.70 11,713 9/30/98 11.54 15,499
12/31/96 11.71 1.032 12,760 12/31/98 14.05 0.648 19,788
3/31/97 12.23 13,327 3/31/99 14.71 20,717
</TABLE>
*<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 March 31, 1999, assuming the deduction of
the Fund's maximum CDSC for redemptions at the end of the one year
period (2.50%), was 1.86% and 22.93% 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.
THE OLSTEIN FINANCIAL ALERT FUND
Schedule of Investments February 28, 1999 (Unaudited)
Value
Shares (Note 2)
------ --------
COMMON STOCKS - 77.9%
AIR TRANSPORTATION - 2.5%
AMR Corporation *<F2> (1)<F3> 96,500 $ 5,349,719
Delta Air Lines, Inc. 23,500 1,429,094
------------
6,778,813
------------
AUTOS & TRUCKS - 1.6%
General Motors Corporation 18,000 1,486,125
Thor Industries, Inc. 115,300 2,853,675
------------
4,339,800
------------
BIOTECHNOLOGY - 0.3%
Human Genome Sciences, Inc. *<F2> 22,000 657,250
Invitrogen Corporation *<F2> 18,300 281,363
------------
938,613
------------
BUILDING & HOUSING - 2.8%
Drew Industries Incorporated *<F2> 58,600 706,862
Simpson Manufacturing Co., Inc. *<F2> 61,100 2,165,231
Skyline Corporation 35,400 1,035,450
Southdown, Inc. 79,500 3,751,406
------------
7,658,949
------------
BUSINESS MACHINES & SOFTWARE - 1.2%
Adobe Systems Incorporated 73,500 2,958,375
Vignette Corporation *<F2> 5,000 271,250
------------
3,229,625
------------
BUSINESS SERVICES - 1.0%
Kelly Services, Inc. - Class A 105,000 2,677,500
------------
CHEMICALS & ALLIED PRODUCTS - 0.2%
Brunswick Technologies, Inc. *<F2> 77,400 464,400
------------
COMMUNICATIONS & MEDIA - 3.2%
Penton Media, Inc. 144,000 2,691,000
Tele-Communications, Inc. - Class A *<F2> 60,000 3,768,750
Univision Communications Inc. - Class A *<F2> 12,000 489,000
USA Networks, Inc. *<F2> 43,500 1,729,125
------------
8,677,875
------------
COMPUTERS - 4.5%
Compaq Computer Corporation 90,000 3,172,500
Quantum Corporation *<F2>(1)<F3> 205,000 3,369,688
RadiSys Corporation *<F2> 117,700 3,016,063
Seagate Technology, Inc. *<F2>(1)<F3> 94,500 2,734,594
------------
12,292,845
------------
CONSUMER DURABLES - 0.3%
Eastman Kodak Company 11,500 761,156
------------
CONSUMER PRODUCTS - 0.7%
Russ Berrie and Company, Inc. 73,200 1,811,700
------------
DRUGS - 0.2%
Sepracor Inc. *<F2> 5,000 623,750
------------
ELECTRICAL EQUIPMENT - 2.2%
Pittway Corporation - Class A 139,900 3,471,269
Veeco Instruments Inc. *<F2> 67,600 2,585,700
------------
6,056,969
------------
ELECTRONICS - 7.2%
Amphenol Corporation - Class A *<F2> 78,300 2,804,119
Dupont Photomasks, Inc. *<F2> 60,800 2,386,400
Harman International Industries,
Incorporated 82,200 3,144,150
Optek Technology, Inc. *<F2> 216,000 3,456,000
SCI Systems, Inc. *<F2> 75,000 2,320,313
Texas Instruments Incorporated 22,500 2,006,719
Varian Associates, Inc. 105,000 3,360,000
------------
19,477,701
------------
ENTERTAINMENT & LEISURE - 0.3%
Park Place Entertainment Corporation *<F2> 96,900 726,750
------------
FINANCIAL SERVICES - 1.8%
Hambrecht & Quist Group *<F2> 36,300 966,487
The John Nuveen Company - Class A 39,100 1,544,450
Merrill Lynch & Co., Inc. 19,000 1,458,250
Paine Webber Group Inc. 27,700 1,035,287
------------
5,004,474
------------
FOOD, BEVERAGES & TOBACCO - 1.0%
Philip Morris Companies Inc. (1)<F3> 61,000 2,386,625
J.M. Smucker Company - Class B 11,800 240,425
------------
2,627,050
------------
FURNITURE & FIXTURES - 2.7%
CompX International, Inc. *<F2> 173,500 3,014,562
Ethan Allen Interiors Inc. 78,300 3,523,500
Herman Miller, Inc. 50,000 850,000
------------
7,388,062
------------
HEALTHCARE SERVICES & SUPPLIES - 3.7%
CONMED Corporation *<F2> 42,500 1,312,187
Hillenbrand Industries, Inc. 45,000 1,884,375
Oxford Health Plans, Inc. *<F2>(1)<F3> 325,000 6,154,687
Rochester Medical Corporation *<F2> 70,000 704,375
------------
10,055,624
------------
INSURANCE - 1.7%
The Chubb Corporation 25,000 1,493,750
LandAmerica Financial Group, Inc. 87,100 3,130,156
------------
4,623,906
------------
MACHINERY - INDUSTRIAL - 3.5%
Ampco-Pittsburgh Corporation 119,500 1,120,312
CLARCOR Inc. 49,000 894,250
Kaydon Corporation 90,000 2,745,000
Precision Castparts Corp. 73,500 2,728,688
Varlen Corporation 95,700 2,009,700
------------
9,497,950
------------
METALS & MINERALS - 3.6%
AK Steel Holding Corporation 190,000 4,144,375
Cleveland-Cliffs Inc. 50,500 1,871,656
Lawson Products, Inc. 71,500 1,505,969
LTV Corporation 242,000 1,331,000
NS Group, Inc. *<F2> 264,900 1,043,044
------------
9,896,044
------------
OIL & GAS SERVICES - 7.6%
Halliburton Company 70,000 1,977,500
Rowan Companies, Inc. *<F2> 362,500 3,126,563
Santa Fe International Corporation 405,000 5,416,875
Smith International, Inc. *<F2> 86,500 2,103,031
Tesoro Petroleum Corporation *<F2> 183,000 1,464,000
Tidewater Inc. 173,500 3,263,969
UTI Energy Corp. *<F2> 362,300 2,105,869
Weatherford International, Inc. *<F2> 76,000 1,292,000
------------
20,749,807
------------
PAPER & FOREST PRODUCTS - 2.9%
Boise Cascade Corporation (1)<F3> 139,500 4,333,219
Champion International Corporation 96,000 3,552,000
------------
7,885,219
------------
PRINTING & PUBLISHING - 3.9%
Playboy Enterprises, Inc. - Class A *<F2> 31,000 734,313
Playboy Enterprises, Inc. - Class B *<F2> 91,800 2,455,650
The Reader's Digest Association, Inc. -
Class B (1)<F3> 227,600 7,354,325
------------
10,544,288
------------
RAILROADS - 0.9%
Florida East Coast Industries, Inc. 47,200 1,280,300
The St. Joe Company 53,000 1,142,813
------------
2,423,113
------------
RETAIL - 3.7%
Ames Department Stores, Inc. *<F2> 60,000 1,800,000
BJ's Wholesale Club, Inc. *<F2> 60,000 2,613,750
Ross Stores, Inc. 55,000 2,516,250
Sbarro, Inc. 119,500 3,017,375
------------
9,947,375
------------
SAVINGS & LOANS - 0.0%
Brookline Bancorp, Inc. 6,400 74,400
------------
SEMICONDUCTORS - 0.8%
Intel Corporation 17,000 2,038,937
------------
TELECOMMUNICATIONS EQUIPMENT - 2.9%
AFC Cable Systems, Inc. *<F2> 15,800 523,375
Dialogic Corporation *<F2> 154,300 4,272,181
General Cable Corporation 163,900 3,083,369
------------
7,878,925
------------
TEXTILES & APPAREL - 6.3%
Jones Apparel Group, Inc. *<F2> 89,000 2,486,437
Liz Claiborne, Inc. 20,300 683,856
Nike, Inc. - Class B 32,000 1,716,000
Nine West Group Inc. *<F2> 55,000 1,234,062
Reebok International Ltd. *<F2> 288,000 4,644,000
R.G. Barry Corporation 134,800 1,196,350
The Timberland Company - Class A *<F2> 45,000 2,716,875
The Wet Seal, Inc. - Class A *<F2> 59,900 2,324,869
------------
17,002,449
------------
TRANSPORTATION EQUIPMENT - 1.5%
Coachmen Industries, Inc. 104,300 2,112,075
Fleetwood Enterprises, Inc. 60,000 1,946,250
------------
4,058,325
------------
TRAVEL & RECREATION - 0.9%
Winnebago Industries, Inc. 173,300 2,382,875
------------
US ROYALTY TRUSTS - 0.3%
Texas Pacific Land Trust 17,800 887,775
------------
TOTAL COMMON STOCK (COST $201,366,650) 211,483,044
------------
Principal
Amount
------
SHORT-TERM INVESTMENTS - 22.6%
MUTUAL FUNDS - 0.4%
Firstar Institutional Money Market Fund 983,832 983,832
------------
U.S. GOVERNMENT AGENCY OBLIGATIONS - 22.2%
Federal Home Loan Bank:
4.58%, 3/05/1999 $ 5,400,000 5,397,252
4.62%, 3/22/1999 (1)<F3> 2,000,000 1,994,610
Federal Farm Credit Bank:
4.68%, 3/01/1999 5,000,000 5,000,000
4.57%, 3/03/1999 7,900,000 7,897,994
4.57%, 3/08/1999 18,500,000 18,483,561
Federal Home Loan
Mortgage Corporation
4.58%, 3/04/1999 16,100,000 16,093,855
Tennessee Valley Authority
4.55%, 3/02/1999 5,500,000 5,499,305
------------
TOTAL U.S. GOVERNMENT
AGENCY OBLIGATIONS 60,366,577
------------
TOTAL SHORT- TERM INVESTMENTS
(Cost $61,350,409) 61,350,409
------------
TOTAL INVESTMENTS - 100.5% (COST $262,717,059) 272,833,453
------------
SECURITIES SOLD SHORT - (3.9)% (PROCEEDS $10,839,963) (10,545,053)
OTHER ASSETS, LESS LIABILITIES - 3.4% 9,172,322
------------
NET ASSETS - 100.0% $271,460,722
------------
------------
*<F2> Non-income producing security.
(1)<F3> All or a portion of the securities have been committed as collateral
for open short positions.
Value
Shares (Note 2)
------ --------
SECURITIES SOLD SHORT
COMMUNICATIONS & BROADCASTING
AT&T Corp. 46,600 $ 3,827,025
------------
MANUFACTURING
Micron Electronics, Inc. 17,000 244,375
Recoton Corporation 37,000 518,000
Sunbeam Corporation 22,000 127,875
Zoltek Companies, Inc. 12,500 107,422
------------
TOTAL MANUFACTURING 997,672
------------
SERVICES
Acxiom Corporation 24,000 574,500
Alternative Living Services, Inc. 15,000 307,500
Analytical Surveys, Inc. 13,000 338,000
Bally Total Fitness Holding Corporation 20,000 450,000
Cerner Corporation 27,000 381,375
Computer Associates International, Inc. 7,500 315,000
Covance Inc. 26,000 716,625
Engineering Animation, Inc. 3,700 167,425
Enhance Financial Services Group Inc. 23,000 544,812
Kendle International Inc. 25,000 603,125
Ocwen Financial Corporation 30,000 240,000
Sapient Corporation 9,500 635,313
Tetra Tech, Inc. 10,000 190,625
------------
TOTAL SERVICES 5,464,300
------------
WHOLESALE & RETAIL TRADE
Boston Chicken, Inc. 39,000 25,740
Einstein/Noah Bagel Corp. 160,220 230,316
------------
TOTAL WHOLESALE & RETAIL TRADE 256,056
------------
TOTAL SECURITIES SOLD SHORT
(PROCEEDS $10,839,963) $ 10,545,053
------------
------------
The accompanying notes are an integral part of the financial statements.
THE OLSTEIN FINANCIAL ALERT FUND
Statement of Assets and Liabilities February 28, 1999 (Unaudited)
ASSETS:
Investments, at value (cost $262,717,059) $272,833,453
Cash 132,163
Receivable from broker for proceeds on securities sold short 10,774,378
Receivable for investments sold 6,085,833
Capital shares sold 85,406
Dividends and interest receivable 156,732
Other receivables 3,052
Organization costs, net of accumulated amortization 31,201
Other assets 86,373
------------
Total Assets 290,188,591
------------
LIABILITIES:
Securities sold short, at value (proceeds of $10,839,963) 10,545,053
Payable for securities purchased 7,282,060
Capital shares redeemed 130,496
12b-1 fee payable 451,712
Payable to Adviser 212,257
Accrued expenses and other liabilities 106,291
------------
Total Liabilities 18,727,869
------------
NET ASSETS $271,460,722
------------
------------
NET ASSETS CONSIST OF:
Capital stock $224,819,665
Accumulated undistributed net realized gain on investments
sold and securities sold short 36,229,753
Net unrealized appreciation on:
Investments 10,116,394
Short positions 294,910
------------
Total Net Assets $271,460,722
------------
------------
Shares outstanding (250,000,000 shares of
$.001 par value authorized) 19,333,227
Net Asset Value and Offering Price Per Share $14.04
-----
-----
The accompanying notes are an integral part of the financial statements.
THE OLSTEIN FINANCIAL ALERT FUND
Statement of Operations
For the
Six Months Ended
February 28, 1999
-----------------
(Unaudited)
INVESTMENT INCOME:
Interest income $ 1,592,259
Dividend Income 751,181
------------
Total investment income 2,343,440
------------
EXPENSES:
Investment advisory fee 1,247,737
Distribution expense 1,247,549
Interest expense 261,923
Administration fee 58,403
Shareholder servicing and accounting costs 50,308
Custody fees 17,978
Federal and state registration 14,415
Professional fees 19,597
Reports to shareholders 5,185
Trustees' fees and expenses 9,860
Amortization of organization costs 12,617
Other 14,448
------------
Total expenses before dividends on short positions 2,960,020
Dividends on short positions 17,079
------------
Total expenses 2,977,099
------------
Net investment loss (633,659)
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain on:
Long transactions 26,612,346
Short transactions 1,301,952
Equity contracts 9,212,494
Change in unrealized appreciation (depreciation) on:
Investments 38,335,213
Short positions (3,183,306)
------------
Net realized and unrealized gain on investments 72,278,699
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 71,645,040
------------
------------
The accompanying notes are an integral part of the financial statements.
THE OLSTEIN FINANCIAL ALERT FUND
Statements of Changes in Net Assets
For the For the
Six Months Ended Year Ended
February 28, 1999 August 31, 1998
----------------- ---------------
(Unaudited)
OPERATIONS:
Net investment loss $ (633,659) $ (932,976)
Net realized gain:
Long transactions 26,612,346 24,306,352
Short transactions 1,301,952 719,783
Equity contracts 9,212,494 --
Change in unrealized appreciation
(depreciation) on:
Investments 38,335,213 (56,652,794)
Short positions (3,183,306) 4,528,897
------------ ------------
Net increase (decrease) in net
assets resulting from operations 71,645,040 (28,030,738)
------------ ------------
DISTRIBUTION TO SHAREHOLDERS FROM
NET REALIZED GAINS (12,016,817) (35,837,667)
------------ ------------
NET INCREASE IN NET ASSETS FROM FUND
SHARE TRANSACTIONS (NOTE 6) 7,509,522 92,589,749
------------ ------------
TOTAL INCREASE IN NET ASSETS 67,137,745 28,721,344
NET ASSETS:
Beginning of period 204,322,977 175,601,633
----------- ------------
End of period $271,460,722 $204,322,977
------------ ------------
------------ ------------
The accompanying notes are an integral part of the financial statements.
THE OLSTEIN FINANCIAL ALERT FUND
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 For the September 21, 1995+<F4>
Six Months Ended Year Ended Year Ended through
February 28, 1999 August 31, 1998 August 31, 1997 August 31, 1996
----------------- ---------------- --------------- ----------------
(Unaudited)
<S> <C> <C> <C> <C>
NET ASSET VALUE - BEGINNING OF PERIOD $10.88 $14.79 $11.21 $10.00
------ ------ ------ ------
INVESTMENT OPERATIONS:
Net investment loss (0.03)1<F7> (0.06)1<F7> (0.05) (0.07)
Net realized and unrealized
gain (loss) on investments 3.84 (0.95) 4.66 1.29
------ ------ ------ ------
Total from investment operations 3.81 (1.01) 4.61 1.22
------ ------ ------ ------
DISTRIBUTIONS FROM NET REALIZED GAIN
ON INVESTMENTS (0.65) (2.90) (1.03) (0.01)
------ ------ ------ ------
NET ASSET VALUE - END OF PERIOD $14.04 $10.88 $14.79 $11.21
------ ------ ------ ------
------ ------ ------ ------
TOTAL RETURN:++<F5> 35.32% (9.33)% 43.61% 12.22%
Ratios (to average net assets)/Supplemental Data:
Expenses2<F8> 2.37%*<F6> 2.25% 2.38% 2.43%*<F6>
Net investment loss (0.51)%*<F6> (0.39)% (0.45)% (0.68)%*<F6>
Dividends on short positions 0.01%*<F6> 0.00% -- --
Portfolio turnover rate 111.04% 187.44% 164.92% 139.77%*
Net assets at end of period (000 omitted) $271,461 $204,323 $175,602 $109,005
</TABLE>
+<F4> Commencement of Operations.
++<F5> Total returns do not reflect any deferred sales charge. The total
returns for the periods ending February 28, 1999 and August 31, 1996
have not been annualized.
*<F6> Annualized.
1<F7> Net investment loss per share represents net investment loss divided by
the average shares outstanding throughout the period.
2<F8> The expense ratio excludes dividends on short positions. The ratio
including dividends on short positions for the period ended February
28, 1999 was 2.38%.
The accompanying notes are an integral part of the financial statements.
THE OLSTEIN FINANCIAL ALERT FUND
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, 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 $181,431 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, 1999, purchases and sales of investment securities (excluding
securities sold short and short-term investments) aggregated as follows:
Purchases $209,265,292
Sales 212,337,827
The following balances for the Fund are as of February 28, 1999:
Cost for Net Tax Basis Tax Basis Gross Tax Basis Gross
Federal Income Unrealized Unrealized Unrealized
Tax Purposes Appreciation Appreciation Depreciation
-------------- ------------ ------------- -------------
$262,873,825 $9,959,628 $26,471,031 $(16,511,403)
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, 1999, the Fund had 3.9% of its net assets in short positions.
Equity Contracts. The Board of Trustees authorized the Fund to enter into an
equity swap contract with a major broker/dealer which allowed 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.
The Fund realized a gain of $9,212,494 upon termination of the contract.
This contract terminated on November 5, 1998.
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, 1999, the Fund incurred
investment management fees of $1,247,737.
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 six months
ended February 28, 1999, fees accrued by the Fund pursuant to the 12b-1 Plan
were $1,247,549.
During the six months ended February 28, 1999, the Fund paid total brokerage
commissions of $398,195 to affiliated broker dealers in connection with
purchases and sales of investment securities.
6.FUND SHARES. At February 28, 1999, 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>
Six Months Ended Year Ended
February 28, 1999 August 31, 1998
----------------- ---------------
Shares Amount Shares Amount
-------- ------ ------ ------
<S> <C> <C> <C> <C>
Shares sold 868,555 $11,543,396 6,685,402 $ 94,858,849
Shares issued to shareholders in
reinvestment of distributions 881,266 11,755,899 2,833,901 35,338,744
Shares redeemed (1,200,307) (15,789,773) (2,610,356) (37,607,844)
----------- ------------ ---------- ------------
Net increase 549,514 $ 7,509,522 6,908,947 $ 92,589,749
----------- ------------
----------- ------------
SHARES OUTSTANDING:
Beginning of period 18,783,713 11,874,766
---------- ----------
End of period 19,333,227 18,783,713
---------- ----------
---------- ----------
</TABLE>
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
---------------------------
Firstar Mutual Fund Services, LLC
615 East Michigan Street
P.O. Box 701
Milwaukee, WI 53202
CUSTODIAN
---------
Firstar Bank Milwaukee, N.A.
777 East Wisconsin Avenue
Milwaukee, WI 53202
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
