THE
OLSTEIN
FUNDS
THE
OLSTEIN
FINANCIAL
ALERT
FUND
SEMI-ANNUAL REPORT
February 29, 2000
THE OLSTEIN FINANCIAL ALERT FUND
President's Message March 21, 2000
OLD ECONOMY/NEW ECONOMY...BLAH, BLAH, BLAH!!
--------------------------------------------
Dear Shareholders:
Although it is not apparent from the general market indexes (especially the
technology heavy NASDAQ Composite Index which year to date is up 13%), more than
three quarters of the stocks in the S&P 500 Index are down approximately 20% or
more from their recent highs. If the 66 technology and telecommunication stocks
are removed from the S&P 500 Index, the 434 remaining S&P 500 Index stocks are
trading at the same low levels seen during the Asian crisis of 1998. The median
price/earnings ratio of the S&P 500 Index, with technology stocks removed, is
about 12 times earnings. That is the same depressed level experienced during
the recession of 1990 and below the lowest point of the 1998 Asian crisis. With
technology stocks included, the S&P 500 Index price/earnings ratio rises to
about 43 times earnings.
A TALE OF TWO STOCK MARKETS
Investors have characterized this tale of two stock markets as a divide between
the old economy stocks (banks, consumer durables, basic materials, etc.) which
are going to be negatively impacted by interest rate increases, and the new
economy stocks (the so-called immune super-charged technology stocks,
telecommunication stocks, biotech stocks, etc.) which will not be impacted. In
our opinion, the split performance between the so-called new economy stocks and
old economy stocks is confusing and lopsided. All references to valuation have
been repressed. The latest battle cry on Wall Street is that the new economy
led by the technology stocks is the only place to invest, regardless of whether
or not the current stock prices have expectations built in that either leaves
little room for error or, in fact, are not achievable.
The subject of risk has been moved to the background. The new economy stocks
are being priced as if there is no risk. The old economy stocks are being
priced as if there is no opportunity. We believe that neither is true and it is
our opinion that if the old economy falters because interest rates rise, the
resulting cutback in capital expenditures and employment at old economy firms
should negatively impact new economy stocks. If old economy companies enter
into a downturn, expenditures for computers, cellular telephones and $90 per
month broadband Internet connections would probably be cut back. Although the
new economy may be currently ignoring the tenets of Economics 101, the joy will
be short lived if the old economy does not come along for the ride.
In addition, investors are ignoring the tangible benefits that accrue to old-
line manufacturers such as General Motors, which are aggressively applying new
technologies, including the Internet, that can lower their manufacturing costs
and improve and modernize their distribution and sales networks. Old-line
manufacturers are probably the biggest beneficiaries of Internet technology
through cost savings. For example, we believe that new technologies can help GM
save as much as $3,000 on a $22,000 automobile while maintaining its current
price structure. In addition, many old economy companies have the resources to
evolve into a force in the new economy. For instance, GM has taken an equity
interest in an independent "business to business" Internet venture that could be
worth about $20.00 per GM share. The partial spin-off of DirecTV (Hughes
Electronics) has helped to raise GM's core earnings to approximately $11.00 per
share and still leaves GM with about $15.00 per share in Hughes stock yet to be
distributed. Thus, we calculate that GM's automobile business is being priced
by the stock market at about $44.00 per share (after deducting GM's remaining
interest in Hughes and its interest in the newly formed "business to business"
purchasing venture). Despite GM's annual free cash flow of about $3 billion and
approximately $11 billion in excess cash, GM is still selling at about four
times current earnings and in our opinion represents an outstanding bargain.
Many investors, who subscribe to the belief that the old economy will continue
to underperform, are deserting mutual funds that hunt bargains based on
deviations between stock market prices and private market values. Those who
believe the new economy/old economy propaganda because it is currently working
(and they do not want to be left at the station) and are making investment
decisions on this theory, are further escalating the split stock market. These
new economy investors are fleeing funds that value companies on a discounted
cash flow and asset model and running to mutual funds that are loading up on a
narrowing base of new technology stocks with high potential growth rates and
stock market momentum. The process becomes self-perpetuating, as new cash flow
pours into momentum mutual funds that focus on new economy stocks. This causes
spike-like price increases in the stocks they buy, attracting more and more
momentum investors.
The split between new economy and old economy stocks should eventually narrow.
Most rallies go harder and farther than anyone envisions, but they also correct
harder and faster than anyone thinks. We are not predicting when this narrowing
will occur, but we believe that it should. The catalyst should be when the
momentum investors, who have been driving the prices of some technology
companies into the stratosphere, realize the inter-relationship of the old and
new economies. The more astute investors will begin to exit the overvalued new
economy stocks looking for bargains with equal potential and less risk. When
investors realize that the old and new economies depend on each other, the rush
to the exits from the concentrated pyramid at the top could get ugly.
Although we understand the optimism surrounding new economy stocks, we prefer to
calculate the earnings assumptions necessary to justify the prices of these
technology stocks, rather than rely on pure stock market momentum and
speculation. If we cannot justify the price, as is the case with many new
economy stocks, we will pass and wait for our opportunity to pay the right
price. Liquidations from conventional value funds are causing price declines in
old economy stocks at prices that we believe over-discounts potential problems.
The Olstein Financial Alert Fund is currently purchasing these stocks at what we
believe are outstanding prices.
PATIENCE PAYS
The internal workings of the marketplace create opportunities for the Fund.
Good value is its own catalyst. Money should eventually start to flow away from
overpriced stocks, to stocks that are not correctly priced. One never knows
when value stocks are going to move, but a good value portfolio manager foresees
a catalyst and waits patiently for the value to be recognized. For example,
last year's Fund performance was helped by the opportunity to buy oil drilling
and service stocks when oil prices plummeted to around $10.00 per barrel during
the 1998 Asian crisis. Pessimism is scary, but we like the prices that
pessimism produces. The catalyst we anticipated at the time, was that oil
exploration was being cut back and the ailing Asian and Latin American economies
would eventually turn, led by a U.S. exported technology revolution which would
create an increased demand for oil. Increased demand for oil at a time of
exploration cutbacks resulted in upward pressure on oil prices. In addition, we
believed that to protect the viability of their economies, which are heavily
dependent on oil prices, the OPEC countries would eventually have to cut back
production. For six months, our oil service stocks lagged the broad market,
negatively impacting the Fund's performance. However, that temporary under-
performance is now a memory. The Fund's oil service stocks have appreciated
approximately 150% during the past 18-months and we believe there is still room
for additional appreciation. Bargain hunters can lag markets for long periods
of time. But when and if the crowd arrives at the door, the speed and size of
the appreciation in the beaten down stocks can be well worth the wait. We also
believe that buying stocks with pessimism already built into their price can
reduce risk when seeking to achieve the Fund's objective of long-term capital
appreciation.
CLASSIFYING MUTUAL FUNDS
Despite the fact that the mutual fund rating services have at least twelve
categories of equity mutual funds, in our opinion, there are only two. The
first category includes all momentum and market psychology funds that react to
money flows in the marketplace. These funds are prepared to take substantial
risk to seek potentially larger rewards and pay little attention to conventional
Wall Street valuation methods. The second category of funds seek to take
advantage of deviations between stock market prices of individual stocks and the
fund's assessment of intrinsic or private market value. This category includes
growth funds, value funds, large cap funds, small cap funds, etc. who use
traditional discounted cash flow methodology to identify undervalued securities.
Funds in the second category, regardless of their stated objective, are seeking
undervalued securities according to cash flow models.
We are not going to evaluate the pros and cons of the latest six-month top
performing mutual funds that we believe fit into the momentum and market
psychology category. We will congratulate their performance and their ability
to assess the current psychology of the masses. However, an investor expecting
meteoric returns from a mutual fund should also be willing to assume the higher
risk involved. For example, in a seven-day period beginning March 13, some
technology and biotech funds dropped 15% or more. Our philosophy states that we
must assess downside risk before upside potential. Sometimes, in the short-term
the Fund's return may seem out of step with the broad market. However, it is
important to note that we measure our performance over 3 to 5-year periods.
Shareholders who do not have this patience are lowering their chances of
benefiting from our investment style.
HOW WE DEFINE VALUE
Stocks represent ownership interests in businesses. It is our job to assess
what we are willing to pay for these businesses. We do not define value
according to whether or not a stock has a low price/earnings ratio, nor do we
look at definitions of value and growth as opposites. Our definition of value
includes growth as part of our calculation and cuts across all artificial
boundaries constructed by Wall Street (such as large cap, small cap, growth,
cyclical, technology, etc). At times, the undervaluation of rapidly growing
companies is greater than more stable companies. We like growth stocks, but
prefer growth at a reasonable price to growth at any price. At other times
basic industry stocks become more undervalued.
We believe that stocks are worth the present value of the free cash flow
generated by the business being valued. Without cash flow prospects, even
though it may be many years into the future, a company's share price should
collapse. Although we are finding most of our values in stocks from the old
economy, we have also located values in the new economy. As we have previously
stated, the new economy is interrelated to the old economy. As new economy
employees acquire wealth, they need banking relationships, homes, furniture,
seek medical treatment, pursue leisure time activities, such as golf and casino
gambling, and purchase cars. Old economy stocks such as Citigroup, PNC Bank,
PaineWebber Group, AK Steel, Callaway Golf and Johnson & Johnson, are all
selling at what we believe to be bargain basement prices. We are also finding
values in new economy stocks such as MCI WorldCom, USA Networks, General Magic
and ValueVision. Although current prices of our new economy stocks may be high
by historical standards, we do not believe these stock prices are discounting
the above average growth in free cash flow that we expect over the next 3 to 5-
years. Knowing when to sell a stock is the most difficult task of a portfolio
manager, who must determine the level of future cash flow needed to justify the
current stock price. The further out into the future one needs to forecast
growth to justify current prices, the more the risk of holding a given security.
Although some new economy stocks may be good companies, the expectations built
into these stocks are eye popping.
THERE IS NO SURE THING
Three years ago, investors believed no price was too high to pay for Coca-Cola,
Gillette, Procter & Gamble and Pfizer. Yet, as the last 18 months have proven,
investor expectations got completely out of step with these valuations,
resulting in sharp corrections and investor disappointment. Similarly, the cult
that has developed over the past five years for "index investing" has started to
spring leaks. The new economy momentum crowd, disappointed with current results
of index funds, has moved its investment interest to a narrower and narrower
pyramid. Multiples of over 100 times earnings are quite common in the
technology sector. Many of the new technology companies have no expectations of
earnings in the foreseeable future.
There is no doubt that the new economy will fundamentally transform our
economic, social and political landscape. However, we do not believe that
investors will earn above average returns by simply investing in an economy-
transforming sector. It is important to identify specific companies within an
economy-transforming sector that can successfully exploit the new technology for
a competitive and profitable advantage. However, it is just as important to pay
the correct price for these companies, in order to achieve superior long-term
reward. One cannot dismiss the entire new economy as being overvalued, as such
a simplistic conclusion could result in missing opportunities in an increasingly
significant part of the market. On the other hand, if you indiscriminately
purchase dot.coms on the belief that a rising Internet tide will lift all
stocks, you may suffer financial consequences.
When I entered the securities industry in the late 1960's, conventional wisdom
stated that investors should purchase IBM stock and hold it forever. Investors
who followed this IBM investment discipline for the 20 years prior to 1973 were
bestowed with meteoric returns. However, nobody alerted the 1972 IBM holders
that the subsequent 20 years would produce negative returns for the IBM cult.
The negative return occurred despite a long-term bull market which started in
1975. The 1972-investor expectations for IBM's future were not realistic.
Investors caught up in the IBM mania failed to identify fundamental changes that
had taken place in the computer industry and IBM.
THE CATALYST TO VALUE RECOGNITION
We do not worry about overvaluation because we believe that a majority of the
stocks in today's market are undervalued. The catalyst that will help to
achieve the values in the so-called "old economy stocks" should be transactions
such as buyouts, acquisitions or going private through a leveraged buyout. The
number of these transactions has started to increase. Private buyout firms,
many of which have shifted their attention to technology ventures, are beginning
to renew their interest in old economy stocks.
The Fund's performance since inception appears below. Olstein & Associates, the
Fund's Investment Manager, looks forward to achieving the Fund's objective of
long-term capital appreciation over the next 3 to 5-years, utilizing the same
philosophy that has been developed over the past 32 years. The opportunities to
apply our philosophy in the current environment are plentiful.
We value our shareholders and look forward to communicating with you in the
future.
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 Class C net asset value
per share, distributions and the value of $10,000 invested in the Fund's Class C
Shares at the time of its inception. (Assumes all distributions were invested
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 12/31/97 $12.81 $2.900 $17,205
9/30/95 10.01 10,010 3/31/98 14.78 19,851
12/31/95 10.25 $0.011 10,261 6/30/98 13.75 18,468
3/31/96 10.87 10,882 9/30/98 11.54 15,499
6/30/96 11.45 11,462 12/31/98 14.05 0.648 19,788
9/30/96 11.70 11,713 3/31/99 14.71 20,717
12/31/96 11.71 1.032 12,760 6/30/99 18.01 25,365
3/31/97 12.23 13,327 9/30/99 16.81 23,675
6/30/97 13.40 14,602 12/31/99 14.63 3.737 26,692
9/30/97 15.83 17,250 3/31/00 15.44 28,170
</TABLE>
*<F1> PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. The value of an
investment will fluctuate so that shares, when redeemed, may be worth
more or less than their original cost. The above chart assumes no
redemptions. Redemptions of Class C shares may be subject to a
contingent deferred sales charge (CDSC) if made within two years of the
investment of such funds. The data in the above chart pertains to the
Fund's Class C share, the Fund's original share class, which has been
sold since the Fund's inception. The average annual total return of the
Fund's Class C shares from inception (9/21/95) and for the one-year
period ended 3/31/00, assuming deduction of the Fund's maximum CDSC for
the one-year period, was 25.68% and 33.47% respectively. The returns of
the Fund's Adviser Class should be higher than the Class C shares because
the shares of both classes are invested in the same portfolio of
securities, but the annual expenses for the Adviser Class are lower than
those of the Class C shares. The Adviser Class does not have a past
performance history because it was only recently created.
This letter should be preceded or accompanied by a current prospectus,
which contains complete details of risks, management fees and expenses.
It should be read carefully before investing. The NASDAQ Composite Index
is an unmanaged, broad-based index of all NASDAQ National Market and
Small Cap stocks. The S&P 500 Index is an unmanaged index created by
Standard & Poor's Corporation that is considered to represent the U.S.
stock market performance in general. Neither the NASDAQ Composite Index,
nor the S&P 500 Index are investment products available for purchase.
The Fund's returns presented herein include operating expenses (such as
management fees, transaction costs, etc.) that reduce returns, while the
return of the NASDAQ Composite Index and the S&P 500 Index do not. An
individual that purchases an investment product that attempts to mimic
the performance of the NASDAQ Composite Index or the S&P 500 Index will
incur expenses such as management fees, transaction costs, etc. that will
reduce returns. The Fund may not maintain a position in some of the
securities mentioned and references to any security are not an investment
recommendation. The information contained herein has been obtained from
sources considered reliable, but no representation is made as to its
completeness or accuracy.
Schedule of Investments February 29, 2000 (Unaudited)
Shares Value
------ -----
COMMON STOCKS - 91.2%
AUTOS & TRUCKS - 5.1%
Arvin Industries, Inc. 108,500 $ 1,993,687
Delphi Automotive Systems
Corporation 130,000 2,169,375
General Motors Corporation (1)<F3> 130,000 9,888,125
Meritor Automotive, Inc. 130,000 1,820,000
Thor Industries, Inc. 172,000 4,396,750
------------
20,267,937
------------
BANKING - 2.2%
The Chase Manhattan
Corporation 16,000 1,274,000
Citigroup Inc. 46,500 2,403,469
PNC Bank Corp. 126,000 4,874,625
------------
8,552,094
------------
BUILDING & HOUSING - 1.6%
Drew Industries Incorporated *<F2> 196,200 1,594,125
Simpson Manufacturing
Co., Inc. *<F2> 91,100 3,860,362
Skyline Corporation 45,000 967,500
------------
6,421,987
------------
BUSINESS MACHINES & SOFTWARE - 3.5%
3Com Corporation *<F2> 25,500 2,499,000
Computer Network Technology
Corporation *<F2> 317,500 7,957,344
General Magic, Inc. *<F2> 215,000 2,244,062
Tektronix, Inc. 17,500 1,015,000
------------
13,715,406
------------
BUSINESS SERVICES - 0.8%
Kelly Services, Inc. - Class A 128,000 3,080,000
------------
COMMUNICATIONS & MEDIA - 8.5%
A. H. Belo Corporation - Class A 103,000 1,326,125
AT&T Corp - Liberty Media
Group - Class A *<F2> 31,000 1,619,750
Adelphia Communications
Corporation - Class A *<F2> 74,500 4,092,844
Cablevision Systems
Corporation - Class A *<F2> 65,000 4,172,187
CBS Corporation*<F2> 38,000 2,263,375
Charter Communications, Inc.*<F2> 105,000 1,844,063
Comcast Corporation - Class A *<F2> 25,000 1,000,000
Fox Entertainment Group,
Inc. - Class A *<F2> 76,500 2,012,906
Four Media Company *<F2> 12,900 185,438
MediaOne Group, Inc. *<F2> 83,000 6,515,500
TV Guide, Inc. - Class A *<F2> 96,000 4,524,000
USA Networks, Inc. *<F2> 116,000 2,602,750
Young Broadcasting Inc. -
Class A *<F2> 56,000 1,351,000
------------
33,509,938
------------
COMPUTERS - 0.8%
Hewlett-Packard Company 23,000 3,093,500
------------
CONSUMER PRODUCTS - 3.5%
American Greetings
Corporation - Class A 318,000 5,485,500
Callaway Golf Company 325,000 3,900,000
Fortune Brands, Inc. 125,000 2,734,375
Maytag Corporation 61,000 1,612,687
------------
13,732,562
------------
DIVERSIFIED MANUFACTURING - 0.2%
NCH Corporation 24,500 970,812
------------
DRUGS - 2.5%
American Home Products
Corporation 228,500 9,939,750
------------
ELECTRICAL EQUIPMENT - 4.2%
Brady Corporation - Class A 74,700 2,026,238
Diebold, Incorporated 215,000 5,267,500
Veeco Instruments Inc. *<F2> 112,600 9,247,275
------------
16,541,013
------------
ELECTRONICS - 2.7%
Harman International Industries,
Incorporated (1)<F3> 130,000 8,051,875
Methode Electronics, Inc. -
Class A 48,000 2,790,000
------------
10,841,875
------------
ENTERTAINMENT & LEISURE - 2.0%
Anchor Gaming *<F2> 47,000 1,956,375
Metro-Goldwyn-Mayer Inc.*<F2> 55,000 1,313,125
Park Place Entertainment
Corporation *<F2> 408,000 4,615,500
------------
7,885,000
------------
FINANCIAL SERVICES - 4.1%
The Dun & Bradstreet
Corporation 170,000 4,451,875
The John Nuveen Company -
Class A 88,000 3,036,000
Paine Webber Group Inc. 225,400 8,621,550
------------
16,109,425
------------
FOOD, BEVERAGES & TOBACCO - 0.6%
Interstate Bakeries
Corporation 103,000 1,178,063
Tootsie Roll Industries, Inc. 37,000 1,098,438
------------
2,276,501
------------
FURNITURE & FIXTURES - 7.0%
American Woodmark
Corporation 206,000 3,399,000
CompX International, Inc. *<F2> 183,000 3,408,375
Ethan Allen Interiors Inc. 300,000 6,993,750
Furniture Brands
International, Inc. *<F2> 134,500 2,160,406
Herman Miller, Inc. 185,800 3,808,900
Shaw Industries, Inc. 369,500 4,688,031
Stanley Furniture
Company, Inc. *<F2> 167,000 2,932,938
------------
27,391,400
------------
HEALTHCARE SERVICES & SUPPLIES - 4.5%
CONMED Corporation *<F2> 99,000 2,722,500
Humana Inc. *<F2> 293,400 1,998,788
Johnson & Johnson 31,500 2,260,125
Oxford Health Plans, Inc. *<F2> 338,000 5,217,875
Universal Health
Services, Inc. 111,000 4,315,125
Varian Medical Systems, Inc. 31,400 1,254,038
------------
17,768,451
------------
INSURANCE - 3.4%
CIGNA Corporation 58,000 4,281,125
Hartford Life, Inc. - Class A 98,200 3,473,825
LandAmerica Financial
Group, Inc. 310,000 5,580,000
------------
13,334,950
------------
MACHINERY - INDUSTRIAL - 3.3%
Ampco-Pittsburgh Corporation 119,500 1,448,938
CLARCOR Inc. 54,000 1,049,625
Kaydon Corporation 147,500 3,392,500
The Manitowoc
Company, Inc. 75,000 2,020,312
Precision Castparts Corp. 166,000 4,284,875
Tecumseh Products Company 25,000 1,007,812
------------
13,204,062
------------
MARKETING - 0.7%
ValueVision International,
Inc. - Class A *<F2> 57,500 2,875,000
------------
METALS & MINERALS - 1.5%
AK Steel Holding Corporation 520,000 4,322,500
NS Group, Inc. *<F2> 150,000 1,753,125
------------
6,075,625
------------
OIL & GAS SERVICES - 8.2%
ENSCO International
Incorporated 60,000 1,815,000
Halliburton Company 87,000 3,322,312
Rowan Companies, Inc. *<F2> 331,500 8,328,938
Santa Fe International
Corporation 162,500 4,661,719
Tesoro Petroleum Corporation *<F2> 422,700 3,909,975
Tidewater Inc. 85,000 2,406,562
UTI Energy Corp. *<F2> 245,000 7,855,313
------------
32,299,819
------------
PAPER & FOREST PRODUCTS - 2.1%
Boise Cascade Corporation 171,500 5,112,844
Champion International
Corporation 59,000 3,053,250
------------
8,166,094
------------
PRINTING & PUBLISHING - 2.8%
Gannett Co., Inc. 33,200 2,164,225
The New York Times
Company - Class A 20,000 845,000
The Reader's Digest
Association, Inc. - Class B 127,400 3,790,150
The Washington Post
Company - Class B 8,800 4,292,200
------------
11,091,575
------------
RAILROADS - 0.5%
Florida East Coast Industries, Inc. 47,200 1,923,400
------------
RESTAURANTS - 2.0%
Outback Steakhouse, Inc.*<F2> 63,200 1,651,100
Tricon Global Restaurants, Inc*<F2> 180,000 4,792,500
Wendy's International, Inc. 94,000 1,480,500
------------
7,924,100
------------
RETAIL - 5.1%
BJ's Wholesale Club, Inc. *<F2> 102,000 3,162,000
Claire's Stores, Inc. 54,500 950,344
J. C. Penney Company, Inc. 500,000 7,875,000
Kmart Corporation*<F2> 280,000 2,467,500
Ross Stores, Inc. 153,000 2,218,500
The Stride Rite Corporation 444,800 2,446,400
Wal-Mart Stores, Inc. 20,000 973,750
------------
20,093,494
------------
SAVINGS & LOAN - 0.2%
Brookline Bancorp, Inc. 75,000 707,812
------------
SEMICONDUCTORS - 1.3%
Intel Corporation (1)<F3> 12,000 1,356,000
National Semiconductor
Corporation *<F2> 49,000 3,681,125
------------
5,037,125
------------
TELECOMMUNICATIONS SERVICES - 3.0%
AT&T Corp. 66,000 3,262,875
MCI WorldCom, Inc. *<F2> 186,000 8,300,250
TALK.com, Inc. *<F2> 5,000 84,375
------------
11,647,500
------------
TEXTILES & APPAREL - 0.9%
The Wet Seal, Inc. - Class A *<F2> 336,600 3,471,187
------------
TRANSPORTATION EQUIPMENT - 1.3%
Arkansas Best Corporation *<F2> 383,400 3,618,337
Coachmen Industries, Inc. 110,300 1,323,600
------------
4,941,937
------------
TRAVEL & RECREATION - 0.8%
Hilton Hotels Corporation 200,000 1,400,000
Hotel Reservations Network,
Inc. - Class A *<F2> 16,000 416,000
Winnebago Industries, Inc. 71,000 1,517,625
------------
3,333,625
------------
US ROYALTY TRUSTS - 0.3%
Texas Pacific Land Trust 32,500 1,180,156
------------
TOTAL COMMON STOCKS
(Cost $339,039,586) 359,405,112
------------
SHORT-TERM INVESTMENTS - 8.5%
MUTUAL FUNDS - 0.3%
Firstar Institutional Money
Market Fund 1,115,379 1,115,379
------------
Principal
---------
U.S. GOVERNMENT AGENCY
OBLIGATIONS - 8.2%
Federal Home Loan Bank
0.00%, 3/01/2000 $14,000,000 14,000,000
Fannie Mae
5.43%, 3/02/2000 16,200,000 16,197,556
Federal Home Loan
Mortgage Corporation (1)<F3>
5.58%, 3/14/2000 2,000,000 1,995,970
------------
TOTAL U.S. GOVERNMENT
AGENCY OBLIGATIONS 32,193,526
------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $33,308,905) 33,308,905
------------
TOTAL INVESTMENTS - 99.7%
(COST $372,348,491) 392,714,017
------------
SECURITIES SOLD SHORT - (0.1%)
(PROCEEDS $898,177) (349,630)
OTHER ASSETS, LESS
LIABILITIES - 0.4% 1,573,212
------------
NET ASSETS - 100.0% $393,937,599
------------
------------
*<F2> Non-income producing security.
(1)<F3> All or a portion of the securities have been committed as collateral
for open short positions.
The accompanying notes are an integral part of the financial statements.
Schedule of Securities Sold Short February 29, 2000 (Unaudited)
Shares Value
------ -----
SECURITIES SOLD SHORT
SERVICES
Ariel Corporation 30,000 $266,250
--------
WHOLESALE & RETAIL TRADE
Boston Chicken, Inc. 39,000 4,290
Einstein/Noah Bagel Corp. 148,283 78,775
Just For Feet, Inc. 3,500 315
--------
TOTAL WHOLESALE & RETAIL TRADE 83,380
--------
TOTAL SECURITIES SOLD SHORT
(PROCEEDS $898,177) $349,630
--------
--------
The accompanying notes are an integral part of the financial statements.
Statement of Assets and Liabilities February 29, 2000 (Unaudited)
ASSETS:
Investments, at value (cost $372,348,491) $392,714,017
Receivable from broker for proceeds on securities sold short 1,663,726
Receivable for investments sold 11,227,878
Capital shares sold 723,415
Dividends and interest receivable 470,509
Other receivables 1,652
Organization costs, net of accumulated amortization 5,687
Other assets 35,314
------------
Total Assets 406,842,198
------------
LIABILITIES:
Securities sold short, at value (proceeds of $898,177) 349,630
Payable for securities purchased 10,386,145
Capital shares redeemed 1,041,641
12b-1 fee payable 608,598
Payable to Adviser 311,531
Accrued expenses and other liabilities 207,054
------------
Total Liabilities 12,904,599
------------
NET ASSETS $393,937,599
------------
------------
NET ASSETS CONSIST OF:
Capital stock $336,302,072
Accumulated undistributed net realized gain on investments
sold and securities sold short 36,721,454
Net unrealized appreciation on:
Investments 20,365,526
Short positions 548,547
------------
Total Net Assets $393,937,599
------------
------------
CLASS C:
Net Assets $385,151,706
Shares outstanding of beneficial interest, $0.001 par value 27,055,187
Net asset value and offering price per share $14.24
------
------
CLASS Y:
Net Assets $8,785,893
Shares outstanding of beneficial interest, $0.001 par value 615,123
Net asset value and offering price per share $14.28
------
------
The accompanying notes are an integral part of the financial statements.
Statement of Operations
For the
Six Months Ended
February 29, 2000
-----------------
(Unaudited)
INVESTMENT INCOME:
Interest income $ 1,426,867
Dividend Income 1,347,670
-----------
Total investment income 2,774,537
-----------
EXPENSES:
Investment advisory fee 1,848,628
Administration fee 121,105
Shareholder servicing and accounting costs 98,451
Custody fees 25,728
Federal and state registration 54,000
Professional fees 37,564
Reports to shareholders 7,862
Trustees' fees and expenses 10,065
Amortization of organization costs 12,687
Distribution expense - Class C 1,826,938
Distribution expense - Class Y 5,423
Other 22,328
-----------
Total expenses before dividends on short positions 4,070,779
Dividends on short positions 2,820
-----------
Total expenses 4,073,599
-----------
Net investment loss (1,299,062)
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) on:
Long transactions 42,531,355
Short transactions (2,094,204)
Change in unrealized appreciation/depreciation on:
Investments (17,787,085)
Short positions (876,493)
-----------
Net realized and unrealized gain on investments 21,773,573
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $20,474,511
-----------
-----------
The accompanying notes are an integral part of the financial statements.
Statements of Changes in Net Assets
For the For the
Six Months Ended Year Ended
February 29, 2000 August 31, 1999
----------------- ---------------
(Unaudited)
OPERATIONS:
Net investment loss $ (1,299,062) $ (2,119,297)
Net realized gain (loss):
Long transactions 42,531,355 63,995,109
Short transactions (2,094,204) 1,504,296
Equity contracts -- 9,212,494
Change in unrealized appreciation/
depreciation on:
Investments (17,787,085) 66,371,430
Short positions (876,493) (2,053,176)
------------ ------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 20,474,511 136,910,856
------------ ------------
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) 99,052,037 19,939,892
------------ ------------
TOTAL INCREASE IN NET ASSETS 44,780,691 144,833,931
NET ASSETS:
Beginning of year 349,156,908 204,322,977
------------ ------------
End of year $393,937,599 $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
FOR THE SEPTEMBER 21, SEPTEMBER 21,
SIX MONTHS 1999++<F5> FOR THE FOR THE FOR THE 1995+<F4>
ENDED THROUGH YEAR ENDED YEAR ENDED YEAR ENDED THROUGH
FEBRUARY 29, FEBRUARY 29, AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
2000 2000 1999 1998 1997 1996
------------- ------------- ---------- ---------- ---------- --------------
CLASS C++<F5> ADVISER CLASS
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE -
BEGINNING OF PERIOD $17.43 $17.48 $10.88 $14.79 $11.21 $10.00
------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS:
Net investment
income (loss) (0.05)1<F8> 0.00 (0.11)1<F8> (0.06)1<F8> (0.05) (0.07)
Net realized and
unrealized gain
(loss) on investments 0.60 0.54 7.31 (0.95) 4.66 1.29
------ ------ ------ ------ ------ ------
Total from investment
operations 0.55 0.54 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 $14.24 $14.28 $17.43 $10.88 $14.79 $11.21
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN:++<F6> 5.83% 6.13% 67.99% (9.33)% 43.61% 12.22%
Ratios (to average net assets)/
Supplemental Data:
Expenses2<F9> 2.21%*<F7> 1.46%*<F7> 2.19% 2.25% 2.38% 2.43%*<F7>
Net investment
income (loss) (0.71)%*<F7> 0.07%*<F7> (0.74)% (0.39)% (0.45)% (0.68)%*<F7>
Interest expense and
dividends on short
positions 0.00%*<F7> 0.00%*<F7> 0.10% 0.00% -- --
Portfolio turnover rate3<F10> 74.96% 74.96% 179.33% 187.44% 164.92% 139.77%*<F7>
NET ASSETS AT END OF
PERIOD (000 OMITTED) $385,152 $8,786 $349,157 $204,323 $175,602 $109,005
</TABLE>
+<F4> Commencement of Operations.
++<F5> On September 1, 1999 the Adviser Class Shares were effective and the
initial class of shares were named Class C Shares. The Adviser Class
first received assets on September 21, 1999.
++<F6> Total returns do not reflect any deferred sales charge. The total
return for the periods ending August 31, 1996 and February 29, 2000
have not been annualized.
*<F7> Annualized.
1<F8> Net investment loss per share represents net investment loss divided
by the average shares outstanding throughout the period.
2<F9> 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<F10> 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 (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.
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.
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.
Generally, 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 $114,284 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 29, 2000, purchases and sales of investment securities (excluding
securities sold short and short-term investments) aggregated as follows:
Purchases $275,243,693
Sales 241,088,485
The following balances for the Fund are as of February 29, 2000:
Cost for Net Tax Basis Tax Basis Gross Tax Basis Gross
Federal Income Unrealized Unrealized Unrealized
Tax Purposes Appreciation Appreciation Depreciation
-------------- ------------- --------------- ---------------
$372,596,637 $20,117,380 $55,546,418 $(35,429,038)
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 29, 2000, the Fund had 0.1% 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 29, 2000, the Fund incurred
investment management fees of $1,848,628.
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. For the six
months ended February 29, 2000, fees accrued by the Fund pursuant to the
12b-1 Plans were $1,826,938 for Class C and $5,423 for Adviser Class Shares.
During the six months ended February 29, 2000, the Fund paid total brokerage
commissions of $472,324 to affiliated broker dealers in connection with
purchases and sales of investment securities.
6. FUND SHARES. At February 29, 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 the Fund:
SIX MONTHS ENDED YEAR ENDED
FEBRUARY 29, 2000 AUGUST 31, 1999
----------------------- -------------------------
CLASS C
SHARES AMOUNT SHARES AMOUNT
---------- ----------- ---------- ------------
Shares sold 2,479,954 $35,591,398 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 (1,250,063) (18,618,512) (1,737,487) (24,406,286)
---------- ----------- ---------- ------------
Net increase 7,027,371 $90,311,003 1,244,103 $ 19,939,892
----------- ------------
----------- ------------
SHARES OUTSTANDING:
Beginning of period 20,027,816 18,783,713
---------- ----------
End of period 27,055,187 20,027,816
---------- ----------
---------- ----------
SIX MONTHS ENDED
FEBRUARY 29, 2000
-------------------
ADVISER CLASS
SHARES AMOUNT
------- -----------
Shares sold 610,965 $ 8,689,601
Shares issued to
shareholders in
reinvestment of
distributions 4,866 61,597
Shares redeemed (708) (10,164)
------- -----------
Net increase 615,123 $ 8,741,034
-----------
-----------
SHARES OUTSTANDING:
Beginning of period --
-------
End of period 615,123
-------
-------
Total Net Increase $99,052,037
-----------
-----------
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.
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
