O'Shaughnessy Cornerstone Growth Fund
O'Shaughnessy Cornerstone Value Fund
November 10, 1997
Dear Fellow Shareholder:
Thank you for your investment in O'Shaughnessy Funds. I believe that, together,
we are using a better style of investing. We call it Strategy Indexing, because
it combines the best qualities of active and passive management. The Cornerstone
Funds use explicitly stated active stock selection strategies that have been
tested over the last 45 years. We then index our portfolio to these superior
strategies and let them work.
In my view, the problem with most conventionally managed active portfolios is
that their managers often have a fuzzy notion of what to look for when buying
and selling securities. What's more, they often lack the discipline and
consistency to let the good ideas that they do have work. The difference between
what they say and what they do is often an impassable chasm. They talk the talk
but don't walk the walk. I believe that this is the key reason 80% of fund
managers underperform a simple index like the S&P 500 over the long term.
Passive indexes work so well because they remain fully invested in a diversified
group of stocks, day in, day out, with no market-timing whatsoever. Yet the 45
years of evidence I studied for my book What Works on Wall Street suggests that
traditional passive indexes are using the right method--but the wrong strategy.
My research shows that the S&P 500 is simply a big-cap strategy. There are
others--like the Cornerstone Value and Growth Strategies--which work much
better. When compared to strategies like these, the S&P 500's performance is
quite lackluster.
The S&P 500's return of 12.15 percent over the last 45 years is considerably
lower than the historical returns of both of our Cornerstone Strategies. But you
must stick to the strategies to reap the rewards. Jumping in and out of the
market--even in these volatile times--is a fool's game. If you can tune out
short-term fluctuations and not become too elated that the Cornerstone Growth
Fund is up 53.05 percent from commencement of operations on November 1, 1996 to
September 30, 1997, nor discouraged that the Cornerstone Value Fund has lagged
over the short term, you can reach your long-term goals. It is the strong
influence of transitory events that leads to the short-term decisions that
devastate long-term performance. There are no market timers on the Forbes 400,
but many, many investors.
Action without knowledge is foolish, and knowledge without action is futile. The
key is informed action. We now have the data to guide us--together, we can reach
our long-term goals through the power of strategy indexing.
Sincerely,
/s/ James P. O'Shaughnessy
James P. O'Shaughnessy
<PAGE>
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
S&P 500
O'Shaughnessy Composite
Cornerstone Stock Price
Growth Fund Index
01-Nov-96 $10,000 $10,000
31-Dec-96 10,073 10,560
31-Mar-97 9,753 10,842
30-Jun-97 11,864 12,729
30-Sep-97 15,305 13,684
Fund total return from commencement
of operations on November 1, 1996 to
September 30, 1997; 53.05%
Past performance is not predictive of future performance.
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
S&P 500
O'Shaughnessy Composite
Cornerstone Stock Price
Value Fund Index
01-Nov-96 $10,000 $10,000
31-Dec-96 10,028 10,560
31-Mar-97 9,818 10,842
30-Jun-97 10,729 12,729
30-Sep-97 11,521 13,684
Fund total return from commencement
of operations on November 1, 1996 to
September 30, 1997; 15.21%
Past performance is not predictive of future performance.
<PAGE>
3
O'Shaughnessy Cornerstone Growth Fund
TOP TEN PORTFOLIO HOLDINGS at September 30, 1997
- --------------------------------------------------------------------------------
Percent of Net Assets
- --------------------------------------------------------------------------------
Dell Computer Corporation .................. 5.41%
Stolt Comex Seaway S.A ..................... 5.40%
SMART Modular Technologies, Inc. ........... 4.89%
Jabil Circuit, Inc. ........................ 4.85%
CHS Electronics, Inc. ...................... 3.55%
The Morningstar Group, Inc. ................ 3.24%
Brightpoint Inc. ........................... 2.88%
Computer Task Group, Inc. .................. 2.88%
Herman Miller, Inc. ........................ 2.80%
Goody's Family Clothing, Inc. .............. 2.67%
O'Shaughnessy Cornerstone Value
TOP TEN PORTFOLIO HOLDINGS at September 30, 1997
- --------------------------------------------------------------------------------
Percent of Net Assets
- --------------------------------------------------------------------------------
Sun Company, Inc. .......................... 3.08%
Bankers Trust New York Corporation ......... 2.44%
Telefonica de Argentina - ADR .............. 2.43%
Ford Motor Company ......................... 2.41%
Hong Kong Telecom Ltd. - ADR ............... 2.36%
IPL Energy, Inc. ........................... 2.36%
Allied Irish Banks - ADR ................... 2.30%
Shell Transport & Trading - ADR ............ 2.25%
National Westminster Bank - ADR ............ 2.23%
PNC Bank Corporation ....................... 2.23%
<PAGE>
4
O'Shaughnessy Cornerstone Growth Fund
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS at September 30, 1997
- -------------------------------------------------------------------------------------------------------------------
Shares COMMON STOCKS: 99.59% Market Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Aerospace/Defense - Equipment: 2.58%
62,381 Ducommun, Inc.#......................................................... $ 2,350,984
-----------
Airlines: 2.05%
90,599 Mesaba Holdings, Inc.#.................................................. 1,874,267
-----------
Beverages - Non-Alcoholic: 1.64%
149,437 National Beverage Corporation#.......................................... 1,494,370
-----------
Building Products - Air and Heating: 1.60%
46,769 Watsco, Inc............................................................. 1,461,531
-----------
Building Products - Doors and Windows: 1.83%
68,027 Apogee Enterprises, Inc................................................. 1,666,661
-----------
Buildings - Mobile Home/Manufactured Houses: 0.99%
47,563 Coachmen Industries, Inc................................................ 903,697
-----------
Computer Services: 4.68%
38,430 Computer Data Systems, Inc.............................................. 1,638,079
62,673 Computer Task Group, Inc................................................ 2,628,349
-----------
4,266,428
-----------
Computers - Memory Devices: 4.89%
53,715 SMART Modular Technologies, Inc.#....................................... 4,458,345
-----------
Computers - Micro: 7.14%
50,937 Dell Computer Corporation#.............................................. 4,934,522
50,408 Gateway 2000, Inc.#..................................................... 1,584,701
-----------
6,519,223
-----------
Computer Services: 1.38%
33,804 InaCom Corporation#..................................................... 1,257,086
-----------
Consumer Products - Miscellaneous: 2.16%
64,035 Central Garden & Pet Company#........................................... 1,969,076
-----------
Containers - Paper/Plastics: 0.99%
24,322 AEP Industries, Inc.#................................................... 899,914
-----------
</TABLE>
<PAGE>
5
O'Shaughnessy Cornerstone Growth Fund
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS at September 30, 1997, Continued
- -------------------------------------------------------------------------------------------------------------------
Shares Market Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Distribution/Wholesale: 9.06%
56,758 Brightpoint, Inc.#...................................................... $ 2,632,152
118,180 CHS Electronics, Inc.#.................................................. 3,235,177
72,337 Insight Enterprises, Inc.#.............................................. 2,396,163
-----------
8,263,492
-----------
Electric Products - Miscellaneous: 4.85%
67,607 Jabil Circuit, Inc.#.................................................... 4,428,259
-----------
Finance - Investment Banker/Broker: 2.48%
77,795 McDonald & Company Investments, Inc..................................... 2,265,779
-----------
Food - Dairy Products: 3.24%
68,754 The Morningstar Group, Inc.#............................................ 2,956,422
-----------
Food - General: 1.39%
90,760 Imperial Holly Corporation.............................................. 1,270,640
-----------
Footwear and Related Apparel: 2.33%
145,468 Genesco, Inc.#.......................................................... 2,127,470
-----------
Health Care Cost Containment: 2.27%
60,331 FPA Medical Management, Inc.#........................................... 2,073,878
-----------
Home Furnishings: 2.38%
70,121 Ethan Allen Interiors, Inc.............................................. 2,173,751
-----------
Industrial Automation/Robot: 1.39%
38,567 DT Industries, Inc...................................................... 1,272,711
-----------
Life/Health Insurance: 2.26%
42,337 Conseco, Inc............................................................ 2,066,575
-----------
Machinery - Construction and Mining: 1.96%
50,011 The Manitowoc Company, Inc.............................................. 1,784,768
-----------
Machinery - General Industry: 2.64%
118,180 Chart Industries, Inc................................................... 2,407,918
-----------
</TABLE>
<PAGE>
6
O'Shaughnessy Cornerstone Growth Fund
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS at September 30, 1997, Continued
- -------------------------------------------------------------------------------------------------------------------
Shares Market Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Office Furnishings - Original: 2.80%
47,762 Herman Miller, Inc...................................................... $ 2,555,267
-----------
Oil Refining and Marketing: 1.13%
58,081 NGC Corporation......................................................... 1,030,937
-----------
Oil - Field Services: 5.40%
78,808 Stolt Comex Seaway S.A.#................................................ 4,930,425
-----------
Recycling: 1.86%
92,943 Philip Services Corporation#............................................ 1,696,210
-----------
Retail: 2.46%
65,986 Dollar General Corporation.............................................. 2,247,657
-----------
Retail - Apparel/Shoe: 6.31%
75,479 Goody's Family Clothing, Inc.#.......................................... 2,434,198
54,112 Ross Stores, Inc........................................................ 1,846,572
63,114 The Wet Seal, Inc. - Class A#........................................... 1,475,290
-----------
5,756,060
-----------
Retail - Building Products: 1.40%
65,027 Eagle Hardware & Garden, Inc.#.......................................... 1,280,219
-----------
Retail - Consumer Electronics: 2.49%
65,027 CompUSA, Inc.#.......................................................... 2,275,945
-----------
Retail - Restaurants: 2.59%
56,295 CKE Restaurants, Inc.................................................... 2,364,390
-----------
Steel Pipe and Tube: 1.39%
57,751 The Shaw Group, Inc.#................................................... 1,266,913
-----------
Steel - Producers: 2.34%
51,437 Gibraltar Steel Corporation#............................................ 1,253,777
53,186 Olympic Steel, Inc.#.................................................... 877,569
-----------
2,131,346
-----------
</TABLE>
<PAGE>
7
O'Shaughnessy Cornerstone Growth Fund
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS at September 30, 1997, Continued
- -------------------------------------------------------------------------------------------------------------------
Shares Market Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Tobacco: 1.24%
67,277 Standard Commercial Corporation#........................................ $ 1,135,299
-----------
Total Common Stocks (cost $80,748,382).................................. 90,883,913
-----------
Total Investments in Securities (cost $80,748,382+): 99.59% ............ 90,883,913
Other Assets less Liabilities: 0.41%.................................... 374,637
-----------
Total Net Assets: 100.0% ............................................... $91,258,550
===========
#Non-income producing security.
+At September 30, 1997, the cost of securities for Federal tax purposes was the
same as the basis for financial reporting. Unrealized appreciation and
depreciation of securities were as follows:
Gross unrealized appreciation........................................... $10,434,134
Gross unrealized depreciation........................................... (298,603)
-----------
Net unrealized appreciation....................................... $10,135,531
===========
</TABLE>
See Notes to Financial Statements.
<PAGE>
8
O'Shaughnessy Cornerstone Value Fund
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS at September 30, 1997
- -------------------------------------------------------------------------------------------------------------------
Shares COMMON STOCKS: 98.26% Market Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Airlines: 2.13%
8,377 KLM Royal Dutch Air - NY REG............................................ $ 287,436
-----------
Auto - Cars/Light Trucks: 4.32%
7,007 Chrysler Corporation.................................................... 257,945
7,173 Ford Motor Company...................................................... 324,578
-----------
582,523
-----------
Building and Construction Products - Miscellaneous: 0.76%
4,261 Hanson PLC - ADR#....................................................... 102,797
-----------
Building Products - Commercial/Aggreg.: 1.84%
10,175 Boral Ltd. - ADR........................................................ 248,016
-----------
Chemicals - Diversified: 7.60%
35,100 Courtaulds PLC - ADR.................................................... 193,050
2,954 Dow Chemical............................................................ 267,891
4,445 Imperial Chemical Industries PLC - ADR.................................. 288,941
10,430 Lyondell Petrochemical.................................................. 273,136
-----------
1,023,018
-----------
Chemicals - Specialty: 1.60%
4,727 Arco Chemical Company................................................... 215,079
-----------
Commercial Banks - Europe: 4.52%
5,891 Allied Irish Banks - ADR................................................ 310,382
3,327 National Westminster Bank - ADR......................................... 300,262
-----------
610,644
-----------
Commercial Banks - Pacific Rim: 1.88%
8,108 Westpac Banking - ADR................................................... 252,868
-----------
Commercial Services: 3.53%
9,731 Dun & Bradstreet Corporation............................................ 276,117
6,766 Mayne Nickless Ltd. - ADR#.............................................. 198,993
-----------
475,110
-----------
Commercial Services - Finance: 1.76%
7,051 Deluxe Corporation...................................................... 236,649
-----------
Consumer Products: 1.17%
4,666 Fortune Brands, Inc.#................................................... 157,186
-----------
</TABLE>
<PAGE>
9
O'Shaughnessy Cornerstone Value Fund
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS at September 30, 1997, Continued
- -------------------------------------------------------------------------------------------------------------------
Shares Market Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Containers - Paper/Plastic: 5.13%
9,059 Amcor Ltd. - ADR........................................................ $ 231,005
37,998 Rexam PLC - ADR......................................................... 218,488
15,492 Stone Container Corporation#............................................ 241,094
-----------
690,587
-----------
Diversified Operations: 1.32%
4,265 Energy Group PLC - ADR#................................................. 177,531
-----------
Diversified Manufacturing Operations: 3.72%
22,960 Pacific Dunlop Ltd. - ADR............................................... 255,430
5,130 Tenneco, Inc............................................................ 245,599
-----------
501,029
-----------
Miscellaneous Manufacturer: 2.09%
12,467 Tomkins PLC - ADR....................................................... 282,066
-----------
Money Center Banks: 2.44%
2,686 Bankers Trust New York Corporation...................................... 329,035
-----------
Music/Clubs: 1.40%
15,343 Rank Group PLC - ADR.................................................... 187,952
-----------
Office Supplies and Forms: 1.59%
11,257 Moore Corporation, Ltd.................................................. 213,883
-----------
Oil Companies - Integrated: 9.45%
3,491 Atlantic Richfield Company.............................................. 298,262
9,879 Occidental Petroleum Corporation........................................ 256,237
6,800 Shell Transport & Trading ADR........................................... 302,600
9,484 Sun Company, Inc........................................................ 415,518
-----------
1,272,617
-----------
Paper and Related Products: 2.22%
4,848 Union Camp Corporation.................................................. 299,061
-----------
Pipelines: 2.36%
8,007 IPL Energy, Inc......................................................... 317,402
-----------
Publishing - Periodicals: 1.28%
5,738 Readers Digest Association, Class A..................................... 172,140
-----------
</TABLE>
<PAGE>
10
O'Shaughnessy Cornerstone Value Fund
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS at September 30, 1997, Continued
- -------------------------------------------------------------------------------------------------------------------
Shares Market Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Retail - Major Department Store: 2.05%
4,743 JC Penney Company....................................................... $ 276,280
-----------
Retail - Miscellaneous/Diversified: 1.95%
7,007 Coles Myer Ltd. - ADR................................................... 263,200
-----------
Steel - Producers: 1.82%
8,406 British Steel PLC - ADR................................................. 244,825
-----------
Super - Regional Banks - U.S.: 2.23%
6,144 PNC Bank Corporation.................................................... 299,904
-----------
Telecommunication Services: 13.46%
9,688 BCE, Inc................................................................ 289,429
3,968 British Telecom, PLC - ADR.............................................. 264,368
5,100 GTE Corporation......................................................... 231,412
6,232 Royal PTT Nederland NV - ADR............................................ 243,437
5,725 Telecom CP New Zealand - ADR............................................ 231,862
8,433 Tele Danmark - A/S ADR.................................................. 225,056
8,930 Telefonica de Argentina - ADR........................................... 327,792
-----------
1,813,356
-----------
Telephone - Local: 6.55%
3,581 Bell Atlantic Corporation............................................... 288,047
14,195 Hong Kong Telecom Ltd. - ADR............................................ 317,613
7,171 U.S. West Communications Group.......................................... 276,083
-----------
881,743
-----------
Telephone - Integrated: 1.80%
5,949 Southern New England Telecom............................................ 243,537
-----------
Tobacco: 4.29%
4,673 Gallaher Group PLC - ADR................................................ 89,663
6,128 Philip Morris Cos., Inc................................................. 254,695
6,797 RJR Nabisco Holdings Corporation........................................ 233,647
-----------
578,005
-----------
Total Common Stocks (cost $12,063,840).................................. 13,235,479
-----------
</TABLE>
<PAGE>
11
O'Shaughnessy Cornerstone Value Fund
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS at September 30, 1997, Continued
- -------------------------------------------------------------------------------------------------------------------
Principal Amount SHORT-TERM INVESTMENTS: 0.77% Market Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
$103,291 Wisconsin Electric Demand Note, 5.1852%, 10/1/1997*
(cost $103,291)......................................................... $ 103,291
-----------
Total Investments in Securities (cost $12,167,131+): 99.03% ............ 13,338,770
Other Assets less Liabilities: 0.97%.................................... 130,606
-----------
Total Net Assets: 100.0% ............................................... $13,469,376
===========
#Non-income producing security.
*Variable rate demand notes are considered short-term obligations and are
payable on demand. Interest rates change periodically on specified dates. The
rates listed are as of September 30, 1997.
+At September 30, 1997, the cost of securities for Federal tax purposes was the
same as the basis for financial reporting. Unrealized appreciation and
depreciation of securities were as follows:
Gross unrealized appreciation........................................... $ 1,306,981
Gross unrealized depreciation........................................... (135,342)
-----------
Net unrealized appreciation....................................... $ 1,171,639
===========
</TABLE>
See Notes to Financial Statements.
<PAGE>
12
O'Shaughnessy Cornerstone Growth Fund
O'Shaughnessy Cornerstone Value Fund
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES at September 30, 1997
- ----------------------------------------------------------------------------------------------------------------------
Cornerstone Cornerstone
Growth Fund Value Fund
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments in securities, at value (identified cost $80,748,382
and $12,167,131, respectively) (Note 2-A) ...................... $ 90,883,913 $ 13,338,770
Receivables:
Fund shares sold ............................................ 2,474,193 535,464
Dividends ................................................... 17,801 49,058
Deferred organization costs ....................................... 20,610 20,610
Prepaid expenses and other ........................................ 27,973 24,551
------------ ------------
Total assets .......................................... 93,424,490 13,968,453
------------ ------------
LIABILITIES
Payables:
Portfolio securities purchased .............................. 35,050 456,604
Fund shares repurchased ..................................... 429,596 1,047
Funds advanced by custodian ................................. 1,599,864 -0-
Advisory fee ................................................ 68,128 7,449
Administration fee .......................................... 5,030 1,012
Accrued expenses .................................................. 28,272 32,965
------------ ------------
Total liabilities ..................................... 2,165,940 499,077
------------ ------------
NET ASSETS .............................................................. $ 91,258,550 $ 13,469,376
============ ============
Net asset value, offering price and redemption price per share
($91,258,550/5,966,561 and $13,469,376/1,170,985 shares
outstanding, respectively; 25,000,000,000 shares of each fund
(par value $.0001) authorized) .............................. $ 15.30 $ 11.50
============ ============
SOURCE OF NET ASSETS
Paid-in capital ................................................... $ 80,927,793 $ 12,141,073
Accumulated net investment income (loss) .......................... (143,591) 155,108
Undistributed net realized gain on investment transactions ........ 338,817 1,556
Net unrealized appreciation of investments ........................ 10,135,531 1,171,639
------------ ------------
Net assets .................................................. $ 91,258,550 $ 13,469,376
============ ============
</TABLE>
See Notes to Financial Statements
<PAGE>
13
O'Shaughnessy Cornerstone Growth Fund
O'Shaughnessy Cornerstone Value Fund
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
For the Period November 1, 1996* through September 30, 1997
- ------------------------------------------------------------------------------------------------------------------------
Cornerstone Cornerstone
Growth Fund Value Fund
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Income:
Dividends (net of foreign witholding tax of $0 and
$22,525, respectively) ..................................... $ 26,571 $ 251,453
Interest ...................................................... 31,008 11,335
------------ ------------
Total income ............................................ 57,579 262,788
------------ ------------
Expenses:
Advisory fees (Note 3) ........................................ 92,933 42,147
Custodian and accounting fees ................................. 22,301 22,301
Administration fee (Note 3) ................................... 20,434 14,847
Professionals' fees ........................................... 18,565 18,565
Registration fees ............................................. 13,060 13,060
Reports to shareholders ....................................... 9,031 9,031
Transfer agent fees ........................................... 9,963 9,964
Directors' fees ............................................... 9,261 9,261
Amortization of organization costs (Note 2-D) ................. 4,580 4,580
Other ......................................................... 9,575 8,553
------------ ------------
Total expenses .......................................... 209,703 152,309
Less: expense reimbursement (Note 3) .................... (8,879) (46,300)
------------ ------------
Net expenses ............................................ 200,824 106,009
------------ ------------
Net investment income (loss) ...................... (143,245) 156,779
------------ ------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on security transactions .................... 338,817 1,556
Net unrealized appreciation of investments .................... 10,135,531 1,171,639
------------ ------------
Net realized and unrealized gain on investments ......... 10,474,348 1,173,195
------------ ------------
Net Increase in Net Assets Resulting
from Operations ................................. $ 10,331,103 $ 1,329,974
============ ============
</TABLE>
*Commencement of operations.
See Notes to Financial Statements
<PAGE>
14
O'Shaughnessy Cornerstone Growth Fund
O'Shaughnessy Cornerstone Growth Fund
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
For the Period November 1, 1996* through September 30, 1997
- ---------------------------------------------------------------------------------------------------------------------
Cornerstone Cornerstone
Growth Fund Value Fund
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS
Net investment income (loss) .......................................... $ (143,245) $ 156,779
Net realized gain on security transactions ............................ 338,817 1,556
Net unrealized appreciation of investments ............................ 10,135,531 1,171,639
------------ ------------
Net increase in net assets resulting from operations ............ 10,331,103 1,329,974
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS
Dividends paid from net investment income ............................. (346) (1,671)
------------ ------------
CAPITAL SHARE TRANSACTIONS
Net increase in net assets derived from capital shares transactions (a) 80,902,793 12,116,073
------------ ------------
Total increase in net assets .................................... 91,233,550 13,444,376
NET ASSETS
Beginning of period ................................................... 25,000 25,000
------------ ------------
End of period (including accumulated net investment (loss) income
of ($143,591) and $155,108, respectively) ...................... $ 91,258,550 $ 13,469,376
============ ============
(a) Summary of capital shares transactions is as follows:
November 1, 1996*
through
September 30, 1997
----------------------------------
Cornerstone Growth Fund Shares Value
----------------------- --------- ------------
Shares sold .................................. 6,334,346 $ 85,931,562
Shares issued on reinvestment of distributions 30 297
Shares redeemed .............................. (370,315) (5,029,066)
--------- ------------
Net increase ................................. 5,964,061 $ 80,902,793
========= ============
Cornerstone Value Fund
----------------------
Shares sold .................................. 1,309,392 $ 13,619,016
Shares issued on reinvestment of distributions 132 1,322
Shares redeemed .............................. (141,039) (1,504,265)
--------- ------------
Net increase ................................. 1,168,485 $ 12,116,073
========= ============
</TABLE>
*Commencement of operations.
See Notes to Financial Statements.
<PAGE>
15
O'Shaughnessy Cornerstone Growth Fund
O'Shaughnessy Cornerstone Value Fund
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
Per Share Operating Performance (For a capital share outstanding throughout the period)
November 1, 1996* through September 30, 1997
- -------------------------------------------------------------------------------------------------------
Cornerstone Cornerstone
Growth Fund Value Fund
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period ....................... $ 10.00 $ 10.00
------------ ------------
Income from investment operations:
Net investment income (loss) ......................... (.02) .13
Net realized and unrealized gain on investments ...... 5.32 1.37
------------ ------------
Total from investment operations ........................... 5.30 1.50
------------ ------------
Net asset value, end of period ............................. $ 15.30 $ 11.50
============ ============
Total return ............................................... 53.05%** 15.21%**
Ratios/supplemental data:
Net assets, end of period (thousands) ...................... $ 91,259 $ 13,469
Ratio of expenses to average net assets:
Before expense reimbursement ......................... 1.63%+ 2.66%+
After expense reimbursement .......................... 1.56%+ 1.85%+
Ratio of net investment income (loss) to average net assets:
Before expense reimbursement ......................... (1.19%)+ 1.93%+
After expense reimbursement .......................... (1.12%)+ 2.73%+
Portfolio turnover rate .................................... 15.52% 2.01%
Average commission rate paid per share ..................... $ 0.0497 $ 0.0500
</TABLE>
*Commencement of operations.
**Not Annualized.
+Annualized.
See Notes to Financial Statements.
<PAGE>
16
O'Shaughnessy Cornerstone Growth Fund
O'Shaughnessy Cornerstone Value Fund
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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. Cornerstone Growth Fund seeks long-term capital growth.
Cornerstone Value Fund seeks both current income and long-term capital growth.
Each Fund seeks to achieve its objective utilizing distinct processes of
Strategy Indexing(TM) developed by the investment advisor.
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 $25,190 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 Funds 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 amount 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 period ended September 30, 1997, 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 at the annual rate of 0.74% based upon the average daily net assets
of the Funds.
<PAGE>
17
O'Shaughnessy Cornerstone Growth Fund
O'Shaughnessy Cornerstone Value Fund
NOTES TO FINANCIAL STATEMENTS, 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 the Funds' aggregate annual operating expenses to
2.00% of average net assets annually. Any such reductions made by the Advisor in
its fees or payments may be subject to reimbursement by the Funds through
September 30, 2000 if the Funds are able to effect such reimbursement and remain
in compliance with any expense limitations in effect. For the period ended
September 30, 1997, the Advisor has reimbursed the Cornerstone Growth Fund and
the Cornerstone Value Fund in the amounts of $8,879 and $46,300, respectively.
Investment Company Administration Corporation (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 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 $10,000 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 period ended September 30, 1997, the cost of purchases and the
proceeds from sales of securities, excluding short-term securities, for the
Cornerstone Growth Fund, were $83,183,512 and $2,773,948, respectively.
For the period ended September 30, 1997, the cost of purchases and the
proceeds from sales of securities, excluding short-term securities, for the
Cornerstone Value Fund, were $12,193,883 and $131,599, respectively.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board Of Directors and Shareholders
O'Shaughnessy Cornerstone Growth Fund and
O'Shaughnessy Cornerstone Value Fund
We have audited the accompanying statements of assets and liabilities, including
the portfolios of investments, of O'Shaughnessy Cornerstone Growth Fund and
O'Shaughnessy Cornerstone Value Fund as of September 30, 1997, the related
statements of operations, the statements of changes in net assets, and the
financial highlights for the period from November 1, 1996 (commencement of
operations) to September 30, 1997. These financial statements and financial
highlights are the responsibility of Funds' management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of September 30, 1997,
by correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
O'Shaughnessy Cornerstone Growth Fund and O'Shaughnessy Cornerstone Value Fund,
as of September 30, 1997, the results of operations, the changes in net assets
and the financial highlights for the period indicated, in conformity with
generally accepted accounting principles.
/s/ McGladrey & Pullen, L.L.P.
New York, New York
October 24, 1997
<PAGE>
INVESTMENT ADVISOR
O'Shaughnessy Capital Management, Inc.
35 Mason Street
Greenwich, Connecticut 06830
ADMINISTRATOR
Investment Company Administration Corporation
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 Trust Company
615 E. Michigan Street
Milwaukee, Wisconsin 53202
INDEPENDENT AUDITOR
McGladrey & Pullen, LLP
555 Fifth Avenue
New York, New York 10017
LEGAL COUNSEL
Shereff, Friedman, Hoffman & Goodman, 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.
<PAGE>
[Back Cover Artwork] [Front Cover Artwork]
O'Shaughnessy Cornerstone
Growth Fund
O'Shaughnessy Cornerstone
Value Fund
Annual Report
September 30, 1997
<PAGE>
O'Shaughnessy Dogs of the Market(TM) Fund
November 10, 1997
Dear fellow Shareholder:
Thank you for your investment in O'Shaughnessy Dogs of the Market Fund. I
believe that, together, we are using a better style of investing. We call it
Strategy Indexing, because it combines the best qualities of active and passive
management. The Dogs of the Market Fund uses active stock selection strategies
that are explicitly stated and historically tested (in fact, one component of
the Fund, the Dogs of the Dow, was tested all the way back to 1929). We then
index our portfolio to these superior strategies and let them work.
Our Dogs of the Market Fund is the only pure dogs mutual fund available today.
It always invests 100 percent of its money in high-yielding blue chip
stocks--the top 10 yielding stocks from the Dow Jones Industrial Average and the
top 20 yielding stocks from the S&P Industrial Index that also have market
capitalization higher than $1 billion and financial strength ratings of A or
higher. Other dog funds limit their investment in high-yielding blue chips to
half of the portfolio, with the other half going into either bonds or an S&P 500
proxy. Historically, such strategies have significantly underperformed a pure
dogs approach. What's more, for the 22 years ending 1996, this 30 stock Dog
strategy actually did slightly better than the 10 Dow dogs alone, with a lower
standard deviation of return. And, as indicated in your prospectus, the strategy
did much better than the S&P 500, compounding at 19.71 percent, compared to
15.90 percent for the S&P 500.
But you must stick to the strategies to reap the rewards. Jumping in and out of
the market--even in these volatile times--is a fool's game. If you can tune out
short-term fluctuations and not become too elated when the portfolio is soaring
nor discouraged when it lags over the short term, you can reach your long-term
goals. It is the strong influence of transitory events that leads to the
short-term goals. It is the strong influence of transitory events that leads to
the short-term decisions that devastate long-term performance. There are no
market timers on the Forbes 400, but many, many investors.
Action without knowledge is foolish, and knowledge without action is futile. The
key is informed action. We now have the data to guide us--together, we can reach
our long-term goals through the power of strategy indexing.
Sincerely,
/s/ James P. O'Shaughnessy
James P. O'Shaughnessy
<PAGE>
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
O'Shaughnessy S&P 500
Dogs of the Composite Stock
Market Price Index
01-Nov-96 $10,000 $10,000
31-Dec-96 10,032 10,560
31-Mar-97 10,072 10,842
30-Jun-97 11,223 12,729
30-Sep-97 11,974 13,684
Fund total return from commencement
of operations on November 1, 1996 to
September 30, 1997; 19.74%
Past performance is not predictive of future performance.
<PAGE>
3
O'Shaughnessy Dogs of the Market(TM) Fund
TOP TEN PORTFOLIO HOLDINGS at September 30, 1997
- --------------------------------------------------------------------------------
Percent of Net Assets
- --------------------------------------------------------------------------------
SBC Communications, Inc. ..................... 3.63%
American Telephone & Telegraph Company ....... 3.59%
H.J. Heinz Company ........................... 3.55%
Bristol-Myers Squibb Company ................. 3.50%
ALLTEL Corporation ........................... 3.49%
Pitney Bowes, Inc. ........................... 3.48%
Royal Dutch Petroleum Company ................ 3.45%
Chevron Corporation .......................... 3.44%
American Greetings Corporation - Class A ..... 3.43%
The Limited, Inc. ............................ 3.43%
<PAGE>
4
O'Shaughnessy Dogs of the Market(TM) Fund
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS at September 30, 1997
- -------------------------------------------------------------------------------------------------------------------
Shares COMMON STOCKS: 99.28% Market Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Auto - Cars/Light Trucks: 3.29%
3,564 General Motors Corporation.............................................. $ 238,565
----------
Auto/Truck Parts and Equipment: 3.19%
7,495 Genuine Parts Company................................................... 230,940
---------
Beverages - Wine/Spirits: 3.33%
4,857 Brown-Forman Corporation - Class B...................................... 241,332
----------
Brewery: 3.40%
5,466 Anheuser-Busch Companies, Inc........................................... 246,653
----------
Chemicals - Diversified: 3.06%
3,599 E. I. du Pont de Nemours and Company.................................... 221,563
----------
Chemicals - Specialty: 3.30%
5,975 Nalco Chemical Company.................................................. 239,373
----------
Cosmetics and Toiletries: 3.01%
4,454 International Flavors & Fragrances, Inc................................. 218,246
----------
Diversified Manufacturing Operations: 6.46%
2,545 Minnesota Mining and Manufacturing Company.............................. 235,413
5,289 National Service Industries, Inc........................................ 232,385
----------
467,798
----------
Filtration/Separation Products: 2.95%
9,899 Pall Corporation........................................................ 213,447
----------
Foods - Miscellaneous/Diversified: 3.55%
5,579 H. J. Heinz Company..................................................... 257,680
----------
Food - Retail: 3.25%
6,653 Winn-Dixie Stores, Inc.................................................. 235,766
----------
Household Products/Wares: 6.69%
6,745 American Greetings Corporation - Class A................................ 248,722
9,241 Rubbermaid, Inc......................................................... 236,223
----------
484,945
----------
</TABLE>
<PAGE>
5
O'Shaughnessy Dogs of the Market(TM) Fund
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS at September 30, 1997, Continued
- -------------------------------------------------------------------------------------------------------------------
Shares Market Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Machinery - Construction and Mining: 2.94%
3,945 Caterpillar, Inc........................................................ $ 212,784
----------
Medical - Drugs: 6.75%
3,224 American Home Products Corporation...................................... 235,352
3,069 Bristol-Myers Squibb Company............................................ 253,960
----------
489,312
----------
Money Center Banks: 3.31%
2,114 J.P. Morgan & Co., Inc.................................................. 240,203
----------
Office Automation and Equipment: 3.48%
3,033 Pitney Bowes, Inc....................................................... 252,308
----------
Oil Companies - Integrated: 10.23%
2,998 Chevron Corporation..................................................... 249,396
3,783 Exxon Corporation....................................................... 242,348
4,504 Royal Dutch Petroleum Company........................................... 249,972
----------
741,716
----------
Photo Equipment and Supplies: 3.19%
3,557 Eastman Kodak Company................................................... 230,983
----------
Retail - Apparel/Shoe: 3.43%
10,167 The Limited, Inc........................................................ 248,456
----------
Retail - Major Department Store: 3.35%
4,454 The May Department Stores Company....................................... 242,743
----------
Telephone - Integrated: 3.63%
4,292 SBC Communications, Inc................................................. 263,422
----------
Telephone - Local: 3.49%
7,339 ALLTEL Corporation...................................................... 253,196
----------
Telephone - Long Distance: 3.59%
5,876 American Telephone & Telegraph Company.................................. 260,380
----------
</TABLE>
<PAGE>
6
O'Shaughnessy Dogs of the Market(TM) Fund
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS at September 30, 1997, Continued
- -------------------------------------------------------------------------------------------------------------------
Shares Market Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Tobacco: 6.41%
5,246 Philip Morris Companies., Inc........................................... $ 218,037
8,060 UST, Inc................................................................ 246,334
----------
464,371
----------
Total Common Stocks (cost $6,933,728)................................... 7,196,182
----------
Total Investments in Securities (cost $6,933,728+): 99.28% ............. 7,196,182
Other Assets less Liabilities: 0.72%.................................... 51,881
----------
Total Net Assets: 100.0% ............................................... $7,248,063
==========
+At September 30, 1997, the cost of securities for Federal tax purposes was the
same as the basis for financial reporting. Unrealized appreciation and
depreciation of securities were as follows:
Gross unrealized appreciation........................................... $ 324,401
Gross unrealized depreciation........................................... (61,947)
---------
Net unrealized appreciation....................................... $ 262,454
=========
</TABLE>
See Notes to Financial Statements.
<PAGE>
7
O'Shaughnessy Dogs of the Market(TM) Fund
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES at September 30, 1997
- --------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Investments in securities, at value (identified cost $6,933,728) (Note 2-A) $7,196,182
Cash ...................................................................... 100,438
Receivables:
Fund shares sold .................................................... 10,477
Dividends ........................................................... 22,351
Deferred organization costs ............................................... 20,611
Prepaid expenses and other ................................................ 17,149
----------
Total assets .................................................. 7,367,208
----------
LIABILITIES
Payables:
Fund shares repurchased ............................................. 86,603
Advisory fee ........................................................ 2,806
Administration fee .................................................. 822
Accrued expenses .......................................................... 28,914
----------
Total liabilities ............................................. 119,145
----------
NET ASSETS ...................................................................... $7,248,063
==========
Net asset value, offering price and redemption price per share
($7,248,063/606,196 shares outstanding;
25,000,000,000 shares (par value $.0001) authorized) ................ $ 11.96
==========
SOURCE OF NET ASSETS
Paid-in capital ........................................................... $6,486,736
Undistributed net investment income ....................................... 54,579
Undistributed net realized gain on investment transactions ................ 444,294
Net unrealized appreciation of investments ................................ 262,454
----------
Net assets .......................................................... $7,248,063
==========
</TABLE>
See Notes to Financial Statements.
<PAGE>
8
O'Shaughnessy Dogs of the Market(TM) Fund
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
For the Period November 1, 1996* through September 30, 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Income:
Dividends (net of foreign witholding tax of $1,909) ............................. $ 110,201
Interest ........................................................................ 6,978
---------
Total income .............................................................. 117,179
---------
Expenses:
Advisory fees (Note 3) .......................................................... 26,765
Custodian and accounting fees ................................................... 22,301
Administration fee (Note 3) ..................................................... 14,548
Professionals' fees ............................................................. 16,037
Registration fees ............................................................... 13,486
Reports to shareholders ......................................................... 9,031
Transfer agent fees ............................................................. 9,963
Directors' fees ................................................................. 9,261
Amortization of organization costs (Note 2-D) ................................... 4,580
Other ........................................................................ 7,036
---------
Total expenses ............................................................ 133,008
Less: expense reimbursement (Note 3) ...................................... (71,199)
---------
Net expenses .............................................................. 61,809
---------
Net investment income ............................................... 55,370
---------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on security transactions ...................................... 444,294
Net unrealized appreciation of investments ...................................... 262,454
---------
Net realized and unrealized gain on investments ........................... 706,748
---------
Net Increase in Net Assets Resulting from Operations ................ $ 762,118
=========
</TABLE>
*Commencement of operations.
See Notes to Financial Statements.
<PAGE>
9
O'Shaughnessy Dogs of the Market(TM) Fund
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
- ---------------------------------------------------------------------------------------------
November 1, 1996*
through
September 30, 1997
- ---------------------------------------------------------------------------------------------
<S> <C>
INCREASE IN NET ASSETS FROM
OPERATIONS
Net investment income .................................................. $ 55,370
Net realized gain on security transactions ............................. 444,294
Net unrealized appreciation of investments ............................. 262,454
-----------
Net increase in net assets resulting from operations ............. 762,118
-----------
DISTRIBUTIONS TO SHAREHOLDERS
Dividends paid from net investment income .............................. (791)
-----------
CAPITAL SHARE TRANSACTIONS
Net increase in net assets derived from capital shares transactions (a) 6,461,736
-----------
Total increase in net assets ..................................... 7,223,063
NET ASSETS
Beginning of period .................................................... 25,000
-----------
End of period (including undistributed net investment income of $54,579) $ 7,248,063
===========
</TABLE>
(a) A summary of capital shares transactions is as follows:
<TABLE>
<CAPTION>
November 1, 1996*
through
September 30, 1997
----------------------------
Shares Value
------- -----------
<S> <C> <C>
Shares sold .................................. 695,230 $ 7,496,135
Shares issued on reinvestment of distributions 66 662
Shares redeemed .............................. (91,600) (1,035,061)
------- -----------
Net increase ................................. 603,696 $ 6,461,736
======= ===========
</TABLE>
*Commencement of operations.
See Notes to Financial Statements.
<PAGE>
10
O'Shaughnessy Dogs of the Market(TM) Fund
FINANCIAL HIGHLIGHTS
Per Share Operating Performance
(For a capital share outstanding throughout the period)
- ----------------------------------------------------------------------------
November 1, 1996*
through
September 30, 1997
- ----------------------------------------------------------------------------
Net asset value, beginning of period ....................... $ 10.00
-------
Income from investment operations:
Net investment income ................................ .10
Net realized and unrealized gain on investments ...... 1.87
-------
Total from investment operations ........................... 1.97
-------
Less distributions:
From net investment income ........................... (.01)
-------
Net asset value, end of period ............................. $ 11.96
=======
Total Return ............................................... 19.74%**
Ratios/supplemental data:
Net assets, end of period (thousands) ...................... $ 7,248
Ratio of expenses to average net assets:
Before expense reimbursement ......................... 4.28%+
After expense reimbursement .......................... 1.99%+
Ratio of net investment income (loss) to average net assets:
Before expense reimbursement ......................... (0.51%)+
After expense reimbursement .......................... 1.78%+
Portfolio turnover rate .................................... 118.44%
Average commission rate paid per share ..................... $ .0449
*Commencement of operations.
**Not Annualized.
+Annualized.
See Notes to Financial Statements.
<PAGE>
11
O'Shaughnessy Dogs of the Market(TM) Fund
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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. The Fund seeks total return,
consisting of capital appreciation and current income. The Fund seeks to achieve
its objective utilizing the distinct process of Strategy Indexing(TM) developed
by the investment advisor.
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 period ended September 30, 1997, 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.
<PAGE>
12
O'Shaughnessy Dogs of the Market(TM) Fund
NOTES TO FINANCIAL STATEMENTS, 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 annually. Any such reductions made by the Advisor in
its fees or payments may be subject to reimbursement by the Fund through
September 30, 2000 if the Fund is able to effect such reimbursement and remain
in compliance with any expense limitations in effect. For the period ended
September 30, 1997, the Advisor has reimbursed the Fund in the amount of
$71,199.
Investment Company Administration Corporation (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 $10,000 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 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 SECURITES
For the period ended September 30, 1997, the cost of purchases and the
proceeds from sales of securities, excluding short-term securities, were
$10,747,788 and $4,258,384, respectively.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
O'Shaughnessy Dogs of the Market Fund
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of O'Shaughnessy Dogs of the Market Fund as of
September 30, 1997, the related statement of operations, the statement of
changes in net assets, and the financial highlights for the period from November
1, 1996 (commencement of operations) to September 30, 1997. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of September 30, 1997,
by correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
O'Shaughnessy Dogs of the Market Fund, as of September 30, 1997, the results of
operations, the changes in net assets and the financial highlights for the
period indicated, in conformity with generally accepted accounting principles.
/s/ McGladrey & Pullen, L.L.P.
New York, New York
October 24, 1997
<PAGE>
INVESTMENT ADVISOR
O'Shaughnessy Capital Management, Inc.
35 Mason Street
Greenwich, Connecticut 06830
ADMINISTRATOR
Investment Company Administration Corporation
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 Trust Company
615 E. Michigan Street
Milwaukee, Wisconsin 53202
INDEPENDENT AUDITOR
McGladrey & Pullen, LLP
555 Fifth Avenue
New York, New York 10017
LEGAL COUNSEL
Shereff, Friedman, Hoffman & Goodman, 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.
<PAGE>
[Back Cover Artwork] [Front Cover Artwork]
O'Shaughnessy
Dogs of the Market(TM)
Fund
Annual Report
September 30, 1997
<PAGE>
O'Shaughnessy Aggressive Growth Fund
November 10, 1997
Dear fellow Shareholder:
Thank you for your investment in O'Shaughnessy Funds. I believe that, together,
we are using a better style of investing. We call it Strategy Indexing, because
it combines the best qualities of active and passive management. The
O'Shaughnessy Aggressive Growth Fund uses active stock selection strategies that
are explicitly stated and historically tested. We then index our portfolio to
these superior strategies and let them work.
In my view, the problem with most conventionally managed active portfolios is
that their managers often have a fuzzy notion of what to look for when buying
and selling securities. What's more, they often lack the discipline and
consistency to let the good ideas that they do have work. The difference between
what they say and what they do is often an impassable chasm. They talk the talk
but don't walk the walk. I believe that this is the key reason 80% of fund
managers underperform a simple index like the S&P 500 over the long term.
Passive indexes work so well because they remain fully invested in a diversified
group of stocks, day in, day out, with no market-timing whatsoever. Yet the 45
years of evidence I studied for my book What Works on Wall Street suggests that
traditional passive indexes are using the right method--but the wrong strategy.
My research shows that the S&P 500 is simply a big-cap strategy. There are many
other strategies that work much better. When compared to strategies like these,
the S&P 500's performance is quite lackluster.
But you must stick to the strategies to reap the rewards. Jumping in and out of
the market--even in these volatile times--is a fool's game. If you can tune out
short-term fluctuations and not become too elated that the Aggressive Growth
Fund is up 42.90 percent from commencement of operations on November 1, 1996 to
September 30, 1997, nor discouraged if it lags the market over the short term,
you can reach your long-term goals. It is the strong influence of transitory
events that leads to the short-term decisions that devastate long-term
performance. There are no market timers on the Forbes 400, but many, many
investors.
Action without knowledge is foolish, and knowledge without action is futile. The
key is informed action. We now have the data to guide us--together, we can reach
our long-term goals through the power of strategy indexing.
Sincerely,
/s/ James P. O'Shaughnessy
James P. O'Shaughnessy
<PAGE>
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
S&P 500
O'Shaughnessy Composite
Aggressive Stock Price
Growth Fund Index
01-Nov-96 $10,000 $10,000
31-Dec-96 10,410 10,560
31-Mar-97 9,860 10,842
30-Jun-97 11,440 12,729
30-Sep-97 14,290 13,684
Fund total return from commencement
of operations on November 1, 1996 to
September 30, 1997; 42.90%
Past performance is not predictive of future performance.
<PAGE>
3
O'Shaughnessy Aggressive Growth Fund
TOP TEN PORTFOLIO HOLDINGS at September 30, 1997
- --------------------------------------------------------------------------------
Percent of Net Assets
- --------------------------------------------------------------------------------
NS Group, Inc. .............................. 3.97%
Quantum Corporation ......................... 2.75%
Compaq Computer Corporation ................. 2.75%
Dell Computer Corporation ................... 2.41%
Paul Harris Stores, Inc. .................... 2.41%
MotivePower Industries, Inc. ................ 2.37%
Navistar International Corporation .......... 2.34%
Trans World Entertainment Corporation ....... 2.31%
Ames Department Stores, Inc. ................ 2.26%
CellStar Corporation ........................ 2.22%
<PAGE>
4
O'Shaughnessy Aggressive Growth Fund
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS at September 30, 1997
- -------------------------------------------------------------------------------------------------------------------
Shares COMMON STOCKS: 97.48% Market Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Aerospace: 1.42%
3,023 Wyman-Gordon Company#................................................... $ 79,354
---------
Apparel Manufacturers: 1.52%
9,848 Hartmarx Corporation#................................................... 84,939
---------
Appliances: 1.70%
2,142 Sunbeam Corporation..................................................... 95,051
---------
Applications Software: 1.37%
2,693 Information Management Resources, Inc.#................................. 76,751
---------
Athletic Footwear: 0.67%
3,686 Converse, Inc.#......................................................... 37,551
---------
Auto - Medium and Heavy Duty Trucks: 2.34%
4,725 Navistar International Corporation#..................................... 130,528
---------
Building - Residential/Commercial: 1.49%
7,937 Standard Pacific Corporation............................................ 83,339
---------
Chemicals - Specialty: 1.55%
2,418 Penn West, Ltd.......................................................... 86,443
---------
Circuits: 2.22%
2,498 Vitesse Semiconductor Corporation#...................................... 123,807
---------
Commercial Services: 1.84%
1,617 Volt Information Sciences, Inc.#........................................ 102,477
---------
Computers - Memory Devices: 4.61%
4,015 Quantum Corporation#.................................................... 153,825
2,581 Western Digital Corporation#............................................ 103,401
---------
257,226
---------
Computers - Micro: 5.16%
2,054 Compaq Computer Corporation#............................................ 153,537
1,391 Dell Computer Corporation#.............................................. 134,753
---------
288,290
---------
</TABLE>
<PAGE>
5
O'Shaughnessy Aggressive Growth Fund
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS at September 30, 1997, Continued
- -------------------------------------------------------------------------------------------------------------------
Shares Market Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Computers - Mini: 1.42%
1,634 Stratus Computer, Inc.#................................................. $ 79,045
---------
Computer Software: 1.23%
1,294 McAfee Associates, Inc.#................................................ 68,582
---------
Distribution/Wholesale: 2.22%
2,665 CellStar Corporation#................................................... 123,923
---------
Diversified Manufacturing Operations: 1.43%
3,907 MascoTech, Inc.......................................................... 80,094
---------
Electric - Generation: 1.81%
2,311 The AES Corporation#.................................................... 101,106
---------
Electric Products - Miscellaneous.: 1.71%
1,137 Philips Electronics N.V................................................. 95,508
---------
Electronic Components - Semiconductor: 1.97%
1,153 Applied Materials, Inc.#................................................ 109,823
---------
Finance - Investment Banker/Broker: 1.62%
3,434 The Advest Group, Inc................................................... 90,357
---------
Food - Baking: 3.45%
4,831 Flower Industries, Inc.................................................. 98,432
1,378 Interstate Bakeries Corporation......................................... 94,479
---------
192,911
---------
Food - Dairy Products: 3.61%
2,603 The Morningstar Group, Inc.#............................................ 111,929
12,847 TCBY Enterprises, Inc................................................... 89,929
---------
201,858
---------
Food - Meat Products: 1.38%
2,572 Smithfield Foods, Inc.#................................................. 77,160
---------
Footwear and Related Apparel: 1.81%
1,267 The Timberland Company#................................................. 101,043
---------
</TABLE>
<PAGE>
6
O'Shaughnessy Aggressive Growth Fund
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS at September 30, 1997, Continued
- -------------------------------------------------------------------------------------------------------------------
Shares Market Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Home Furnishings: 1.59%
2,867 Ethan Allen Interiors, Inc.............................................. $ 88,877
---------
Life/Health Insurance: 1.93%
2,207 Conseco, Inc............................................................ 107,729
---------
Machinery - Tools and Related Products: 1.32%
1,261 SPX Corporation......................................................... 73,926
---------
Machinery - Electric Utilities: 1.64%
2,540 Kuhlman Corporation..................................................... 91,440
---------
Office Furnishings - Original: 2.17%
2,268 Herman Miller, Inc...................................................... 121,338
---------
Oil and Gas Drilling: 3.93%
3,499 Global Marine, Inc.#.................................................... 116,342
2,895 Rowan Companies, Inc.#.................................................. 103,134
---------
219,476
---------
Real Estate Investment/Management: 1.24%
4,760 Grubb & Ellis Company#.................................................. 69,318
---------
Retail - Apparel/Shoe: 3.99%
4,182 Burlington Coat Factory Warehouse Corporation........................... 88,345
4,866 Paul Harris Stores, Inc.#............................................... 134,423
---------
222,768
---------
Retail - Arts and Crafts: 2.11%
3,850 Michaels Stores, Inc.#.................................................. 117,666
---------
Retail - Bookstore: 1.92%
3,798 Barnes & Noble, Inc.#................................................... 107,294
---------
Retail - Discount: 2.26%
8,395 Ames Department Stores, Inc.#........................................... 125,925
---------
Retail - Music Store: 2.31%
4,725 Trans World Entertainment Corporation#.................................. 128,756
---------
</TABLE>
<PAGE>
7
O'Shaughnessy Aggressive Growth Fund
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS at September 30, 1997, Continued
- -------------------------------------------------------------------------------------------------------------------
Shares Market Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Retail- Regional Department Store: 1.51%
1,580 Fred Meyer, Inc.#....................................................... $ 84,135
---------
Retail - Restaurants: 1.94%
2,581 CKE Restaurants, Inc.................................................... 108,402
---------
Retail - Vitamins/Nutrition Supply: 1.52%
2,915 General Nutrition Companies, Inc.#...................................... 84,899
---------
Steel Pipe and Tube: 3.97%
6,856 NS Group, Inc.#......................................................... 221,963
---------
Textiles - Products: 1.47%
4,348 Galey & Lord, Inc.#..................................................... 82,069
---------
Tools - Hand Held: 1.57%
2,042 The Stanley Works....................................................... 87,806
---------
Transportation - Air Freight: 2.11%
1,949 Airborne Freight Corporation............................................ 118,036
---------
Transportation - Equipment and Leasing: 2.37%
5,094 MotivePower Industries, Inc.#........................................... 132,444
---------
Transportation - Truck: 5.06%
5,214 American Freightways Corporation#....................................... 99,066
8,910 Arkansas Best Corporation#.............................................. 100,794
4,128 U.S. Xpress Enterprises, Inc. - Class A#................................ 82,560
---------
282,420
---------
Total Common Stocks (cost $4,499,107)................................... 5,443,853
---------
Principal Amount SHORT-TERM INVESTMENTS: 8.08%
- -------------------------------------------------------------------------------------------------------------------
$ 50,060 General Mills Demand Note, 5.1350%, due 10/1/1997*...................... 50,060
143,000 Pitney Bowes Demand Note, 5.1441%, due 10/1/1997*....................... 143,000
5,000 Wisconsin Electric Demand Note, 5.1852%, due 10/1/1997*................. 5,000
80,612 American Family Demand Note, 5.1553%, due 10/1/1997*.................... 80,612
172,000 Johnson Controls Demand Note, 5.1650%, due 10/1/1997*................... 172,000
----------
Total Short-Term Investments (cost $450,672)............................ 450,672
----------
</TABLE>
<PAGE>
8
O'Shaughnessy Aggressive Growth Fund
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS at September 30, 1997, Continued
- -------------------------------------------------------------------------------------------------------------------
Market Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
Total Investments in Securities (cost $4,949,779+): 105.56% ............ $5,894,525
Liabilities in excess of Other Assets: (5.56)%.......................... (310,277)
----------
Total Net Assets: 100.0% ............................................... $5,584,248
==========
#Non-income producing security.
*Variable rate demand notes are considered short-term obligations and are
payable on demand. Interest rates change periodically on specified dates. The
rates listed are as of September 30, 1997.
+At September 30, 1997, the cost of securities for Federal tax purposes was the
same as the basis for financial reporting. Unrealized appreciation and
depreciation of securities were as follows:
Gross unrealized appreciation........................................... $1,000,879
Gross unrealized depreciation........................................... (56,133)
----------
Net unrealized appreciation....................................... $ 944,746
==========
</TABLE>
See Notes to Financial Statements.
<PAGE>
9
O'Shaughnessy Aggressive Growth Fund
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES at September 30, 1997
- ---------------------------------------------------------------------------------------------------
ASSETS
<S> <C>
Investments in securities, at value (identified cost $4,949,779) (Note 2-A) $ 5,894,525
Receivables:
Fund shares sold .................................................... 15,545
Dividends and interest .............................................. 1,807
Due from Advisor .................................................... 4,605
Deferred organization costs ............................................... 20,611
Prepaid expenses and other ................................................ 15,733
-----------
Total assets .................................................. 5,952,826
-----------
LIABILITIES
Payables:
Portfolio securities purchased ...................................... 333,978
Administration fee .................................................. 822
Accrued expenses .......................................................... 33,778
-----------
Total liabilities ............................................. 368,578
-----------
NET ASSETS ...................................................................... $ 5,584,248
===========
Net asset value, offering price and redemption price per share
($5,584,248/390,865 shares outstanding;
25,000,000,000 shares (par value $.0001) authorized) ................ $ 14.29
===========
SOURCE OF NET ASSETS
Paid-in capital ........................................................... $ 4,547,748
Accumulated net investment loss ........................................... (24,106)
Undistributed net realized gain on investment transactions ................ 115,860
Net unrealized appreciation of investments ................................ 944,746
-----------
Net assets .......................................................... $ 5,584,248
===========
</TABLE>
See Notes to Financial Statements.
<PAGE>
10
O'Shaughnessy Aggressive Growth Fund
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
For the Period November 1, 1996* through September 30, 1997
- ---------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Income:
Dividends (net of foreign witholding tax of $233) .............. $ 7,131
Interest ....................................................... 3,199
-----------
Total income ............................................. 10,330
-----------
Expenses:
Advisory fees (Note 3) ......................................... 17,218
Custodian and accounting fees .................................. 22,301
Administration fee (Note 3) .................................... 14,548
Professionals' fees ............................................ 15,037
Registration fees .............................................. 13,487
Reports to shareholders ........................................ 9,031
Transfer agent fees ............................................ 9,963
Directors' fees ................................................ 9,261
Amortization of organization costs (Note 2-D) .................. 4,580
Other .......................................................... 6,319
-----------
Total expenses ........................................... 121,745
Less: expense reimbursement (Note 3) ..................... (87,309)
-----------
Net expenses ............................................. 34,436
-----------
Net investment loss ................................ (24,106)
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on security transactions ..................... 115,860
Net unrealized appreciation of investments ..................... 944,746
-----------
Net realized and unrealized gain on investments .......... 1,060,606
-----------
Net Increase in Net Assets Resulting from Operations $ 1,036,500
===========
</TABLE>
*Commencement of operations.
See Notes to Financial Statements.
<PAGE>
11
O'Shaughnessy Aggressive Growth Fund
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------------------
November 1, 1996*
through
September 30, 1997
- -------------------------------------------------------------------------------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS
Net investment loss .................................................. $ (24,106)
Net realized gain on security transactions ........................... 115,860
Net unrealized appreciation of investments ........................... 944,746
-----------
Net increase in net assets resulting from operations ........... 1,036,500
-----------
CAPITAL SHARE TRANSACTIONS
Net increase in net assets derived from capital share transactions (a) 4,522,748
-----------
Total increase in net assets ................................... 5,559,248
NET ASSETS
Beginning of period .................................................. 25,000
-----------
End of period (including accumulated net investment loss of $24,106) . $ 5,584,248
===========
</TABLE>
(a) A summary of capital shares transactions is as follows:
<TABLE>
<CAPTION>
November 1, 1996*
through
September 30, 1997
----------------------------------
Shares Value
------- -----------
<S> <C> <C>
Shares sold .......................... 473,170 $ 5,453,047
Shares redeemed ...................... (84,805) (930,299)
------- -----------
Net increase ......................... 388,365 $ 4,522,748
======= ===========
</TABLE>
*Commencement of operations.
See Notes to Financial Statements.
<PAGE>
12
O'Shaughnessy Aggressive Growth Fund
FINANCIAL HIGHLIGHTS
Per Share Operating Performance
(For a share outstanding throughout the period)
- -----------------------------------------------------------------------
November 1, 1996*
through
September 30, 1997
- -----------------------------------------------------------------------
Net asset value, beginning of period ................ $10.00
------
Income from investment operations:
Net investment loss ........................... (.06)
Net realized and unrealized gain on investments 4.35
------
Total from investment operations .................... 4.29
------
Net asset value, end of period ...................... $14.29
======
Total Return ........................................ 42.90%**
Ratios/supplemental data:
Net assets, end of period (thousands) ............... $5,584
Ratio of expenses to average net assets:
Before expense reimbursement .................. 7.01%+
After expense reimbursement ................... 1.98%+
Ratio of net investment loss to average net assets:
Before expense reimbursement .................. (6.41%)+
After expense reimbursement ................... (1.39%)+
Portfolio turnover rate ............................. 104.77%
Average commission rate paid per share .............. $.0492
*Commencement of operations.
**Not Annualized.
+Annualized.
See Notes to Financial Statements.
<PAGE>
13
O'Shaughnessy Aggressive Growth Fund
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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. The Fund's objective is capital
appreciation.
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 period ended September 30, 1997, 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 1.00% based upon the average daily net assets of the Fund.
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 annually. Any such reductions made by the Advisor in
<PAGE>
14
O'Shaughnessy Aggressive Growth Fund
NOTES TO FINANCIAL STATEMENTS, Continued
- --------------------------------------------------------------------------------
its fees or payments may be subject to reimbursement by the Fund through
September 30, 2000 if the Fund is able to effect such reimbursement and remain
in compliance with any expense limitations in effect. For the period ended
September 30, 1997, the Advisor has reimbursed the Fund in the amount of
$87,309.
Investment Company Administration Corporation (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 $10,000 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 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 SECURITES
For the period ended September 30, 1997, the cost of purchases and the
proceeds from sales of securities, excluding short-term securities, were
$6,540,902 and $2,157,656, respectively.
================================================================================
INVESTMENT ADVISOR
O'Shaughnessy Capital Management, Inc.
35 Mason Street
Greenwich, Connecticut 06830
ADMINISTRATOR
Investment Company Administration Corporation
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 Trust Company
615 E. Michigan Street
Milwaukee, Wisconsin 53202
INDEPENDENT AUDITOR
McGladrey & Pullen, LLP
555 Fifth Avenue
New York, New York 10017
LEGAL COUNSEL
Shereff, Friedman, Hoffman & Goodman, 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.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
O'Shaughnessy Aggressive Growth Fund
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of O'Shaughnessy Aggressive Growth Fund as of
September 30, 1997, the related statement of operations, the statement of
changes in net assets, and the financial highlights for the period from November
1, 1996 (commencement of operations) to September 30, 1997. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of September 30, 1997,
by correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
O'Shaughnessy Aggressive Growth Fund, as of September 30, 1997, the results of
operations, the changes in net assets and the financial highlights for the
period indicated, in conformity with generally accepted accounting principles.
/s/ McGladrey & Pullen, L.L.P.
New York, New York
October 24, 1997
<PAGE>
[Front Cover Artwork]
O'Shaughnessy
Aggressive Growth Fund
Annual Report
September 30, 1997
