O'SHAUGHNESSY CORNERSTONE GROWTH FUND O'SHAUGHNESSY CORNERSTONE VALUE FUND November 21, 1999 Dear Fellow Shareholders, Enclosed is the annual report for the O'Shaughnessy Cornerstone Growth and Cornerstone Value Funds. The report contains financial statements for the Funds during the year ended September 30, 1999, as well as the Funds' portfolios on that date. For the one-year period ended September 30, 1999 our Cornerstone Growth and Cornerstone Value Funds had returns of 29.15% and 17.12%, respectively. Obviously, we are pleased with the performance of our Cornerstone Funds over this past year. The market recovery in the fall of 1998 fueled Cornerstone Growth's performance, as the fund was 100% committed to equities when the market surged. Cornerstone Value's performance, on the other hand, was bolstered by the protection high dividend yielding stocks provided during the late summer 1998 market correction. The Fund also benefited from the rally experienced by large value stocks in the early summer of 1999. Those of you who were shareholders a year ago may recall the turbulence we faced during the third quarter of 1998, and the challenge this presented to staying the course. In my letter then, I reminded you to remain focused on the long-term, because I strongly believe that's where the biggest rewards lay for patient, intelligent investors. As I've said many times before, focusing on the short-term is a dangerous and destructive investment habit, which usually leads to unnecessary despair in downturns and often-unrealistic optimism in rising markets. Investors focusing only on Cornerstone Growth's performance in August 1988 would be tempted to run for the hills--but that would mean missing its rebound and strong performance over the next 12 months. To stay the course, we must constantly remind ourselves of our goals, and why we're investing in the first place--usually for our retirement or our children's education. In most circumstances, these are events that are at least five to ten years away. As always, I hope that together, we can reach our long-term goals by staying the course and sticking with our time-tested investment strategies. Sincerely, /s/ James P. O'Shaughnessy James P. O'Shaughnessy The Cornerstone Growth Fund's and Cornerstone Value Fund's average annual total returns from inception on November 1, 1996 through September 30, 1999 were 12.68% and 8.89%, respectively. Performance figures of the Funds represent past performance and are not indicative of future performance. Share values will fluctuate so that an investor's shares, when redeemed, may be worth more or less than the original investment. Strategy Indexing, Cornerstone Growth and Cornerstone Value are trademarks of O'Shaughnessy Capital Management, Inc. U.S. Patent number 5,978,778. The Fund is distributed by First Fund Distributors, Inc., Phoenix, AZ. Member NASD. 2 O'SHAUGHNESSY CORNERSTONE GROWTH FUND Comparison of the change in value of a $10,000 investment in the O'Shaughnessy Cornerstone Growth Fund versus the S&P 500 Composite Stock Price Index, the Lipper Small Cap Growth Index and the Russell 2000 Index O'Shaughnessy Lipper Russell Cornerstone Small Cap 2000 Growth Fund S&P 500 Growth Index Index ----------- ------- ------------ ----- 1-Nov-96 10,000 10,000 10,000 10,000 31-Dec-96 10,073 10,560 10,287 10,678 31-Mar-97 9,753 10,842 9,061 10,127 30-Jun-97 11,864 12,729 10,708 11,764 30-Sep-97 15,305 13,684 12,504 13,510 31-Dec-97 13,229 14,080 11,442 13,051 31-Mar-98 15,000 16,041 12,734 14,397 30-Jun-98 15,498 16,570 12,268 13,739 30-Sep-98 11,077 14,921 9,342 10,957 31-Dec-98 13,716 18,119 11,552 12,744 31-Mar-99 12,674 19,023 11,176 12,053 30-Jun-99 14,723 20,366 12,769 13,928 30-Sep-99 14,306 19,093 13,000 13,047 Past performance is not predictive of future performance. The S&P 500 is a broad market-weighted average of U.S. blue-chip companies. The Lipper Small Cap Growth Index is comprised of mutual funds that invest at least 75% of equity assets in companies with market capitalizations of less than 250% of the dollar-weighted market capitalization of the S&P Small-Cap 600 index and have an above average price-to-earnings ratio, price-to-book ratio and three year earnings growth. The Russell 2000 tracks the 2000 smallest stocks in the Russell 3000. The indices are unmanaged and include reinvested dividends. 3 O'SHAUGHNESSY CORNERSTONE VALUE FUND Comparison of the change in value of a $10,000 investment in the O'Shaughnessy Cornerstone Value Fund versus the S&P 500 Composite Stock Price Index and the Lipper Multi-Cap Value Index O'Shaughnessy Lipper Cornerstone Multi-Cap Value Fund S&P 500 Value Index ---------- ------- ----------- 1-Nov-96 10,000 10,000 10,000 31-Dec-96 10,028 10,560 10,629 31-Mar-97 9,818 10,842 10,809 30-Jun-97 10,729 12,729 12,264 30-Sep-97 11,521 13,684 13,490 31-Dec-97 11,562 14,080 13,490 31-Mar-98 12,934 16,041 15,031 30-Jun-98 12,253 16,570 14,765 30-Sep-98 11,023 14,921 12,520 31-Dec-98 12,324 18,119 14,370 31-Mar-99 12,519 19,023 14,474 30-Jun-99 14,244 20,366 16,184 30-Sep-99 12,910 19,093 14,444 Past performance is not predictive of future performance. The S&P 500 is a broad market-weighted average of U.S. blue-chip companies. The Lipper Multi-Cap Value Index is comprised of mutual funds that invest in a variety of market capitalization ranges, without concentrating 75% or more of net assets in any one capitalization range over an extended period of time and have a below average price-to-earning ratio, price-to-book ratio and three year growth figure. The indices are unmanaged and include reinvested dividends. 4 O'SHAUGHNESSY CORNERSTONE GROWTH FUND TOP TEN PORTFOLIO HOLDINGS at September 30, 1999 - -------------------------------------------------------------------------------- Percent of Net Assets - -------------------------------------------------------------------------------- 1) Echostar Communications Corporation .................... 7.01% 2) Optical Coating Laboratory, Inc. ....................... 6.03% 3) Calpine Corporation .................................... 5.87% 4) Best Buy Co., Inc. ..................................... 3.58% 5) Insituform Technologies, Inc. .......................... 3.22% 6) Gateway 2000, Inc. ..................................... 3.04% 7) Corel Corporation ...................................... 2.90% 8) Apple Computer, Inc. ................................... 2.82% 9) Winnebago Industries, Inc. ............................. 2.74% 10) The Topps Company, Inc. ................................ 2.72% O'SHAUGHNESSY CORNERSTONE VALUE FUND TOP TEN PORTFOLIO HOLDINGS at September 30, 1999 - -------------------------------------------------------------------------------- Percent of Net Assets - -------------------------------------------------------------------------------- 1 ) Anglo American Corporation of South Africa Ltd. ....... 3.88% 2 ) British Steel PLC ..................................... 3.17% 3 ) Compania Anonima Nacional Telefonos de Venezuela ...... 2.93% 4 ) Rio Tinto plc ......................................... 2.92% 5 ) Telefonos de Mexico ................................... 2.87% 6 ) Occidental Petroleum Corporation ...................... 2.66% 7 ) Atlantic Richfield Company ............................ 2.59% 8 ) Minnesota Mining and Manufacturing Company ............ 2.56% 9 ) Imperial Petroleum, Inc. .............................. 2.56% 10 ) The Dow Chemical Company .............................. 2.51% 5 O'SHAUGHNESSY CORNERSTONE GROWTH FUND PORTFOLIO OF INVESTMENTS at September 30, 1999 - -------------------------------------------------------------------------------- Shares COMMON STOCK: 99.44% Market Value - -------------------------------------------------------------------------------- ADVERTISING: 0.67% 212,100 E4L, Inc.* .......................................... $ 808,631 ------------ AIRLINES: 1.30% 83,600 Amtran, Inc.*........................................ 1,567,500 ------------ APPAREL: 2.61% 110,900 Quicksilver, Inc.* .................................. 2,023,925 60,500 Tropical Sportswear Int'l Corporation* .............. 1,126,813 ------------ 3,150,738 ------------ COMPUTERS: 9.71% 53,700 Apple Computer, Inc.* ............................... 3,399,881 45,500 CDW Computer Centers, Inc.* ......................... 2,223,812 34,500 Computer Sciences Corporation* ...................... 2,425,781 82,600 Gateway 2000, Inc.* ................................. 3,670,537 ------------ 11,720,011 ------------ COSMETICS/PERSONAL CARE: 1.71% 53,000 The Estee Lauder Companies Inc. ..................... 2,070,313 ------------ DISTRIBUTION/WHOLESALE: 1.23% 82,800 Miami Computer Supply Corporation* .................. 1,485,225 ------------ ELECTRIC: 5.87% 83,400 Calpine Corporation* ................................ 7,094,213 ------------ ELECTRONICS: 8.61% 53,500 Flextronics International Limited* .................. 3,113,031 79,100 Optical Coating Laboratory, Inc. .................... 7,282,144 ------------ 10,395,175 ------------ ENGINEERING & CONSTRUCTION: 5.91% 59,800 Granite Construction Incorporated ................... 1,558,538 155,400 Insituform Technologies, Inc.* ...................... 3,885,000 52,300 Jacobs Engineering Group Inc.* ...................... 1,699,750 ------------ 7,143,288 ------------ 6 O'SHAUGHNESSY CORNERSTONE GROWTH FUND PORTFOLIO OF INVESTMENTS at September 30, 1999, Continued - -------------------------------------------------------------------------------- Shares Market Value - -------------------------------------------------------------------------------- FOOD: 3.15% 36,400 Safeway Inc.* ........................................ $ 1,385,475 177,100 The Grand Union Company* ............................. 2,418,522 ------------ 3,803,997 ------------ HEALTH CARE: 1.22% 25,900 Wellpoint Health Networks Inc.* ...................... 1,476,300 ------------ HOME BUILDERS: 1.97% 47,200 NVR, Inc.* ........................................... 2,383,600 ------------ HOME FURNISHINGS: 1.00% 36,300 Maytag Corporation* .................................. 1,209,244 ------------ INSURANCE: 3.45% 38,000 LandAmerica Financial Group, Inc. .................... 750,500 46,550 Reinsurance Group of America, Incorporated ........... 1,195,753 73,000 Stewart Information Services Corporation ............. 1,336,813 66,200 The First American Financial Corporation ............. 885,425 ------------ 4,168,491 ------------ MACHINERY -- CONSTRUCTION & MINING: 1.46% 72,900 Astec Industries, Inc.* .............................. 1,758,712 ------------ MACHINERY -- DIVERSIFIED: 1.62% 77,700 Specialty Equipment Companies, Inc.* ................. 1,961,925 ------------ MEDIA: 2.14% 61,300 Viacom Inc., Class B* ................................ 2,589,925 ------------ MISCELLANEOUS MANUFACTURING: 1.19% 81,160 Myers Industries, Inc. 1,440,590 ------------ MOBILE HOME BUILDERS: 5.24% 123,850 Monaco Coach Corporation* ............................ 3,018,844 138,400 Winnebago Industries, Inc. ........................... 3,312,950 ------------ 6,331,794 ------------ 7 O'SHAUGHNESSY CORNERSTONE GROWTH FUND PORTFOLIO OF INVESTMENTS at September 30, 1999, Continued - -------------------------------------------------------------------------------- Shares Market Value - -------------------------------------------------------------------------------- PHARMACEUTICALS: 5.05% 63,900 Alpharma Inc., Class A................................ $ 2,256,469 92,766 Bindley Western Industries, Inc....................... 1,327,713 32,100 Express Scripts, Inc.*................................ 2,511,825 ------------ 6,096,007 ------------ RESTAURANT: 1.74% 108,000 Ruby Tuesday, Inc..................................... 2,106,000 ------------ RETAIL: 17.02% 56,900 AnnTalor, Inc.*....................................... 2,325,788 69,700 Best Buy Co., Inc.*................................... 4,325,756 78,600 Brinker International, Inc.* ........................ 2,132,025 31,000 Costco Companies, Inc.*............................... 2,232,000 41,600 CVS Corporation....................................... 1,697,800 156,100 Musicland Stores Corporation*......................... 1,365,875 126,800 Sonic Automotive, Inc.*............................... 1,648,400 78,400 The TJX Companies, Inc................................ 2,200,100 54,900 Wal-Mart Stores, Inc.................................. 2,611,181 ------------ 20,538,925 ------------ SOFTWARE: 2.90% 472,400 Corel Corporation* ................................... 3,498,712 ------------ TELECOMMUNICATION EQUIPMENT: 0.65% 56,700 Superior TeleCom Inc. ................................ 790,256 ------------ TELECOMMUNICATIONS: 7.02% 93,200 Echostar Communications Corporation* ................. 8,463,725 ------------ TEXTILES: 0.89% 54,200 Mohawk Industries, Inc.* ............................. 1,080,613 ------------ TOYS/GAMES/HOBBIES: 2.72% 437,400 The Topps Company, Inc.* ............................. 3,280,500 ------------ 8 O'SHAUGHNESSY CORNERSTONE GROWTH FUND PORTFOLIO OF INVESTMENTS at September 30, 1999, Continued - -------------------------------------------------------------------------------- Shares/Principal Amount Market Value - -------------------------------------------------------------------------------- TRANSPORTATION: 1.39% 48,300 Landstar System, Inc.*............................... $ 1,678,425 ------------ Total Common Stocks (Cost $112,267,992): 99.44%...... 120,092,835 ------------ SHORT-TERM INVESTMENT: 0.57% $ 684,755 Firstar Bank Demand Note 5.1300%, due 10/1/99 (cost $684,755)................. 684,755 ------------ Total Investment in Securities (cost $112,952,747): 100.01% 120,777,590 Liabilities less Other Assets: -0.01%................ (5,365) ------------ Total Net Assets: 100.0%............................. $120,772,225 ============ * Non-income producing security. See Notes to Financial Statements. 9 O'SHAUGHNESSY CORNERSTONE VALUE FUND PORTFOLIO OF INVESTMENTS at September 30, 1999 - -------------------------------------------------------------------------------- Shares COMMON STOCK: 98.65% Market Value - -------------------------------------------------------------------------------- AUTO MANUFACTURERS: 1.72% 9,000 Ford Motor Company .................................... $ 451,688 ------------ AUTO PARTS & EQUIPMENT: 1.83% 13,000 Dana Corporation ...................................... 482,625 ------------ BANKS: 13.54% 10,200 Banc One Corporation .................................. 355,087 8,600 BankAmerica Corporation ............................... 478,912 13,500 BankBoston Corporation ................................ 585,562 8,600 First Union Corporation ............................... 305,838 16,300 KeyCorp ............................................... 420,744 6,800 National Australia Bank Ltd. .......................... 501,925 9,900 PNC Bank Corp. ........................................ 521,606 12,100 Summit Bancorp ........................................ 392,494 ------------ 3,562,168 ------------ BEVERAGES: 1.78% 11,300 Diageo PLC ............................................ 468,244 ------------ CHEMICALS: 4.24% 11,400 Eastman Chemical Company .............................. 456,000 5,800 The Dow Chemical Company .............................. 659,025 ------------ 1,115,025 ------------ DISTRIBUTION/WHOLESALE: 1.58% 15,600 Genuine Parts Company ................................. 414,375 ------------ FINANCIAL SERVICES: 1.73% 11,200 Union Planters Corporation ............................ 456,400 ------------ FOOD: 3.04% 6,600 General Mills, Inc. ................................... 535,425 17,700 Nabisco Group Holdings Corp. .......................... 265,500 ------------ 800,925 ------------ FOREST PRODUCTS & PAPER: 4.17% 19,400 Westvaco Corporation .................................. 497,125 10,400 Weyerhaeuser Company .................................. 599,300 ------------ 1,096,425 ------------ 10 O'SHAUGHNESSY CORNERSTONE VALUE FUND PORTFOLIO OF INVESTMENTS at September 30, 1999, Continued - -------------------------------------------------------------------------------- Shares Market Value - -------------------------------------------------------------------------------- HOLDING COMPANIES -- DIVERSIFIED: 1.79% 27,700 Tomkins PLC ........................................ $ 470,900 ------------ HOUSEHOLD PRODUCTS/WARES: 2.04% 16,600 Fortune Brands, Inc. ............................... 535,350 ------------ INSURANCE: 2.86% 12,300 SAFECO Corporation .................................. 344,400 14,800 The St. Paul Companies, Inc. ...................... 407,000 ------------ 751,400 ------------ IRON/STEEL: 8.64% 24,700 Allegheny Teledyne Incorporated ................... 416,812 18,277 Anglo American Corporation of South Africa Ltd. .... 1,021,227 32,400 British Steel PLC* .................................. 834,300 ------------ 2,272,339 ------------ MACHINERY -- DIVERSIFIED: 2.29% 15,600 Deere & Company ..................................... 603,525 ------------ MINING: 2.91% 10,800 Rio Tinto PLC ..................................... 766,800 ------------ MISCELLANEOUS MANUFACTURING: 5.49% 10,900 Cooper Industries, Inc. ............................ 509,575 7,000 Minnesota Mining and Manufacturing Company .......... 672,438 15,400 Tenneco Inc. ........................................ 261,800 ------------ 1,443,813 ------------ OIL & GAS PRODUCERS: 22.70% 7,700 Atlantic Richfield Company........................... 682,412 5,433 BP Amoco ADR.......................................... 602,044 6,300 Chevron Corporation ................................. 559,125 32,300 Imperial Petroleum, Inc............................... 672,244 30,300 Occidental Petroleum Corporation..................... 700,688 12,000 Phillips Petroleum Company........................... 585,000 13,900 Shell Transport and Trading Company.................. 632,450 14,600 Sunoco, Inc........................................... 399,675 9,800 Texaco Inc........................................... 618,625 17,700 USX-Marathon Group.................................... 517,725 ------------ 5,969,988 ------------ 11 O'SHAUGHNESSY CORNERSTONE VALUE FUND PORTFOLIO OF INVESTMENTS at September 30, 1999, Continued - -------------------------------------------------------------------------------- Shares Market Value - -------------------------------------------------------------------------------- PACKAGING & CONTAINERS: 1.56% 16,900 Crown Cork & Seal Company, Inc........................ $ 409,825 ------------ RETAIL: 1.45% 11,100 J. C. Penny Company................................... 381,563 ------------ TELEPHONE: 9.40% 28,700 Compania Anonima Nacional Telefonos de Venezuela...... 769,519 17,800 Telefonica de Argentina S.A........................... 469,475 10,600 Telefonos de Mexico................................... 755,250 8,400 U S WEST, Inc......................................... 479,325 ------------ 2,473,569 ------------ TOBACCO: 1.89% 9,900 Philip Morris Companies Inc........................... 338,456 5,866 RJ Reynolds Tobacco Holdings, Inc..................... 158,382 ------------ 496,838 ------------ TRANSPORTATION: 2.00% 12,400 CSX Corporation ..................................... 525,450 ------------ Total Common Stocks (Cost $26,850,423): 98.65% ....... 25,949,235 ------------ Total Investment in Securities (cost $26,850,423): 98.65% ......................... 25,949,235 Other Assets less Liabilities: 1.35% ................. 355,815 ------------ Total Net Assets: 100.0% ............................ $ 26,305,050 ============ *Non-income producing security. See Notes to Financial Statements. 12 O'SHAUGHNESSY CORNERSTONE GROWTH FUND O'SHAUGHNESSY CORNERSTONE VALUE FUND STATEMENTS OF ASSETS AND LIABILITIES at September 30, 1999 - -------------------------------------------------------------------------------- Cornerstone Cornerstone Growth Fund Value Fund ------------- ------------ ASSETS Investments in securities, at value (identified cost $112,952,747 and $26,850,423 respectively) $ 120,777,590 $ 25,949,235 Receivables: Portfolio securities sold ................... -- 528,239 Fund shares sold ............................ 107,375 8,160 Dividends and interest ...................... 21,555 97,720 Deferred organization costs .................... 10,532 10,532 Prepaid expenses and other ..................... 39,497 21,829 ------------- ------------ Total assets .............................. 120,956,549 26,615,715 ------------- ------------ LIABILITIES Payables: Fund shares repurchased ..................... 41,572 10,560 Funds advanced by custodian ................. -- 256,741 Advisory fee ................................ 75,012 16,898 Administration fee .......................... 9,486 3,397 Accrued expenses ............................... 58,254 23,069 ------------- ------------ Total liabilities ......................... 184,324 310,665 ------------- ------------ NET ASSETS ........................................ $ 120,772,225 $ 26,305,050 ============= ============ Net asset value, offering and redemption price per share ($120,772,225/9,773,751 and $26,305,050/2,210,552 shares outstanding; respectively; 25,000,000,000 shares (par value $.0001) authorized) ............... $ 12.36 $ 11.90 ============= ============ COMPONENTS OF NET ASSETS Paid-in capital ................................ $ 123,664,912 $ 24,820,527 Undistributed net investment income ............ -- 565,497 Accumulated net realized gain (loss) on investment transactions ...................... (10,717,530) 1,820,214 Net unrealized appreciation (depreciation) of investments ............................... 7,824,843 (901,188) ------------- ------------ Net assets .................................. $ 120,772,225 $ 26,305,050 ============= ============ See Notes to Financial Statements. O'SHAUGHNESSY CORNERSTONE GROWTH FUND O'SHAUGHNESSY CORNERSTONE VALUE FUND STATEMENTS OF OPERATIONS Year Ended September 30, 1999 - -------------------------------------------------------------------------------- Cornerstone Cornerstone Growth Fund Value Fund ----------- ----------- INVESTMENT INCOME Income Dividends (net of foreign withholding tax of $0 and $23,142, respectively) .................. $ 215,083 $ 968,020 Interest ........................................... 19,383 8,380 Income from securities lending ..................... 100,580 122,728 ----------- ---------- Total income ..................................... 335,046 1,099,128 ----------- ---------- Expenses (Note 3) Advisory fees ...................................... 783,280 204,286 Transfer agent fees ................................ 104,413 32,449 Administration fees ................................ 101,802 37,053 Custodian fees ..................................... 65,999 26,647 Registration fees .................................. 49,446 20,878 Accounting fees .................................... 28,425 21,768 Professional fees .................................. 37,233 11,794 Reports to shareholders ............................ 21,999 10,001 Insurance fees ..................................... 9,373 2,218 Directors' fees .................................... 7,399 7,399 Other .............................................. 6,671 3,114 Amortization of deferred organization costs ........ 5,038 5,038 ----------- ---------- Total expenses ................................... 1,221,078 382,645 ----------- ---------- Net investment income (loss) ............................. (886,032) 716,483 ----------- ---------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) from security transactions (1,597,353) 2,269,047 Net change in unrealized appreciation of investments 25,593,050 553,549 ----------- ---------- Net realized and unrealized gain on investments .. 23,995,697 2,822,596 ----------- ---------- Net Increase in Net Assets Resulting from Operations ..... $23,109,665 $3,539,079 =========== ========== See Notes to Financial Statements. 14 O'SHAUGHNESSY CORNERSTONE GROWTH FUND O'SHAUGHNESSY CORNERSTONE VALUE FUND STATEMENTS OF CHANGES IN NET ASSETS - -------------------------------------------------------------------------------- Cornerstone Growth Fund Cornerstone Value Fund -------------------------------------- -------------------------------------- Year Ended Year Ended Year Ended Year Ended September 30, 1999 September 30, 1998 September 30, 1999 September 30, 1998 ------------------ ------------------ ------------------ ------------------ INCREASE IN NET ASSETS FROM OPERATIONS Net investment income (loss) $ (886,032) $ (665,794) $ 716,483 $ 437,383 Net realized gain (loss) from security transactions ........................ (1,597,353) (1,821,292) 2,269,047 561,340 Net change in unrealized appreciation (depreciation) on investments 25,593,050 (27,903,738) 553,549 (2,626,376) ------------- ------------ ------------ ------------ Net increase (decrease) in net assets resulting from operations ........................ 23,109,665 (30,390,824) 3,539,079 (1,627,653) ------------- ------------ ------------ ------------ DISTRIBUTIONS TO SHAREHOLDERS From net investment income ............ -- -- (511,737) (231,740) Net realized gains from security transactions ........................ -- (7,364,392) (1,009,259) (2,470) ------------- ------------ ------------ ------------ 0 (7,364,392) (1,520,996) (234,210) ------------- ------------ ------------ ------------ CAPITAL SHARE TRANSACTIONS Net increase in net assets derived from capital share transactions(a) 17,283,911 26,875,315 2,360,574 10,318,880 ------------- ------------ ------------ ------------ Total increase (decrease) in net assets 40,393,576 (10,879,901) 4,378,657 8,457,017 NET ASSETS Beginning of year 80,378,649 91,258,550 21,926,393 13,469,376 ------------- ------------ ------------ ------------ End of year (including undistributed net investment income (loss) of $0, $0, $565,497, and $360,751, respectively) $ 120,772,225 $ 80,378,649 $ 26,305,050 $ 21,926,393 ============= ============ ============ ============ See Notes to Financial Statements. 15 O'SHAUGHNESSY CORNERSTONE GROWTH FUND O'SHAUGHNESSY CORNERSTONE VALUE FUND STATEMENTS OF CHANGES IN NET ASSETS, continued - -------------------------------------------------------------------------------- (a) A summary of capital share transactions is as follows: - -------------------------------------------------------------------------------- Year Ended Year Ended Cornerstone Growth Fund September 30, 1999 September 30, 1998 - ------------------------------------------------------------------------------------------- Shares Value Shares Value ---------- ------------ ---------- ------------ Shares sold ................. 7,152,440 $ 82,058,831 9,244,626 $116,802,209 Shares issued on reinvestment of distributions .......... 0 0 631,833 7,164,991 Shares redeemed ............. (5,777,646) (64,774,920) (7,444,063) (97,091,885) ---------- ------------ ---------- ------------ Net increase ................ 1,374,794 $ 17,283,911 2,432,396 $ 26,875,315 ========== ============ ========== ============ Year Ended Year Ended Cornerstone Value Fund September 30, 1999 September 30, 1998 - ------------------------------------------------------------------------------------------- Shares Value Shares Value ---------- ------------ ---------- ----------- Shares sold ................. 1,924,794 $ 23,974,199 1,691,812 $ 20,010,395 Shares issued on reinvestment of distributions .......... 124,352 1,412,633 19,959 226,714 Shares redeemed ............. (1,861,996) (23,026,258) (859,354) (9,918,229) ---------- ------------ --------- ------------ Net increase ................ 187,150 $ 2,360,574 852,417 $ 10,318,880 ========== ============ ========= ============ See Notes to Financial Statements. 16 O'SHAUGHNESSY CORNERSTONE GROWTH FUND O'SHAUGHNESSY CORNERSTONE VALUE FUND FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- Cornerstone Growth Fund ------------------------------------------------- Year Ended November 1, 1996* ----------------------------- through September 30, September 30, September 30, 1999 1998 1997 ------------- ------------- ------------- Net asset value, beginning of period .... $ 9.57 $ 15.30 $10.00 ------- ------- ------ Income from investment operations: Net investment income (loss)........... (0.09) (0.07) (0.02) Net realized and unrealized gain (loss) on investments.. ......... 2.88 (3.88) 5.32 ------- ------- ------ Total from investment operations......... 2.79 (3.95) 5.30 ------- ------- ------ Less distributions: From net investment income............. -- -- -- From net realized gains................ (1.78) -- ------- ------ -- (1.78) -- ------- ------- ------ Net asset value, end of period........... $ 12.36 $ 9.57 $15.30 ======= ======= ====== Total return ............................ 29.15% (27.63%) 53.05%** Ratios/supplemental data: Net assets, end of period (millions) ............................. $ 120.8 $ 80.4 $ 91.3 Ratio of expenses to average net assets: Before expense reimbursement........... 1.15% 1.16% 1.63%++ After expense reimbursement............ 1.15% 1.16% 1.56%++ Ratio of net investment (loss) income to average net assets: Before expense reimbursement........... (0.84%) (0.86%) (1.19%)++ After expense reimbursement............ (0.84%) (0.86%) (1.12%)++ Portfolio turnover rate.................. 125.19% 119.98% 15.52% Cornerstone Value Fund ------------------------------------------------- Year Ended November 1, 1996* ----------------------------- through September 30, September 30, September 30, 1999 1998 1997 ------------- ------------- ------------- Net asset value, beginning of period..... $ 10.84 $11.50 $10.00 ------- ------ ------ Income from investment operations: Net investment income (loss)........... 0.33 0.21 0.15 Net realized and unrealized gain (loss) on investments............ 1.49 (0.70) 1.37 ------- ------ ------ Total from investment operations......... 1.82 (0.49) 1.52 ------- ------ ------ Less distributions: From net investment income............. (0.26) (0.17) (0.02) From net realized gains................ (0.50) -- -- ------- ------ ------ (0.76) (0.17) (0.02) ------- ------ ------ Net asset value, end of period........... $ 11.90 $10.84 $11.50 ======= ====== ====== Total return ........................... 17.12% (4.32%) 15.21%** Ratios/supplemental data: Net assets, end of period (millions).............................. $ 26.3 $ 21.9 $ 13.5 ** Ratio of expenses to average net assets: Before expense reimbursement........... 1.38% 1.45% 2.66%++ After expense reimbursement.. ......... 1.38% 1.45% 1.85%++ Ratio of net investment (loss) income to average net assets: Before expense reimbursement........... 2.58% 2.12% 1.93%++ After expense reimbursement............ 2.58% 2.12% 2.73%++ Portfolio turnover rate.................. 122.79% 51.56% 2.01% * Commencement of operations. ** Not Annualized. ++ Annualized. See Notes to Financial Statements. 17 O'SHAUGHNESSY CORNERSTONE GROWTH FUND O'SHAUGHNESSY CORNERSTONE VALUE FUND NOTES TO FINANCIAL STATEMENTS at September 30, 1999 - -------------------------------------------------------------------------------- NOTE 1--ORGANIZATION The O'Shaughnessy Cornerstone Growth Fund and O'Shaughnessy Cornerstone Value Fund (the "Funds") are each a series of shares of O'Shaughnessy Funds, Inc., which is registered under the Investment Company Act of 1940 as a diversified, open-end management investment company. The Funds began operations on November 1, 1996. NOTE 2--SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies consistently followed by the Funds. These policies are in conformity with generally accepted accounting principles. A. SECURITY VALUATION: The Funds' investments are carried at market value. Securities listed on an exchange or quoted on a National Market System are valued at the last sale price. Other securities are valued at the mean between the last bid and asked prices. Securities for which market quotations are not readily available, if any, are valued following procedures approved by the Board of Directors. Short-term investments are valued at amortized cost, which approximates market value. B. FEDERAL INCOME TAXES: It is each Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no federal income tax provision is required. C. SECURITY TRANSACTIONS, DIVIDENDS AND DISTRIBUTIONS: Security transactions are accounted for on the trade date. Dividend income and distributions to shareholders are recorded on the ex-dividend date. Realized gains and losses on securities sold are determined under the identified cost basis. D. DEFERRED ORGANIZATION COSTS: The Funds have each incurred expenses of $25,191 in connection with their organization. These costs have been deferred and are being amortized on a straight-line basis over a period of sixty months from the date the Fund commenced investment operations. E. USE OF ESTIMATES: 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 at the date of the financial statements and the reported amounts of increases and decreases in net assets during the reporting period. Actual results could differ from those estimates. NOTE 3--INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES For the year ended September 30, 1999, O'Shaughnessy Capital Management, Inc. (the "Advisor") provided the Funds with investment management services under an Investment Advisory Agreement. The Advisor furnished all investment advice, office space, facilities, and provides most of the personnel needed by the Funds. As compensation for its services, the Advisor is entitled to a monthly fee from each Fund at the annual rate of 0.74 % based upon the average daily net assets of the Funds. 18 O'SHAUGHNESSY CORNERSTONE GROWTH FUND O'SHAUGHNESSY CORNERSTONE VALUE FUND NOTES TO FINANCIAL STATEMENTS at September 30, 1999, Continued - -------------------------------------------------------------------------------- The Funds are responsible for their own operating expenses. The Advisor has agreed to reduce fees payable to it by the Funds or reimburse the Funds to the extent necessary to limit each Fund's aggregate annual operating expenses to 2.00% of average net assets (the "expense cap"). Any such reductions made by the Advisor in its fees or reimbursement of Fund expenses, which are the Fund's obligation, are subject to recapture by the Advisor provided the Fund is able to effect such recapture while keeping total operating expenses at or below the annual expense cap. No recapture will be made after September 30, 2000. Any amounts reimbursed will have the effect of increasing fees otherwise paid by the Fund. No reimbursed expenses were subject to recapture by the Advisor from the Cornerstone Growth Fund for the year ended September 30, 1999. Cumulative reimbursed expenses subject to recapture by the Advisor from Cornerstone Growth Fund and Cornerstone Value Fund totaled $8,879 and $46,300, respectively, at September 30, 1999. Investment Company Administration, L.L.C. (the "Administrator") acts as the Funds' Administrator under an Administration Agreement. The Administrator prepares various federal and state regulatory filings, reports and returns for the Funds; prepares reports and materials to be supplied to the trustees; monitors the activities of the Funds' custodian, transfer agent and accountants; coordinates the preparation and payment of the Funds' expenses and reviews the Funds' expense accruals. For its services, the Administrator receives a monthly fee per portfolio at the following annual rate: Under $100 million--0.10% of average daily net assets, subject to a minimum fee of $40,000 annually $100 to $200 million--0.05% of average daily net assets Over $200 million--0.03% of average daily net assets Prior to January 5, 1999, the administration fee for the Cornerstone Value Fund was subject to a $10,000 annual minimum fee. Effective October 1, 1999, the administration fee for Cornerstone Growth Fund and Cornerstone Value Fund is 0.10% of the first $200 million of average net assets and 0.03% of average net assets in excess of $200 million. First Fund Distributors, Inc. (the "Distributor") acts as the Funds' principal underwriter in a continuous public offering of the Funds' shares. The Distributor is an affiliate of the Administrator. Certain officers of the Funds are also officers and/or directors of the Administrator and the Distributor. NOTE 4--PURCHASES AND SALES OF SECURITIES For the year ended September 30, 1999, the cost of purchases and the proceeds from sales of securities, excluding short-term securities, for the Cornerstone Growth Fund were $149,073,701 and $133,425,961, respectively. For the year ended September 30, 1999, the cost of purchases and the proceeds from sales of securities, excluding short-term securities, for the Cornerstone Value Fund were $34,821,256 and $33,499,269, respectively. 19 O'SHAUGHNESSY CORNERSTONE GROWTH FUND O'SHAUGHNESSY CORNERSTONE VALUE FUND NOTES TO FINANCIAL STATEMENTS at September 30, 1999, Continued - -------------------------------------------------------------------------------- NOTE 5--SECURITIES LENDING At September 30, 1999, the Cornerstone Growth Fund and Cornerstone Value Fund, respectively, loaned securities valued at $12,032,000 and $2,973,000 to certain brokers, dealers and other financial institutions who pay the Funds negotiated lenders' fees. For collateral, the Funds received $12,273,400 and $3,032,900, respectively, an amount equal to 102% of the market value of the loaned securities, marked-to-market daily. The risks to the Funds, of lending their securities, include delay in recovery of securities loaned or loss of rights in the collateral should the borrower of the securities fail financially. NOTE 6--INCOME TAXES At September 30, 1999, the cost of securities for income tax purposes in the Cornerstone Growth Fund was approximately $113,494,486. Unrealized appreciation and depreciation of securities were as follows: Gross unrealized appreciation........... $ 24,616,891 Gross unrealized depreciation........... (17,333,787) ------------- Net unrealized appreciation............. $ 7,283,104 ============= At September 30, 1999, the cost of securities for income tax purposes in the Cornerstone Value Fund was approximately $27,389,652. Unrealized appreciation and depreciation of securities were as follows: Gross unrealized appreciation........... $ 2,794,408 Gross unrealized depreciation........... (4,234,825) ------------ Net unrealized depreciation............. $ (1,440,417) ============ Net realized capital losses differ for financial statement and tax purposes primarily due to differing tax treatment of wash sales. At September 30, 1999, Cornerstone Growth Fund had tax basis capital losses of $8,200,000, which may be carried over to offset future capital gains. Such losses expire September 30, 2007. At September 30, 1999, Cornerstone Growth Fund has deferred capital losses occurring subsequent to October 31, 1998 of $1,900,000. For tax purposes, such losses will be reflected in the year ending September 30, 2000. NOTE 7--SUBSEQUENT EVENTS At a special meeting held on October 18, 1999, the Board of Directors of O'Shaughnessy Funds, Inc. determined that it would be in the best interest of Fund shareholders to merge the O'Shaughnessy Aggressive Growth Fund with O'Shaughnessy Cornerstone Growth Fund, and the O'Shaughnessy Dogs of the Market Fund with the O'Shaughnessy Cornerstone Value Fund. Under the proposal, shares of the O'Shaughnessy Aggressive Growth Fund would be exchanged for shares of the O'Shaughnessy Cornerstone Growth Fund, and shares of the O'Shaughnessy Dogs of the Market Fund would be exchanged for shares of the O'Shaughnessy Cornerstone Value Fund if approved at a forthcoming meeting of the shareholders. It is anticipated that such an exchange would be done on a tax-free basis. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of O'Shaughnessy Cornerstone Growth Fund and O'Shaughnessy Cornerstone Value Fund In our opinion, the accompanying statements of assets and liabilities, including the portfolios of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of O'Shaughnessy Cornerstone Growth Fund and O'Shaughnessy Cornerstone Value Fund (two of the series of O'Shaughnessy Funds, Inc., hereafter referred to as the "Funds") at September 30, 1999, and the results of their operations, the changes in their net assets and the financial highlights for the year then ended, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Funds' management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these financial statements in accordance with generally accepted auditing standards, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit, which included confirmation of securities at September 30, 1999 by correspondence with the custodian, provides a reasonable basis for the opinion expressed above. The financial statements for the year ended September 30, 1998 including the financial highlights for the year then ended and the period from November 1, 1996 (commencement of operations) to September 30, 1997, were audited by other independent accountants whose report dated October 23, 1998 expressed an unqualified opinion on those financial statements. PricewaterhouseCoopers LLP New York, New York October 22, 1999 CHANGE IN INDEPENDENT ACCOUNTANT On August 13, 1999, McGladrey & Pullen, LLP ("McGladrey") resigned as independent auditors of the Fund pursuant to an agreement by PricewaterhouseCoopers LLP ("PwC") to acquire McGladrey's investment company practice. The McGladrey partners and professionals serving the Fund at the time of the acquisition joined PwC. The reports of McGladrey on the financial statements of the Fund during the past two fiscal years contained no adverse opinion or disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles. In connection with its audits for the two most recent fiscal years and through August 13, 1999, there were no disagreements with McGladrey on any matter of accounting principle or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of McGladrey would have caused it to make reference to the subject matter of disagreement in connection with its report. Effective August 13, 1999, the Fund, with the approval of its Board of Directors and its Audit Committee, engaged PwC as its independent auditors. INVESTMENT ADVISOR O'Shaughnessy Capital Management, Inc. 35 Mason Street Greenwich, Connecticut 06830 ADMINISTRATOR Investment Company Administration, LLC 4455 E. Camelback Road, Suite 261 E Phoenix, Arizona 85018 DISTRIBUTOR First Fund Distributors, Inc. 4455 E. Camelback Road, Suite 261 E Phoenix, Arizona 85018 TRANSFER AGENT Firstar Mutual Fund Services, LLC 615 E. Michigan Street Milwaukee, Wisconsin 53202 INDEPENDENT AUDITOR PricewaterhouseCoopers LLP 1177 Avenue of the Americas New York, New York 10036 LEGAL COUNSEL Swidler Berlin Shereff Friedman, LLP 919 Third Avenue New York, New York 10022 This report is intended for shareholders of O'Shaughnessy Cornerstone Growth Fund and O'Shaughnessy Cornerstone Value Fund and may not be used as sales literature unless preceded or accompanied by a current prospectus. Past performance results shown in this report should not be considered a representation of future performance. Share price and returns will fluctuate so that shares, when redeemed, may be more or less than their original cost. Statements and other information herein are dated and are subject to change. [O'SHAUGHNESSY FUNDS INC. LOGO] BUILDING NEW STANDARDS FOR INVESTMENT SUCCESS DOGS OF THE MARKET(TM) FUND ANNUAL REPORT SEPTEMBER 30, 1999 O'SHAUGHNESSY DOGS OF THE MARKET(TM) FUND November 21, 1999 Dear Fellow Shareholders, Enclosed is the annual report for the O'Shaughnessy Dogs of the Market Fund. The report contains financial statements for the Fund during the year ended September 30, 1999, as well as the Fund's portfolio on that date. For the one-year period ended September 30, 1999 our Dogs of the Market Fund had a return of 10.36%. Although the Dogs of the Market Fund held its value better than the overall market during the correction in October of 1998, the subsequent market recovery was led by growth and technology companies. The Fund currently doesn't own many of these stocks, since they pay little or no dividend, and it did not have a particularly strong year as a result. However, we remain committed to the wisdom of the long-term efficacy of high yield investing for more conservative investors. Those of you who were shareholders a year ago may recall the turbulence we faced during the third quarter of 1998, and the challenge this presented to staying the course. In my letter then, I reminded you to remain focused on the long-term, because I strongly believe that's where the biggest rewards lay for patient, intelligent investors. As I've said many times before, focusing on the short-term is a dangerous and destructive investment habit, which usually leads to unnecessary despair in downturns and often-unrealistic optimism in rising markets. To focus only on the performance of the Dogs of the Market Fund over the past year means missing the forest for the trees: remember that between 1974 and 1998, the Dogs of the Market Strategy compounded at an annual rate of 19.49%, while the S&P 500 compounded at 17.09% over the same period. To stay the course, we must constantly remind ourselves of our goals, and why we're investing in the first place--usually for our retirement or our children's education. In most circumstances, these are events that are at least five to ten years away. As you may know, the O'Shaughnessy Funds' Board of Directors recently approved a reorganization plan where the Dogs of the Market Fund will be merged into the Cornerstone Value Fund. While we had hoped that the Fund would grow to a size large enough to permit it to be economically viable, this growth hasn't materialized. We and the Board have concluded that a merger of the Fund into the larger Cornerstone Value Fund, with a similar investment objective and a lower expense ratio, will be in the best interest of shareholders. A proxy statement detailing the proposal will be sent out within a few weeks, and I encourage you to review the statement and vote on the matter. 2 O'SHAUGHNESSY DOGS OF THE MARKET(TM) FUND As always, I hope that together, we can reach our long-term goals by staying the course and sticking with our time-tested investment strategies. Sincerely, /s/ James P. O'Shaughnessy James P. O'Shaughnessy The S&P 500 Composite Stock Price Index is an unmanaged capitalization-weighted index of 500 stocks designed to represent the broad domestic economy. Indexes do not incur expenses and are not available for investment. The Fund's average annual total return from inception on November 1, 1996 through September 30, 1999 was 10.01%. Performance figures of the Fund, Strategy and indexes referenced represent past performance and are not indicative of future performance of the Fund, Strategy or the indexes. Share values will fluctuate so that an investor's shares, when redeemed, may be worth more or less than the original investment. The Fund is distributed by First Fund Distributors, Inc., Phoenix, AZ. Member NASD. 3 O'SHAUGHNESSY DOGS OF THE MARKET(TM) FUND Comparison of the change in value of a $10,000 investment in the O'Shaughnessy Dogs of The Market Fund versus the S&P 500 Composite Stock Price Index, the Lipper Multi-Cap Value Index and the Dow Jones Industrial Average O'Shaughnessy Dogs S & P 500 Composite Lipper Multi-Cap Dow Jones of The Market Fund Stock Price Index Value Index Industrial Average ------------------ ----------------- ----------- ------------------ 1-Nov-96 10,000 10,000 10,000 10,000 31-Dec-96 10,032 10,560 10,629 10,745 31-Mar-97 10,072 10,842 10,809 11,027 30-Jun-97 11,223 12,729 12,264 12,907 30-Sep-97 11,974 13,684 13,490 13,426 31-Dec-97 12,624 14,080 13,490 13,425 31-Mar-98 13,629 16,041 15,031 15,000 30-Jun-98 13,396 16,570 14,765 15,322 30-Sep-98 12,063 14,921 12,520 13,491 31-Dec-98 13,773 18,119 14,370 15,864 31-Mar-99 12,808 19,023 14,474 16,981 30-Jun-99 14,693 20,366 16,184 19,109 30-Sep-99 13,312 19,093 14,444 18,079 Past performance is not predictive of future performance. The S&P 500 is a broad market-weighted average of U.S. blue-chip companies. The Lipper Multi-Cap Value index is comprised of mutual funds that invest in a variety of market capitalization ranges, without concentrating 75% or more of net assets in any one capitalization range over an extended period of time and have a below average price-to-earning ratio, price-to-book ratio and three year growth figure. The Dow Jones Industrial Average tracks the performance of 30 blue-chip stocks. The indices are unmanaged and include reinvested dividends. 4 O'SHAUGHNESSY DOGS OF THE MARKET(TM) FUND TOP TEN PORTFOLIO HOLDINGS AT SEPTEMBER 30, 1999 - -------------------------------------------------------------------------------- Percent of Net Assets - -------------------------------------------------------------------------------- 1) Nalco Chemical Company............................. 6.35% 2) Minnesota Mining and Manufacturing Company......... 4.45% 3) Royal Dutch Petroleum Company--ADR................. 4.13% 4) Caterpillar Inc.................................... 3.99% 5) ALLTELL Corporation................................ 3.93% 6) Johnson Controls, Inc.............................. 3.85% 7) E. I. du Pont de Nemours and Company............... 3.81% 8) Chevron Corporation................................ 3.76% 9) Kellogg Company.................................... 3.74% 10) J.P. Morgan & Co., Incorporated.................... 3.67% 5 O'SHAUGHNESSY DOGS OF THE MARKET(TM) FUND PORTFOLIO OF INVESTMENTS AT SEPTEMBER 30, 1999 - -------------------------------------------------------------------------------- Shares COMMON STOCKS: 99.70% Market Value - -------------------------------------------------------------------------------- AUTO MANUFACTURERS: 3.09% 8,700 General Motors Corporation............................. $ 547,556 ----------- AUTO PARTS & EQUIPMENT: 6.76% 30,300 Cooper Tire & Rubber Company........................... 534,038 6,289 Delphi Automotive Systems.............................. 101,017 11,700 The Goodyear Tire & Rubber Company..................... 563,063 ----------- 1,198,118 ----------- BANKS: 3.67% 5,700 J.P. Morgan & Co., Incorporated........................ 651,225 ----------- CHEMICALS: 12.74% 15,700 Air Products and Chemicals............................. 456,281 11,100 E. I. du Pont de Nemours and Company................... 675,712 22,300 Nalco Chemical Company................................. 1,126,150 ----------- 2,258,143 ----------- CONSUMER PRODUCTS: 2.17% 14,900 American Greetings Corporation......................... 383,675 ----------- COSMETICS/PERSONAL CARE: 2.65% 13,600 International Flavors & Fragrances, Inc................ 469,200 ----------- DISTRIBUTION/WHOLESALE: 2.77% 18,500 Genuine Parts Company.................................. 491,406 ----------- ELECTRICAL COMPONENT & EQUIPMENT: 3.57% 10,000 Emerson Electric....................................... 631,875 ----------- ELECTRONICS: 3.85% 10,300 Johnson Controls, Inc.................................. 683,019 ----------- FOOD: 14.23% 11,400 Bestfoods.............................................. 552,900 19,200 ConAgra, Inc........................................... 433,200 10,700 H.J. Heinz Company..................................... 460,100 17,700 Kellogg Company........................................ 662,644 13,900 Winn-Dixie Stores, Inc................................. 412,656 ----------- 2,521,500 ----------- 6 O'SHAUGHNESSY DOGS OF THE MARKET(TM) FUND PORTFOLIO OF INVESTMENTS AT SEPTEMBER 30, 1999, CONTINUED - -------------------------------------------------------------------------------- Shares Market Value - -------------------------------------------------------------------------------- HOUSEWARES: 2.35% 14,600 Newell Rubbermaid, Inc................................. $ 417,013 ----------- MACHINERY--CONSTRUCTION & MINING: 3.99% 12,900 Caterpillar Inc........................................ 707,081 ----------- MISCELLANEOUS MANUFACTURING: 10.98% 8,600 Eastman Kodak Company.................................. 648,762 8,200 Minnesota Mining and Manufacturing Company............. 787,713 16,100 National Service Industries, Inc....................... 507,150 ----------- 1,943,625 ----------- OIL & GAS PRODUCERS: 11.49% 7,500 Chevron Corporation.................................... 665,625 8,400 Exxon Corporation...................................... 637,875 12,400 Royal Dutch Petroleum Company--ADR..................... 732,375 ----------- 2,035,875 ----------- PACKAGING & CONTAINERS: 3.08% 16,100 Bemis Company.......................................... 545,387 ----------- RETAIL: 3.09% 15,050 The May Dept Stores Company............................ 548,384 ----------- TELEPHONE: 3.93% 9,900 ALLTELL Corporation.................................... 696,712 ----------- TOBACCO: 5.29% 11,700 Philip Morris Companies Inc............................ 399,994 17,800 UST, Inc............................................... 537,338 ----------- 937,332 ----------- Total Investment in Securities (cost $18,470,326): 99.70%............................. 17,667,126 Other Assets less Liabilities: 0.30% .................. 53,965 ----------- TOTAL NET ASSETS: 100.0%............................... 17,721,091 =========== 7 O'SHAUGHNESSY DOGS OF THE MARKET(TM) FUND STATEMENT OF ASSETS AND LIABILITIES AT SEPTEMBER 30, 1999 - -------------------------------------------------------------------------------- ASSETS Investments in securities, at value (identified cost $18,470,326)................................ $17,667,126 Receivables: Portfolio securities sold.................................... 341,560 Fund shares sold............................................. 5,456 Dividends.................................................... 47,527 Deferred organization costs.................................... 10,533 Prepaid expenses and other..................................... 20,789 ----------- Total assets............................................... 18,092,991 ----------- LIABILITIES Payables: Fund shares repurchased...................................... 35,277 Advisory fee................................................. 2,908 Administration fee........................................... 1,606 Funds advanced by custodian.................................. 317,354 Accrued expenses............................................... 14,755 ----------- Total liabilities.......................................... 371,900 ----------- NET ASSETS....................................................... $17,721,091 =========== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE ($17,721,091/1,459,090 shares outstanding; 25,000,000,000 shares (par value $.0001) authorized)........................ $ 12.15 =========== COMPONENTS OF NET ASSETS Paid-in capital................................................ $16,971,347 Undistributed net investment income............................ 271,390 Undistributed net realized gain on investment transactions..... 1,281,554 Net unrealized depreciation of investments..................... (803,200) ----------- Net assets................................................... $17,721,091 =========== See Notes to Financial Statements. 8 O'SHAUGHNESSY DOGS OF THE MARKET(TM) FUND STATEMENT OF OPERATIONS YEAR ENDED SEPTEMBER 30, 1999 - -------------------------------------------------------------------------------- INVESTMENT INCOME Income: Dividends (net of foreign withholding tax of $6,544)......... $ 567,835 Interest..................................................... 2,862 Other........................................................ 24,237 ----------- Total income............................................... 594,934 ----------- Expenses (Note 3): Advisory fees................................................ 164,117 Administration fees.......................................... 32,127 Transfer agent fees.......................................... 26,293 Registration fees............................................ 25,793 Reports to shareholders...................................... 21,999 Accounting fees.............................................. 20,985 Custodian fees............................................... 16,315 Professional fees............................................ 9,794 Directors' fees.............................................. 7,399 Amortization of deferred organization costs.................. 5,037 Other........................................................ 5,052 ----------- Total expenses............................................. 334,911 Less: expense reimbursement (Note 3)....................... (92,281) ----------- Net expenses............................................... 242,630 ----------- NET INVESTMENT INCOME.................................... 352,304 ----------- REALIZED AND UNREALIZED GAIN ON INVESTMENTS Net realized gain from security transactions................. 1,470,454 Net change in unrealized appreciation of investment.......... 694,626 ----------- Net realized and unrealized gain on investments............ 2,165,080 ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS..... $ 2,517,384 =========== See Notes to Financial Statements. 9 O'SHAUGHNESSY DOGS OF THE MARKET(TM) FUND STATEMENTS OF CHANGES IN NET ASSETS - -------------------------------------------------------------------------------------------------------- Year Ended Year Ended September 30, 1999 September 30, 1998 - -------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income............................................ $ 352,304 $ 208,847 Net realized gain on security transactions....................... 1,470,454 408,727 Net change in unrealized appreciation (depreciation) of investments................................................. 694,626 (1,760,280) ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS............................................ 2,517,384 (1,142,706) ----------- ----------- DISTRIBUTIONS TO SHAREHOLDERS Net investment income............................................ (274,381) (69,959) Net realized gains from security transactions.................... (597,939) (443,982) ----------- ----------- (872,320) (513,941) ----------- ----------- CAPITAL SHARE TRANSACTIONS Net increase (decrease) in net assets derived from capital share transactions(a).......................................... (6,551,183) 17,035,794 ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS...................... (4,906,119) 15,379,147 NET ASSETS....................................................... Beginning of year................................................ 22,627,210 7,248,063 ----------- ----------- END OF YEAR (including undistributed net investment income of $271,390 and $193,467, respectively)........................... $17,721,091 $22,627,210 =========== =========== (a) A summary of capital share transactions is as follows: - ---------------------------------------------------------------------------------------------- Year Ended Year Ended September 30, 1999 September 30, 1998 - ---------------------------------------------------------------------------------------------- Shares Value Shares Value - ---------------------------------------------------------------------------------------------- Shares sold........................ 959,418 $12,044,414 2,072,680 $25,664,085 Shares issued on reinvestment of distributions................. 62,336 784,885 42,247 504,011 Shares redeemed.................... (1,546,861) (19,380,482) (736,926) (9,132,302) ----------- ----------- ----------- ----------- Net increase (decrease)............ (525,107) $(6,551,183) 1,378,001 $17,035,794 =========== =========== =========== =========== See Notes to Financial Statements. 10 O'SHAUGHNESSY DOGS OF THE MARKET(TM) FUND FINANCIAL HIGHLIGHTS (FOR A CAPITAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - ------------------------------------------------------------------------------------------------------- November 1, 1996* Year Ended Year Ended through September 30, 1999 September 30, 1998 September 30, 1997 - ------------------------------------------------------------------------------------------------------- Net asset value, beginning of period....... $ 11.40 $ 11.96 $ 10.00 ----------- ----------- ----------- Income from investment operations: Net investment income.................. 0.23 0.10 0.10 Net realized and unrealized gain on investments.......................... 0.97 0.02 1.87 ----------- ----------- ----------- Total from investment operations........... 1.20 0.12 1.97 ----------- ----------- ----------- Less distributions: From net investment income............. (0.14) (0.09) (0.01) From net realized gains................ (0.31) (0.59) 0.00 ----------- ----------- ----------- Total distributions........................ (0.45) (0.68) (0.01) ----------- ----------- ----------- Net asset value, end of period............. $ 12.15 $ 11.40 $ 11.96 =========== =========== =========== TOTAL RETURN............................... 10.36% 0.74% 19.74%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (millions)....... $ 17.7 $ 22.6 $ 7.2 Ratio of expenses to average net assets: Before expense reimbursement........... 1.50% 1.46% 4.28%++ After expense reimbursement............ 1.09% 1.46% 1.99%++ Ratio of net investment income (loss) to average net assets: Before expense reimbursement........... 1.17% 1.24% (0.51%)++ After expense reimbursement............ 1.58% 1.24% 1.78%++ Portfolio turnover rate.................... 63.31% 44.35% 118.44% * Commencement of operations. ** Not Annualized. ++ Annualized. See Notes to Financial Statements. 11 O'SHAUGHNESSY DOGS OF THE MARKET(TM) FUND NOTES TO FINANCIAL STATEMENTS AT SEPTEMBER 30, 1999 - -------------------------------------------------------------------------------- NOTE 1 -- ORGANIZATION The O'Shaughnessy Dogs of the Market(TM) Fund (the "Fund") is a series of shares of O'Shaughnessy Funds, Inc., which is registered under the Investment Company Act of 1940 as a diversified, open-end management investment company. The Fund began operations on November 1, 1996. NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies consistently followed by the Fund. These policies are in conformity with generally accepted accounting principles. A. SECURITY VALUATION: The Fund's investments are carried at market value. Securities listed on an exchange or quoted on a National Market System are valued at the last sale price. Other securities are valued at the mean between the last bid and asked prices. Securities for which market quotations are not readily available, if any, are valued following procedures approved by the Board of Directors. Short-term investments are valued at amortized cost, which approximates market value. B. FEDERAL INCOME TAXES: It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no federal income tax provision is required. C. SECURITY TRANSACTIONS, DIVIDENDS AND DISTRIBUTIONS: Security transactions are accounted for on the trade date. Dividend income and distributions to shareholders are recorded on the ex-dividend date. Realized gains and losses on securities sold are determined under the identified cost basis. D. DEFERRED ORGANIZATION COSTS: The Fund has incurred expenses of $25,191 in connection with its organization. These costs have been deferred and are being amortized on a straight-line basis over a period of sixty months from the date the Fund commenced investment operations. E. USE OF ESTIMATES: 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 at the date of the financial statements and the reported amounts of increases and decreases in net assets during the reporting period. Actual results could differ from those estimates. NOTE 3 -- INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES For the year ended September 30, 1999, O'Shaughnessy Capital Management, Inc. (the "Advisor") provided the Fund with investment management services under an Investment Advisory Agreement. The Advisor furnished all investment advice, office space, facilities, and provides most of the personnel needed by the Fund. As compensation for its services, the Advisor is entitled to a monthly fee at the annual rate of 0.74 % based upon the average daily net assets of the Fund. 12 O'SHAUGHNESSY DOGS OF THE MARKET(TM) FUND NOTES TO FINANCIAL STATEMENTS AT SEPTEMBER 30, 1999, CONTINUED - -------------------------------------------------------------------------------- The Fund is responsible for its own operating expenses. The Advisor has agreed to reduce fees payable to it by the Fund or reimburse the Fund to the extent necessary to limit the Fund's aggregate annual operating expenses to 1.09% of average net assets (the "expense cap"). Any such reductions made by the Advisor in its fees or reimbursement of Fund expenses, which are the Fund's obligation, are subject to recapture by the Advisor provided the Fund is able to effect such recapture while keeping total operating expenses at or below the annual expense cap. No recapture will be made after September 30, 2000. Any amounts reimbursed will have the effect of increasing fees otherwise paid by the Fund. For the year ended September 30, 1999, the Advisor reimbursed the Fund in the amount of $92,281. Cumulative reimbursed expenses subject to recapture by the Advisor totaled $163,480 at September 30, 1999. Effective October 1, 1999, the expense cap was eliminated. Investment Company Administration, L.L.C. (the "Administrator") acts as the Fund's Administrator under an Administration Agreement. The Administrator prepares various federal and state regulatory filings, reports and returns for the Fund; prepares reports and materials to be supplied to the trustees; monitors the activities of the Fund's custodian, transfer agent and accountants; coordinates the preparation and payment of Fund's expenses and reviews the Fund's expense accruals. For its services, the Administrator receives a monthly fee per portfolio at the following annual rate: Under $200 million -- 0.10% of average daily net assets Over $200 million -- 0.03% of average daily net assets Prior to July 1, 1999 the administration fee was 0.10% of the first $100 million of average net assets; 0.05% of the next $100 million of average net assets; and 0.03% of average net assets in excess of $200 million. The administration fee was subject to an annual minimum of $10,000 from October 1, 1998 to January 4, 1999 and $40,000 from January 5, 1999 to June 30, 1999. Effective July 1, 1999 there is no minimum fee. First Fund Distributors, Inc. (the "Distributor") acts as the Fund's principal underwriter in a continuous public offering of the Fund's shares. The Distributor is an affiliate of the Administrator. Certain officers of the Fund are also officers and/or directors of the Administrator and the Distributor. NOTE 4 -- PURCHASES AND SALES OF SECURITIES For the year ended September 30, 1999, the cost of purchases and the proceeds from sales of securities, excluding short-term securities, were $13,945,945 and $20,981,238, respectively. NOTE 5 -- SECURITIES LENDING At September 30, 1999, securities valued at $1,623,000 were on loan from the Fund to certain brokers, dealers and other financial institutions who pay the Fund negotiated lenders' fees. For collateral, the Fund received $1,655,700, an amount equal to 102% of the market value of the loaned securities, marked-to-market daily. The risks to the Fund, of lending its securities, include delay in recovery of securities loaned or loss of rights in the collateral should the borrower of the securities fail financially. 13 O'SHAUGHNESSY DOGS OF THE MARKET(TM) FUND NOTES TO FINANCIAL STATEMENTS AT SEPTEMBER 30, 1999, CONTINUED - -------------------------------------------------------------------------------- NOTE 6 -- INCOME TAXES At September 30, 1999, the cost of securities for income tax purposes was approximately $18,987,563. Unrealized appreciation and depreciation of securities were as follows: Gross unrealized appreciation............................... $ 1,980,656 Gross unrealized depreciation............................... (3,301,093) ----------- Net unrealized depreciation................................. $(1,320,437) =========== Net realized capital gains differ for financial statements and tax purposes primarily due to differing tax treatment of wash sales. NOTE 7 -- SUBSEQUENT EVENTS At a special meeting held on October 18, 1999, the Board of Directors determined that it would be in the best interest of Fund shareholders to merge the Fund with the O'Shaughnessy Cornerstone Value Fund. Under the proposal, shares of the Fund would be exchanged for shares of the O'Shaughnessy Cornerstone Value Fund if approved at a forthcoming meeting of the shareholders. It is anticipated that such an exchange would be done on a tax-free basis. Effective October 19, 1999, the Fund ceased offering new shares. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of O'Shaughnessy Dogs of the Market Fund In our opinion, the accompanying statement of assets and liabilities, including the portfolio of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of O'Shaughnessy Dogs of the Market Fund (one of the series of O'Shaughnessy Funds, Inc., hereafter referred to as the "Fund") at September 30, 1999, and the results of its operations, the changes in its net assets and the financial highlights for the year then ended, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these financial statements in accordance with generally accepted auditing standards, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit, which included confirmation of securities at September 30, 1999 by correspondence with the custodian, provides a reasonable basis for the opinion expressed above. The financial statements for the year ended September 30, 1998 including the financial highlights for the year then ended and the period from November 1, 1996 (commencement of operations) to September 30, 1997, were audited by other independent accountants whose report dated October 23, 1998 expressed an unqualified opinion on those financial statements. PricewaterhouseCoopers LLP New York, New York October 22, 1999 CHANGE IN INDEPENDENT ACCOUNTANT On August 13, 1999, McGladrey & Pullen, LLP ("McGladrey") resigned as independent auditors of the Fund pursuant to an agreement by PricewaterhouseCoopers LLP ("PwC") to acquire McGladrey's investment company practice. The McGladrey partners and professionals serving the Fund at the time of the acquisition joined PwC. The reports of McGladrey on the financial statements of the Fund during the past two fiscal years contained no adverse opinion or disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles. In connection with its audits for the two most recent fiscal years and through August 13, 1999, there were no disagreements with McGladrey on any matter of accounting principle or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of McGladrey would have caused it to make reference to the subject matter of disagreement in connection with its report. Effective August 13, 1999, the Fund, with the approval of its Board of Directors and its Audit Committee, engaged PwC as its independent auditors. INVESTMENT ADVISOR O'Shaughnessy Capital Management, Inc. 35 Mason Street Greenwich, Connecticut 06830 ADMINISTRATOR Investment Company Administration, LLC 4455 E. Camelback Road, Suite 261 E Phoenix, Arizona 85018 DISTRIBUTOR First Fund Distributors, Inc. 4455 E. Camelback Road, Suite 261 E Phoenix, Arizona 85018 TRANSFER AGENT Firstar Mutual Fund Services, LLC 615 E. Michigan Street Milwaukee, Wisconsin 53202 INDEPENDENT AUDITOR PricewaterhouseCoopers LLP 1177 Avenue of the Americas New York, New York 10036 LEGAL COUNSEL Swidler Berlin Shereff Friedman, LLP 919 Third Avenue New York, New York 10022 This report is intended for shareholders of O'Shaughnessy Dogs of the Market(TM) Fund and may not be used as sales literature unless preceded or accompanied by a current prospectus. Past performance results shown in this report should not be considered a representation of future performance. Share price and returns will fluctuate so that shares, when redeemed, may be more or less than their original cost. Statements and other information herein are dated and are subject to change. [O'SHAUGHNESSY FUNDS INC. LOGO] 35 Mason Street Greenwich, Connecticut 06830 877-OSFUNDS www.osfunds.com [O'SHAUGHNESSY FUNDS INC. LOGO] BUILDING NEW STANDARDS FOR INVESTMENT SUCCESS AGGRESSIVE GROWTH FUND ANNUAL REPORT SEPTEMBER 30, 1999 O'SHAUGHNESSY AGGRESSIVE GROWTH FUND November 21, 1999 Dear Fellow Shareholders, Enclosed is the annual report for the O'Shaughnessy Aggressive Growth Fund. The report contains financial statements for the Fund during the year ended September 30, 1999, as well as the Fund's portfolio on that date. For the one-year period ended September 30, 1999 our Aggressive Growth Fund had a return of 43.51%. Obviously, we are pleased with the performance of Aggressive Growth over this past year. The market recovery in the fall of 1998 fueled the fund's performance, as it was 100% committed to equities when the market surged. Those of you who were shareholders a year ago may recall the turbulence we faced during the third quarter of 1998, and the challenge this presented to staying the course. In my letter then, I reminded you to remain focused on the long-term, because I strongly believe that's where the biggest rewards lay for patient, intelligent investors. As I've said many times before, focusing on the short-term is a dangerous and destructive investment habit, which usually leads to unnecessary despair in downturns and often-unrealistic optimism in rising markets. Investors focusing only on the performance of the Aggressive Growth Fund in August 1988 would be tempted to run for the hills--but that would mean missing its rebound and strong performance over the next 12 months. To stay the course, we must constantly remind ourselves of our goals, and why we're investing in the first place--usually for our retirement or our children's education. In most circumstances, these are events that are at least five to ten years away. As you may know, the O'Shaughnessy Funds' Board of Directors recently approved a reorganization plan whereby the Aggressive Growth Fund is proposed to be merged into the Cornerstone Growth Fund. While we had hoped that the Fund would grow to a size large enough to permit it to be economically viable, this growth hasn't materialized. We and the Board have concluded that a merger of the Fund into the larger Cornerstone Growth Fund, with a similar investment objective and a lower expense ratio, will be in the best interest of shareholders. A proxy statement detailing the proposal will be sent out within a few weeks, and I encourage you to review the statement and vote on the matter. As always, I hope that together, we can reach our long-term goals by staying the course and sticking with our time-tested investment strategies. Sincerely, /s/ James P. O'Shaughnessy James P. O'Shaughnessy The Fund's average annual total return from inception on November 1, 1996 through September 30, 1999 was 16.10%. Performance figures of the Fund represent past performance and are not indicative of future performance. Share value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than the original investment. The Fund is distributed by First Fund Distributors, Inc., Phoenix, AZ. Member NASD. 2 O'SHAUGHNESSY AGGRESSIVE GROWTH FUND Comparison of the change in value of a $10,000 investment in the O'Shaughnessy Aggressive Growth Fund versus the S&P 500 Composite Stock Price Index, the Lipper Multi-Cap Growth Index and the NASDAQ Composite Index O'Shaughnessy Lipper NASDAQ Aggressive Multi-Cap Composite Growth Fund S&P 500 Growth Index Index ----------- ------- ------------ ----- 1-Nov-96 10,000 10,000 1,751.520 10,000 31-Dec-96 10,410 10,560 1,817.851 10,569 31-Mar-97 9,860 10,842 1,756.959 10,002 30-Jun-97 11,440 12,729 2,040.188 11,806 30-Sep-97 14,290 13,684 2,304.171 13,800 31-Dec-97 12,732 14,080 2,235.050 12,856 31-Mar-98 14,409 16,041 2,550.200 15,028 30-Jun-98 13,840 16,570 2,609.296 15,512 30-Sep-98 10,903 14,921 2,223.960 13,867 31-Dec-98 13,784 18,119 2,789.278 17,951 31-Mar-99 13,848 19,023 2,966.157 20,150 30-Jun-99 15,990 20,366 3,187.931 21,989 30-Sep-99 15,647 19,093 3,067.250 22,482 Past performance is not predictive of future performance. The S&P 500 is a broad market-weighted average of U.S. blue-chip companies. The Lipper Multi-Cap Growth index is comprised of mutual funds that invest in a variety of market capitalization ranges, without concentrating 75% or more of net assets in any one capitalization range over an extended period of time and have an above average price-to-earning ratio, price-to-book ratio and three year growth figure. The NASDAQ Composite tracks the performance of domestic common stocks traded on the regular Nasdaq market as well as National Market System traded foreign common stocks and ADR's. The indices are unmanaged and include reinvested dividends. 3 O'SHAUGHNESSY AGGRESSIVE GROWTH FUND TOP TEN PORTFOLIO HOLDINGS at September 30, 1999 - -------------------------------------------------------------------------------- Percent of Net Assets - -------------------------------------------------------------------------------- 1) Symantec Corp. ...................... 2.79% 2) Lands' End, Inc. .................... 2.75% 3) Apple Computer, Inc. ................ 2.74% 4) Sun Microsystems, Inc. .............. 2.66% 5) Hambrecht & Quist Group ............. 2.64% 6) QUALCOM Incorporated ............... 2.63% 7) Titan Corp. ......................... 2.59% 8) EMC Corp. ........................... 2.57% 9) PE Corp--PE Biosystems Group ........ 2.48% 10) Biogen, Inc. ........................ 2.45% 4 O'SHAUGHNESSY AGGRESSIVE GROWTH FUND PORTFOLIO OF INVESTMENTS at September 30, 1999 - -------------------------------------------------------------------------------- Shares COMMON STOCKS: 97.36% Market Value - -------------------------------------------------------------------------------- AEROSPACE AIRCRAFT: 4.51% 5,500 Boeing Company ........................................ $ 234,437 22,100 Titan Corp.* .......................................... 317,688 ----------- 552,125 ----------- APPAREL: 5.81% 7,100 Jones Apparel Group, Inc.* ............................ 204,125 5,100 Lands' End, Inc.* ..................................... 336,600 9,350 Quicksilver, Inc.* .................................... 170,638 ----------- 711,363 ----------- BANK: 1.59% 1,700 J.P. Morgan & Company, Inc. ........................... 194,225 ----------- BIOTECHNOLOGY: 2.45% 3,800 Biogen, Inc.* ......................................... 299,487 ----------- BUSINESS: 2.18% 5,400 Jabil Cricuit, Inc.* .................................. 267,300 ----------- COMPUTERS: 7.82% 5,300 Apple Computer, Inc.* ................................. 335,556 3,700 Lexmark International Group, Inc.* .................... 297,850 3,500 Sun Microsystems, Inc.* ............................... 325,500 ----------- 958,906 ----------- DRUGS: 1.07% 7,600 ICN Pharmaceuticals, Inc. ............................. 130,625 ----------- ELECTRICAL EQUIPMENT: 1.48% 4,300 Dycom Industries, Inc.* ............................... 181,406 ----------- ELECTRONIC: 6.40% 4,200 PE Corp-PE Biosystems Group ........................... 303,450 17,500 Sensormatic Electronics Corp.* ........................ 222,031 3,600 Solectron Corp.* ...................................... 258,525 ----------- 784,006 ----------- 5 O'SHAUGHNESSY AGGRESSIVE GROWTH FUND PORTFOLIO OF INVESTMENTS at September 30, 1999, Continued - -------------------------------------------------------------------------------- Shares Market Value - -------------------------------------------------------------------------------- ENERGY: 2.02% 6,000 Enron Corp. ........................................... $ 247,500 ----------- ENGINEERING & CONSTRUCTION: 1.58% 7,100 CDI Corp.* ............................................ 193,919 ----------- ENTERTAINMENT & LEISURE: 6.33% 26,465 Aztar Corp.* .......................................... 271,266 11,500 Mandalay Resort Group* ................................ 227,125 11,900 Station Casinos, Inc.* ................................ 276,675 ----------- 775,066 ----------- HEALTHCARE: 1.96% 14,300 Apria Healthcare Group, Inc.* ......................... 239,525 ----------- HOME BUILDERS: 2.11% 10,800 Winnebago Industries .................................. 258,525 ----------- HOSPITAL SUPPLY: 1.90% 84,700 Laboratory Corporation of America Holdings* ........... 232,925 ----------- HOUSEHOLD PRODUCT: 1.63% 13,800 Haverty Furniture Companies, Inc. ..................... 200,100 ----------- INVESTMENT COMPANY: 4.32% 7,500 Alliance Capital Management L.P. ...................... 205,781 6,600 Hambrecht & Quist Group* .............................. 322,987 ----------- 528,768 ----------- MACHINERY -- AGRICULTURAL & CONSTRUCTION: 1.18% 6,000 Astec Industries, Inc.* ............................... 144,750 ----------- MANUFACTURING: 1.76% 16,200 Material Sciences Corp.* .............................. 215,662 ----------- 6 O'SHAUGHNESSY AGGRESSIVE GROWTH FUND PORTFOLIO OF INVESTMENTS at September 30, 1999, Continued - -------------------------------------------------------------------------------- Shares Market Value - -------------------------------------------------------------------------------- MANUFACTURING/COMPUTER: 2.57% 4,400 EMC Corp.* ............................................ $ 314,325 ----------- MISCELLANEOUS: 3.49% 19,000 Mentor Graphics Corp.* ................................ 162,688 3,900 Safeguard Scientifics, Inc. ........................... 265,200 ----------- 427,888 ----------- POLUTION CONTROL: 1.41% 13,700 Autonation, Inc.* ..................................... 172,106 ----------- RETAIL: 12.70% 5,300 American Eagle Outfitters, Inc.* ...................... 256,719 3,610 Best Buy Co., Inc.* ................................... 224,046 39,900 Charming Shoppes* ..................................... 204,488 5,200 Circuit City Stores-Circuit City Group ................ 219,375 9,500 Claire's Sores, Inc. .................................. 157,344 7,900 Michaels Stores, Inc.* ................................ 233,050 5,000 Tandy Corp. ........................................... 258,438 ----------- 1,553,460 ----------- SEMICONDUCTOR: 2.23% 5,300 LSI Logic Corp.* ...................................... 272,950 ----------- SHOES: 2.30% 7,200 Timberland Company, Class A* .......................... 281,250 ----------- SOFTWARE: 2.79% 9,500 Symantec Corp.* ....................................... 341,703 ----------- TELECOMMUNICATION: 6.63% 1,700 QUALCOM Incorporated* ................................. 321,619 3,600 Tellabs, Inc.* ........................................ 204,975 1,200 Vodafone Airtouch PLC, ADR ............................ 285,300 ----------- 811,894 ----------- TRANSPORTATION: 1.86% 4,900 Navistar International Corp.* ......................... 227,850 ----------- 7 O'SHAUGHNESSY AGGRESSIVE GROWTH FUND PORTFOLIO OF INVESTMENTS at September 30, 1999, Continued - -------------------------------------------------------------------------------- Shares Market Value - -------------------------------------------------------------------------------- TRANSPORTATION/RAILROAD: 3.28% 12,400 American Freightways Corp.* ......................... $ 225,525 3,800 Kansas City Southern Industries, Inc. ............. 176,462 ----------- 401,987 ----------- Total Investment in Securities (cost $11,003,051): 97.36% ......................... 11,921,596 Other Assets less Liabilities: 2.64% ................ 323,332 ----------- Total Net Assets: 100.0% ............................ $12,244,928 =========== * Non-income producing securities. See Notes to Financial Statements. 8 O'SHAUGHNESSY AGGRESSIVE GROWTH FUND STATEMENT OF ASSETS AND LIABILITIES at September 30, 1999 - -------------------------------------------------------------------------------- ASSETS Investments in securities, at value (identified cost $11,003,051) .......................................... $11,921,596 Receivables: Portfolio securities sold ................................. 219,044 Fund shares sold .......................................... 181,478 Dividends and interest .................................... 2,967 From Investment Advisor ................................... 1,846 Deferred organization costs .................................. 10,533 Prepaid expenses and other ................................... 16,907 ----------- Total assets ............................................ 12,354,371 ----------- LIABILITIES Payables: Fund shares repurchased ................................... 5,907 Administration fee ........................................ 3,397 Funds advanced by custodian ............................... 68,273 Accrued expenses ............................................. 31,866 ----------- Total liabilities ....................................... 109,443 ----------- NET ASSETS ...................................................... $12,244,928 =========== Net asset value, offering and redemption price per share [$12,244,928/838,354 shares outstanding; 25,000,000,000 shares (par value $.0001) authorized] ...... $ 14.61 =========== COMPONENTS OF NET ASSETS Paid-in capital .............................................. $10,751,911 Undistributed net realized gain on investment transactions ... 574,472 Net unrealized appreciation of investments ................... 918,545 ----------- Net assets ................................................ $12,244,928 =========== See Notes to Financial Statements. 9 O'SHAUGHNESSY AGGRESSIVE GROWTH FUND STATEMENT OF OPERATIONS Year Ended September 30, 1999 - -------------------------------------------------------------------------------- INVESTMENT INCOME Income: Dividends (net of foreign withholding tax of $357) .... $ 40,452 Interest 2,379 Other 4,677 ----------- Total income 47,508 ----------- Expenses: Advisory fees (Note 3) ................................ 74,894 Administration fees (Note 3) .......................... 34,501 Transfer agent fees ................................... 25,926 Accounting fees 21,314 Registration fees 19,778 Custodian fees 17,002 Reports to shareholders 13,001 Professional fees 10,576 Directors' fees 7,399 Amortization of deferred organization costs (Note 2-D) 5,038 Other 3,664 ----------- Total expenses ...................................... 233,093 Less: expense reimbursement (Note 3) (27,163) ----------- Net expenses 205,930 ----------- Net investment loss ......................................... (158,422) ----------- REALIZED AND UNREALIZED GAIN ON INVESTMENTS Net realized gain from security transactions 802,788 Net change in unrealized appreciation of investments .. 2,906,193 ----------- Net realized and unrealized gain on investments ..... 3,708,981 ----------- Net Increase in Net Assets Resulting from Operations ........ $ 3,550,559 =========== See Notes to Financial Statements. 10 O'SHAUGHNESSY AGGRESSIVE GROWTH FUND STATEMENTS OF CHANGES IN NET ASSETS - ---------------------------------------------------------------------------------------- Year Ended Year Ended September 30, 1999 September 30, 1998 ------------------ ------------------ INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment loss $ (158,422) $ (143,595) Net realized gain from security transactions .... 802,788 613,829 Net change in unrealized appreciation (depreciation) on investments .................. 2,906,193 (2,932,394) ------------ ----------- Net increase (decrease) in net assets resulting from operations ................... 3,550,559 (2,462,160) ------------ ----------- DISTRIBUTIONS TO SHAREHOLDERS Net realized gains from security transactions ... (527,839) (104,043) ------------ ----------- CAPITAL SHARE TRANSACTIONS Net increase in net assets derived from capital share transactions(a) .......................... 879,426 5,324,737 ------------ ----------- Total increase in net assets ................. 3,902,146 2,758,534 NET ASSETS Beginning of year ............................... 8,342,782 5,584,248 ------------ ----------- End of year (including accumulated net investment loss of $0, and $143,595, respectively) ........ $ 12,244,928 $ 8,342,782 ============ =========== (a) A summary of capital share transactions is as follows: Year Ended Year Ended September 30, 1999 September 30, 1998 ------------------------- -------------------------- Shares Value Shares Value ----------- ------------ ----------- ------------- Shares sold...................... 380,716 $ 5,034,395 825,148 $ 10,967,878 Shares issued on reinvestment of distributions............... 39,298 497,283 8,307 102,677 Shares redeemed.................. (359,360) (4,652,252) (446,620) (5,745,818) --------- ----------- --------- ------------ Net increase..................... 60,654 $ 879,426 386,835 $ 5,324,737 ========= =========== ========= ============ See Notes to Financial Statements. 11 O'SHAUGHNESSY AGGRESSIVE GROWTH FUND FINANCIAL HIGHLIGHTS Per Share Operating Performance (For a capital share outstanding throughout each period) - ----------------------------------------------------------------------------------------------------------- Year Year November 1, 1996* Ended Ended through September 30, 1999 September 30, 1998 September 30, 1997 ------------------ ------------------ ------------------- Net asset value, beginning of period ........ $ 10.73 $ 14.29 $ 10.00 ------- -------- ------- Income from investment operations: Net investment loss ...................... (0.18) (0.15) (0.06) Net realized and unrealized gain (loss) on investments .......................... 4.75 (3.21) 4.35 ------- -------- ------- Total from investment operations ............ 4.57 (3.36) 4.29 ------- -------- ------- Less distributions: From net realized gains .................. (0.69) (0.20) -- ------- -------- ------- Net asset value, end of period .............. $ 14.61 $ 10.73 $ 14.29 ======= ======== ======= Total return ................................ 43.51% (23.70)% 42.90%** Ratios/supplemental data: Net assets, end of period (millions) ........ $ 12.2 $ 8.3 $ 5.6 Ratio of expenses to average net assets: Before expense reimbursement ............. 2.23% 2.24% 7.01%++ After expense reimbursement .............. 1.97% 2.00% 1.98%++ Ratio of net investment loss to average net assets: Before expense reimbursement ............. (1.78)% (1.77)% (6.41)%++ After expense reimbursement .............. (1.52)% (1.53)% (1.39)%++ Portfolio turnover rate ..................... 193.84% 206.30% 104.77% * Commencement of operations. ** Not Annualized. ++ Annualized. See Notes to Financial Statements. 12 O'SHAUGHNESSY AGGRESSIVE GROWTH FUND NOTES TO FINANCIAL STATEMENTS at September 30, 1999 - -------------------------------------------------------------------------------- NOTE 1 -- ORGANIZATION The O'Shaughnessy Aggressive Growth Fund (the "Fund") is a series of shares of O'Shaughnessy Funds, Inc., which is registered under the Investment Company Act of 1940 as a diversified, open-end management investment company. The Fund began operations on November 1, 1996. NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies consistently followed by the Fund. These policies are in conformity with generally accepted accounting principles. A. SECURITY VALUATION: The Fund's investments are carried at market value. Securities listed on an exchange or quoted on a National Market System are valued at the last sale price. Other securities are valued at the mean between the last bid and asked prices. Securities for which market quotations are not readily available, if any, are valued following procedures approved by the Board of Directors. Short-term investments are valued at amortized cost, which approximates market value. B. FEDERAL INCOME TAXES: It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no federal income tax provision is required. C. SECURITY TRANSACTIONS, DIVIDENDS AND DISTRIBUTIONS: Security transactions are accounted for on the trade date. Dividend income and distributions to shareholders are recorded on the ex-dividend date. Realized gains and losses on securities sold are determined under the identified cost basis. D. DEFERRED ORGANIZATION COSTS: The Fund has incurred expenses of $25,191 in connection with its organization. These costs have been deferred and are being amortized on a straight-line basis over a period of sixty months from the date the Fund commenced investment operations. E. USE OF ESTIMATES: 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 at the date of the financial statements and the reported amounts of increases and decreases in net assets during the reporting period. Actual results could differ from those estimates. NOTE 3 -- INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES For the year ended September 30, 1999, O'Shaughnessy Capital Management, Inc. (the "Advisor") provided the Fund with investment management services under an Investment Advisory Agreement. The Advisor furnished all investment advice, office space, facilities, and provides most of the personnel needed by the Fund. As compensation for its services, the Advisor is entitled to a monthly fee at the annual rate of 0.74% based upon the average daily net assets of the Fund. Prior to October 27, 1998, the advisory fee was 1.00% of the average daily net assets of the Fund. 13 O'SHAUGHNESSY AGGRESSIVE GROWTH FUND NOTES TO FINANCIAL STATEMENTS at September 30, 1999, continued - -------------------------------------------------------------------------------- The Fund is responsible for its own operating expenses. The Advisor has agreed to reduce fees payable to it by the Fund or reimburse the Fund to the extent necessary to limit the Fund's aggregate annual operating expenses to 2.00% of average net assets (the "expense cap"). Any such reductions made by the Advisor in its fees or reimbursement of Fund expenses, which are the Fund's obligation, are subject to recapture by the Advisor provided the Fund is able to effect such recapture while keeping total operating expenses at or below the annual expense cap. No recapture will be made after September 30, 2000. Any amounts reimbursed will have the effect of increasing fees otherwise paid by the Fund. For the year ended September 30, 1999, the Advisor reimbursed the Fund in the amount of $27,163. Cumulative reimbursed expenses subject to recapture by the Advisor totaled $136,777 at September 30, 1999. Effective October 1, 1999, the expense cap was eliminated. Investment Company Administration, L.L.C. (the "Administrator") acts as the Fund's Administrator under an Administration Agreement. The Administrator prepares various federal and state regulatory filings, reports and returns for the Fund; prepares reports and materials to be supplied to the trustees; monitors the activities of the Fund's custodian, transfer agent and accountants; coordinates the preparation and payment of Fund's expenses and reviews the Fund's expense accruals. For its services, the Administrator receives a monthly fee per portfolio at the following annual rate: Under $100 million -- 0.10% of average daily net assets, subject to a minimum fee of $40,000 annually $100 to $200 million -- 0.05% of average daily net assets Over $200 million -- 0.03% of average daily net assets Prior to January 5, 1999, the administration fee was subject to a $10,000 annual minimum fee. Effective October 1, 1999, the administration fee is 0.10% of the first $200 million of average net assets and 0.03% of average net assets in excess of $200 million. First Fund Distributors, Inc. (the "Distributor") acts as the Fund's principal underwriter in a continuous public offering of the Fund's shares. The Distributor is an affiliate of the Administrator. Certain officers of the Fund are also officers and/or directors of the Administrator and the Distributor. NOTE 4 -- PURCHASES AND SALES OF SECURITIES For the year ended September 30, 1999, the cost of purchases and the proceeds from sales of securities, excluding short-term securities, were $20,323,341 and $20,419,518, respectively. NOTE 5 -- SECURITIES LENDING At September 30, 1999, securities valued at $701,000 were on loan from the Fund to certain brokers, dealers and other financial institutions who pay the Fund negotiated lenders' fees. For collateral, the Fund received $715,200, an amount equal to 102% of the market value of the loaned securities, marked-to-market HERE IT IS amount equal to 102% of the market value of the loaned securities, marked-to-market daily. The risks to the Fund, of lending its securities, include delay in recovery of securities loaned or loss of rights in the collateral should the borrower of the securities fail financially. 14 O'SHAUGHNESSY AGGRESSIVE GROWTH FUND NOTES TO FINANCIAL STATEMENTS at September 30, 1999, continued - -------------------------------------------------------------------------------- NOTE 6 -- INCOME TAXES At September 30, 1999, the cost of securities for income tax purposes was approximately $11,040,510. Unrealized appreciation and depreciation of securities were as follows: Gross unrealized appreciation............ $1,718,118 Gross unrealized depreciation............ (837,032) ---------- Net unrealized appreciation.............. $ 881,086 ========== Net realized capital gains differ for financial statements and tax purposes primarily due to differing treatment of wash sales. NOTE 7 -- SUBSEQUENT EVENTS At a special meeting held on October 18, 1999, the Board of Directors determined that it would be in the best interest of Fund shareholders to merge the Fund with the O'Shaughnessy Cornerstone Growth Fund. Under the proposal, shares of the Fund would be exchanged for shares of the O'Shaughnessy Cornerstone Growth Fund if approved at a forthcoming meeting of the shareholders. It is anticipated that such an exchange would be done on a tax-free basis. Effective October 19, 1999, the Fund ceased offering new shares. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of O'Shaughnessy Aggressive Growth Fund In our opinion, the accompanying statement of assets and liabilities, including the portfolio of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of O'Shaughnessy Aggressive Growth Fund (one of the series of O'Shaughnessy Funds, Inc., hereafter referred to as the "Fund") at September 30, 1999, and the results of its operations, the changes in its net assets and the financial highlights for the year then ended, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these financial statements in accordance with generally accepted auditing standards, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit, which included confirmation of securities at September 30, 1999 by correspondence with the custodian, provides a reasonable basis for the opinion expressed above. The financial statements for the year ended September 30, 1998 including the financial highlights for the year then ended and the period from November 1, 1996 (commencement of operations) to September 30, 1997, were audited by other independent accountants whose report dated October 23, 1998 expressed an unqualified opinion on those financial statements. PricewaterhouseCoopers LLP New York, New York October 22, 1999 CHANGE IN INDEPENDENT ACCOUNTANT On August 13, 1999, McGladrey & Pullen, LLP ("McGladrey") resigned as independent auditors of the Fund pursuant to an agreement by PricewaterhouseCoopers LLP ("PwC") to acquire McGladrey's investment company practice. The McGladrey partners and professionals serving the Fund at the time of the acquisition joined PwC. The reports of McGladrey on the financial statements of the Fund during the past two fiscal years contained no adverse opinion or disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles. In connection with its audits for the two most recent fiscal years and through August 13, 1999, there were no disagreements with McGladrey on any matter of accounting principle or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of McGladrey would have caused it to make reference to the subject matter of disagreement in connection with its report. Effective August 13, 1999, the Fund, with the approval of its Board of Directors and its Audit Committee, engaged PwC as its independent auditors. INVESTMENT ADVISOR O'Shaughnessy Capital Management, Inc. 35 Mason Street Greenwich, Connecticut 06830 ADMINISTRATOR Investment Company Administration, LLC 4455 E. Camelback Road, Suite 261 E Phoenix, Arizona 85018 DISTRIBUTOR First Fund Distributors, Inc. 4455 E. Camelback Road, Suite 261 E Phoenix, Arizona 85018 TRANSFER AGENT Firstar Mutual Fund Services, LLC 615 E. Michigan Street Milwaukee, Wisconsin 53202 INDEPENDENT AUDITOR PricewaterhouseCoopers LLP 1177 Avenue of the Americas New York, New York 10036 LEGAL COUNSEL Swidler Berlin Shereff Friedman, LLP 919 Third Avenue New York, New York 10022 This report is intended for shareholders of O'Shaughnessy Aggressive Growth Fund and may not be used as sales literature unless preceded or accompanied by a current prospectus. Past performance results shown in this report should not be considered a representation of future performance. Share price and returns will fluctuate so that shares, when redeemed, may be more or less than their original cost. Statements and other information herein are dated and are subject to change. [O'SHAUGHNESSY FUNDS INC. LOGO] 35 Mason Street Greenwich, Connecticut 06830 877-OSFUNDS www.osfunds.com