[LOGO] O'SHAUGHNESSY FUNDS INC. BUILDING NEW STANDARDS FOR INVESTMENT SUCCESS CORNERSTONE GROWTH FUND CORNERSTONE VALUE FUND SEMI-ANNUAL REPORT MARCH 31, 1999 O'SHAUGHNESSY CORNERSTONE GROWTH FUND O'SHAUGHNESSY CORNERSTONE VALUE FUND May 11, 1999 Dear Fellow Shareholder: Enclosed is the Semi-annual Report for the O'Shaughnessy Cornerstone Growth and Cornerstone Value Funds. The Report contains financial statements for the Funds during the six-month period ended March 31, 1999 and the Fund's portfolio on that date. For the period of October 1, 1998 to March 31, 1999, our Cornerstone Growth and Value Funds had a return of 14.42% and 13.58% respectively. The Chinese have a saying (which is considered a curse): "May you live in interesting times." After the upside down market of the last few years, I understand WHY it's a curse. For the last year and a half, the market has been very interesting indeed. Everything that has historically led to disastrous returns in the stock market has been rewarded, while everything that has historically led to superior returns has gone nowhere. We've seen a market where wrong is right; where inexperienced plungers have prospered while seasoned investors have suffered; where the higher the valuation, the higher the price moved. In 1998, just a handful of large-cap growth stocks were responsible for virtually all the S&P 500's rise. And so it continued during the first quarter of 1999, with just a few large-cap growth stocks and the Anything.com stocks continuing to soar while everything else was left behind. The good news is that this narrow rally left a huge contingent of extraordinarily cheap small and cyclical stocks positioned to jump should investor sentiment shift. For while the rally in the nifty few large-cap growth stocks left them dramatically overvalued, the lack of movement in everything else led to valuations that looked better and better--in some instances, you could buy stocks with forecasted double digit earnings growth for almost single digit PE ratios. Bargains like these eventually become too compelling for investors to ignore. I believe that we are just now seeing a movement back into value and smaller stocks. Our Cornerstone Value Fund, rich in undervalued cyclical stocks sporting high dividend yields, jumped 13.69% in April 1999. That certainly seems like a change in investor sentiment to me! Over the same period, the Cornerstone Growth Fund rose 6.12% while the S&P 500 rose 3.87%. Yet despite this strong short-term showing, we remain focused on the long-term. The Cornerstone Value Fund's strong performance in April points to the futility of trying to time the market or your investment style, because no one could have predicted it. And it underscores why your focus should be not on what a fund does over a month but what you can expect it to do over the time that you hold it. That's where the real power of Strategy Indexing(R) has always been--and always will be. 2 O'SHAUGHNESSY CORNERSTONE GROWTH FUND O'SHAUGHNESSY CORNERSTONE VALUE FUND As always, I hope that together, we can reach our long-term goals by 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 no incur expenses and are not available for investment. The Cornerstone Growth Fund's and Cornerstone Value Fund's annual average total returns from inception on November 1, 1996 through March 31, 1999 were 10.32% and 9.76%, respectively. The Cornerstone Growth Fund's and Cornerstone Value Fund's one-year total returns through March 31, 1999 were (15.51)% and (3.21)%, respectively. Performance Figures of the Funds and indexes referenced represent past performance and are not indicative of future performance of the Funds or the indexes. 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. 3 O'SHAUGHNESSY CORNERSTONE GROWTH FUND TOP TEN PORTFOLIO HOLDINGS AT MARCH 31, 1999 (UNAUDITED) - -------------------------------------------------------------------------------- Percent of Net Assets - -------------------------------------------------------------------------------- 1) Echostar Communications Corporation................ 3.59% 2) Optical Coating Laboratory, Inc.................... 3.58% 3) Best Buy Co., Inc.................................. 3.42% 4) Quicksilver, Inc................................... 2.95% 5) Calpine Corporation................................ 2.86% 6) Costco Companies, Inc.............................. 2.68% 7) Gateway 2000, Inc.................................. 2.67% 8) Express Scripts, Inc............................... 2.60% 9) Flextronics International Limited.................. 2.57% 10) Insituform Technologies, Inc....................... 2.56% O'SHAUGHNESSY CORNERSTONE VALUE FUND TOP TEN PORTFOLIO HOLDINGS AT MARCH 31, 1999 (UNAUDITED) - -------------------------------------------------------------------------------- Percent of Net Assets - -------------------------------------------------------------------------------- 1) Telefonos de Mexico-ADR............................ 2.63% 2) British Steel PLC.................................. 2.49% 3) Anglo American Corporation of South Africa Ltd..... 2.45% 4) Fortune Brands, Inc................................ 2.44% 5) Imperial Petroleum, Inc............................ 2.35% 6) National Australia Bank Ltd........................ 2.34% 7) BankAmerica Corporation............................ 2.32% 8) Deere & Company.................................... 2.30% 9) Rio Tinto PLC-ADR.................................. 2.25% 10) BankBoston Corporation............................. 2.23% O'SHAUGHNESSY CORNERSTONE GROWTH FUND PORTFOLIO OF INVESTMENTS AT MARCH 31, 1999 (UNAUDITED) - -------------------------------------------------------------------------------- Shares COMMON STOCKS: 99.82% Market Value - -------------------------------------------------------------------------------- ADVERTISING: 1.69% 192,900 E4L, Inc.*........................................ $ 1,627,594 ----------- AIRLINES: 1.50% 76,000 Amtran, Inc.*..................................... 1,444,000 ----------- APPAREL: 4.11% 67,300 Quicksilver, Inc.................................. 2,843,425 55,000 Tropical Sportswear Int'l Corporation............. 1,120,625 ----------- 3,964,050 ----------- COMPUTERS: 7.77% 48,800 Apple Computer, Inc............................... 1,753,750 20,700 CDW Computer Centers, Inc.*....................... 1,428,300 31,400 Computer Sciences Corporation..................... 1,732,888 37,600 Gateway 2000, Inc.*............................... 2,577,950 ----------- 7,492,888 ----------- COSMETICS / PERSONAL CARE: 2.36% 24,100 The Estee Lauder Companies Inc.................... 2,277,450 ----------- DISTRIBUTION / WHOLESALE: 1.56% 75,300 Miami Computer Supply Corporation................. 1,501,294 ----------- ELECTRIC: 2.86% 75,800 Calpine Corporation*.............................. 2,761,963 ----------- ELECTRONICS: 6.15% 48,700 Flextronics International Limited................. 2,483,700 71,900 Optical Coating Laboratory, Inc................... 3,451,200 ----------- 5,934,900 ----------- ENGINEERING AND CONSTRUCTION: 5.82% 54,400 Granite Construction Incorporated*................ 1,271,600 141,300 Insituform Technologies, Inc.*.................... 2,472,750 47,500 Jacobs Engineering Group Inc.*.................... 1,873,281 ----------- 5,617,631 ----------- FOOD: 3.64% 33,100 Safeway Inc.*..................................... 1,698,444 161,100 The Grand Union Company*.......................... 1,812,375 ----------- 3,510,819 ----------- 5 O'SHAUGHNESSY CORNERSTONE GROWTH FUND PORTFOLIO OF INVESTMENTS AT MARCH 31, 1999 (UNAUDITED), CONTINUED - -------------------------------------------------------------------------------- Shares Market Value - -------------------------------------------------------------------------------- HEALTH CARE: 1.85% 23,500 Wellpoint Healthcare Networks Inc................. $ 1,781,594 ----------- HOME BUILDERS: 1.88% 43,000 NVR, Inc.*........................................ 1,811,375 ----------- HOME FURNISHINGS: 2.07% 33,000 Maytag Corporation................................ 1,992,375 ----------- INSURANCE: 5.05% 34,500 LandAmerica Financial Group, Inc.................. 1,000,500 42,350 Reinsurance Group of America, Incorporated........ 1,802,522 33,200 Stewart Information Services Corporation.......... 1,114,275 60,200 The First American Financial Corporation*......... 951,913 ----------- 4,869,209 ----------- MACHINERY - CONSTRUCTION AND MINING: 2.12% 66,300 Astec Industries, Inc.*........................... 2,047,013 ----------- MACHINERY - DIVERSIFIED: 2.02% 70,700 Specialty Equipment Companies, Inc.*.............. 1,953,088 ----------- MEDIA: 2.43% 27,900 Viacom Inc., Class B.............................. 2,341,856 ----------- MISCELLANEOUS MANUFACTURING: 1.47% 67,100 Myers Industries, Inc............................. 1,417,488 ----------- MOBILE HOME BUILDERS: 3.62% 75,100 Monaco Coach Corporation.......................... 1,731,994 125,900 Winnebago Industries, Inc......................... 1,762,600 ----------- 3,494,594 ----------- PHARMACEUTICALS: 6.84% ----------- 58,200 Alphama Inc., Class A............................. 2,284,350 63,300 Bindley Western Industries, Inc................... 1,808,006 29,200 Express Scripts, Inc.*............................ 2,509,375 ----------- 6,601,731 ----------- RESTAURANTS: 1.77% 98,200 Ruby Tuesday, Inc................................. 1,706,225 ----------- 6 O'SHAUGHNESSY CORNERSTONE GROWTH FUND PORTFOLIO OF INVESTMENTS AT MARCH 31, 1999 (UNAUDITED), CONTINUED - -------------------------------------------------------------------------------- Shares Market Value - -------------------------------------------------------------------------------- RETAIL: 20.29% 51,700 AnnTalor, Inc.*................................... $ 2,284,494 63,400 Best Buy Co., Inc.*............................... 3,296,800 71,400 Brinker International, Inc........................ 1,843,013 28,200 Costco Companies, Inc.*........................... 2,582,063 37,900 CVS Corporation................................... 1,800,250 141,900 Musicland Stores Corporation*..................... 1,250,494 115,300 Sonic Automotive, Inc.*........................... 1,787,150 71,300 The TJX Companies, Inc............................ 2,424,200 25,000 Walmart Stores, Inc............................... 2,304,688 ----------- 19,573,150 ----------- SOFTWARE: 1.53% 429,600 Corel Corporation*................................ 1,476,750 ----------- TELECOMMUNICATION EQUIPMENT: 1.01% 51,600 Superior TeleCom Inc.............................. 973,950 ----------- TELECOMMUNICATIONS: 3.59% 42,400 Echostar Communications Corporation*.............. 3,460,900 ----------- TEXTILES: 1.53% 49,300 Mohawk Industries, Inc............................ 1,479,000 ----------- TOYS / GAMES / HOBBIES: 1.80% 397,800 The Topps Company, Inc............................ 1,740,375 ----------- TRANSPORTATION: 1.51% 43,900 Landstar System, Inc.*............................ 1,454,188 ----------- Total Common Stocks (cost $99,676,571)............ 96,307,447 ----------- Other Assets less Liabilities: 0.18%.............. 173,355 ----------- TOTAL NET ASSETS: 100.00% ........................ $96,480,802 =========== See Notes to Financial Statements. 7 O'SHAUGHNESSY CORNERSTONE VALUE FUND PORTFOLIO OF INVESTMENTS AT MARCH 31, 1999 (UNAUDITED) - -------------------------------------------------------------------------------- Shares COMMON STOCKS: 99.50% Market Value - -------------------------------------------------------------------------------- AUTO MANUFACTURERS: 1.93% 8,400 Ford Motor Company................................ $ 476,700 ----------- AUTO PARTS AND EQUIPMENT: 1.88% 12,200 Dana Corporation.................................. 463,600 ----------- BANKS: 16.54% 9,600 Banc One Corporation.............................. 528,600 8,100 BankAmerica Corporation........................... 572,063 12,700 BankBoston Corporation............................ 550,069 8,100 First Union Corporation........................... 432,844 15,300 KeyCorp........................................... 463,781 6,400 National Australia Bank Ltd.-ADR.................. 577,600 9,300 PNC Bank Corp..................................... 516,731 11,300 Summit Bancorp.................................... 440,700 ----------- 4,082,388 ----------- BEVERAGES: 1.96% 10,600 Diageo PLC-ADR.................................... 484,950 ----------- CHEMICALS: 3.86% 10,700 Eastman Chemical Company.......................... 450,069 5,400 The Dow Chemical Company.......................... 503,213 ----------- 953,281 ----------- DISTRIBUTION / WHOLESALE: 1.72% 14,700 Genuine Parts Company............................. 423,544 ----------- FINANCIAL SERVICES: 1.87% 10,500 Union Planters Corporation........................ 461,344 ----------- FOOD: 1.90% 6,200 General Mills, Inc................................ 468,488 ----------- FOREST PRODUCTS & PAPER: 3.73% 18,200 Westvaco Corporation.............................. 382,200 9,700 Weyerhaeuser Company.............................. 538,350 ----------- 920,550 ----------- HOLDING COMPANIES - DIVERSIFIED: 1.56% 25,900 Tomkins PLC-ADR................................... 385,263 ----------- 8 O'SHAUGHNESSY CORNERSTONE VALUE FUND PORTFOLIO OF INVESTMENTS AT MARCH 31, 1999 (UNAUDITED), CONTINUED - -------------------------------------------------------------------------------- Shares Market Value - -------------------------------------------------------------------------------- HOUSEHOLD PRODUCTS / WARES: 2.44% 15,600 Fortune Brands, Inc............................... $ 603,525 ----------- INSURANCE: 3.65% 11,600 SAFECO Corporation................................ 469,075 13,900 The St. Paul Companies, Inc....................... 431,769 ----------- 900,844 ----------- IRON / STEEL: 6.72% 23,200 Allegheny Teledyne Incorporated................... 439,350 17,400 Anglo American Corporation of South Africa Ltd.-ADR.......................................... 604,650 30,400 British Steel PLC-ADR............................. 613,700 ----------- 1,657,700 ----------- MACHINERY - DIVERSIFIED: 2.30% 14,700 Deere & Company................................... 567,788 ----------- MINING: 2.25% 10,100 Rio Tinto PLC-ADR................................. 555,500 ----------- MISCELLANEOUS MANUFACTURING: 5.25% 10,200 Cooper Industries, Inc............................ 434,775 6,500 Minnesota Mining and Manufacturing Company........ 459,875 14,400 Tenneco Inc....................................... 402,300 ----------- 1,296,950 ----------- OIL & GAS PRODUCERS: 23.16% 7,200 Atlantic Richfield Company........................ 525,600 5,133 BP Amoco-ADR...................................... 518,112 5,900 Chevron Corporation............................... 521,781 30,300 Imperial Petroleum, Inc........................... 579,488 28,400 Occidental Petroleum Corporation.................. 511,200 11,300 Phillips Petroleum Company........................ 533,925 13,000 Shell Transport and Trading Company............... 528,125 13,700 Sunoco, Inc....................................... 494,056 9,200 Texaco, Inc....................................... 522,100 16,600 USX-Marathon Group................................ 456,500 16,700 YPF Sociedad Anonima-ADR.......................... 527,094 ----------- 5,717,981 ----------- PACKAGING AND CONTAINERS: 1.84% 15,900 Crown Cork & Seal Company, Inc.................... 454,144 ----------- 9 O'SHAUGHNESSY CORNERSTONE VALUE FUND PORTFOLIO OF INVESTMENTS AT MARCH 31, 1999 (UNAUDITED), CONTINUED - -------------------------------------------------------------------------------- Shares Market Value - -------------------------------------------------------------------------------- RETAIL: 1.71% 10,400 J.C. Penny Company................................ $ 421,200 ----------- TELEPHONE: 8.40% 26,900 Compania Anonima Nacional Telefonos de Venezuela-ADR..................................... 489,244 16,700 Telefonica de Argentina S.A.-ADR.................. 505,175 9,900 Telefonos de Mexico-ADR........................... 648,450 7,800 U S West, Inc..................................... 429,488 ----------- 2,072,356 ----------- TOBACCO: 3.01% 9,300 Philip Morris Companies Inc....................... 327,244 16,600 RJR Nabisco Holdings Corp......................... 415,000 ----------- 742,244 ----------- TRANSPORTATION: 1.83% 11,600 CSX Corporation................................... 451,675 ----------- Total Common Stocks (cost $24,649,672)............ 24,562,012 ----------- Other Assets less Liabilities: 0.50%.............. 123,366 ----------- TOTAL NET ASSETS: 100.0% ......................... $24,685,378 =========== See Notes to Financial Statements. 10 O'SHAUGHNESSY CORNERSTONE GROWTH FUND O'SHAUGHNESSY CORNERSTONE VALUE FUND STATEMENT OF ASSETS AND LIABILITIES AT MARCH 31, 1999 (UNAUDITED) - --------------------------------------------------------------------------------------------- CORNERSTONE CORNERSTONE GROWTH FUND VALUE FUND - --------------------------------------------------------------------------------------------- ASSETS Investments in securities, at value (identified cost $99,676,571 and $24,649,672, respectively) ............... $ 96,307,447 $ 24,562,012 Receivables: Portfolio securities sold ................................ 129,427 147,175 Fund shares sold ......................................... 483,917 22,744 Dividends and interest ................................... 25,888 92,742 Other .................................................... 8,202 5,005 Deferred organization costs ................................ 13,057 13,057 Prepaid expenses and other ................................. 42,676 12,652 ------------- ------------ Total assets .......................................... 97,010,614 24,855,387 ------------- ------------ LIABILITIES Payables: Fund shares repurchased .................................. 50,346 8 Funds advanced by custodian .............................. 390,260 139,599 Advisory fee ............................................. 62,793 15,351 Administration fee ....................................... 8,418 3,397 Accrued expenses ........................................... 17,995 11,854 ------------- ------------ Total liabilities ..................................... 529,812 170,009 ------------- ------------ NET ASSETS .................................................. $ 96,480,802 $ 24,685,378 ============= ============ NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE [$96,480,802/8,809,707 and $24,685,378/2,138,501 shares outstanding, respectively; 25,000,000,000 shares (par value $.0001) authorized] .................... $ 10.95 $ 11.54 ============= ============ SOURCE OF NET ASSETS Paid-in capital ............................................ $ 111,208,563 $ 23,803,126 (Accumulated) Undistributed net investment (loss) income ................................................... (369,020) 145,582 (Accumulated) Undistributed net realized (loss) gain on investment transactions .......................... (10,989,617) 824,330 Net unrealized depreciation of investments ................. (3,369,124) (87,660) ------------- ------------ Net assets ............................................ $ 96,480,802 $ 24,685,378 ============= ============ See Notes to Financial Statements. 11 O'SHAUGHNESSY CORNERSTONE GROWTH FUND O'SHAUGHNESSY CORNERSTONE VALUE FUND STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31, 1999 (UNAUDITED) - -------------------------------------------------------------------------------- CORNERSTONE CORNERSTONE GROWTH FUND VALUE FUND - -------------------------------------------------------------------------------- INVESTMENT INCOME Income: Dividends (net of foreign witholding tax of $0 and $11,338, respectively) .............. $ 109,332 $ 428,907 Interest ..................................... 10,149 2,080 Securities lending ........................... 93,646 41,338 ------------ ---------- Total income ............................ 213,127 472,325 ------------ ---------- Expenses: Advisory fees ................................ 371,812 88,326 Administration fees (Note 3) ................. 49,039 16,998 Custodian and accounting fees ................ 45,792 21,773 Transfer agent fees .......................... 41,307 13,742 Registration fees ............................ 30,846 14,844 Professional fees ............................ 18,181 5,903 Reports to shareholders ...................... 10,969 4,987 Other ........................................ 8,000 2,983 Directors' fees .............................. 3,689 3,689 Amortization of deferred organization costs .. 2,512 2,512 ------------ ---------- Total expenses .......................... 582,147 175,757 ------------ ---------- NET INVESTMENT (LOSS) INCOME .......... (369,020) 296,568 ------------ ---------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized (loss) gain from security transactions ............................... (1,999,159) 1,273,163 Net change in unrealized appreciation of investments ................................ 14,399,083 1,367,077 ------------ ---------- Net realized and unrealized gain on investments ........................... 12,399,924 2,640,240 ------------ ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ..................... $ 12,030,904 $2,936,808 ============ ========== See Notes to Financial Statements. 12 O'SHAUGHNESSY CORNERSTONE GROWTH FUND O'SHAUGHNESSY CORNERSTONE VALUE FUND STATEMENT OF CHANGES IN NET ASSETS - ---------------------------------------------------------------------------------------------------------------- CORNERSTONE GROWTH FUND CORNERSTONE VALUE FUND -------------------------------- ------------------------------- Six Months Ended Year Ended Six Months Ended Year Ended March 31, 1999# Sept. 30, 1998 March 31, 1999# Sept. 30, 1998 --------------- -------------- --------------- -------------- INCREASE IN NET ASSETS FROM OPERATIONS Net investment (loss) income ................ $ (369,020) $ (665,794) $ 296,568 $ 437,383 Net realized (loss) gain from security transactions .............................. (1,999,159) (1,821,292) 1,273,163 561,340 Net change in unrealized depreciation on investments ............................ 14,399,083 (27,903,738) 1,367,077 (2,626,376) ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ............. 12,030,904 (30,390,824) 2,936,808 (1,627,653) ------------ ------------ ------------ ------------ DISTRIBUTIONS TO SHAREHOLDERS Net investment income ....................... -- -- (511,737) (231,740) Net realized gains from security transactions -- (7,364,392) (1,009,259) (2,470) ------------ ------------ ------------ ------------ TOTAL DISTRIBUTIONS ..................... -- (7,364,392) (1,520,996) (234,210) ------------ ------------ ------------ ------------ CAPITAL SHARE TRANSACTIONS Net increase in net assets derived from capital shares transactions (a) ........... 4,071,249 (26,875,315) 1,343,173 10,318,880 ------------ ------------ ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS . 16,102,153 (10,879,901) 2,758,985 8,457,017 NET ASSETS Beginning of period ......................... 80,378,649 91,258,550 21,926,393 13,469,376 ------------ ------------ ------------ ------------ END OF PERIOD (including undistributed net investment (loss) income of ($369,020), $0, $146,582, and $360,751, respectively) . $ 98,480,802 $ 80,378,649 $ 24,685,378 $ 21,926,393 ============ ============ ============ ============ (a) A summary of capital shares transactions is as follows: Six Months Ended Year Ended March 31, 1999# September 30, 1998 --------------------------- ------------------------------ CORNERSTONE GROWTH FUND Shares Value Shares Value ---------- ------------ ---------- ------------ Shares sold .................................. 4,213,135 $ 45,256,173 9,244,626 $ 116,802,209 Shares issued on reinvestment of distributions -- -- 631,833 7,164,991 Shares redeemed .............................. (3,802,385) (41,184,924) (7,444,063) (97,091,885) ---------- ------------ ---------- ------------ Net increase ................................. 410,750 $ 4,071,249 2,432,396 $ 26,875,315 ========== ============ ========== ============= CORNERSTONE VALUE FUND Shares sold .................................. 667,797 $ 7,674,718 1,691,812 $ 20,010,395 Shares issued on reinvestment of distributions 124,352 1,412,633 19,959 226,714 Shares redeemed .............................. (677,050) (7,744,178) (859,354) (9,918,229) ---------- ------------ ---------- ------------ Net increase ................................. 115,099 $ 1,343,173 852,417 $ 10,318,880 ========== ============ ========== ============= #Unaudited 13 O'SHAUGHNESSY CORNERSTONE GROWTH FUND O'SHAUGHNESSY CORNERSTONE VALUE FUND FINANCIAL HIGHLIGHTS PER SHARE OPERATING PERFORMANCE (FOR A CAPITAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - ------------------------------------------------------------------------------------------------------------------ CORNERSTONE GROWTH FUND CORNERSTONE VALUE FUND ------------------------------------- ----------------------------------- Six Months Year Nov. 1, 1996* Six Months Year Nov. 1, 1996* Ended Ended through Ended Ended through Mar. 31,# Sept. 30, Sept. 30, Mar. 31,# Sept. 30, Sept. 30, 1999 1998 1997 1999 1998 1997 ---------- --------- ------------- ---------- -------- ------------- Net asset value, beginning of period .................. $ 9.57 $ 15.30 $ 10.00 $ 10.84 $ 11.50 $ 10.00 ------ ------- ------- ------- ------- ------- Income from investment operations: Net investment (loss) income ......... (0.04) (0.07) (0.02) 0.15 0.21 0.15 Net realized and unrealized (loss) gain on investments ................ 1.42 (3.88) 5.32 1.31 (0.70) 1.37 ------ ------- ------- ------- ------- ------- Total from investment operations ....... 1.38 (3.95) 5.30 1.46 (0.49) 1.52 ------ ------- ------- ------- ------- ------- Less distributions: From net investment income ........... -- -- -- (0.26) (0.17) (0.02) From net capital gains ............... -- (1.78) -- (0.50) -- -- ------ ------- ------- ------- ------- ------- Total distributions .................... -- (1.78) -- (0.76) (0.17) (0.02) ------ ------- ------- ------- ------- ------- Net asset value, end of period ......... $10.95 $ 9.57 $ 15.30 $ 11.54 $ 10.84 $ 11.50 ====== ======= ======= ======= ======= ======= TOTAL RETURN ........................... 14.42% (27.63%) 53.05%** 13.58% (4.32%) 15.21%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (millions) $ 96.5 $ 80.4 $ 91.3 $ 24.9 $ 21.9 $ 13.5 Ratio of expenses to average net assets: Before expense reimbursement........ 1.16%++ 1.16% 1.63%++ 1.45%++ 1.45% 2.66%++ After expense reimbursement......... 1.16%++ 1.16% 1.56%++ 1.45%++ 1.45% 1.85%++ Ratio of net investment (loss) income to average net assets: Before expense reimbursement........ (0.73%)++ (0.86%) (1.19%)++ 2.45%++ 2.12% 1.93%++ After expense reimbursement......... (0.73%)++ (0.86%) (1.12%)++ 2.45%++ 2.12% 2.73%++ Portfolio turnover rate................. 124.47% 119.98% 15.52% 95.81% 51.56% 2.01% #Unaudited. *Commencement of operations. **Not Annualized. ++Annualized. 14 O'SHAUGHNESSY CORNERSTONE GROWTH FUND O'SHAUGHNESSY CORNERSTONE VALUE FUND NOTES TO FINANCIAL STATEMENTS AT MARCH 31, 1999 (UNAUDITED) - -------------------------------------------------------------------------------- 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 six months ended March 31, 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 15 O'SHAUGHNESSY CORNERSTONE GROWTH FUND O'SHAUGHNESSY CORNERSTONE VALUE FUND NOTES TO FINANCIAL STATEMENTS, Continued - -------------------------------------------------------------------------------- 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. 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 expense were subject to recapture by the Advisor from the Cornerstone Growth Fund at March 31, 1999. Cumulative reimbursed expenses subject to recapture by the Advisor from the Cornerstone Value Fund totaled $46,300 at March 31, 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 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 six months ended March 31, 1999, the cost of purchases and the proceeds from sales of securities, excluding short-term securities, for the Cornerstone Growth Fund were $129,142,792 and $125,684,666, respectively. For the six months ended March 31, 1999, the cost of purchases and the proceeds from sales of securities, excluding short-term securities, for the Cornerstone Value Fund were $23,214,401 and $22,961,540, respectively. NOTE 5 - SECURITIES LENDING For the six months ended March 31, 1999, for the Cornerstone Growth Fund and Cornerstone Value Fund, respectively, loaned securities valued at $9,658,137 and $1,765,294 to certain brokers, dealers and other financial institutions who pay the Funds negotiated lenders' fees. For collateral, the Funds received $9,851,300 and $1,800,600, respectively, an amount equal to at 102% of the market value of the loaned 16 O'SHAUGHNESSY CORNERSTONE GROWTH FUND O'SHAUGHNESSY CORNERSTONE VALUE FUND NOTES TO FINANCIAL STATEMENTS AT MARCH 31, 1999 (UNAUDITED) - -------------------------------------------------------------------------------- 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 March 31, 1999, the cost of securities for income tax purposes in the Cornerstone Growth Fund was approximately $99,824,582. Unrealized appreciation and depreciation of securities were as follows: Gross unrealized appreciation.......................... $5,996,585 Gross unrealized depreciation.......................... (9,365,709) ----------- Net unrealized depreciation...................... $(3,369,124) =========== At March 31, 1999, the cost of securities for income tax purposes in the Cornerstone Value Fund was approximately $24,776,763. Unrealized appreciation and depreciation of securities were as follows: Gross unrealized appreciation.......................... $ 1,332,547 Gross unrealized depreciation.......................... (1,420,207) ----------- Net unrealized depreciation...................... $ (87,660) =========== Cornerstone Growth Fund Cornerstone Value Fund SEMI-ANNUAL REPORT MARCH 31, 1999 INVESTMENT ADVISOR O'Shaughnessy Capital Management, Inc. 35 Mason Street Greenwich, Connecticut 06830 ADMINISTRATOR Investment Company Administration, L.L.C. 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 McGladrey & Pullen, LLP 555 Fifth Avenue New York, New York 10017 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.