THE
OLSTEIN
FUNDS
THE
OLSTEIN
FINANCIAL
ALERT
FUND
ANNUAL REPORT
August 31, 2000
President's Message October 3, 2000
WHY WE DO OUR OWN RESEARCH
Dear Shareholders:
My belief has always been that long-term performance in the stock market is
highly correlated with error avoidance. The table below highlights, on a
quarterly basis, how a hypothetical shareholder who subscribed to our philosophy
of analyzing downside risk before considering upside potential would have
performed by investing $10,000 at the Fund's inception (assumes all dividends
were reinvested and no shares were redeemed).
VALUE OF SHARES VALUE OF SHARES
OWNED, IF INITIAL OWNED, IF INITIAL
INVESTMENT WAS INVESTMENT WAS
DATE $10,000 DATE $10,000
---- ----------------- ---- -----------------
9/21/95 $10,000 3/31/98 $19,851
9/30/95 10,010 6/30/98 18,468
12/31/95 10,261 9/30/98 15,499
3/31/96 10,882 12/31/98 19,788
6/30/96 11,462 3/31/99 20,717
9/30/96 11,713 6/30/99 25,365
12/31/96 12,760 9/30/99 23,675
3/31/97 13,327 12/31/99 26,692
6/30/97 14,602 3/31/00 28,170
9/30/97 17,250 6/30/00 28,899
12/31/97 17,205 9/30/00 30,596
Past performance does not guarantee future results. The above chart
pertains to the Fund's Class C shares, and assumes no redemptions.
Redemptions of Class C shares may be subject to a contingent deferred
sales charge ("CDSC") if made within two years of investment. The
Fund's Class C share average annual return from inception, and for the
five-year and one-year periods ended 9/30/00, assuming deduction of the
Fund's maximum CDSC of 2.5% for the one-year period was 24.88%, 25.04%,
and 26.73% respectively. The principal value and return of an
investment in the Fund may fluctuate with market conditions so that
shares, when redeemed, may be worth more or less than their original
purchase price.
As a sports fan, my error avoidance philosophy was shaped by my many years of
following college football. As a young Michigan State University student in the
early 1960's, my alma mater was recognized for its great football teams (the
mathematics department was not so bad either). We never lost to Notre Dame, and
the University of Michigan could not beat us either. However, there was one
football team that always finished ahead of us in the polls, the Ohio State
Buckeyes. The press called the Buckeyes boring, yet they would always beat us.
Ohio State's Head Coach, Woody Hayes, was known for his "three yards and a cloud
of dust" style of football. Woody would recruit big bruising fullbacks, such as
Matt Snell of New York Jets Super Bowl fame, who carried the ball on every play
picking up three or four yards at a time, and rarely fumbled the ball.
Furthermore, Ohio State's defense was solid, making the football game rather
boring. Nonetheless, Ohio State was a consistent winner. Similarly, throughout
sports history, the champions were usually the best defensive teams, not the
most exciting offensive teams.
Strong defenses may not win all the time (or be the most exciting teams to
watch), but defensive teams win most of the time. Much like Woody Hayes'
defensive style of football, we methodically analyze a company and are not
looking to win quickly. Our research staff must discuss a company's downside
risk (separate and apart from stock market risk) for any company being
considered for the Fund's portfolio, before considering upside potential. The
discussion of downside risk must include such factors as cash flow, debt
structure, accounting and reporting practices, an inferential analysis of all
footnotes and SEC filings, and a comparative analysis of three years of
shareholder letters to determine the veracity of management.
ROADBLOCKS TO UNBIASED INFORMATION
Despite the importance of error avoidance to long-term performance, few research
reports emanating from the big Wall Street brokerage houses discuss the
importance of downside risk. In fact, less than 1% of the research reports
published on Wall Street are sell recommendations. Why is there a lack of
negative information disseminated by Wall Street firms when we believe error
avoidance is more important to long-term performance than selecting big winners?
Let's look at the four conflicts of interest that prevent investors from
receiving unbiased information from Wall Street.
1) Management - The industry analysts are too dependent on a company's
management for their information. Management attempts to place a positive
spin on their company and usually puts its best foot forward. It is to
management's advantage to keep their company's stock price high for various
purposes including personal compensation, stock options, and financing.
During my 33 years in the research profession, I have yet to hear
management warn of an existing problem, that if not resolved, would result
in a dramatic drop in their stock's price. Rarely have we encountered
management who stated that their company's stock was overvalued.
2) Accountants - Although accountants are technically hired by a company's
Board of Directors, in reality the accountants answer to management.
Accountants hide behind Generally Accepted Accounting Principles (GAAP),
but in many cases GAAP and economic reality can be worlds apart. It is
crucial to look behind the numbers in today's "accounting generated"
earnings market where it has become more important to pay for cash flow,
than the cleverness of a company's accounting department. Throughout my
career, the analytical community has paid little attention to corporate
reporting practices. We believe our ability to perform an inferential look
behind the numbers, combined with our awareness of the importance of
understanding accounting (the language of business) are important
advantages that help the Fund achieve its objective of long-term capital
appreciation.
3) Analysts - Industry analysts need to communicate with management, otherwise
it would be difficult to follow an industry. Analysts fear loss of
management contact and repercussions from institutional holders of a stock
if they dispense negative information about a company. Many analysts just
repeat what a company tells them, and are afraid to stand on their own. I
know of several examples of negative repercussions for analysts who
contradicted management's rosy view of operations, by issuing sell
recommendations or lowering investment ratings. The analyst who predicted
Dell's sales slowdown received bomb threats, and the analyst who correctly
predicted Boston Chicken's downfall was eliminated from subsequent
conference calls and company meetings. Donald Trump allegedly harassed the
employer of the analyst who questioned the future of Mr. Trump's casino
company.
4) Investment Banking - The major brokerage firms on Wall Street housing large
research departments also have substantial investment banking departments.
In most cases, an investment banking department is the firm's key profit
center and generates significant fees from corporate clients. The
investment bankers fear the loss of these fees should their research
department negatively critique one of their client's stocks. In addition,
the SEC's conflict of interest rules restrict brokerage houses that are
participating in a company's underwriting from making recommendations or
estimates on that stock during the underwriting period. Yet, the
prospectus provides detailed information which can provide an analyst with
valuable insight about a company's future prospects. The Internet analyst
from Morgan Stanley dubbed "The Queen of the Internet" has had unwavering
support for Amazon.com during a period in which the stock has experienced a
meteoric rise and then a significant fall from its peak. Amazon.com had a
$40 billion market capitalization at its peak price of $113 per share in
December 1999. Amazon.com at its current price of $26 a share is
capitalized at $8 billion. In 1998 the Morgan Stanley analyst originally
predicted a $53 million loss for Amazon.com in 1999, which turned out to be
$390 million; yet, her support for the stock never wavered. Since 1998,
Morgan Stanley earned tens of millions of dollars in fees from Amazon.com
as the firm raised $2 billion for the on-line bookseller. One may conclude
that it was worth having an unwavering positive opinion on Amazon.com
despite the continuing earnings disappointments and mounting losses.
Because of the conflicts of interest that set up roadblocks to receiving
unbiased information, we refer to Wall Street research only to help us gather
industry data, product information and to assess what information and opinions
the public is receiving. When the conclusions of the Wall Street analysts
(which serve as a basis for the decisions made by institutions and the general
public) differ from our opinions, it often presents opportunities for the Fund
to purchase or sell securities at what we believe are attractive prices.
EXAMPLES OF WHY WE DO OUR OWN RESEARCH
The recent chain of events with Lucent Technologies is a prime example of why we
perform our own research. Wall Street analysts were falling all over each other
to recommend Lucent Technologies as a play on the significant build-up taking
place in the Internet and telecommunications infrastructure. On the surface,
the former AT&T subsidiary would have appeared to be a prime candidate for the
Fund's portfolio. However, after performing a detailed analysis of Lucent's
financial statements, our conclusion was that not only was the stock highly
overvalued on reported earnings, but we had several questions with regard to the
quality of Lucent's earnings. Beginning in March 1999, in interviews on CNBC,
the New York Times and Barron's, I continued to question Lucent's growing
receivables relative to sales, excessive inventories, customer financing,
continuing non-recurring write-offs, reserve reversals, high levels of pension
income, declining backlogs, and acquisition generated sales and earnings. Our
warning not only fell on deaf ears but was also the subject of intense
criticism. From the date of our first interview (March 1999), the stock went on
to appreciate almost 30%. In January 2000, the other shoe finally dropped.
After Lucent announced its first downside earnings alert (two other negative
announcements have occurred since then), the stock dropped 75% from its high in
January 2000, and is still down 60% from our first warning. The nine months
after our first warning, during which Lucent's stock continued to climb, was
lonely. However, when the problems at Lucent became apparent, the subsequent
decline was rapid and steep.
Conseco, the faltering insurance and financial services company, is another
outstanding example of why we do our own research, and do not rely on Wall
Street analysts. Conseco piled acquisition upon acquisition to build itself
into a life and health insurance powerhouse, financed with $10 billion in debt.
Just two years ago, Conseco's stock hit a high of about $58 per share. As is
usually the case with companies that grow by acquisition, Conseco strayed too
far from its basic business to keep the momentum going. Conseco did not perform
adequate due diligence in its acquisition of Green Tree Financial (a lender
specializing in manufactured housing financing) for $6 billion. From the date
of this ill-conceived acquisition, Conseco's finances and stock price eroded
steadily. However, more than a dozen Wall Street analysts kept their strong buy
recommendations. Many in the Wall Street community based their bullish outlooks
on management's optimistic view of growth that was anticipated at Green Tree.
However, a careful, objective look behind the numbers would have alerted
investors to potential problems with management's rosy outlook. Questions arose
about overvaluation of Green Tree's loans and the ability to expand the lending
operation without encountering cash flow problems. As time progressed, doubts
began to emerge about the viability of Conseco's business plans and forecasts.
Although Conseco had a reported book value of over $16 per share, when one
removed goodwill (an intangible asset representing the premium over book value
paid for another company in an acquisition) and capitalized marketing costs,
actual book value sunk to a negative $9.12 a share. Other warning signs were
also flashing. There were inter-company dealings of a questionable nature among
Conseco's subsidiaries and the parent company. In addition, there were
guaranteed loans by the parent company for officers to purchase Conseco stock
and fees paid to the parent company for managing the affiliates' bond
portfolios. Furthermore, securities of uncertain value were being sold to the
insurance subsidiaries by the parent company in an effort to move cash from the
subsidiaries to the parent company for additional acquisitions.
The stock has subsequently fallen to $6.00 a share and Conseco's former CEO,
Steven Hilbert, has been ousted. During Conseco's miraculous rise, the press
made allegations of misleading accounting, yet Wall Street paid little attention
to the negative information. The story is hard to believe but it gets even
better. Conseco's Board voted Mr. Hilbert a $53 million severance payment, a
$23 million loan to cover margin calls on his Conseco stock (Hilbert owed $181
million on stock worth only $43 million) and paid a former GE executive $50
million in cash up front to help salvage the company. A former corporate raider
who purchased Conseco stock, recently ran a full-page advertisement in the Wall
Street Journal asking investors to squeeze short sellers. Perhaps the Board and
the corporate raider should have used the money spent on Mr. Hilbert's severance
payment and the Wall Street Journal ad to secure Reggie Miller's contract with
the Indiana Pacers. During the Hilbert regime, Conseco also paid significant
dollars to rename the Indiana Pacers' arena to the "Conseco Field House."
The examples above illustrate why it is necessary for us to do our own, unbiased
research. There were numerous warning signs at Lucent and Conseco that should
have been addressed by the Wall Street analytical community. However, these
alerts were ignored as analysts were focused on protecting their relationships
with management, rather than protecting the average investor from a potential
loss. The Fund did not participate in the significant up moves in Lucent and
Conseco, but we were not there for the precipitous falls either. Wall Street
research cannot help us with risk evaluation and error avoidance because of the
previously mentioned conflicts that prevent unbiased information from surfacing
in research reports. Thus, we will continue to do our own research,
concentrating on looking behind the numbers to assess risk before looking at
upside potential. Our objective of above-average performance has a better
chance of being realized if we can ferret out potential problems before they
become apparent to the general public.
OUR RESEARCH TEAM
I believe our research team is the finest on Wall Street and has received
intense training in cash flow analysis, inferential reasoning and screening, and
the meaning of the word "risk". Sean Reidy (associate portfolio manager and
research director) has been with me for nine years. Research analysts Eric
Heyman and Randy Fontanilla have been with the firm for six years and two years
respectively. We recently hired Victor Cunningham, a CPA and CFA who has eight
years of experience. Erik Olstein and Michael Luper have been with me for eight
years. Erik runs the company from a business and marketing perspective and
helps with our portfolio strategy. Michael Luper, CPA, is our resident
accounting expert who helps to research potential short sales. He is also our
controller and oversees our operations. Camille Valente has been with the firm
for six years, and manages our research library.
OUR PORTFOLIO AND HOW WE SEE THE FUTURE
The following is our view of the next year:
1) Excess cash flow, internal earnings growth, multiples of book value,
analyzing financial statements and footnotes and two year stock price
horizons will be valued.
2) Big write-offs, serial acquisitions, multiples of revenues, touting
quarterly earnings, and two-day stock price horizons will not be valued.
3) The NASDAQ Composite Index will under-perform the other averages due to its
components (Cisco, Yahoo, etc). Slower growth than expected in the
telecommunications area will disappoint high price/earnings ratio
investors. The fabulous five, (Cisco, EMC, Sun Microsystems, Oracle and
JDS Uniphase), which may be great companies, should under-perform the
averages until they can grow sufficient cash flow to substantiate their
current valuations.
4) Disassociation between stocks and the company's fundamentals underlying the
stock disappears.
5) Takeover activity of old line companies continues to accelerate, and the
disequilibrium between new technology and old economy narrows to realistic
levels (see the Fund's portfolio and our comments below).
6) Profits become more valuable than losses.
7) Businesses become more valuable than business plans.
We believe that the Fund's portfolio is properly structured to take advantage of
the environment that we foresee over the next few years and as always,
incorporates our discounted cash flow methodology of valuation, in conjunction
with our emphasis on risk analysis first.
The Fund's portfolio continues to be a mix of conventional old economy
companies, such as J. C. Penney, Maytag, Boise Cascade, Ethan Allen, Furniture
Brands, Mattel and Winnebago and the new economy stocks such as Charles River
Laboratories, National Semiconductor, LSI Logic, International Rectifier, and
American Power Conversion. All of these companies generate excess cash flow,
sell at discounts to our calculation of private market value, and usually have
some sort of negative psychology surrounding the company. Negative psychology
can create opportunities for the Fund to purchase outstanding companies at what
we believe are discounted prices. These companies cut across all investment
disciplines but are tied together by our ability to read financial statements,
and look away from what we believe is temporary short sightedness. One company
which illustrates our thought process is Charles River Laboratories. The bio-
tech revolution is capturing the imagination of all investors. We agree that
the future of biotech companies is exciting, but we prefer to play the biotech
revolution with a concern for valuation. Charles River provides genetically
altered animals, such as mice, to pharmaceutical and biotech companies allowing
these companies to engage in drug discovery and genome research. Charles River
generates strong cash flow, has predictable earnings and sells at a discount to
our calculation of private market value.
It has been a great five years, and we look forward to celebrating the next five
years with our shareholders. Our money is invested alongside yours, and it is
our strong belief that we work for our shareholders.
Very truly yours,
/s/Robert A. Olstein
Robert A. Olstein
President
COMPARISON OF THE CHANGE IN VALUE OF A HYPOTHETICAL $10,000 INVESTMENT FROM
THE FUND'S CLASS C INCEPTION THROUGH THE FISCAL YEAR END OF 8/31/00. THE
LINE CHART DOES NOT REFLECT ANY APPLICABLE CDSC REDEMPTION FEES.
OLSTEIN FINANCIAL ALERT LIPPER MID CAP
DATE FUND - CLASS C S&P 500 VALUE 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
8/31/99 $24,547 $24,133 $18,574
8/31/00 $30,596 $28,072 $22,107
AVERAGE ANNUAL TOTAL RETURN
---------------------------
1 YEAR INCEPTION
------ ---------
Olstein Financial Alert - Class C*<F1> 22.14% 25.34%
Lipper Mid Cap Value Index**<F2> 19.02% 17.38%
S&P 500***<F3> 16.32% 23.18%
*<F1> 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.
**<F2> Lipper Mid Cap Value 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."
***<F3> 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."
COMPARISON OF THE CHANGE IN VALUE OF A HYPOTHETICAL $10,000 INVESTMENT FROM
THE FUND'S ADVISER CLASS INCEPTION THROUGH THE FISCAL YEAR END OF 8/31/00.
OLSTEIN FINANCIAL ALERT LIPPER MID CAP
DATE FUND - ADVISER CLASS S&P 500 VALUE INDEX
---- -------------------- ------- -----------
9/21/99 $10,000 $10,000 $10,000
8/31/00 $12,517 $11,491 $12,038
CUMULATIVE TOTAL RETURN
-----------------------
SEPTEMBER 21, 1999+<F4>
THROUGH AUGUST 31, 2000
-----------------------
Olstein Financial Alert - Adviser Class*<F5> 25.17%
Lipper Mid Cap Value Index**<F6> 20.38%
S&P 500***<F7> 14.91%
+<F4> Commencement of operations.
*<F5> Assumes reinvestment of dividends and capital gains. Past performance
is not necessarily indicative of future results. Investment returns
and principal values may fluctuate, so that, when redeemed, shares may
be worth more or less than their original cost.
**<F6> Lipper Mid Cap Value 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."
***<F7> 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, 2000
Shares Value
------ -----
COMMON STOCKS - 80.3%
AEROSPACE - 0.4%
Herley Industries, Inc. *<F8> 110,200 $ 2,031,812
------------
AUTOS & TRUCKS - 2.8%
Cummins Engine Company, Inc. 73,300 2,602,150
Delphi Automotive Systems
Corporation 407,135 6,692,282
Thor Industries, Inc. 195,100 4,548,269
------------
13,842,701
------------
BANKING - 0.5%
Citigroup Inc. 42,667 2,490,667
------------
BUILDING & HOUSING - 2.7%
Drew Industries Incorporated *<F8> 60,900 426,300
Fleetwood Enterprises, Inc. 370,200 5,067,112
Simpson Manufacturing
Co., Inc. *<F8> 116,100 5,456,700
Skyline Corporation 106,100 2,347,463
------------
13,297,575
------------
BUSINESS MACHINES & SOFTWARE - 2.9%
Computer Network Technology
Corporation *<F8> 246,200 4,924,000
General Magic, Inc. *<F8> 1,310,000 9,210,937
------------
14,134,937
------------
BUSINESS SERVICES - 0.6%
Kelly Services, Inc. - Class A 124,800 2,886,000
------------
CHEMICALS - 0.5%
A. Schulman, Inc. 184,000 2,219,500
------------
COMMUNICATIONS & MEDIA - 2.3%
Cablevision Systems
Corporation - Class A *<F8> 44,000 2,959,000
USA Networks, Inc. *<F8> 230,500 5,546,406
Viacom Inc. - Class B *<F8> 41,230 2,775,294
------------
11,280,700
------------
CONSUMER PRODUCTS - 8.9%
American Greetings
Corporation - Class A 389,000 7,245,125
Callaway Golf Company 160,000 2,310,000
Fortune Brands, Inc. 169,500 4,322,250
Gemstar-TV Guide
International, Inc. *<F8> 121,584 10,972,956
Mattel, Inc. 955,000 9,430,625
Maytag Corporation 249,300 9,504,563
------------
43,785,519
------------
DIVERSIFIED MANUFACTURING - 1.0%
Trinity Industries, Inc. 248,000 4,805,000
------------
DRUGS - 2.4%
American Home Products
Corporation (1)<F9> 135,400 7,336,988
Charles River Laboratories
International, Inc. *<F8> 115,900 3,180,006
Diversa Corporation *<F8> 50,500 1,439,250
------------
11,956,244
------------
ELECTRICAL EQUIPMENT - 4.0%
American Power Conversion
Corporation *<F8> 211,100 5,026,819
Brady Corporation - Class A 74,700 2,161,631
Diebold, Incorporated 186,300 5,262,975
Emerson Electric Co. 74,000 4,897,875
Veeco Instruments Inc. *<F8> 26,600 2,384,025
------------
19,733,325
------------
ELECTRONICS - 3.0%
CTS Corporation 117,600 6,034,350
Harman International Industries,
Incorporated (1)<F9> 101,000 7,751,750
Methode Electronics, Inc. -
Class A 14,700 883,838
------------
14,669,938
------------
ENTERTAINMENT & LEISURE - 0.9%
Metro-Goldwyn-Mayer Inc. *<F8> 53,000 1,358,125
Park Place Entertainment
Corporation *<F8> 203,000 2,981,563
------------
4,339,688
------------
FINANCIAL SERVICES - 4.4%
The Dun & Bradstreet
Corporation 59,500 1,963,500
The John Nuveen Company -
Class A 88,000 3,993,000
Paine Webber Group Inc. 132,900 9,502,350
PNC Financial Services Group 100,500 5,923,219
------------
21,382,069
------------
FOOD, BEVERAGES & TOBACCO - 0.2%
Interstate Bakeries
Corporation 67,300 1,207,194
------------
FURNITURE & FIXTURES - 7.0%
American Woodmark
Corporation 170,400 3,951,150
CompX International, Inc. *<F8> 139,300 3,160,369
Ethan Allen Interiors Inc. 280,150 7,546,541
Furniture Brands
International, Inc. *<F8> 332,900 5,368,012
La-Z-Boy Incorporated 154,400 2,480,050
Shaw Industries, Inc. 563,200 7,004,800
Stanley Furniture
Company, Inc. *<F8> 167,000 4,529,875
------------
34,040,797
------------
HEALTHCARE SERVICES & SUPPLIES - 0.7%
Humana Inc. *<F8> 404,800 3,466,100
------------
INSURANCE - 2.5%
The Allstate Corporation 80,000 2,325,000
CIGNA Corporation 22,000 2,139,500
LandAmerica Financial
Group, Inc. 309,300 7,867,819
------------
12,332,319
------------
MACHINERY - INDUSTRIAL - 5.1%
Ampco-Pittsburgh Corporation 119,500 1,374,250
Baldor Electric Company 126,600 2,484,525
Cascade Corporation 70,300 949,050
CLARCOR Inc. 51,000 1,051,875
Kaydon Corporation 309,700 6,832,756
The Manitowoc Company, Inc. 124,800 2,862,600
SatCon Technology
Corporation *<F8> 63,600 2,202,150
Tecumseh Products Company 42,400 1,643,000
Tecumseh Products Company -
Class A 34,500 1,371,375
Zebra Technologies
Corporation - Class A *<F8> 82,100 4,433,400
------------
25,204,981
------------
MARKETING - 0.9%
ValueVision International, Inc. -
Class A *<F8> 149,500 4,382,219
------------
METALS & MINERALS - 1.2%
AK Steel Holding Corporation 530,000 5,763,750
------------
OIL & GAS SERVICES - 4.6%
ENSCO International
Incorporated 40,000 1,595,000
Rowan Companies, Inc. *<F8> 233,500 7,238,500
Santa Fe International
Corporation 116,900 4,595,631
Tesoro Petroleum Corporation *<F8> 508,400 4,893,350
UTI Energy Corp. *<F8> 109,800 4,090,050
------------
22,412,531
------------
PAPER & FOREST PRODUCTS - 1.9%
Boise Cascade Corporation 318,000 9,500,250
------------
PRINTING & PUBLISHING - 1.0%
The New York Times
Company - Class A 17,000 666,187
The Reader's Digest
Association, Inc. - Class B 121,400 4,218,650
------------
4,884,837
------------
RAILROADS - 0.4%
Florida East Coast Industries, Inc. 47,200 2,059,100
------------
RESTAURANTS - 1.5%
Outback Steakhouse, Inc. *<F8> 65,200 1,495,525
Wendy's International, Inc. 300,000 5,662,500
------------
7,158,025
------------
RETAIL & WHOLESALE TRADE - 7.1%
Brookstone, Inc. *<F8> 94,700 1,237,019
Costco Wholesale Corporation 85,000 2,927,187
Federated Department
Stores, Inc. *<F8> 95,000 2,624,375
J. C. Penney Company, Inc. 885,000 12,390,000
Ross Stores, Inc. 269,000 4,068,625
The Stride Rite Corporation 906,500 5,439,000
The TJX Companies, Inc. 313,000 5,888,312
------------
34,574,518
------------
SAVINGS & LOAN - 0.2%
Brookline Bancorp, Inc. 70,500 832,781
------------
SEMICONDUCTORS - 1.5%
American Superconductor
Corporation *<F8> 84,000 3,564,750
National Semiconductor
Corporation *<F8> 90,000 4,005,000
------------
7,569,750
------------
TELECOMMUNICATIONS SERVICES - 3.4%
AT&T Corp. 50,000 1,575,000
Motorola, Inc. 152,000 5,481,500
Tellabs, Inc. *<F8> 64,500 3,624,094
WorldCom, Inc. *<F8> 166,000 6,059,000
------------
16,739,594
------------
TEXTILES & APPAREL - 1.2%
V. F. Corporation 103,700 2,372,137
The Wet Seal, Inc. - Class A *<F8> 243,900 3,414,600
------------
5,786,737
------------
TRANSPORTATION EQUIPMENT - 1.2%
Arkansas Best Corporation *<F8> 405,700 6,110,856
------------
TRAVEL & RECREATION - 1.1%
Winnebago Industries, Inc. 416,700 5,338,969
------------
US ROYALTY TRUSTS - 0.3%
Texas Pacific Land Trust 32,500 1,287,812
------------
TOTAL COMMON STOCKS
(Cost $340,347,892) 393,508,795
------------
SHORT-TERM INVESTMENTS - 18.1%
MUTUAL FUNDS - 0.2%
Firstar Institutional Money
Market Fund 1,040,192 1,040,192
------------
Principal
Amount
------
U.S. GOVERNMENT AGENCY
OBLIGATIONS - 17.9%
Federal Home Loan Bank:
0.00%, 9/01/2000 $20,400,000 20,400,000
6.30%, 9/08/2000 26,600,000 26,567,415
6.32%, 9/13/2000 17,800,000 17,762,501
Sallie Mae:
0.00%, 9/01/2000 10,000,000 10,000,000
6.20%, 9/06/2000 12,700,000 12,689,064
------------
TOTAL U.S. GOVERNMENT
AGENCY OBLIGATIONS 87,418,980
------------
TOTAL SHORT- TERM INVESTMENTS
(Cost $88,459,172) 88,459,172
------------
TOTAL INVESTMENTS - 98.4%
(COST $428,807,064) 481,967,967
------------
SECURITIES SOLD SHORT - (0.4%)
(PROCEEDS $2,309,008) (2,121,094)
------------
OTHER ASSETS, LESS
LIABILITIES - 2.0% 9,862,521
------------
NET ASSETS - 100.0% $489,709,394
------------
------------
*<F8> Non-income producing security.
(1)<F9> 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 August 31, 2000
Shares Value
------ -----
SECURITIES SOLD SHORT
WHOLESALE & RETAIL TRADE
Boston Chicken, Inc. 39,000 $ 390
Einstein/Noah Bagel Corp. 148,283 10,380
Just For Feet, Inc. 3,500 105
----------
10,875
----------
FINANCIAL SERVICES
Conseco, Inc. 250,100 2,110,219
----------
TOTAL SECURITIES SOLD SHORT
(PROCEEDS $2,309,008) $2,121,094
----------
----------
The accompanying notes are an integral part of the financial statements.
Statement of Assets and Liabilities August 31, 2000
ASSETS:
Investments, at value (cost $428,807,064) $481,967,967
Cash 19,338
Receivable from broker for proceeds on securities sold short 3,455,359
Receivable for investments sold 11,394,058
Capital shares sold 1,356,584
Dividends and interest receivable 556,413
Other assets 18,872
------------
Total Assets 498,768,591
------------
LIABILITIES:
Securities sold short, at value (proceeds of $2,309,008) 2,121,094
Payable for securities purchased 5,291,855
Capital shares redeemed 222,615
12b-1 fee payable 768,788
Payable to Adviser 401,867
Accrued expenses and other liabilities 252,978
------------
Total Liabilities 9,059,197
------------
NET ASSETS $489,709,394
------------
------------
NET ASSETS CONSIST OF:
Capital stock $362,644,428
Accumulated undistributed net realized gain on investments
sold and securities sold short 73,716,149
Net unrealized appreciation on:
Investments 53,160,903
Short positions 187,914
------------
Total Net Assets $489,709,394
------------
------------
CLASS C:
Net Assets $465,651,829
Shares outstanding of beneficial interest, $0.001 par value 27,767,527
Net asset value and offering price per share $16.77
------
------
ADVISER CLASS:
Net Assets $24,057,565
Shares outstanding of beneficial interest, $0.001 par value 1,424,275
Net asset value and offering price per share $16.89
------
------
The accompanying notes are an integral part of the financial statements.
Statement of Operations
For the
year ended
August 31, 2000
---------------
INVESTMENT INCOME:
Interest income $ 3,347,487
Dividend income 3,818,771
-----------
Total investment income 7,166,258
-----------
EXPENSES:
Investment management fee 4,076,772
Distribution expense - Class C 3,974,876
Distribution expense - Adviser Class 25,145
Administration fee 264,075
Shareholder servicing and accounting costs 212,447
Custody fees 62,823
Federal and state registration 92,165
Professional fees 59,896
Reports to shareholders 18,949
Trustees' fees and expenses 19,529
Amortization of organization costs 18,374
Other 42,825
-----------
Total expenses before dividends on short positions 8,867,876
Dividends on short positions 8,320
-----------
Total expenses 8,876,196
-----------
Net investment loss (1,709,938)
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) on:
Long transactions 82,074,948
Short transactions (1,922,827)
Change in unrealized appreciation/depreciation on:
Investments 15,008,292
Short positions (1,237,126)
-----------
Net realized and unrealized gain on investments 93,923,287
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $92,213,349
-----------
-----------
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, 2000 August 31, 1999
--------------- ---------------
OPERATIONS:
Net investment loss $ (1,709,938) $ (2,119,297)
Net realized gain (loss):
Long transactions 82,074,948 63,995,109
Short transactions (1,922,827) 1,504,296
Equity contracts -- 9,212,494
Change in unrealized
appreciation/depreciation on:
Investments 15,008,292 66,371,430
Short positions (1,237,126) (2,053,176)
------------ ------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 92,213,349 136,910,856
DISTRIBUTIONS TO CLASS C SHAREHOLDERS
FROM NET REALIZED GAINS (74,684,260) (12,016,817)
------------ ------------
DISTRIBUTIONS TO ADVISER CLASS
SHAREHOLDERS FROM NET REALIZED GAINS (61,597) --
------------ ------------
NET INCREASE IN NET ASSETS FROM
FUND SHARE TRANSACTIONS (NOTE 6) 123,084,994 19,939,892
------------ ------------
TOTAL INCREASE IN NET ASSETS 140,552,486 144,833,931
NET ASSETS:
Beginning of year 349,156,908 204,322,977
------------ ------------
End of year $489,709,394 $349,156,908
------------ ------------
------------ ------------
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 PERIOD
SEPTEMBER 21, SEPTEMBER 21,
1999++<F11> FOR THE FOR THE FOR THE FOR THE 1995+<F10>
THROUGH YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
2000 2000 1999 1998 1997 1996
-------------- -------------- ---------- ---------- ---------- --------------
ADVISER CLASS CLASS C++<F11>
-------------- --------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE -
BEGINNING OF PERIOD $17.48 $17.43 $10.88 $14.79 $11.21 $10.00
------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS:
Net investment
income (loss) 0.051<F14> (0.07)1<F14> (0.11)1<F14> (0.06)1<F14> (0.05) (0.07)
Net realized and
unrealized gain
(loss) on investments 3.10 3.15 7.31 (0.95) 4.66 1.29
------ ------ ------ ------ ------ ------
Total from investment
operations 3.15 3.08 7.20 (1.01) 4.61 1.22
------ ------ ------ ------ ------ ------
DISTRIBUTIONS FROM
NET REALIZED GAIN
ON INVESTMENTS (3.74) (3.74) (0.65) (2.90) (1.03) (0.01)
------ ------ ------ ------ ------ ------
NET ASSET VALUE -
END OF PERIOD $16.89 $16.77 $17.43 $10.88 $14.79 $11.21
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN:+++<F12> 25.17% 24.64% 67.99% (9.33)% 43.61% 12.22%
Ratios (to average net assets)/
Supplemental Data:
Expenses2<F15> 1.45%*<F13> 2.20% 2.19% 2.25% 2.38% 2.43%*<F13>
Net investment
income (loss) 0.34%*<F13> (0.44)% (0.74)% (0.39)% (0.45)% (0.68)%*<F13>
Interest expense and
dividends on short
positions 0.00%*<F13> 0.00% 0.10% 0.00% -- --
Portfolio turnover rate3<F16> 158.44% 158.44% 179.33% 187.44% 164.92% 139.77%*<F13>
Net assets at end of
period (000 omitted) $24,058 $465,652 $349,157 $204,323 $175,602 $109,005
</TABLE>
+<F10> Commencement of Operations.
++<F11> On September 1, 1999 the Adviser Class Shares went effective and the
existing class of shares was designated Class C Shares. The Adviser
Class first received assets on September 21, 1999.
+++<F12> Total returns do not reflect any deferred sales charge. The total
returns for the periods ending August 31, 1996 and August 31, 2000
have not been annualized.
*<F13> Annualized.
1<F14> Net investment loss per share represents net investment loss divided
by the average shares outstanding throughout the period.
2<F15> The expense ratio excludes interest expense on equity swap contracts
and dividends on short positions. The ratio including interest
expense on equity swap contracts and dividends on short positions
for the period ended August 31, 1999 was 2.29%.
3<F16> Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
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.
The Fund issued a second class of shares, Adviser Class shares, and renamed
the initial class as Class C shares on September 1, 1999. The Adviser Class
shares were initially sold on September 21, 1999 and are subject to expenses
pursuant to the Shareholder Servicing and Distribution Plan described in
Note 5. The Class C shares are subject to a contingent deferred sales charge
("CDSC") for redemptions made within 2 years of purchase, in accordance with
the Fund's prospectus, and expenses pursuant to the Shareholder Servicing
and Distribution Plan described in Note 5. The maximum CDSC is 2.50% of the
original purchase price for Class C shares.
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.
These differences are either temporary or permanent in nature. To the
extent these differences are permanent, reclassifications are made in the
capital accounts in the period that the difference arises. Generally,
distributions are declared annually in December. The Fund may utilize
earnings and profits distributed to shareholders on redemption of shares as
part of the dividend paid deduction.
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 $138,209 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, 2000, purchases and sales of investment securities (excluding securities
sold short and short-term investments) aggregated as follows:
Purchases $545,082,555
Sales 548,615,786
The following balances for the Fund are as of August 31, 2000:
Cost for Net Tax Basis Tax Basis Gross Tax Basis Gross
Federal Income Unrealized Unrealized Unrealized
Tax Purposes Appreciation Appreciation Depreciation
-------------- ------------- --------------- ---------------
$429,699,277 $52,268,690 $69,809,546 $(17,540,856)
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, 2000, the Fund had 0.4% 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.
Upon termination of the contract on November 5, 1998, the Fund realized a
gain of $9,212,494.
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, 2000, the Fund incurred investment
management fees of $4,076,772.
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 PLANS. Olstein & Associates (the "Distributor")
has entered into a distribution and underwriting agreement with the Fund
dated August 18, 1995 (subsequently revised on July 29, 1999 to reflect the
additional class), 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 Shareholder Servicing and Distribution Plans
pursuant to Rule 12b-1 under the 1940 Act (the "12b-1 Plans"). Amounts paid
under the 12b-l Plans 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 Plans for the Class C and Adviser Class shares are 1.00% and 0.25%,
respectively, per annum of the Fund's average daily net assets of Class C
and Adviser Class shares. For the year ended August 31, 2000, fees accrued
by the Fund pursuant to the 12b-1 Plans were $3,974,876 for Class C and
$25,145 for Adviser Class Shares.
During the year ended August 31, 2000, the Fund paid total brokerage
commissions of $909,354 to affiliated broker dealers in connection with
purchases and sales of investment securities.
6. FUND SHARES. At August 31, 2000, there was an unlimited number of shares of
beneficial interest, $0.001 par value, authorized. The following table
summarizes the activity in shares of each class of the Fund:
<TABLE>
YEAR ENDED YEAR ENDED
AUGUST 31, 2000 AUGUST 31, 1999
----------------------------- ------------------------------
CLASS C
SHARES AMOUNT SHARES AMOUNT
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Shares sold 4,415,311 $ 66,098,485 2,100,324 $ 32,590,279
Shares issued to shareholders in
reinvestment of distributions 5,797,480 73,338,117 881,266 11,755,899
Shares redeemed (2,473,080) (37,893,945) (1,737,487) (24,406,286)
---------- ------------ ---------- ------------
Net increase 7,739,711 $101,542,657 1,244,103 $ 19,939,892
------------ ------------
------------ ------------
SHARES OUTSTANDING:
Beginning of period 20,027,816 18,783,713
---------- ----------
End of period 27,767,527 20,027,816
---------- ----------
---------- ----------
</TABLE>
FOR THE PERIOD
SEPTEMBER 21, 1999+<F17>
THROUGH
AUGUST 31, 2000
------------------------------
ADVISER CLASS
SHARES AMOUNT
------------ ------------
Shares sold 1,497,403 $ 22,682,932
Shares issued to shareholders in
reinvestment of distributions 4,865 61,597
Shares redeemed (77,993) (1,202,192)
--------- ------------
Net increase 1,424,275 $ 21,542,337
------------
------------
SHARES OUTSTANDING:
Beginning of period --
---------
End of period 1,424,275
---------
---------
Total Net Increase $123,084,994
------------
------------
+<F17> Commencement of Operations.
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, 2000, 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 auditing standards generally accepted
in the United States. 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,
2000, 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, 2000, 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 accounting
principles generally accepted in the United States.
/s/Ernst & Young LLP
Milwaukee, Wisconsin
September 29, 2000
Tax Information
In early 2000, shareholders received information regarding all distributions
paid to them by the Fund during the fiscal year ended August 31, 2000. The Fund
hereby designates $13,785,360 as a long-term capital gain distribution taxed at
20%.
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, N.A.
425 Walnut Street
Cincinnati, Ohio 45202
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
