As Filed With the Securities and Exchange Commission On November 22, 1999
Securities Act File No. _________
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
[ ] PRE-EFFECTIVE AMENDMENT NO. [ ] POST-EFFECTIVE AMENDMENT NO.
(Check appropriate box or boxes)
O'SHAUGHNESSY FUNDS, INC.
(Exact Name of Registrant as Specified in its Charter)
1-877-OSFUNDS
(Area Code and Telephone Number)
35 Mason Street
Greenwich, Connecticut 06830
(Address of Principal Executive Offices:
Number, Street, City, State, Zip Code)
James P. O'Shaughnessy
35 Mason Street
Greenwich, Connecticut 06830
(Name and Address of Agent for Service)
COPIES TO:
COUNSEL FOR THE FUND:
Swidler Berlin Shereff Friedman, LLP Steven J. Paggioli
The Chrysler Building Investment Company Administration, LLC
405 Lexington Avenue 915 Broadway
New York, New York 10174 Suite 1605
Attention: Joel H. Goldberg, Esq. New York, New York 10010
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after the Registration Statement becomes effective
under the Securities Act of 1933.
TITLE OF SECURITIES BEING REGISTERED:
Shares of Beneficial Interest, Par Value $.0001 per share.
No filing fee is required because of reliance on Section 24(f) under the
Investment Company Act of 1940, as amended.
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
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<PAGE>
O'SHAUGHNESSY FUNDS, INC.
O'SHAUGHNESSY DOGS OF THE MARKET(TM) FUND
O'SHAUGHNESSY AGGRESSIVE GROWTH FUND
35 MASON STREET
GREENWICH, CONNECTICUT 06830
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NOTICE OF JOINT SPECIAL MEETING OF SHAREHOLDERS
----------
TO BE HELD ON JANUARY 21, 2000
TO OUR SHAREHOLDERS:
NOTICE IS HEREBY GIVEN that a joint special meeting of shareholders (the
"Meeting") of the O'Shaughnessy Dogs of the Market(TM) Fund (the "Dogs of the
Market Fund") and the O'Shaughnessy Aggressive Growth Fund (the "Aggressive
Growth Fund" and together with the Dogs of the Market Fund, the "Acquired
Funds") of O'Shaughnessy Funds, Inc. ("O'Shaughnessy Funds") will be held at the
Stamford Marriott, 2 Stamford Forum, Stamford, Connecticut, on January 21, 2000
at 4:00 p.m., Eastern Time, for the following purposes:
(1) With respect to the Dogs of the Market Fund, to approve or disapprove
an Agreement and Plan of Reorganization (the "Value Funds Agreement and Plan")
providing for the acquisition of substantially all of the assets, and assumption
of substantially all of the liabilities, of the Dogs of the Market Fund by the
O'Shaughnessy Cornerstone Value Fund (the "Cornerstone Value Fund") of
O'Shaughnessy Funds, solely in exchange for an equal aggregate value of
newly-issued shares of the Cornerstone Value Fund. The Value Funds Agreement and
Plan also provides for distribution of such shares of the Cornerstone Value Fund
to shareholders of the Dogs of the Market Fund in liquidation of the Dogs of the
Market Fund. A vote in favor of this proposal will constitute a vote in favor of
the liquidation of the Dogs of the Market Fund;
(2) With respect to the Aggressive Growth Fund, to approve or disapprove an
Agreement and Plan of Reorganization (the "Growth Funds Agreement and Plan")
providing for the acquisition of substantially all of the assets, and assumption
of substantially all of the liabilities, of the Aggressive Growth Fund by the
O'Shaughnessy Cornerstone Growth Fund (the "Cornerstone Growth Fund") of
O'Shaughnessy Funds, solely in exchange for an equal aggregate value of
newly-issued shares of the Cornerstone Growth Fund. The Growth Funds Agreement
and Plan also provides for distribution of such shares of the Cornerstone Growth
Fund to shareholders of the Aggressive Growth Fund in liquidation of the
Aggressive Growth Fund. A vote in favor of this proposal will constitute a vote
in favor of the liquidation of the Aggressive Growth Fund; and
(3) To transact such other business as properly may come before the Meeting
or any adjournment thereof.
The Board of Directors of O'Shaughnessy Funds has fixed the close of
business on December 7, 1999 as the record date for the determination of
shareholders entitled to notice of, and to vote at, the Meeting or any
adjournment thereof.
A complete list of the shareholders of each of the Acquired Funds entitled
to vote at the Meeting will be available and open to the examination of any
shareholders of each Acquired Fund for any purpose germane to such Meeting
during ordinary business hours from and after January [7], 2000 at the offices
of such Acquired Fund, 35 Mason Street, Greenwich, Connecticut and at the
Meeting.
<PAGE>
YOU ARE CORDIALLY INVITED TO ATTEND THE MEETING. SHAREHOLDERS WHO DO NOT
EXPECT TO ATTEND THE MEETING IN PERSON ARE REQUESTED TO COMPLETE, DATE AND SIGN
THE ENCLOSED RESPECTIVE FORM OF PROXY AND RETURN IT PROMPTLY IN THE ENVELOPE
PROVIDED FOR THAT PURPOSE. Each of the enclosed proxies is being solicited on
behalf of the Board of Directors of O'Shaughnessy Funds.
By Order of the Board of Directors,
Steven J. Paggioli
Secretary, O'Shaughnessy Funds, Inc.
Greenwich, Connecticut
Dated: [___________, 1999]
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROXY STATEMENT AND PROSPECTUS DATED NOVEMBER 22, 1999
O'SHAUGHNESSY FUNDS, INC.
35 MASON STREET
GREENWICH, CONNECTICUT 06830
1-877-OSFUNDS
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JOINT SPECIAL MEETING OF SHAREHOLDERS OF
O'SHAUGHNESSY DOGS OF THE MARKET(TM) FUND
AND
O'SHAUGHNESSY AGGRESSIVE GROWTH FUND
OF
O'SHAUGHNESSY FUNDS, INC.
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JANUARY 21, 2000
This Proxy Statement and Prospectus (this "Proxy Statement and Prospectus")
is furnished in connection with the solicitation of proxies on behalf of the
Board of Directors (the "Board of Directors") of O'Shaughnessy Funds, Inc., a
Maryland corporation ("O'Shaughnessy Funds"), for use at the Joint Special
Meeting of Shareholders (the "Meeting") of O'Shaughnessy Dogs of the Market(TM)
Fund (the "Dogs of the Market Fund" or an "Acquired Fund") and O'Shaughnessy
Aggressive Growth Fund (the "Aggressive Growth Fund" or an "Acquired Fund," and
together with the Dogs of the Market Fund, the "Acquired Funds") of
O'Shaughnessy Funds. The Meeting has been called to approve or disapprove the
proposed Agreement and Plan of Reorganization (each a "Plan" and collectively,
the "Plans") between each of the Acquired Funds and each other fund of
O'Shaughnessy Funds set forth below (each an "Acquiring Fund," and collectively,
the "Acquiring Funds"):
Acquired Fund Acquiring Fund
------------- --------------
Dogs of the Market Fund O'Shaughnessy Cornerstone Value Fund (the
"Cornerstone Value Fund," and together with the
Dogs of the Market Fund, the "Value Funds")
Aggressive Growth Fund O'Shaughnessy Cornerstone Growth Fund (the
"Cornerstone Growth Fund," and together with the
Aggressive Growth Fund, the "Growth Funds")
The Plan with respect to the Value Funds is sometimes referred to herein as the
"Value Funds Agreement and Plan" and the Plan with respect to the Growth Funds
is sometimes referred to herein as the "Growth Funds Agreement and Plan." Each
Plan provides for the acquisition by the respective Acquiring Fund of
substantially all of the assets, and assumption of substantially all of the
liabilities, of the respective Acquired Fund, solely in exchange for an equal
aggregate value of newly-issued shares of the respective Acquiring Fund. The
reorganization of the Value Funds and the Growth Funds shall be hereinafter
referred to as the "Value Funds Reorganization" and the "Growth Funds
Reorganization," respectively, and collectively such reorganizations shall be
referred to as the "Reorganizations," and individually as a "Reorganization."
Immediately upon the receipt by an Acquiring Fund of the assets of the
respective Acquired Fund and the assumption by such Acquiring Fund of the
liabilities of such Acquired Fund, and as part of the respective Reorganization,
such Acquired Fund will distribute the shares of the Acquiring Fund received in
such Reorganization to the shareholders of such Acquired Fund in liquidation
thereof.
<PAGE>
Holders of shares of an Acquired Fund will receive shares of the respective
Acquiring Fund, which will be subject to the same management fees (with respect
to the Cornerstone Value Fund, the "Value Fund Corresponding Shares", with
respect to the Cornerstone Growth Fund, the "Growth Fund Corresponding Shares,"
and collectively the "Corresponding Shares," as the context requires), as the
shares of such Acquired Fund. The aggregate net asset value of the Corresponding
Shares to be issued in a Reorganization to the shareholders of an Acquired Fund
will equal the aggregate net asset value of the outstanding shares of such
Acquired Fund, as set forth in the respective Plan. The Acquired Funds and the
Acquiring Funds sometimes are referred to herein collectively as the "Funds" and
individually as a "Fund," as the context requires. The Acquired Funds following
the Reorganizations sometimes are referred to herein collectively as the
"Combined Funds" and individually as the "Pro Forma Cornerstone Value Fund" in
the case of the Cornerstone Value Fund and the "Pro Forma Cornerstone Growth
Fund" in the case of the Cornerstone Growth Fund.
This Proxy Statement and Prospectus serves as a prospectus of O'Shaughnessy
Funds under the Securities Act of 1933, as amended (the "Securities Act"), in
connection with the issuance of the Corresponding Shares by the Acquiring Funds
to the Acquired Funds pursuant to the terms of the Reorganizations.
The Dogs of the Market Fund, the Aggressive Growth Fund, the Cornerstone
Value Fund and the Cornerstone Growth Fund are separate series of O'Shaughnessy
Funds, a diversified, open-end management investment company registered under
the Investment Company Act of 1940, as amended (the "Investment Company Act").
Both the Dogs of the Market Fund and the Cornerstone Value Fund seek to provide
their respective shareholders with total return, consisting of capital
appreciation and current income. They both seek to achieve their investment
objective through a process of Strategy Indexing(R) which is pursued through the
implementation of an investment strategy developed by O'Shaughnessy Capital
Management, Inc., the Funds' investment manager (the "Manager"). For more
information regarding the process of Strategy Indexing(R), see "Summary -- The
Funds -- Comparison of the Funds -- Investment Policies" and "-- How Each
Strategy Works." Both Value Funds invest substantially all of their respective
assets in common stocks selected through this strategy. The Aggressive Growth
Fund and the Cornerstone Growth Fund seek to provide their respective
shareholders with capital appreciation and long-term growth of capital,
respectively. The Aggressive Growth Fund seeks to achieve its investment
objective through implementation of proprietary aggressive growth models
developed by the Manager. For more information relating to such proprietary
aggressive growth models, see "Summary -- The Funds -- Comparison of the Funds
- -- Investment Policies -- Strategies." The Cornerstone Growth Fund also seeks to
achieve its investment objective through a process of Strategy Indexing(R).
There can be no assurance that, after the Reorganizations, the Combined Funds
will achieve their respective investment objectives.
The current prospectus relating to the Acquiring Funds, dated November 28,
1998, as supplemented (the "Acquiring Funds Prospectus"), accompany this Proxy
Statement and Prospectus and are incorporated herein by reference. The
Semi-Annual Reports to Shareholders of the Acquiring Funds for the six-month
period ended March 31, 1999 also accompany this Proxy Statement and Prospectus.
The current prospectuses relating to the Acquired Funds, each dated November 28,
1998, as supplemented (the "Acquired Funds Prospectuses," and together with the
Acquiring Funds Prospectus, the "O'Shaughnessy Funds Prospectuses") (which
Acquired Funds Prospectuses are also incorporated herein by reference) and a
statement of additional information relating to the Funds, dated November 28,
1998 (the "O'Shaughnessy Funds Statement"), have been filed with the Securities
and Exchange Commission (the "Commission"). Such documents may be obtained,
without charge, by writing the Funds at the address above, or by calling
toll-free 1-877-OSFUNDS.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROXY STATEMENT AND PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------
<PAGE>
This Proxy Statement and Prospectus sets forth concisely the information
about the Acquiring Funds that shareholders of the respective Acquired Fund
should know before considering the applicable Reorganization and should be
retained for future reference. The Acquired Funds have authorized the
solicitation of proxies in connection with the Reorganizations solely on the
basis of this Proxy Statement and Prospectus and the accompanying documents.
Additional information contained in a statement of additional information
relating to the Reorganizations (the "Statement of Additional Information"),
including pro forma financial statements of the Combined Funds giving effect to
the consummation of the Reorganizations, is on file with the Commission. The
Statement of Additional Information is available from the Funds without charge,
upon request by calling the toll free telephone number set forth above or by
writing the Funds at their principal executive offices. The Statement of
Additional Information, dated [__________, 1999] is incorporated by reference
into this Proxy Statement and Prospectus.
The Commission maintains a web site (http://www.sec.gov) that contains the
Statement of Additional Information, the O'Shaughnessy Funds Prospectuses, the
O'Shaughnessy Funds Statement, other material incorporated by reference and
other information regarding the Funds.
The address of the principal executive offices of the Funds is 35 Mason
Street, Greenwich, Connecticut 06830, the telephone number is 1-877-OSFUNDS and
the web address is http://www.osfunds.com.
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THE DATE OF THIS PROXY STATEMENT AND PROSPECTUS IS NOVEMBER 22, 1999
<PAGE>
TABLE OF CONTENTS
Page
----
INTRODUCTION .............................................................. 1
SUMMARY ................................................................... 2
The Reorganizations ..................................................... 2
Fee Tables .............................................................. 4
The Funds ............................................................... 6
PRINCIPAL RISK FACTORS AND SPECIAL CONSIDERATIONS ......................... 16
Potential Risks Associated with a Fund's Strategy ....................... 16
Potential Risks Associated with Investing Primarily in Common Stocks .... 16
Year 2000 Risk .......................................................... 17
Additional Risks Associated with an Investment in the Funds ............. 17
COMPARISON OF THE FUNDS ................................................... 18
Financial Highlights .................................................... 18
Management .............................................................. 22
Expenses ................................................................ 24
Purchase, Exchange and Redemption of Shares ............................. 25
Performance ............................................................. 25
Shareholder Rights....................................................... 25
Dividends ............................................................... 26
Tax Information ......................................................... 26
Portfolio Transactions .................................................. 26
Portfolio Turnover ...................................................... 26
Additional Information .................................................. 27
THE REORGANIZATIONS ....................................................... 28
General ................................................................. 28
Terms of the Plans ...................................................... 29
Potential Benefits to Shareholders as a Result of the Reorganizations ... 30
Federal Income Tax Consequences of the Reorganizations .................. 31
Capitalization .......................................................... 33
INFORMATION CONCERNING THE MEETING ........................................ 34
Date, Time and Place of Meeting ......................................... 34
Solicitation, Revocation and Use of Proxies ............................. 34
Record Date and Outstanding Shares ...................................... 34
Security Ownership of Certain Beneficial Owners and Management
of the Funds .......................................................... 35
Voting Rights and Required Vote ......................................... 35
ADDITIONAL INFORMATION .................................................... 36
LEGAL PROCEEDINGS ......................................................... 37
LEGAL OPINIONS ............................................................ 37
EXPERTS ................................................................... 37
SHAREHOLDER PROPOSALS ..................................................... 37
i
<PAGE>
INTRODUCTION
This Proxy Statement and Prospectus is furnished in connection with the
solicitation of proxies on behalf of the Board of Directors for use at the
Meeting to be held at the Stamford Marriott, 2 Stamford Forum, Stamford,
Connecticut on January 21, 2000, at 4:00 p.m., Eastern Time. The mailing address
for the Acquired Funds is 35 Mason Street, Greenwich, Connecticut 06830. The
approximate mailing date of this Proxy Statement and Prospectus is December __,
1999.
Any person giving a proxy may revoke it at any time prior to its exercise
by executing a superseding proxy, by giving written notice of the revocation to
the Secretary of the Acquired Fund of which such person is a shareholder at the
address indicated above or by voting in person at the Meeting of shareholders of
such Acquired Fund. All properly executed proxies received prior to a Meeting
will be voted at such Meeting in accordance with the instructions marked thereon
or otherwise as provided therein. Unless instructions to the contrary are
marked, properly executed proxies will be voted "FOR" the proposal to approve
the Plans.
The Board of Directors has fixed the close of business on December 7, 1999
as the record date for the determination of shareholders entitled to notice of,
and to vote at, the Meetings or any adjournment thereof. Approval of the Plans
will require the affirmative vote of shareholders of the applicable Acquired
Fund representing not less than a majority of the total number of votes entitled
to be cast thereon. Shareholders of each Acquired Fund will vote as a single
class on the proposal to approve the Plan of such Acquired Fund. Approval of the
Plan with respect to one Acquired Fund is not dependent on approval of the Plan
with respect to the other Acquired Fund. Properly executed proxies that are
returned but that are marked "abstain" or with respect to which a broker-dealer
has declined to vote on any proposal ("broker non-votes") are counted for
purposes of determining the presence or absence of a quorum for the transaction
of business. Because they are not votes in favor of the proposal, they have the
effect of a negative vote. Each share of an Acquired Fund is entitled to one
vote. See "Information Concerning the Meeting."
The Board of Directors currently knows of no business other than that
discussed above that will be presented for consideration at the Meetings. If any
other matter is properly presented, it is the intention of the persons named in
the enclosed proxy to vote in accordance with their best judgment.
1
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROXY STATEMENT AND PROSPECTUS (INCLUDING DOCUMENTS INCORPORATED BY
REFERENCE) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE COMPLETE
INFORMATION CONTAINED IN THIS PROXY STATEMENT AND PROSPECTUS AND IN THE PLANS,
ATTACHED HERETO AS EXHIBIT I.
IN THIS PROXY STATEMENT AND PROSPECTUS, THE TERM "VALUE FUNDS
REORGANIZATION" REFERS TO (I) THE ACQUISITION OF SUBSTANTIALLY ALL OF THE
ASSETS, AND ASSUMPTION OF SUBSTANTIALLY ALL OF THE LIABILITIES, OF THE DOGS OF
THE MARKET FUND BY THE CORNERSTONE VALUE FUND SOLELY IN EXCHANGE FOR AN EQUAL
AGGREGATE VALUE OF THE VALUE FUND CORRESPONDING SHARES, (II) THE SUBSEQUENT
DISTRIBUTION OF SUCH CORRESPONDING SHARES TO THE SHAREHOLDERS OF THE DOGS OF THE
MARKET FUND IN LIQUIDATION THEREOF AND (III) THE SUBSEQUENT TERMINATION OF THE
EXISTENCE OF THE DOGS OF THE MARKET FUND; AND THE TERM "GROWTH FUND
REORGANIZATION" REFERS TO (I) THE ACQUISITION OF SUBSTANTIALLY ALL OF THE
ASSETS, AND ASSUMPTION OF SUBSTANTIALLY ALL OF THE LIABILITIES, OF THE
AGGRESSIVE GROWTH FUND BY THE CORNERSTONE GROWTH FUND SOLELY IN EXCHANGE FOR AN
EQUAL AGGREGATE VALUE OF THE GROWTH FUND CORRESPONDING SHARES (II) THE
SUBSEQUENT DISTRIBUTION OF SUCH CORRESPONDING SHARES TO THE SHAREHOLDERS OF THE
AGGRESSIVE GROWTH FUND IN LIQUIDATION THEREOF AND (III) THE SUBSEQUENT
TERMINATION OF THE EXISTENCE OF THE AGGRESSIVE GROWTH FUND. THE VALUE FUNDS
REORGANIZATION AND THE GROWTH FUNDS REORGANIZATION ARE SOMETIMES REFERRED TO
COLLECTIVELY HEREIN AS THE "REORGANIZATIONS" AND INDIVIDUALLY AS A
"REORGANIZATION."
THE REORGANIZATIONS
At a meeting of the Board of Directors held on October 18, 1999, the Board
of Directors unanimously approved a proposal that each Acquiring Fund acquire
substantially all of the assets, and assume substantially all of the
liabilities, of the respective Acquired Fund solely in exchange for an equal
aggregate value of such Acquiring Fund's Corresponding Shares to be distributed
to the shareholders of such Acquired Fund.
Based upon their evaluation of all relevant information, Fund management
and the Board of Directors have determined that the Reorganizations will
potentially benefit the shareholders of the Acquired Funds. First, following the
Reorganizations, shareholders of an Acquired Fund will remain invested in a
diversified open-end fund which has the same Manager, substantially the same
investment objective and similar, though not identical, investment techniques. A
second advantage to shareholders relates to the potential for reduced operating
expenses due to economies of scale. The net assets of the Cornerstone Value Fund
and Cornerstone Growth Fund as of September 30, 1999 were $26,298,592 and
$120,706,544, respectively. These would increase by the amount of the net assets
of each of the Acquired Funds at the time of the Reorganizations. As of
September 30, 1999, those amounts were approximately $17,746,000 in the case of
the Dogs of the Market Fund and $12,069,000 in the case of the Aggressive Growth
Fund. Since the expenses of the Combined Funds will therefore be spread over a
larger asset base, Fund management anticipates that all Funds are likely to
benefit from reduced overall operating expenses (on a pro forma basis) as a
result of economies of scale expected after the Reorganizations. See "Summary --
Fee Tables"; "The Reorganizations -- Potential Benefits to Shareholders as a
Result of the Reorganizations" and "Comparison of the Funds -- Expenses."
The Board of Directors, including all of the directors who are not
"interested persons," as defined in the Investment Company Act, has determined
that the Value Funds Reorganization and Growth Funds Reorganization are in the
best interests of the Dogs of the Market Fund and the Aggressive Growth Fund,
respectively. In addition, since the Corresponding Shares of each Acquiring Fund
will be issued at net asset value in exchange for the net assets of the
respective Acquired Fund having a value equal to the aggregate net asset value
2
<PAGE>
of the shares of the respective Acquired Fund outstanding as of the Valuation
Time (as defined herein), the net asset value per share of the respective
Acquired Fund should remain virtually unchanged solely as a result of the
respective Reorganization. Thus, the Reorganizations should not result in
dilution of net asset value of the Acquiring Funds immediately following
consummation of the Reorganizations. However, as a result of the
Reorganizations, a shareholder of an Acquired Fund would hold a smaller
percentage of ownership in the respective Acquiring Fund than he or she did in
that Acquired Fund prior to the respective Reorganization.
If all of the requisite approvals are obtained, it is anticipated that the
Reorganizations will occur as soon as practicable after such approvals are
obtained, provided that the Funds have obtained prior to that time an opinion of
counsel concerning the tax consequences of the Reorganizations as set forth in
the Plans. The Plans may be terminated, and the Reorganizations abandoned,
whether before or after the requisite approval by the shareholders of the
Acquired Funds, at any time prior to the Exchange Date (as defined herein), (i)
by the Board of Directors; (ii) by an Acquired Fund if any condition to such
Acquired Fund's obligations has not been fulfilled or waived; or (iii) by an
Acquiring Fund if any condition to such Acquiring Fund's obligations has not
been fulfilled or waived.
3
<PAGE>
FEE TABLES
ACTUAL AND PRO FORMA FEE TABLE FOR SHAREHOLDERS OF THE CORNERSTONE VALUE FUND,
THE DOGS OF THE MARKET FUND, THE PRO FORMA CORNERSTONE VALUE FUND, THE
CORNERSTONE GROWTH FUND, THE AGGRESSIVE GROWTH FUND AND THE PRO FORMA
CORNERSTONE GROWTH FUND, EACH AS OF SEPTEMBER 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
Actual Actual
------------------------ Pro Forma ------------------------ Pro Forma
Cornerstone Dogs of the Cornerstone Cornerstone Aggressive Cornerstone
Value Fund Market Fund Value Fund Growth Fund Growth Fund Growth Fund
---------- ----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDER FEES:*
Maximum Sales Charge (Load) Imposed
on Purchases (as a percentage of
offering price) None None None None None None
Maximum Sales Charge (Load) Imposed
on Dividend Reinvestment None None None None None None
Maximum Deferred Sales Charge
(Load) (as a percentage of original
purchase price or redemption
proceeds, whichever is lower) None None None None None None
Redemption Fee (a) (on shares
held less than 90 days) 1.50% 1.50% 1.50% 1.50% 1.50% 1.50%
Exchange Fee (a)(b) (on shares
held less than 90 days) 1.50% 1.50% 1.50% 1.50% 1.50% 1.50%
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average
net assets):
Management Fees(c) 0.74% 0.74%(d) 0.74% 0.74% 0.74%(d) 0.74%
Rule 12b-1 Fees None None None None None None
Other Expenses 0.64% 0.35%(d) 0.56% 0.41% 1.23%(d) 0.36%
Total Fund Operating Expenses 1.38% 1.09%(d) 1.30% 1.15% 1.97%(d) 1.10%
</TABLE>
- ----------
* Numbers may not foot due to rounding
(a) A 1.5% redemption fee payable to the Funds will be assessed on shares
purchased and held for less than 90 days. Shareholders who effect
redemptions of Fund shares by wire transfer will pay a $12.00 wire transfer
fee. See "Information About Your Account -- Redemption of Shares" in the
O'Shaughnessy Funds Prospectuses.
(b) Shareholders who effect exchanges of shares of a Fund for shares of another
Fund by telephone in accordance with the exchange privilege will be charged
a $5.00 exchange fee in addition to any fees applicable as indicated in
footnote (a). See "Information About Your Account--Exchange Privilege" in
the O'Shaughnessy Funds Prospectuses.
(c) See "Management and Organization of the Fund -- Management" in the
O'Shaughnessy Funds Prospectuses.
(d) To limit the Fund's expenses, the Manager voluntarily agreed to reduce its
fees or reimburse such Fund through September 30, 1999 to ensure that the
total operating expenses of the Dogs of the Market Fund and the Aggressive
Growth Fund do not exceed 1.09% and 2.00%, respectively, of average net
assets annually (the "expense cap"). Any such reductions made by the
Manager in its fees or reimbursement of expenses with respect to such Fund
are subject to reimbursement by such Fund to the Manager (recapture by the
Manager), provided such Fund is able to effect such reimbursement while
keeping total operating expenses at or below the annual expense cap, and
that no reimbursement will be made after September 30, 2000. Any amounts
reimbursed will have the effect of increasing fees otherwise paid by such
Fund. In absence of any reimbursements, the overall operating expenses, as
a percent of net assets, for the Dogs of the Market Fund and Aggressive
Growth Fund would have been 1.50% and 2.23%, respectively, for the fiscal
period ended September 30, 1999.
4
<PAGE>
These examples are intended to help you compare the cost of investing in the
Funds with the cost of investing in other mutual funds.
EXAMPLES:
An investor would pay the following expenses on a $10,000 investment and
assuming (1) the Total Fund Operating Expenses set forth in the table above for
the relevant Fund, (2) a 5% annual return throughout the period and (3)
redemption at the end of the period:
Cumulative Expenses Paid for the Period Of:
-------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Cornerstone Value Fund 140 436 753 1,652
Dogs of the Market Fund (a) 111 346 600 1,325
Pro Forma Cornerstone Value Fund* 132 411 711 1,563
Cornerstone Growth Fund 117 365 632 1,393
Aggressive Growth Fund (b) 199 617 1,059 2,286
Pro Forma Cornerstone Growth Fund* 112 349 605 1,336
- ----------
* Assuming the Reorganization had taken place on October 1, 1998.
(a) Absent certain fee reductions and reimbursements by the Manager of the
expenses of the Dogs of the Market Fund, such cumulative expenses that an
investor in that Fund would pay for the period of one year, three years,
five years and ten years would be $152, $473, $816 and $1,784,
respectively.
(b) Absent certain fee reductions and reimbursements by the Manager of the
expenses of the Aggressive Growth Fund, such cumulative expenses that an
investor in that Fund would pay for the period of one year, three years,
five years and ten years would be $225, $695, $1,191 and $2,552,
respectively.
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder bears directly or indirectly as compared
to the costs and expenses that would be borne by such investors on a pro forma
basis taking into account the consummation of the Reorganizations. The Examples
set forth above assume reinvestment of all dividends and distributions and
utilize a 5% annual rate of return as mandated by Commission regulations. THE
EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR
ANNUAL RATES OF RETURN, AND ACTUAL EXPENSES OR ANNUAL RATES OF RETURN MAY BE
MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF THE EXAMPLES. See "The
Reorganizations -- Potential Benefits to Shareholders as a Result of the
Reorganizations," "Comparison of the Funds -- Management,", and "-- Purchase,
Exchange and Redemption of Shares."
5
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THE FUNDS
BUSINESS OF THE FUNDS
The Funds are organized as separate investment portfolios or series of
O'Shaughnessy Funds, a Maryland corporation, which was incorporated on May 20,
1996. Each of the Funds commenced operations on November 1, 1996.
As of September 30, 1999, the net assets of the Funds were as follows:
Dogs of the Market Fund $ 17,746,399
Cornerstone Value Fund $ 26,298,592
Aggressive Growth Fund $ 12,069,457
Cornerstone Growth Fund $120,706,544
COMPARISON OF THE FUNDS
INVESTMENT OBJECTIVES
Both the Dogs of the Market Fund and the Cornerstone Value Fund seek to
provide their respective shareholders with total return, consisting of capital
appreciation and current income.
The Aggressive Growth Fund and the Cornerstone Growth Fund seek to provide
their respective shareholders with capital appreciation and long-term growth of
capital, respectively.
INVESTMENT POLICIES
GENERAL. Each of the Value Funds and the Cornerstone Growth Fund seeks to
achieve its investment objective through a process of Strategy Indexing(R) which
is pursued through the implementation of an investment strategy developed by the
Manager. For more information regarding the process of Strategy Indexing(R), See
"-- Strategies" and "-- How Each Strategy Works" below. The Aggressive Growth
Fund seeks to achieve its investment objective through implementation of
proprietary aggressive growth models developed by the Manager. For more
information relating to such proprietary aggressive growth models, see "--
Strategies" below. There can be no assurance that, after the Reorganizations,
the Combined Funds will achieve their respective investment objectives.
STRATEGIES. The Dogs of the Market Fund seeks to achieve its objective
through a process of Strategy Indexing(R), which is pursued through
implementation of the Dogs of the Market Strategy. The Dogs of the Market
Strategy entails the selection of 30 common stocks from the Dow Jones Industrial
Average(1) and the S&P 400 Industrial Average using the following criteria:
1. Ten stocks in the Fund's portfolio will be the highest yielding stocks
from Dow Jones.
2. Twenty stocks will be the highest yielding stocks from the S&P 400
Industrial Average that also have (a) market capitalization exceeding
$1 billion and (b) an issue of common stock outstanding rated A or
higher by Standard & Poor's
- ----------
(1) "Dow Jones Industrial Average" is a trademark of Dow Jones & Company, Inc.
("Dow Jones"). Neither the Funds nor the Manager is affiliated with, nor
are the Funds sponsored by, Dow Jones. Dow Jones has not participated in
any way in the creation of the Funds or in the selection of stocks included
in the Funds, nor has Dow Jones reviewed or approved any information
included in this Proxy Statement Prospectus.
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<PAGE>
The Cornerstone Value Fund seeks to achieve its investment objective
through a process of Strategy Indexing(R), which is pursued through the
implementation of the Cornerstone Value Strategy. The Cornerstone Value Strategy
involves the selection of the 50 highest dividend-yielding common stocks from
the O'Shaughnessy Market Leaders Universe(TM) that have historical trading
volume sufficient to allow for the Fund to purchase the required number of
shares as of the Re-Balance Date (as defined below). See "-- How Each Strategy
Works" below.
The O'Shaughnessy Market Leaders Universe(TM) consists of those domestic
and foreign stocks in the Standard & Poor's Compustat ("S&P Compustat") database
(the "COMPUSTAT(R) Database") which are not power utility companies and which
have (i) market capitalizations exceeding the average of the COMPUSTAT(R)
Database; (ii) twelve month sales which are fifty percent greater than the
average for the COMPUSTAT(R) Database; (iii) a number of shares outstanding
which exceeds the average for the COMPUSTAT(R) Database; and (iv) cash flow
which exceeds the average for the COMPUSTAT(R) Database. Currently, the
O'Shaughnessy Market Leaders Universe(TM) consists of the stocks of [624]
issuers. The Cornerstone Growth Fund seeks to achieve its investment objective
through a process of Strategy Indexing(R), which is pursued through the
implementation of the Cornerstone Growth Strategy.
The Cornerstone Growth Strategy selects the 50 stocks with the highest
one-year price appreciation as of the date of purchase from the O'Shaughnessy
All Stocks Universe(TM) that also meet the following criteria: (i) annual
earnings that are higher than the previous year, (ii) a price-to-sales ratio
below 1.5, and (iii) historical trading volume sufficient to allow for the Fund
to purchase the required number of shares as of the Re-Balance Date. A stock's
price-to-sales ratio is computed by dividing the market value of the stock by
the issuer's most recent twelve month sales. See "-- How Each Strategy Works"
below.
The O'Shaughnessy All Stocks Universe(TM) consists of all the domestic and
foreign common stocks in the COMPUSTAT(R) Database with market capitalizations
exceeding $172 million. Currently, the COMPUSTAT(R) Database consists of the
stocks (including American Depository Receipts ("ADRs")) of 9,898 issuers, and
the O'Shaughnessy All Stocks Universe(TM) consists of the stocks of 3,762
issuers.
7
<PAGE>
The Aggressive Growth Fund seeks to achieve its objective through the
implementation of proprietary aggressive growth models developed by the Manager.
The Fund's portfolio will generally consist of approximately 45 stocks, selected
through implementation of the Manager's proprietary aggressive growth models. At
the time of purchase, such stocks will generally possess the following
characteristics:
1. a market capitalization in excess of $150 million;
2. outstanding price performance during the last six months or one year
period prior to purchase;
3. high earnings gains during the one year period prior to purchase; and
4. expected high future earnings gains in the general consensus of market
analysts.
It is expected that the proprietary aggressive growth models used by the Manager
in selecting stocks for the Aggressive Growth Fund's portfolio will select
stocks for investment without regard to capitalization, except that the issuers
must have market capitalizations in excess of $150 million. The majority of
these stocks will be common stocks of domestic corporations and ADRs.
The Manager may invest the Aggressive Growth Fund's assets in stocks which
do not meet all of the above criteria, if, in the opinion of the Manager, such
stocks possess characteristics similar to stocks meeting such criteria. In
addition, the Manager may continue to hold a stock in the Aggressive Growth
Fund's portfolio which no longer meets the initial criteria for investment if
the Manager believes such investments are consistent with the Fund's investment
objective.
Other than assets temporarily maintained in cash or liquid short-term
securities pending investment to meet redemption requests or to comply with
federal tax laws applicable to mutual funds, each of the Dogs of the Market
Fund, the Cornerstone Value Fund and the Cornerstone Growth Fund will invest
substantially all of its assets in common stocks selected through its respective
Strategy described above.
HOW EACH STRATEGY WORKS. Upon implementation of the Dogs of the Market
Strategy, the Manager purchased 30 stocks for the Dogs of the Market Fund as
dictated by such Strategy, based on information as of that date. The Fund's
holdings of each stock in its portfolio were initially weighted equally by
dollar amount. Thereafter, the Manager has re-balanced the portfolio of the Fund
annually in the first month of the succeeding year (the "Re-Balance Date"), in
accordance with the Fund's Strategy, based on information on or about the
immediately preceding December 31. That is, on the Re-Balance Date of each year,
stocks meeting the Strategy's criteria on or about the immediately preceding
December 31 are purchased for the Fund to the extent not then held, stocks which
no longer meet the criteria as of such date are sold, and the holdings of all
stocks in the Fund that continue to meet the criteria are appropriately
increased or decreased to result in equal weighting of all stocks in the
portfolio.
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<PAGE>
Upon commencement of operations of the Cornerstone Value Fund and
Cornerstone Growth Fund, the Manager purchased 50 stocks for each Fund as
dictated by their respective Strategies, based on information as of commencement
of operations of such Funds. Each Acquiring Fund's holdings of each stock in its
portfolio were initially weighted equally by dollar amount. Thereafter, the
Manager has re-balanced (and will in the future re-balance) the portfolio of
each Acquiring Fund on the Re-Balance Date, in accordance with such Fund's
respective Strategy, based on information on or about the immediately preceding
December 31. That is, on the Re-Balance Date of each year, stocks meeting the
Strategy's criteria on or about the immediately preceding December 31 are
purchased for the respective Fund to the extent not then held, stocks which no
longer meet the criteria as of such date are sold, and the holdings of all
stocks in the respective Fund that continue to meet the criteria are
appropriately increased or decreased to result in equal weighting of all stocks
in the portfolio.
When the Dogs of the Market Fund, the Cornerstone Value Fund or the
Cornerstone Growth Fund receives new cash flow from the sale of its shares over
the course of the year, such cash will first be used to the extent necessary to
meet redemptions. The balance of any such cash will be invested in the stocks
selected for such Fund pursuant to its respective Strategy as of the most recent
rebalancing of the Fund's portfolio, in proportion to the current weightings of
such stocks in the portfolio and without any intention to rebalance the
portfolio on an interim basis. It is anticipated that such purchases will
generally be made on a weekly basis, but may be on a more or less frequent basis
in the discretion of the Manager, depending on certain factors, including the
size of the Fund and the amount of cash to be invested. To the extent
redemptions exceed new cash flow into a Fund, such Fund will meet redemption
requests by selling securities on a pro rata basis, based on the current
weightings of such securities in the portfolio. Thus, interim purchases and
sales of securities between annual Re-Balance Dates will be based on current
portfolio weightings and will be made without regard to whether or not a
particular security continues to meet the Fund's Strategy criteria.
Unlike the Aggressive Growth Fund, which utilizes an actively managed stock
selection approach, each of the Dogs of the Market Fund, Cornerstone Value Fund
and Cornerstone Growth Fund offers a disciplined approach to investing, based on
a buy and hold philosophy over the course of each year, which ignores market
timing and rejects active management. Each of the Dogs of the Market Fund,
Cornerstone Value Fund and Cornerstone Growth Fund will adhere to its respective
Strategy regardless of the performance of the stock market in a particular
period.
The Manager anticipates that the stocks held in the portfolio of each of
the Dogs of the Market Fund, Cornerstone Value Fund and Cornerstone Growth Fund
will remain the same throughout the course of a year, despite any adverse
developments concerning an issuer, an industry, the economy or the stock market
generally. However, if during the course of a year it is determined that
earnings or other factual criteria that form the basis for selecting a security
are false or incorrect, the Manager reserves the right to replace such a
security with another meeting the criteria of the applicable Strategy. Also, due
to purchases and redemptions of Fund shares during the year, changes in the
market value of the stock positions held in a Fund's portfolio and compliance
with the federal tax laws, it is likely that stock positions will not be
weighted equally at all times during a year.
Each of the Dogs of the Market Fund, Cornerstone Value Fund and Cornerstone
Growth Fund will be substantially fully invested in stocks selected as described
above at all times.
9
<PAGE>
Because each of the Acquiring Funds adheres to a disciplined Strategy and
invests only in the stocks selected through its Strategy, it is anticipated that
each of the Acquired Funds will be required to liquidate a substantial portion
of its portfolio in order to effectuate the respective Reorganization. Such a
liquidation will entail transaction costs and may result in tax consequences to
shareholders. See "The Reorganizations -- Federal Income Tax Consequences of the
Reorganizations." However, following the Reorganizations, shareholders of the
Acquired Funds will remain invested in a diversified fund which has the same
Manager, substantially the same investment objective and similar, though not
identical, investment techniques. See "The Reorganizations--Potential Benefits
to Shareholders as a Result of the Reorganizations."
CASH AND SHORT-TERM SECURITIES. Each Fund may temporarily invest a portion
of its total assets in cash or liquid short-term securities pending investment
of such assets in stocks in accordance with the Fund's investment strategy, to
meet redemption requests, and in the case of the Acquiring Funds, to the extent
necessary to comply with the federal tax laws applicable to regulated investment
companies. Unlike the Acquiring Funds, which will not use investments in cash
and short-term securities for temporary defensive purposes, the Acquired Funds
may invest a portion of their respective assets in cash or liquid short-term
securities for such purposes, but are under no obligation to do so.
Short-term securities in which the Funds may invest include certificates of
deposit, commercial paper, notes, obligations issued or guaranteed by the U.S.
Government or any of its agencies or instrumentalities, and repurchase
agreements involving such securities. See "-- Repurchase Agreements," below.
The Manager does not expect assets invested in cash or liquid short-term
securities to exceed 5% of a Fund's total assets at any time.
REPURCHASE AGREEMENTS. As described above in "--Cash and Short-Term
Securities," each Fund may invest in short-term securities pursuant to
repurchase agreements. The Funds may only enter into repurchase agreements with
a member bank of the Federal Reserve System or well-established securities
dealer in U.S. government securities. In the event of a bankruptcy or default by
the seller of the repurchase agreement, a Fund may suffer delays and incur costs
or possible losses in liquidating the underlying security which is held as
collateral, and such Fund may incur a loss if the value of the collateral
declines during this period. As a matter of operating policy, the Funds may not
invest more than 15% of their respective total assets in repurchase agreements
maturing in more than seven days.
ILLIQUID SECURITIES. The Acquired Funds may invest up to 15% of their
respective assets in illiquid securities. Illiquid securities are securities
which cannot be readily resold because of legal or contractual restrictions or
which cannot otherwise be marketed, redeemed, put to the issuer or a third
party, which do not mature within seven days, or which the Manager, in
accordance with guidelines approved by the Board of Directors, has not
determined to be liquid. The Acquiring Funds will not invest in illiquid
securities.
The Acquired Funds may purchase, without regard to the above limitation,
securities that are not registered under the Securities Act but that can be
offered and sold to "qualified institutional buyers" under Rule 144A under the
Securities Act, provided that the Board of Directors or the Manager pursuant to
guidelines adopted by the Board of Directors, continuously determines, based on
the trading markets for the specific Rule 144A security, that it is liquid.
10
<PAGE>
LENDING OF PORTFOLIO SECURITIES. Like other mutual funds, each Fund may
from time to time lend securities from its portfolio to banks, brokers and other
financial institutions to earn additional income. The principal risk is that the
borrower may default on its obligation to return borrowed securities, because of
insolvency or otherwise. In this event, a Fund could experience delays in
recovering its securities and capital. In accordance with applicable law, each
Fund may not lend portfolio securities representing in excess of 33 1/3% of its
respective total assets. The lending policy is a fundamental policy.
BORROWING. Each Fund may borrow money from banks in an amount up to 33% of
its respective total assets for extraordinary or emergency purposes such as
meeting anticipated redemptions, and may pledge assets in connection with such
borrowing. The borrowing policy is a fundamental policy.
SMALL CAP STOCKS. Unlike the portfolios of the Dogs of the Market Fund and
each of the Acquiring Funds, which will typically include larger capitalization
stocks, it is anticipated that the Aggressive Growth Fund's portfolio will
include small cap stocks (i.e., stocks whose issuers have market capitalizations
exceeding $150 million but less than $1 billion). Small cap stocks may present
greater opportunities for capital appreciation and a higher degree of risk; they
tend to be more vulnerable to financial and other risks and thus are more
volatile than stocks of larger, more established companies. Because the
Aggressive Growth Fund may invest in stocks with greater than average
volatility, which may result in substantial declines in the Fund's share price,
it is suitable only for the most aggressive investors.
INDUSTRY CONCENTRATION. Each Fund may not invest more than 25% of its total
assets in any one industry (excluding U.S. Government securities). The
concentration policy is a fundamental policy.
In the case of either the Dogs of the Market Fund or one of the Acquiring
Funds, if upon rebalancing, the stocks selected by such Fund's investment
strategy would result in more than 25% of such Fund's total assets being
invested in a single industry, the Manager will be required to deviate from such
investment strategy in investing the portfolio so as not to violate such Fund's
concentration policy.
FOREIGN SECURITIES. The Funds may invest in securities of foreign issuers.
The Acquired Funds may invest up to 25% of their respective total assets in such
securities, while the Acquiring Funds are not limited in the amount of foreign
securities that they may invest in.
The Funds may invest in foreign securities either through (i) direct
purchase of securities of foreign issuers or (ii) purchase of ADRs, which are
dollar-denominated securities of foreign issuers traded in the U.S. Such
investments increase diversification of a Fund's portfolio and may enhance
return, but they also involve some special risks such as exposure to potentially
adverse local political and economic developments, nationalization and exchange
controls; potentially lower liquidity and higher volatility; possible problems
arising from regulatory practices that differ from U.S. standards; the
imposition of withholding taxes on income from such securities; confiscating
taxation; and the chance that fluctuations in foreign exchange rates will
decrease the investment's value (favorable changes can increase its value).
These risks are heightened for investment in developing countries and there is
no limit on the amount of a Fund's foreign investments that may be invested in
such countries.
11
<PAGE>
The Funds may invest in ADRs through both sponsored and unsponsored
arrangements. The issuers of unsponsored ADRs are not obligated to disclose
material information in the United States, and therefore, there may not be a
correlation between such information and the market value of the ADRs.
HEDGING AND RETURN ENHANCEMENT STRATEGIES. The Funds are permitted to
utilize certain hedging and return enhancement strategies and techniques such as
options on securities and securities indices, futures contracts on securities
and securities indices and options on futures contracts, as described below.
Futures (a type of potentially high-risk derivative) are often used to
manage or hedge risk, because they enable the investor to buy or sell an asset
in the future at an agreed upon price. Options (another potentially high-risk
derivative) give the investor the right, but not the obligation, to buy or sell
an asset at a predetermined price in the future. The Funds may buy and sell
futures and options contracts for any number of reasons, including: to manage
their respective exposure to changes in securities prices; as an efficient means
of adjusting their respective overall exposure to certain markets; in an effort
to enhance income; and to protect the value of portfolio securities. The Funds
may purchase, sell, or write call and put options on securities, financial
indices and futures.
Futures contracts and options may not always be successful hedges; their
prices can be highly volatile. Using them could lower a Fund's total return, and
the potential loss from the use of futures can exceed a Fund's initial
investment in such contracts.
As a matter of operating policy, initial margin deposits and premiums on
options used for nonhedging purpose will not equal more than 5% of a Fund's net
asset value.
FIRM COMMITMENT AGREEMENTS AND WHEN-ISSUED PURCHASES. The Funds may
purchase securities under a firm commitment agreement or on a when-issued basis.
Firm commitment agreements and when-issued purchases call for the purchase of
securities at an agreed-upon price on a specified future date, and would be
used, for example, when a decline in the yield of securities of a given issuer
is anticipated. A Fund as purchaser assumes the risk of any decline in value of
the security beginning on the date of the agreement or purchase. The Funds will
not enter into such transactions for the purpose of leveraging, and accordingly,
will segregate liquid assets with its custodian equal (on a daily
market-to-market basis) to the amount of its commitment to purchase the
when-issued securities and securities subject to the firm commitment agreement.
WARRANTS. The Acquired Funds may invest in warrants . Warrants are similar
to options to purchase securities at a specific price valid for a specific
period of time. The Acquired Funds may not invest more than 5% of their
respective net assets (at the time of investment) in warrants (other than those
attached to other securities). If the market price of the underlying security
never exceeds the exercise price, the Acquired Funds will lose the entire
investment in the warrant. Moreover, if a warrant is not exercised within the
specified time period, it will become worthless and the Acquired Funds will lose
the purchase price and the right to purchase the underlying security. The
Acquiring Funds do not currently intend to invest in warrants.
12
<PAGE>
DIVERSIFICATION. In order to maintain each Fund's status as a diversified
investment company, with respect to 75% of a Fund's total assets: (i) not more
than 5% of the Fund's assets may be invested in the securities of a single
issuer (excluding U.S. Government Securities); and (ii) a Fund may not hold more
than 10% of the outstanding voting securities of a single issuer. The
diversification policy is a fundamental policy.
COMPUSTAT(R) DATABASE. Although S&P Compustat obtains information for
inclusion in or for use in the COMPUSTAT(R) Database from sources which S&P
Compustat considers reliable, S&P Compustat does not guarantee the accuracy or
completeness of the COMPUTSTAT(R) Database. S&P Compustat makes no warranty,
express or implied, as to the results to be obtained by the Funds, or any other
persons or entity from the use of the COMPUSTAT(R) Database. S&P Compustat makes
no express or implied warranties, and expressly disclaims all warranties of
merchantability or fitness for a particular purpose with respect to the
COMPUSTAT(R) Database. "Standard & Poor's" and "S & P" are trademarks of The
McGraw-Hill Companies, Inc. The Funds are not sponsored, endorsed, sold or
promoted by S&P Compustat and S&P Compustat makes no representation regarding
the advisability of investing in the Funds.
PRINCIPAL RISK FACTORS
For a discussion of the principal risks of investing in each Fund, see
"Principal Risk Factors and Special Considerations."
MANAGEMENT
GENERAL OVERSIGHT. O'Shaughnessy Funds is governed by a Board of Directors
that meets regularly to review the Funds' investment, performance, expenses, and
other business affairs. The Board of Directors elects the Funds' officers.
MANAGER. The Manager acts as investment manager of each Fund pursuant to a
management agreement with O'Shaughnessy Funds on behalf of the Funds (the
"Management Agreement"). In its capacity as investment manager, the Manager is
responsible for selection and management of each Fund's portfolio investments.
For its services, each Fund pays the Manager a fee each month, at the annual
rate of 0.74% of the Fund's average daily net assets.
PORTFOLIO MANAGEMENT. James P. O'Shaughnessy has had the day-to-day
responsibility for managing the portfolio of each Fund and developing and
executing each Fund's investment program since the commencement of operations of
each Fund. For the past ten years, Mr. O'Shaughnessy has served as Chairman and
Chief Executive Officer of the Manager, and in such capacity, has managed equity
accounts for high net worth individuals and served as portfolio consultant to a
unit investment trust. Mr. O'Shaughnessy is recognized as a leading expert and
pioneer in quantitative equity analysis. He is the author of three financial
books, INVEST LIKE THE BEST, WHAT WORKS ON WALL STREET and HOW TO RETIRE RICH.
DISTRIBUTOR. First Fund Distributors, Inc. (the "Distributor"), a
registered broker-dealer, acts as the principal distributor of the shares of the
Funds. The Distributor provides distribution services to the Funds at no cost to
the Funds.
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<PAGE>
ADMINISTRATOR. Pursuant to an Administration Agreement, as amended
Investment Company Administration, LLC (the "Administrator") serves as
administrator of the Funds. The Administrator provides certain administrative
services, including, among other responsibilities, coordinating relationships
with independent contractors and agents, preparing for signature by officers and
filing certain documents required for compliance with applicable laws and
regulations, preparing financial statements, and arranging for the maintenance
of books and records. For its services, each Fund pays the Administrator a fee
each month, at the annual rate of 0.10% of the first $200 million of the Fund's
average daily net assets and 0.03% of such net assets over $200 million. The
Administrator and the Distributor are under common control and are therefore
considered affiliates of each other.
See "Comparison of the Funds -- Management" for more information regarding
the management of the Funds.
OTHER
SHARES. As with all mutual funds, investors purchase shares when they
invest in the Funds. These shares are a part of the Funds' authorized capital
stock, but share certificates are not generally issued.
Each full share and fractional share entitles the shareholder to: receive a
proportional interest in the respective Fund's capital gain distributions and
cast one vote per share on certain Fund matters, including the election of
directors, changes in fundamental policies, or approval of changes in the
Management Agreement.
OVERALL EXPENSE RATIO. The actual overall operating expenses, as a percent
of net assets, as of September 30, 1999, were 1.09% for the Dogs of the Market
Fund and 1.38% for the Cornerstone Value Fund. Absent certain fee reductions and
reimbursements by the Manager of the expenses of the Dogs of the Market Fund,
the overall operating expenses of such Fund, as a percent of net assets would
have been 1.50% for the fiscal period ended September 30, 1999. If the Value
Funds Reorganization had taken place on October 1, 1998, the overall operating
expenses, as a percent of net assets, for the Value Combined Fund on a pro forma
combined basis would have been 1.30% as of such date.
The actual overall operating expenses, as a percent of net assets, as of
September 30, 1999, were 1.97% for the Aggressive Growth Fund and 1.15% for the
Cornerstone Growth Fund. Absent certain fee reductions and reimbursements by the
Manager of the expenses of the Aggressive Growth Fund, the overall operating
expenses for such Fund, as a percent of net assets would have been 2.23% for the
fiscal period ended September 30, 1999. If the Growth Funds Reorganization had
taken place on October 1, 1998, the overall operating expenses, as a percent of
net assets, for the Growth Combined Fund on a pro forma combined basis would
have been 1.10%% as of such date.
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<PAGE>
PURCHASE OF SHARES. The procedures for purchasing shares are the same for
all Funds, see "Comparison of the Funds -- Purchase, Exchange and Redemption of
Shares -- Purchase of Shares" and "Information About Your Account" in the
O'Shaughnessy Funds Prospectuses.
REDEMPTION OF SHARES. The procedures for redeeming shares are the same for
all Funds, see "Comparison of the Funds -- Purchase, Exchange and Redemption of
Shares -- Redemption of Shares" and "Information About Your Account" in the
O'Shaughnessy Funds Prospectuses.
DIVIDENDS. The Funds currently have the same policy with respect to
dividends. See "Comparison of the Funds -- Dividends" and "Information On
Distributions and Taxes" in the O'Shaughnessy Funds Prospectuses.
NET ASSET VALUE. The price at which each Fund's shares are purchased or
redeemed is the Fund's next determined net asset value per share. The net asset
value per share is calculated as of the close of the New York Stock Exchange
("NYSE") (currently 4:00 p.m., Eastern time) on each day that the NYSE is open
for business and on each other day in which there is a sufficient degree of
trading in a Fund's portfolio securities that the current net asset value of the
Fund's shares may be materially affected by changes in the value of the Fund's
portfolio securities. For further discussion on net asset value and how it is
determined, see "Comparison of the Funds -- Additional Information -- Net Asset
Value" and "Valuation of Shares" in the O'Shaughnessy Funds Statement.
TAX CONSIDERATIONS. The tax consequences associated with an investment in
shares of an Acquired Fund are substantially the same as the tax consequences
associated with an investment in shares of the respective Acquiring Fund. See
"Information on Distributions and Taxes" in the O'Shaughnessy Funds
Prospectuses.
For a more detailed discussion regarding potential tax consequences of the
Reorganizations, see "The Reorganizations -- Federal Income Tax Consequences of
the Reorganizations."
THE PROCESS OF STRATEGY INDEXING(R), THE CORNERSTONE GROWTH STRATEGY, AND
THE CORNERSTONE VALUE STRATEGY ARE PATENTS OF O'SHAUGHNESSY CAPITAL MANAGEMENT,
INC., U.S. PATENT #5,978,778.
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PRINCIPAL RISK FACTORS AND SPECIAL CONSIDERATIONS
Many of the investment risks associated with an investment in an Acquired
Fund are substantially the same as those associated with an investment in the
respective Acquiring Fund. A discussion of certain principal risks of investing
in the Funds is set forth below. See "Investment Policies and Limitations" in
the O'Shaughnessy Funds Statement for a more detailed discussion of investment
risks associated with an investment in the Funds.
POTENTIAL RISKS ASSOCIATED WITH A FUND'S STRATEGY
The Strategy Indexing(R) utilized by the Dogs of the Market Fund and each
of the Acquiring Funds provides a disciplined approach to investing, based on a
buy and hold philosophy during the course of each year, which ignores market
timing and rejects active management. Each such Fund will adhere to its
respective investment strategy (subject to applicable federal tax requirements
relating to mutual funds), despite any adverse developments concerning an
issuer, an industry, the economy or the stock market generally. This could
result in substantial losses to a Fund, if for example, the stocks selected for
such Fund's portfolio for a given year are experiencing financial difficulty, or
are out of favor in the market because of weak performance, poor earnings
forecast, negative publicity or general market cycles. The Dogs of the Market
Fund and the Acquiring Funds are not appropriate investments for those who are
not comfortable with the applicable Fund's investment strategy.
There can be no assurance that the market factors that caused the stocks
held in each such Fund's portfolio to meet its respective investment strategy's
investment criteria as of rebalancing in any given year will continue during
such year until the next rebalancing, that any negative conditions adversely
affecting a stock's price will not develop and/or deteriorate during a given
year, or that share prices of a stock will not decline during a given year.
As described above, the portfolio of the Dogs of the Market Fund and each
of the Acquiring Funds is rebalanced annually in accordance with its respective
investment strategy. Rebalancing may result in elimination of better performing
assets from such Funds portfolio and increases in investments in securities with
relatively lower total return.
The foregoing risks are not applicable to the Agreessive Growth Fund, which
is an actively managed fund.
POTENTIAL RISKS ASSOCIATED WITH INVESTING PRIMARILY IN COMMON STOCKS
The fundamental risk associated with any common stock fund, including all
of the Funds, is the risk that the value of the stocks it holds might decrease.
Stock values may fluctuate in response to the activities of an individual
company or in response to general market and/or economic conditions.
Historically, common stocks have provided greater long-term returns and have
entailed greater short-term risks than other investment choices. Smaller or
newer issuers are more likely to realize more substantial growth as well as
suffer more significant losses than larger or more established issuers.
Investments in such companies can be both more volatile and more speculative.
The Funds are not appropriate investments for those who are unable or unwilling
to assume the risk involved generally with investment in common stocks. See "The
Funds -- Comparison of the Funds -- Investment Policies -- Small Cap Stocks" for
a discussion of the special risks applicable to the Aggressive Growth Fund in
connection with its investment in small cap stocks.
16
<PAGE>
Although the stocks in which the Aggressive Growth Fund may invest
have, in the Manager's judgment, the potential to provide superior return, such
stocks are likely to be subject to greater than average price volatility, which
may result in substantial declines in such Fund's share price. Accordingly, the
Aggressive Growth Fund is suitable only for the most aggressive investors.
YEAR 2000 RISK
Like other business organizations around the world, each Fund could be
adversely affected if the computer systems used by the Manager and other service
providers do not properly process and calculate information related to dates
beginning January 1, 2000. This is commonly known as the "Year 2000 Issue." The
Manager has taken steps that it believes are reasonably designed to address the
Year 2000 Issue with respect to its own computer systems, and each Fund has
obtained assurances from its other service providers that they are taking
comparable steps. However, there can be no assurance that these actions will be
sufficient to avoid any adverse impact on such Fund.
ADDITIONAL RISKS ASSOCIATED WITH AN INVESTMENT IN THE FUNDS
There is no guarantee that the investment objective of a Fund will be
achieved or that the value of a shareholder's investment in the Fund will not
decrease.
17
<PAGE>
COMPARISON OF THE FUNDS
FINANCIAL HIGHLIGHTS
DOGS OF THE MARKET FUND. The financial information in the table below is
included in the Dogs of the Market Fund's Annual Report. The financial
information has been audited by McGladrey & Pullen, LLP whose report thereon is
included in the Fund's 1998 Annual Report. The financial statements and
financial highlights included in the Annual Reports are incorporated by
reference into [the O'Shaughnessy Funds Statement].
Per Share Operating Performance (For a share outstanding throughout the period)
November 1,
1996*
For the Year Ended Through
September 30, September 30,
------------------ -------------
1998 1997
---- ----
Net asset value, beginning of period $ 11.96 $ 10.00
------- -------
Income from investment operations:
Net investment income (loss) 0.10 .10
Net realized and unrealized gain
(loss) on investments 0.02 1.87
------ -------
Total from investment operations 0.12 1.97
------ -------
Less distributions:
From net investment income (0.09) (0.01)
From net realized gains (0.59) (0.00)
------ -------
Total distributions (0.68) (0.01)
------ -------
NET ASSET VALUE, END OF PERIOD $11.40 $ 11.96
====== =======
TOTAL RETURN 0.74% 19.74%**
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (millions) $22.6 $ 7.2
Ratio of expenses to average net assets:
Before expense reimbursement 1.46% 4.28%+
After expense reimbursement 1.46% 1.99%+
Ratio of net investment income (loss)
to average net assets:
Before expense reimbursement 1.24% (0.51%)+
After expense reimbursement 1.24% 1.78%+
Portfolio turnover rate 44.35% 118.44%
- ----------
* Commencement of operations.
** Not annualized.
+ Annualized.
18
<PAGE>
CORNERSTONE VALUE FUND. The financial information in the table below is
included in the Cornerstone Value Fund's Annual Report. The financial
information has been audited by McGladrey & Pullen, LLP whose report thereon is
included in the Fund's 1998 Annual Report. The financial statements and
financial highlights included in the Annual Reports are incorporated by
reference into [the O'Shaughnessy Funds Statement].
Per Share Operating Performance (For a share outstanding throughout the period)
November 1,
1996*
For the Year Ended Through
September 30, September 30,
------------------ -------------
1998 1997
---- ----
Net asset value, beginning of period $ 11.50 $10.00
------ ------
Income from investment operations:
Net investment income (loss) 0.21 0.15
Net realized and unrealized
gain (loss) on investments (0.70) 1.37
------ ------
Total from investment operations (0.49) 1.52
------ ------
Less distributions:
From net investment income (0.17) (0.02)
From net realized gains -- --
------ ------
Total distributions (0.17) (0.02)
------ ------
NET ASSET VALUE, END OF PERIOD $10.84 $11.50
====== ======
TOTAL RETURN (4.32%) 15.21%**
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (millions) $21.90 $13.50
Ratio of expenses to average net assets:
Before expense reimbursement 1.45% 2.66%+
After expense reimbursement 1.45% 1.85%+
Ratio of net investment income (loss)
to average net assets:
Before expense reimbursement 2.12% 1.93%+
After expense reimbursement 2.12% 2.73%+
Portfolio turnover rate 51.56% 2.01%
- ----------
* Commencement of operations.
** Not annualized.
+ Annualized.
19
<PAGE>
AGGRESSIVE GROWTH FUND. The financial information in the table below is
included in the Aggressive Growth Fund's Annual Report. The financial
information has been audited by McGladrey & Pullen, LLP whose report thereon is
included in the Fund's 1998 Annual Report. The financial statements and
financial highlights included in the Annual Reports are incorporated by
reference into [the O'Shaughnessy Funds Statement].
Per Share Operating Performance (For a share outstanding throughout the period)
November 1,
1996*
For the Year Ended Through
September 30, September 30,
------------------ -------------
1998 1997
---- ----
Net asset value, beginning of period $14.29 $10.00
------ ------
Income from investment operations:
Net investment income (loss) (0.15) (0.06)
Net realized and unrealized
gain (loss) on investments (3.21) 4.35
------ ------
Total from investment operations (3.36) 4.29
------ ------
Less distributions:
From net realized gains (0.20) --
------ ------
NET ASSET VALUE, END OF PERIOD $10.73 $14.29
====== ======
TOTAL RETURN (23.70%) 42.90%**
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (millions) $ 8.30 $5.60
Ratio of expenses to average net assets:
Before expense reimbursement 2.24% 7.01%+
After expense reimbursement 2.00% 1.98%+
Ratio of net investment income (loss)
to average net assets:
Before expense reimbursement (1.77%) (6.41%)+
After expense reimbursement (1.53%) (1.39%)+
Portfolio turnover rate 206.30% 104.77%
- ----------
* Commencement of operations.
** Not annualized.
+ Annualized.
20
<PAGE>
CORNERSTONE GROWTH FUND. The financial information in the table below is
included in the Cornerstone Growth Fund's Annual Report. The financial
information has been audited by McGladrey & Pullen, LLP who's report thereon is
included in the Fund's 1998 Annual Report. The financial statements and
financial highlights included in the Annual Reports are incorporated by
reference into [the O'Shaughnessy Funds Statement].
Per Share Operating Performance (For a share outstanding throughout the period)
November 1,
1996*
For the Year Ended Through
September 30, September 30,
------------------ -------------
1998 1997
---- ----
Net asset value, beginning of period $ 15.30 $10.00
------- ------
Income from investment operations:
Net investment income (loss) (0.07) (0.02)
Net realized and unrealized
gain (loss) on investments (3.88) 5.32
------- ------
Total from investment operations (3.95) 5.30
------- ------
Less distributions:
From net investment income -- --
From net realized gains (1.78) --
Total distributions (1.78) --
------- ------
NET ASSET VALUE, END OF PERIOD $ 9.57 $15.30
======= ======
TOTAL RETURN (27.63%) 53.05%**
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (millions) $ 80.40 $91.30
Ratio of expenses to average net assets:
Before expense reimbursement 1.16% 1.63%+
After expense reimbursement 1.16% 1.56%+
Ratio of net investment income (loss)
to average net assets:
Before expense reimbursement (0.86%) (1.19%)+
After expense reimbursement (0.86%) (1.12%)+
Portfolio turnover rate 119.98% 15.52%
- ----------
* Commencement of operations.
** Not annualized.
+ Annualized.
21
<PAGE>
MANAGEMENT
GENERAL OVERSIGHT. O'Shaughnessy Funds is governed by a Board of Directors
consisting of four individuals, three of whom are not "interested persons" as
defined in the Investment Company Act. After the Reorganizations, the Board of
Directors will continue to serve as the Board of Directors of O'Shaughnessy
Funds. The Board of Directors meets regularly to review the Funds' investment,
performance, expenses, and other business affairs. The Board of Directors elects
the Funds' officers. See "Directors and Officers" in the O'Shaughnessy Funds
Statement.
The directors and officers of O'Shaughnessy Funds, their business addresses
and principal occupations during the past five years are listed below. Unless
otherwise indicated, each person's address is 35 Mason Street, Greenwich,
Connecticut 06830.
<TABLE>
<CAPTION>
Name, Age and Address Position Other Business Activities in Past 5 Years
--------------------- -------- -----------------------------------------
<S> <C> <C>
James P. O'Shaughnessy* Director, President Chairman and Chief Executive Officer of the Manager,
Age: 39 and Treasurer 1988 - present; author of INVEST LIKE THE BEST, WHAT
WORKS ON WALL STREET, and HOW TO RETIRE RICH.
C. Flemming Heilmann Director President and Director, Danish American, N.Y.; Former
Age: 60 Chairman and CEO, Brockway Standard, Inc., 1989-1994;
Director, Porter Chadburn, Inc.; Porter Chadburn, plc;
Wheaton, Inc.; Danish American Chamber of Commerce,
N.Y.; American Friends of Cambridge University;
Trustee, Royal Wessanen Group U.S. Trust.
Robert E. Ix Director Retired Chairman and Chief Executive Officer of
Age: 70 Cadbury Schweppes, Inc.; Director, Loctite Corp.
Joseph John McAleer Director Founder and President, MCA Associates, Inc. (ship
Age: 69 broker), 1983 - present; General Partner, Sixtus
Limited Partnership; President and Director, Salesian
Sisters Partners Circle; Trustee, American Merchant
Marine Museum Foundation.
Steven J. Paggioli Vice President and Executive Vice President and Director, Wadsworth Group
Age: 49 Secretary of since 1986; Vice President of the Distributor since
O'Shaughnessy Funds 1989; Vice President of the Administrator since 1990.
</TABLE>
* Interested person, as defined in the Investment Company Act.
Pursuant to the terms of the Management Agreement with O'Shaughnessy Funds
on behalf of the Funds, the Manager pays the compensation of all officers and
directors who are affiliated persons of the Manager. Pursuant to the terms of
the Administration Agreement, the Administrator pays the compensation of all
officers that are affiliated persons of the Administrator.
O'Shaughnessy Funds pays directors who are not interested persons of the
O'Shaughnessy Funds (each, a "Disinterested Director") fees for serving as
directors. Specifically, O'Shaughnessy Funds pays each Disinterested Director a
$9,750 annual retainer paid quarterly, together with such director's
out-of-pocket expenses relating to attendance at meetings. Each Fund pays one
quarter of the foregoing fees.
22
<PAGE>
The following table sets forth the aggregate compensation the Funds paid to
the Disinterested Directors for the fiscal year ended September 30, 1999.
Pension or
Aggregate Retirement Benefits
Compensation From Accrued as Part of Total Compensation
Name of Director Funds* Fund Expenses From Fund Complex*
- ---------------- ------ ------------- ------------------
C. Flemming Heilman 9,750 None 9,750
Robert E. Ix 9,750 None 9,750
Joseph John McAleer 9,750 None 9,750
* During the fiscal period year September 30, 1999, aggregate directors fees
and expenses in the amount of $29,596 were allocated to the Funds.
Because the Manager and the Administrator perform substantially all of the
services necessary for the operation of the Funds, the Funds require no
employees. No officer, director or employee of the Manager or the Administrator
receives any compensation from the Funds for acting as a director or officer.
MANAGEMENT ARRANGEMENTS AND FEES. O'Shaughnessy Capital Management, Inc.
(previously defined as the "Manager") acts as investment manager of each Fund
pursuant to the Management Agreement. In its capacity as investment manager, the
Manager is responsible for selection and management of each Fund's portfolio
investments. For its services, each Fund pays the Manager a fee each month, at
the annual rate of 0.74% of the Fund's average daily net assets. After the
consummation of the Reorganizations, the Manager will continue to perform
management services for each Combined Fund under the Management Agreement. The
pro forma effective fee rate of each Combined Fund after taking into account the
consummation of the Reorganizations would be 0.74% of each Combined Fund's
average daily net assets.
The Manager's office is located at 35 Mason Street, Greenwich, Connecticut
06830. The Manager was incorporated in 1988. The Manager serves as portfolio
consultant to a unit investment trust and provides investment advisory services
to investment companies and individual and institutional accounts with assets in
excess of $800 million. See "Management of the Funds" in the O'Shaughnessy Funds
Statement.
PORTFOLIO MANAGEMENT. James P. O'Shaughnessy has had the day-to-day
responsibility for managing the portfolio of each Fund and developing and
executing each Fund's investment program since the commencement of operations of
each Fund. For the past ten years, Mr. O'Shaughnessy has served as Chairman and
Chief Executive Officer of the Manager, and in such capacity, has managed equity
accounts for high net worth individuals and served as portfolio consultant to a
unit investment trust. Mr. O'Shaughnessy is recognized as a leading expert and
pioneer in quantitative equity analysis. He is the author of three financial
books, INVEST LIKE THE BEST, WHAT WORKS ON WALL STREET and How TO RETIRE RICH.
DISTRIBUTOR. First Fund Distributors, Inc. (previously defined as the
"Distributor"), a registered broker-dealer, acts as the principal distributor of
the shares of the Funds. The address of the Distributor is 4455 E. Camelback
Road, Suite 261 E, Phoenix, Arizona 85018. The Distributor provides distribution
services to the Funds at no cost to the Funds. After the consummation of the
Reorganizations, the Distributor will continue to provide distribution services
to each Combined Fund.
ADMINISTRATION ARRANGEMENTS AND FEES. Pursuant to the Administration
Agreement, Investment Company Administration, LLC (previously defined as the
"Administrator") serves as administrator of the Funds. The Administrator
provides certain administrative services, including, among other
responsibilities, coordinating relationships with independent contractors and
agents, preparing for signature by officers and filing of certain documents
required for compliance with applicable laws and regulations, preparing
financial statements, and arranging for the maintenance of books and records.
For its services, each Fund pays the Administrator a fee each month, at the
annual rate of 0.10% of the first $200 million of the Fund's average daily net
23
<PAGE>
assets and 0.03% of such net assets over $200 million. The address of the
Administrator is 4455 E. Camelback Road, Suite 261 E, Phoenix, Arizona 85018.
The Administrator and the Distributor are under common control and are therefore
considered affiliates of each other. After the consummation of the
Reorganizations, the Administrator will continue to perform administrative
services for each Combined Fund under the Administration Agreement. The pro
forma effective fee payable to the Administrator by each Combined Fund after
taking into account the consummation of the Reorganizations would be the same as
that fee currently paid by each Fund.
EXPENSES
The Management Agreement identifies the expenses to be paid by each Fund.
In addition to the fees paid to the Manager, each Fund pays certain additional
expenses, including but not limited to, the following: shareholder service
expenses; custodial, accounting, legal, and audit fees; administrative fees;
costs of preparing and printing prospectuses and reports sent to shareholders;
registration fees and expenses; proxy and annual meeting expenses (if any); and
Disinterested Director fees and expenses. The Manager voluntarily agreed to,
until September 30, 1999, reduce fees payable to it by the Dogs of the Market
Fund and the Aggressive Growth Fund or reimburse such Funds to the extent
necessary to limit each such Fund's aggregate annual operating expenses to 1.09%
and 2.00%, respectively, of its average net assets (previously defined as the
"expense cap"). Any such reductions made by the Manager in its fees or
reimbursements of expenses with respect to such Funds are subject to recapture
by the Manager provided the applicable Fund is able to effect such recapture
while keeping total operating expenses at or below the annual expense cap, and
that no recapture will be made after September 30, 2000. Any amounts reimbursed
will have the effect of increasing fees otherwise paid by such Funds.
The total operating expenses, as a percent of net assets, as of September
30, 1999, were 1.09% for the Dogs of the Market Fund and 1.38% for the
Cornerstone Value Fund. Absent certain fee reductions and reimbursements by the
Manager of the expenses of the Dogs of the Market Fund, the total operating
expenses of such Fund, as a percent of net assets would have been 1.50% for the
fiscal period ended September 30, 1999. If the Value Funds Reorganization had
taken place on October 1, 1998, the overall operating expenses, as a percent of
net assets, for the Pro Forma Cornerstone Value Fund on a pro forma basis would
have been 1.30% as of such date. The overall operating expenses, as a percent of
net assets, as of September 30, 1999, were 1.97% for the Aggressive Growth Fund
and 1.15% for the Cornerstone Growth Fund. Absent certain fee reductions and
reimbursements by the Manager of the expenses of the Aggressive Growth Fund, the
overall operating expenses for such Fund, as a percent of net assets would have
been 2.23% for the fiscal period ended September 30, 1999. If the Growth Funds
Reorganization had taken place on October 1, 1998, the overall operating
expenses, as a percent of net assets, for the Pro Forma Cornerstone Growth Fund
on a pro forma basis would have been 1.10% as of such date. After consummation
of the Reorganizations, certain fixed costs, such as printing of prospectuses
and reports sent to shareholders, legal and audit fees and registration fees
would be spread across a larger asset base. This would tend to lower the expense
ratio borne by shareholders of both the Acquiring Funds and the Acquired Funds,
but the effect would be considerably more significant in the case of
shareholders of the Acquired Funds. This is because the Acquired Funds are
smaller, and effective September 30, 1999, the Manager ceased its previous
practice of reducing certain fees payable by, or reimbursing certain expenses
to, the Acquired Funds in order to ensure that the Acquired Funds maintained
their total operating expenses below certain levels. Accordingly, Fund
management believes that the Reorganizations are in the best interest of the
Funds. See "The Reorganizations -- Potential Benefits to Shareholders as a
Result of the Reorganization" and "Summary -- Fee Tables."
24
<PAGE>
PURCHASE, EXCHANGE AND REDEMPTION OF SHARES
The procedures for purchasing and redeeming shares of a Fund as well as the
exchange privileges are the same for all Funds. See "Information About Your
Account" in the O'Shaughnessy Funds Prospectuses.
PERFORMANCE
GENERAL. The following tables provide performance information for shares of
the Funds for the periods indicated. Past performance is not indicative of
future performance.
Dogs of the Cornerstone Aggressive Cornerstone
Period ^ Market Fund(1) Value Fund Growth Fund(1) Growth Fund
- -------- -------------- ---------- -------------- -----------
year ended
September 30, 1999^ 10.36% 17.12% 43.51% 29.15%
Inception* through
September 30, 1999^^ 10.01% 8.89% 16.10% 12.68%
- ----------
^ Return shown is annualized.
^^ Aggregate total returns.
* Each of the Funds commenced operations on November 1, 1996.
(1) Absent certain fee reductions and reimbursements by the Manager of expenses
of the Dogs of the Market Fund and the Aggressive Growth Fund, the total
returns for such Funds (i) for the year ended September 30, 1999 would have
been ____% and ____%, respectively, and (ii) for the period from inception
through September 30, 1999 would have been ____% and ____%, respectively.
See "Summary--Fee Tables."
SHAREHOLDER RIGHTS
Each full share and fractional share of a Fund entitles the shareholder to
receive a proportional interest in the respective Fund's capital gain
distributions and cast one vote per share on certain Fund matters, including the
election of directors, changes in fundamental policies, or approval of changes
in the Management Agreement. Voting rights are not cumulative, so that holders
of more than 50% of the shares voting in the election of directors can, if they
choose to do so, elect all the directors of a Fund, in which event the holders
of the remaining shares are unable to elect any person as a director.
Corresponding Shares issued in the Reorganizations will be fully paid and
nonassessable and will have no preemptive rights. In the event of the
liquidation of a Fund, shareholders of such Fund are entitled to share pro rata
in the net assets of such Fund available for distribution to shareholders.
The Funds are not required to hold annual meetings and do not intend to do
so except when certain matters, such as a change in a Fund's fundamental
policies, are to be decided. In addition, shareholders representing at least 10%
of all eligible votes may call a special meeting if they wish, for the purpose
of voting on the removal of any Fund director.
25
<PAGE>
DIVIDENDS
The Funds currently have the same policy with respect to dividends. Each
Fund declares and pays dividends (if any) annually. In addition, if a Fund has
net capital gains for the year (after subtracting any capital losses), they are
usually declared and paid in December to shareholders of record on a specified
date that month.
TAX INFORMATION
The tax consequences associated with an investment in shares of an Acquired
Fund are substantially the same as the tax consequences associated with an
investment in shares of the respective Acquiring Fund. See "Information on
Distributions and Taxes" in the O'Shaughnessy Funds Prospectuses.
PORTFOLIO TRANSACTIONS
In executing portfolio transactions, the Funds seek to obtain the best net
results, taking into account such factors as price (including the applicable
brokerage commission or dealer spread), size of order, difficulty of execution,
operational facilities of the firm involved and the firm's risk in positioning a
block of securities. While the Funds generally seek reasonably competitive
commission rates, the Funds do not necessarily pay the lowest commission or
spread available. In addition, consistent with the Conduct Rules of the National
Association of Securities Dealers, Inc., the Manager may consider sales of
shares of the Funds as a factor in the selection of brokers or dealers to
execute portfolio transactions for the Fund. For additional information
regarding procedures for engaging in portfolio transactions, see "Portfolio
Transactions" in the O'Shaughnessy Funds Statement.
PORTFOLIO TURNOVER
As described above, in accordance with each Acquiring Fund's investment
strategy, an Acquiring Fund's portfolio will be rebalanced based on information
on or about December 31 of each year. That is, stocks meeting the respective
investment strategy's criteria will be purchased for the Fund's portfolio to the
extent not then held, stocks which no longer meet the criteria will be sold, and
the holdings of all stocks in the portfolio that continue to meet the criteria
will be appropriately increased or decreased to result in equal weighting of all
stocks in the portfolio.
The portfolio turnover rate is calculated by dividing the lesser of a
Fund's annual sales or purchases of portfolio securities (exclusive of purchases
or sales of securities whose maturities at the time of acquisition were one year
or less) by the monthly average value of the securities in the portfolio during
the year. High portfolio turnover involves correspondingly greater transaction
costs in the form of brokerage commissions and dealer spreads, which a Fund
bears.
Neither Fund has placed a limit on its rate of portfolio turnover and
securities may be sold without regard to the time they have been held when, in
the opinion of the Manager, the investment considerations warrant such action.
Under normal conditions, the annual turnover rate should not exceed 50% and 100%
for the Cornerstone Value Fund and Cornerstone Growth Fund, respectively. Each
of the Dogs of the Market Fund and Aggressive Growth Fund anticipates that its
respective annual turnover rate should not exceed 50% and 200%, respectively,
under normal conditions. The portfolio turnover rates for the Dogs of the Market
Fund, the Cornerstone Value Fund, the Aggressive Growth Fund and the Cornerstone
Growth Fund, for the fiscal year ended September 30, 1999, were 63.31%, 122.79%,
193.84% and 125.19%, respectively. A high portfolio turnover may result in
adverse tax consequences, such as an increase in capital gain dividends. High
portfolio turnover may also involve correspondingly greater transaction costs in
the form of dealer spreads and brokerage commissions, which are borne directly
by the Funds. See "Portfolio Transactions--Portfolio Turnover" in the
O'Shaughnessy Funds Statement for further information regarding portfolio
turnover.
26
<PAGE>
Because each of the Acquiring Funds adheres to a disciplined Strategy and
invests only in the stocks selected through its Strategy, it is anticipated that
each of the Acquired Funds will be required to liquidate a substantial portion
of its portfolio in order to effectuate the respective Reorganization. Such a
liquidation will entail transaction costs and may result in tax consequences to
shareholders. See "The Reorganizations--Federal Income Tax Consequences of the
Reorganizations."
ADDITIONAL INFORMATION
NET ASSET VALUE. The price at which each Fund's shares are purchased or
redeemed is the Fund's next determined net asset value per share. The net asset
value per share is calculated as of the close of the NYSE (currently 4:00 p.m.,
Eastern time) on each day that the NYSE is open for business and on each other
day in which there is a sufficient degree of trading in a Fund's portfolio
securities that the current net asset value of the Fund's shares may be
materially affected by changes in the value of the Fund's portfolio securities.
Each Fund determines the net asset value per share by subtracting the Fund's
total liabilities from the Fund's total assets (the value of the securities that
the Fund holds plus cash and other assets), dividing the remainder by the total
number of shares outstanding, and adjusting the result to the nearest full cent.
Securities listed on the NYSE, American Stock Exchange or other national
exchanges are valued at the last sale price on such exchange on the day as of
which the net asset value per share is to be calculated. Over-the counter
securities included in the NASDAQ National Market System are valued at the last
sale price. If there is no sale on a particular security on such day, it is
valued at the mean between the bid and asked prices. Other securities, to the
extent that market quotations are readily available, are valued at market value
in accordance with procedures established by the Board of Directors. Any
securities and other assets, for which market quotations are not readily
available, are valued in good faith in a manner determined by the Board of
Directors best to reflect their fair value.
SHAREHOLDER SERVICES. The Funds offer the same shareholder services to
their respective shareholders. For information regarding such services, see
"Information About Your Account -- Shareholder Services" in the O'Shaughnessy
Funds Prospectuses.
INDEPENDENT AUDITORS. Currently PricewaterhouseCoopers LLP serves as the
independent auditors of the Funds. If the Reorganizations are completed, it is
currently anticipated that PricewaterhouseCoopers LLP will continue to serve as
the independent auditors of the Combined Funds. The principal business address
of PricewaterhouseCoopers LLP is 1177 Avenue of the Americas, New York, New York
10036.
CUSTODIAN. Firstar Bank Milwaukee (the "Custodian") acts as the custodian
of each of the Funds. If the Reorganizations are completed, it is currently
anticipated that the Custodian will continue to serve as the custodian of the
Combined Funds. The principal business address of the Custodian is 615 E.
Michigan Street, Milwaukee, Wisconsin 53202.
TRANSFER AGENT Firstar Mutual Fund Services, LLC (the "Transfer Agent"),
615 E. Michigan Street, Milwaukee, Wisconsin 53202, serves as the transfer agent
with respect to each Fund, pursuant to a transfer agency agreement with
O'Shaughnessy Funds. The Transfer Agent is responsible for the issuance,
transfer and redemption of shares and the opening, maintenance and servicing of
shareholder accounts. If the Reorganizations are completed, it is currently
anticipated that the Transfer Agent will continue to serve as the transfer agent
of the Combined Funds. See "Information About Your Account--Purchase of Shares,"
"--Exchange Privilege," and "--Redemption of Shares" in the O'Shaughnessy Funds
Prospectuses.
27
<PAGE>
CAPITAL STOCK Each of the Funds has 25,000,000,000 shares of a single class
authorized, par value $.0001 per share. See "Other Information" in the
O'Shaughnessy Funds Statement for further discussion of the rights and
preferences attributable to shares of the Funds. See "Summary -- Fee Tables"
above and "About The Funds--Transaction and Fund Expenses" in each of the
O'Shaughnessy Funds Prospectuses for further discussion on the expenses
attributable to shares of the Funds.
SHAREHOLDER INQUIRIES Shareholder inquiries may be addressed to each Fund
at the address or telephone number set forth on the cover page of this
Prospectus.
THE REORGANIZATIONS
GENERAL
Under the Value Funds Agreement and Plan, the Cornerstone Value Fund will
acquire substantially all of the assets, and assume substantially all of the
liabilities, of the Dogs of the Market Fund solely in exchange for an equal
aggregate value of Value Fund Corresponding Shares. Under the Growth Funds
Agreement and Plan, the Cornerstone Growth Fund will acquire substantially all
of the assets, and assume substantially all of the liabilities, of the
Aggressive Growth Fund solely in exchange for an equal aggregate value of Growth
Fund Corresponding Shares. Upon receipt by an Acquired Fund of Corresponding
Shares, such Acquired Fund will liquidate through a distribution of such
Corresponding Shares to its shareholders, as described below.
Generally, the assets transferred by an Acquired Fund to the respective
Acquiring Fund will include all investments of such Acquired Fund held in its
portfolio as of the Valuation Time (as defined in the Plans) and all other
assets of such Acquired Fund as of such time.
Each Acquired Fund will distribute the Corresponding Shares received by it
in connection with its Reorganization pro rata to its shareholders in exchange
for such shareholders' proportional interests in such Acquired Fund. The
Corresponding Shares received by an Acquired Fund's shareholders will have the
same aggregate net asset value as each such shareholder's interest in such
Acquired Fund as of the Valuation Time. See " -- Terms of the Plans -- Valuation
of Assets and Liabilities" for information concerning the calculation of net
asset value. The distribution will be accomplished by opening new accounts on
the books of the respective Acquiring Fund in the names of all shareholders of
such Acquired Fund, including shareholders holding shares in certificate form,
and transferring to each shareholder's account the Corresponding Shares
representing such shareholder's interest previously credited to the account of
such Acquired Fund. Shareholders holding an Acquired Fund shares in certificate
form may receive certificates representing the Corresponding Shares credited to
their account in respect of such Acquired Fund's shares by sending the
certificates to the Transfer Agent accompanied by a written request for such
exchange.
Since the Corresponding Shares will be issued at net asset value in
exchange for the net assets of an Acquired Fund having a value equal to the
aggregate net asset value of the shares of such Acquired Fund as of the
Valuation Time, the net asset value per share of the respective Acquiring Fund
should remain virtually unchanged solely as a result of the applicable
Reorganization. Thus, the Reorganizations should not result in dilution of net
asset value of the Acquiring Funds immediately following consummation of the
Reorganizations. However, as a result of the Reorganizations, a shareholder of
an Acquired Fund would hold a smaller percentage of ownership in the respective
Acquiring Fund than he or she did in the Acquired Fund prior to the
Reorganizations.
28
<PAGE>
If the shareholders of the Acquired Funds approve the Reorganizations at
the Meetings, all required regulatory approvals are obtained, and certain
conditions are either met or waived, it is expected that the Reorganizations
will take place during the first calendar quarter of 2000. Neither
Reorganization is dependent on the consummation of the other Reorganization.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS OF THE
DOGS OF THE MARKET FUND AND THE AGGRESSIVE GROWTH FUND APPROVE THE VALUE FUNDS
AGREEMENT AND PLAN AND GROWTH FUNDS AGREEMENT AND PLAN, RESPECTIVELY.
TERMS OF THE PLANS
THE FOLLOWING IS A SUMMARY OF THE SIGNIFICANT TERMS OF THE PLANS. THIS
SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE VALUE FUNDS AGREEMENT
AND PLAN AND THE GROWTH FUNDS AGREEMENT AND PLAN, ATTACHED HERETO AS EXHIBIT I.
VALUATION OF ASSETS AND LIABILITIES. The respective assets and liabilities
of the Acquired Funds and the Acquiring Funds will be valued as of the Valuation
Time. The assets in each Fund will be valued according to the procedures set
forth under "Valuation of Shares" in the O'Shaughnessy Funds Statement. Purchase
orders for an Acquired Fund's shares which have not been confirmed as of the
Valuation Time will be treated as assets of such Acquired Fund for purposes of
the respective Reorganization; redemption requests with respect to an Acquired
Fund's shares which have not settled as of the Valuation Time will be treated as
liabilities of such Acquired Fund for purposes of the respective Reorganization.
DISTRIBUTION OF CORRESPONDING SHARES. On the next full business day
following the Valuation Time (the "Exchange Date"), each Acquiring Fund will
issue to the respective Acquired Fund a number of Corresponding Shares the
aggregate net asset value of which will equal the aggregate net asset value of
shares of such Acquired Fund as of the Valuation Time. Such Acquired Fund will
then liquidate and distribute the Corresponding Shares received by it pro rata
to its shareholders in exchange for such shareholders' proportional interests in
such Acquired Fund. The Corresponding Shares received by an Acquired Fund's
shareholder will have the same aggregate net asset value as such shareholder's
interest in such Acquired Fund as of the Valuation Time.
EXPENSES. The expenses of each Reorganization that are directly
attributable to each Fund and the conduct of its business will be deducted from
the assets of that Fund as of the Valuation Time. These expenses are expected to
include the expenses incurred in preparing materials to be distributed to the
Board of Directors, legal fees incurred in preparing Board of Directors
materials, attending Board meetings and preparing the minutes thereof, and
accounting fees associated with each Fund's financial statements. The Funds
shall bear, pro rata according to their respective net assets on the Valuation
Date, all expenses incurred in connection with the respective Reorganization,
including, but not limited to, all costs related to the preparation of the
respective Plan, the preparation and distribution of the registration statement
of which this Proxy Statement and Prospectus is a part, the cost of preparing
and filing a ruling request with the IRS (if applicable), other filing fees,
legal and accounting fees, printing costs, portfolio transfer taxes (if any),
and any similar expenses incurred in connection with the respective
Reorganization.
REQUIRED APPROVALS. The completion of each Reorganization is conditioned
upon, among other things, the receipt of certain regulatory approvals. In
addition, the O'Shaughnessy Funds Articles of Incorporation (as amended to date)
requires approval of each Reorganization by the affirmative vote of the
respective Acquired Fund's shareholders representing no less than a majority of
the total number of votes entitled to be cast thereon.
AMENDMENTS AND CONDITIONS. The Plans may be amended at any time prior to
the Exchange Date with respect to any of the terms therein. The obligations of
each Acquired Fund and Acquiring Fund pursuant to the respective Plan are
subject to various conditions, including a registration statement on Form N-14
29
<PAGE>
being declared effective by the Commission, the requisite approval of the
respective Reorganization by such Acquired Fund's shareholders, the receipt of
an opinion of counsel as to tax matters, the receipt of opinions of counsel as
to certain securities matters and the confirmation by the respective Acquired
Fund and Acquiring Fund of the continuing accuracy of their respective
representations and warranties contained in such Plan.
TERMINATION, POSTPONEMENT AND WAIVERS. Each Plan may be terminated, and the
respective Reorganization abandoned at any time, whether before or after
adoption thereof by the respective Acquired Fund's shareholders, prior to the
Exchange Date or the Exchange Date may be postponed: (i) by the Board of
Directors; (ii) by an Acquired Fund if any condition to such Acquired Fund's
obligations has not been fulfilled or waived; or (iii) by an Acquiring Fund if
any condition to such Acquiring Fund's obligations has not been fulfilled or
waived.
POTENTIAL BENEFITS TO SHAREHOLDERS AS A RESULT OF THE REORGANIZATIONS
Fund management and the Board of Directors have identified certain
potential benefits to shareholders that are likely to result from the
Reorganizations. First, following the Reorganizations, shareholders of an
Acquired Fund will remain invested in a diversified open-end fund which has the
same Manager, substantially the same investment objective and similar, though
not identical, investment techniques. That is, both of the Value Funds seek
large, blue chip companies with high dividend yields that suggest that the
company's stock is undervalued. Dividend yield is the final determinant of stock
selection for both Funds. The main difference is the universe from which stocks
are selected: the Dogs of the Market Fund includes stocks based on dividend
yield from the thirty- stock Dow Jones Industrial Average and the 400-stock S&P
400 Industrial Average. The Cornerstone Value Fund, on the other hand, holds
stocks based on their dividend yield from the O'Shaughnessy Market Leaders
Universe(TM), which consists of over 600 issuers. The other difference is the
number of stocks held by each Fund - thirty by the Dogs of the Market Fund and
fifty by the Cornerstone Value Fund, making the latter a somewhat more
diversified portfolio. With respect to the Growth Funds, both ultimately rely on
price momentum as the final criterion for stock selection. The stock selection
strategy of the Aggressive Growth Fund is composed of eight quantitative models,
all of which have as a final criterion price momentum. The strategy of the
Aggressive Growth Fund is to buy inexpensive stocks (determined on the basis of
low price-to-sales ratios, a price/earnings growth rate of 3-5 and a
price/earnings ratio of less than 40), that are growing or are projected to grow
in value (based on certain objective factors identified by the Manager) and are
moving in price (26 and 52 week price momentum). The strategy of the Cornerstone
Growth Fund is to buy inexpensive stocks, based on a low price to sales ratio,
that are moving in price (price momentum).
A second advantage to shareholders relates to the potential for reduced
operating expenses due to economies of scale. The net assets of the Cornerstone
Value Fund and Cornerstone Growth Fund as of September 30, 1999 were $26,298,592
and $120,706,544, respectively. These would increase by the amount of the net
assets of each of the Acquired Funds at the time of the Reorganizations. As of
September 30, 1999, those amounts were approximately $17,746,000 in the case of
the Dogs of the Market Fund, and $12,069,000 in the case of the Aggressive
Growth Fund. Certain fixed costs, such as printing of prospectuses and reports
sent to shareholders, legal and audit fees, and registration fees would be
spread across a larger asset base. This would tend to lower the expense ratio
borne by shareholders of both the Acquiring Funds and the Acquired Funds, but
the effect would be considerably more significant in the case of shareholders of
the Acquired Funds. This is because the Acquired Funds are smaller, and
effective September 30, 1999, the Manager ceased its previous practice of
reducing certain fees payable by, or reimbursing certain expenses to, the
Acquired Funds in order to ensure that the Acquired Funds maintained their total
operating expenses below specified levels. See "Summary -- Fee Tables" and
"Comparison of the Funds -- Expenses." As described above under "Comparison of
the Funds -- Management -- Management Arrangements and Fees" and "--
Administration Arrangements and Fees," after the Reorganizations, the Combined
Funds will, on a pro forma basis, pay a management fee and administration fee to
the Manager and the Administrator, respectively, at the same effective annual
30
<PAGE>
rate as currently paid by the Funds. To illustrate potential benefits to the
Acquired Funds as a result of the Reorganizations, including potential economies
of scale, on September 30, 1999, the total operating expenses as a percent of
net assets, for the Dogs of the Market Fund were 1.09% (based on Fund net assets
of approximately $17.7 million) and the total operating expenses, as a percent
of net assets, for the Aggressive Growth Fund were 1.97% (based on Fund net
assets of approximately $12.1 million). Absent the aforementioned fee reductions
and reimbursements by the Manager of the expenses of the Dogs of the Market Fund
and the Aggressive Growth Fund, the total operating expenses of such Funds, as a
percent of net assets, would have been 150% and 2.23%, respectively, for the
fiscal period ended September 30, 1999. If the Reorganizations had taken place
on that date, the total operating expenses, as a percent of net assets, for the
Pro Forma Cornerstone Value Fund and the Pro Forma Cornerstone Growth Fund, on a
pro forma combined basis, would have been 1.30% (based on Fund net assets of
approximately $44.0 million) and 1.10% (based on Fund net assets of
approximately $132.8 million), respectively, each as of such date.
The following table sets forth the total net assets of each of the Value
Funds and each of the Growth Funds as of the dates indicated.
Total Net Assets of
Dogs of the Cornerstone Aggressive Cornerstone
Date Market Fund Value Fund Growth Fund Growth Fund
---- ------------ ------------ ------------ ------------
As of 9/30/97 $ 7,248,063 $ 13,469,376 $ 5,584,248 $ 91,258,550
As of 9/30/98 $ 22,627,210 $ 21,926,393 $ 8,342,782 $ 80,378,649
As of 9/30/99 $ 17,746,399 $ 26,298,592 $ 12,069,457 $120,706,544
The table illustrates that the net assets of the Cornerstone Value Fund
have experienced an increase, while the net assets of the Dogs of the Market
Fund have recently experienced a decrease. The net assets of both the
Cornerstone Growth Fund and the Aggressive Growth Fund have recently experienced
increases, but to a much more substantial degree in the case of the Cornerstone
Growth Fund. Were these trends to continue, the Acquiring Funds would experience
increasing economies of scale, which should have the effect of reducing their
overall operating expense ratios. The Aggressive Growth Fund would experience
less significant benefits and the Dogs of the Market Fund would experience the
opposite result, that is, a higher operating expense ratio due to a continuing
reduction in assets. Although there can be no certainty that the foregoing
trends would in fact continue, the Manager believes that the economies of scale
that may be realized as a result of the Reorganizations would be beneficial to
the shareholders of the Acquired Funds.
Based on the foregoing, the Board of Directors concluded that the
Reorganizations present no significant risks or costs (including legal,
accounting and administrative costs) that would outweigh the benefits discussed
above.
In approving the Reorganizations, the Board of Directors determined that
the net asset value of the Funds would not be diluted as a result of the
Reorganizations. See "The Reorganization - General."
FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATIONS
GENERAL. Each Reorganization has been structured with the intention that it
qualify for Federal income tax purposes as a tax-free reorganization under
Section 368(a)(1)(C) of the Code. As a condition to closing of each
Reorganization, each of the Value Funds and Growth Funds will receive an opinion
of Swidler Berlin Shereff Friedman, LLP substantially to the effect that for
Federal income tax purposes: (a) the respective Reorganization, as described
herein, should constitute a reorganization within the meaning of Section
368(a)(1)(C) of the Code and (b) assuming that the respective Reorganization
qualifies as a reorganization within the meaning of Section 368(a)(1)(C) of the
Code: (i) each Fund will each be deemed a "party" to such Reorganization within
the meaning of Section 368(b) of the Code; (ii) in accordance with Section
354(a)(1) of the Code, no gain or loss will be recognized by a shareholder of an
Acquired Fund upon the receipt of Corresponding Shares in the respective
Reorganization solely in exchange for their shares of such Acquired Fund; (iii)
31
<PAGE>
in accordance with Section 358 of the Code, immediately after each
Reorganization, the tax basis of the Corresponding Shares received by a
shareholder of the respective Acquired Fund in such Reorganization will be
equal, in the aggregate, to the tax basis of the shares of such Acquired Fund
surrendered in exchange therefor; (iv) in accordance with Section 1223(1) of the
Code, the holding period of the Corresponding Shares received by a shareholder
of an Acquired Fund in the respective Reorganization will include the holding
period of the shares of such Acquired Fund immediately prior to such
Reorganization (provided that at the time of such Reorganization the shares of
such Acquired Fund were held as capital assets); (v) in accordance with Sections
361(a), 361(c)(1) and 357(a) of the Code, no gain or loss will be recognized by
an Acquired Fund on the acquisition of substantially all of the assets, and
assumption of substantially all of the liabilities, of such Acquired Fund by the
respective Acquiring Fund solely in exchange for the Corresponding Shares or on
the distribution of the Corresponding Shares to such Acquired Fund's
shareholders; (vi) under Section 1032 of the Code, no gain or loss will be
recognized by an Acquiring Fund on the exchange of its shares for the respective
Acquired Fund's assets and the assumption by such Acquiring Fund of such
Acquired Fund's liabilities; (vii) in accordance with Section 362(b) of the
Code, the tax basis of the assets of an Acquired Fund in the hands of the
respective Acquiring Fund will be the same as the tax basis of such assets in
the hands of such Acquired Fund immediately prior to the consummation of the
respective Reorganization; (viii) in accordance with Section 1223(2) of the
Code, the holding period of the transferred assets in the hands of an Acquiring
Fund will include the holding period of such assets in the hands of the
respective Acquired Fund; and (ix) the taxable year of an Acquired Fund will end
on the effective date of the respective Reorganization and pursuant to Section
381(a) of the Code and regulations thereunder, the respective Acquiring Fund
will succeed to and take into account certain tax attributes of such Acquired
Fund, such as earnings and profits and capital loss carryovers.
An opinion of counsel does not have the effect of a private letter ruling
from the IRS and is not binding on the IRS or any court. If a Reorganization
fails to qualify as a reorganization within the meaning of Section 368 of the
Code, the Reorganization would be treated as a taxable sale of assets followed
by a taxable liquidation of the respective Acquired Fund.
To the extent an Acquiring Fund has unrealized capital gains at the time of
the respective Reorganization, the respective Acquired Fund's shareholders may
incur taxable gains in the year that such Acquiring Fund realizes and
distributes those gains. This will be true notwithstanding that the unrealized
gains were reflected in the price of such Acquiring Fund's shares at the time
they were exchanged for assets of such Acquired Fund in the respective
Reorganization. Conversely, shareholders of an Acquiring Fund will share in
unrealized capital gains of the respective Acquired Fund after the respective
Reorganization and bear a tax consequence on the subsequent realization of such
gains. It is anticipated that each Acquired Fund will be required to dispose of
a substantial portion of its investment portfolio prior to consummation of the
Reorganization, and any income or gain resulting therefrom generally will be
distributed to shareholders of the applicable Acquired Fund (in either cash or
additional shares), which will be taxable thereto. Shareholders should consult
their tax advisers regarding the effect of the Reorganizations in light of their
individual circumstances. As the foregoing relates only to Federal income tax
consequences, shareholders also should consult their tax advisers as to the
foreign, state, local and other tax consequences of the Reorganizations.
STATUS AS A REGULATED INVESTMENT COMPANY. All Funds have elected and
qualified to be taxed as regulated investment companies under Sections 851-855
of the Code, and after the Reorganizations, the Combined Funds intend to
continue to operate so as to qualify as regulated investment companies.
32
<PAGE>
CAPITALIZATION
The following table sets forth as of September 30, 1999: (i) the
capitalization of the Dogs of the Market Fund, (ii) the capitalization of the
Cornerstone Value Fund, (iii) the pro forma capitalization of the Pro Forma
Cornerstone Value Fund, as adjusted to give effect to the Value Funds
Reorganization, (iv) the capitalization of the Aggressive Growth Fund, (v) the
capitalization of the Cornerstone Growth Fund, and (vi) the pro forma
capitalization of the Pro Forma Cornerstone Growth Fund, as adjusted to give
effect to the Growth Funds Reorganization.
CAPITALIZATION OF THE DOGS OF THE MARKET FUND, THE CORNERSTONE VALUE FUND,
THE PRO FORMA CORNERSTONE VALUE FUND (ON A PRO FORMA BASIS), THE AGGRESSIVE
GROWTH FUND, THE CORNERSTONE GROWTH FUND AND THE CORNERSTONE GROWTH FUND
(ON A PRO FORMA BASIS), EACH AS OF SEPTEMBER 30, 1999.
<TABLE>
<CAPTION>
Unaudited
Unaudited Pro Forma
Dogs of the Pro Forma Aggressive Cornerstone Cornerstone
Market Cornerstone Cornerstone Growth Growth Growth
Fund Value Fund Value Fund* Fund Fund Fund*
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
TOTAL NET
ASSETS: $17,746,399 $26,298,592 $44,044,991 $12,069,457 $120,706,544 $132,776,001
SHARES
OUTSTANDING: 1,461,173 2,210,009 3,701,303 826,343 9,768,438 10,742,395
NET ASSET
VALUE PER
SHARE: $ 12.15 $ 11.90 $ 11.90 $ 14.61 $ 12.36 $ 12.36
</TABLE>
- ----------
* Total Net Assets and Net Asset Value Per Share include the aggregate value
of the net assets of the Dogs of the Market Fund or the Aggressive Growth
Fund, as applicable, that would have been transferred to the Pro Forma
Cornerstone Value Fund and the Pro Forma Cornerstone Growth Fund,
respectively, had the Reorganizations been consummated on October 1, 1998.
Assumes distribution of undistributed net investment income and
undistributed realized capital gains. No assurance can be given as to how
many Corresponding Shares will be issued on the date the Reorganizations
take place, and the foregoing should not be relied upon to reflect the
number of Corresponding Shares that actually will be issued on or after
such date.
33
<PAGE>
INFORMATION CONCERNING THE MEETING
DATE, TIME AND PLACE OF MEETING
The Meeting will be held on January 21, 2000, at the Stamford Marriot, 2
Stamford Forum, Stamford, Connecticut, at 4:00 p.m., Eastern Time.
SOLICITATION, REVOCATION AND USE OF PROXIES
A shareholder executing and returning a proxy has the power to revoke it at
any time prior to its exercise by executing a superseding proxy or by submitting
a notice of revocation to the Secretary of the Dogs of the Market Fund or the
Aggressive Growth Fund, as the case may be. Although mere attendance at a
Meeting will not revoke a proxy, a shareholder present at a Meeting may withdraw
his or her proxy and vote in person.
All shares represented by properly executed proxies received at or prior to
a Meeting, unless such proxies previously have been revoked, will be voted at
such Meeting in accordance with the directions on the proxies; if no direction
is indicated on a properly executed proxy, such shares will be voted "FOR"
approval of the respective Plan.
It is not anticipated that any matters other than the adoption of the Plan
will be brought before each Meeting. If, however, any other business properly is
brought before a Meeting, proxies will be voted in accordance with the judgment
of the persons designated on such proxies.
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of shares of the Acquired Funds at the close of
business on December 7, 1999 (the "Record Date") are entitled to vote at the
respective Meeting or any adjournment thereof. At the close of business on the
Record Date, there were ______________ and ___________ shares of the Dogs of the
Market Fund and the Aggressive Growth Fund, respectively, issued and outstanding
and entitled to vote.
34
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF THE FUNDS
To the knowledge of each Fund, as of the Record Date, the following
shareholders, if any, owned more than 5% of the outstanding voting securities of
such Fund:
Name and Address Percentage and
Name of Fund of Shareholder Type of Ownership
- ------------ -------------- -----------------
Dogs of the Market Fund None *
Aggressive Growth Fund Charles Schwab & Co., Inc. [21.43%]; record
for the Exclusive Benefit ownership
of Customers ("Charles Schwab")
San Francisco, California 94104
Cornerstone Value Fund Charles Schwab [42.56%]; record
San Francisco, California 94104 ownership
Cornerstone Growth Fund None *
Assuming that Charles Schwab owns the same number of shares of the
Aggressive Growth Fund and the Cornerstone Value Fund on the date of
consummation of the Reorganizations as on the Record Date, Charles Schwab will
own of record, on a pro form basis, ________ and ___________ shares of the Value
Combined Fund and Growth Combined Fund, respectively, after completion of the
Reorganizations.
At the Record Date, the directors and officers of the O'Shaughnessy Funds
as a group (__ persons) owned an aggregate of less than 1% of the outstanding
shares of the Dogs of the Market Fund [and owned an aggregate of less than 1% of
the outstanding shares of common stock of O'Shaughnessy Funds]. [TO BE
CONFIRMED]
At the Record Date, the directors and officers of the O'Shaughnessy Funds
as a group (__ persons) owned an aggregate of less than 1% of the outstanding
shares of the Aggressive Growth Fund [and owned an aggregate of less than 1% of
the outstanding shares of common stock of O'Shaughnessy Funds. [TO BE CONFIRMED]
At the Record Date, the directors and officers of the O'Shaughnessy Funds
as a group (___ persons) owned an aggregate of less than 1% of the outstanding
shares of the Cornerstone Value Fund [and owned an aggregate of less than 1% of
the outstanding shares of common stock of O'Shaughnessy Funds] [TO BE CONFIRMED]
At the Record Date, the directors and officers of the O'Shaughnessy Funds
as a group (__ persons) owned an aggregate of less than 1% of the outstanding
shares of the Cornerstone Growth Fund [and owned an aggregate of less than 1% of
the outstanding shares of common stock of O'Shaughnessy funds. [TO BE CONFIRMED]
VOTING RIGHTS AND REQUIRED VOTE
Each share of an Acquired Fund is entitled to one vote. Approval of the
Value Funds Agreement and Plan and the Growth Funds Agreement and Plan requires
the affirmative vote of shareholders of the Dogs of the Market Fund and the
Aggressive Growth Fund, respectively, representing a majority of the total votes
entitled to be cast thereon.
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<PAGE>
Broker-dealer firms holding shares of any of the Acquired Funds in "street
name" for the benefit of their customers and clients will request the
instructions of such customers and clients on how to vote their shares before
the Meetings. Broker-dealer firms will not be permitted to grant voting
authority without instructions with respect to the approval of the Plans. Each
of the Acquired Funds will include shares held of record by broker-dealers as to
which such authority has been granted in its tabulation of the total number of
shares present for purposes of determining whether the necessary quorum of
shareholders exists. Properly executed proxies that are returned but that are
marked "abstain" or broker non-votes will be counted as present for the purposes
of determining a quorum. Since approval of the Value Funds Agreement and Plan
and Growth Funds Agreement and Plan requires the affirmative vote of
shareholders representing no less than a majority of the shares entitled to vote
of the Dogs of the Market Fund and the Aggressive Growth Fund, respectively,
abstentions and broker non-votes will have the same effect as a vote against
approval of the Value Funds Agreement and Plan or Growth Funds Agreement and
Plan, as the case may be.
A quorum for each Acquired Fund for purposes of the Meeting consists of
one-third of the shares of such Acquired Fund entitled to vote at the Meeting,
present in person or by proxy. If, by the time scheduled for each Meeting, a
quorum of the applicable Acquired Fund's shareholders is not present or if a
quorum is present but sufficient votes in favor of the Value Funds Agreement and
Plan or Growth Funds Agreement and Plan, as the case may be, are not received
from the shareholders of the respective Acquired Fund, the persons named as
proxies may propose one or more adjournments of such Meeting to permit further
solicitation of proxies from shareholders. Any such adjournment will require the
affirmative vote of a majority of the shares of the applicable Acquired Fund
present in person or by proxy and entitled to vote at the session of the Meeting
to be adjourned. The persons named as proxies will vote in favor of any such
adjournment if they determine that adjournment and additional solicitation are
reasonable and in the interests of the shareholders of such Acquired Fund.
ADDITIONAL INFORMATION
The expenses of preparation, printing and mailing of the enclosed form of
proxy, the accompanying Notice and this Proxy Statement and Prospectus will be
borne by the Funds pro rata according to the aggregate net assets of each Fund's
portfolio on the date of the Value Funds Reorganization or Growth Funds
Reorganization, as the case may be. Such expenses are currently estimated to be
approximately $______________ in the aggregate.
Each of the Acquired Funds will reimburse banks, brokers and others for
their reasonable expenses in forwarding proxy solicitation materials to its
beneficial owners of shares of and will reimburse certain persons that it may
employ for their reasonable expenses in assisting in the solicitation of proxies
from such beneficial owners.
In order to obtain the necessary quorums at the Meetings, supplementary
solicitation may be made by mail, telephone, telegraph or personal interview by
officers of the Acquired Funds. The cost of soliciting proxies will be borne by
the Acquired Funds on a pro rata basis.
This Proxy Statement and Prospectus does not contain all of the information
set forth in the registration statements and the exhibits relating thereto which
O'Shaughnessy Funds has filed on behalf of the Funds with the Commission under
the Securities Act and the Investment Company Act, to which reference is hereby
made.
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<PAGE>
The Funds are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith file reports and
other information with the Commission. Proxy material, reports and other
information filed by the Funds (or by O'Shaughnessy Funds on behalf of the
Funds) can be inspected and copied at the public reference facilities of the
Commission in Washington, D.C. and at the New York Regional Office of the
Commission at Seven World Trade Center, New York, New York 10048. Copies of such
materials also can be obtained by mail from the Public Reference Branch, Office
of Consumer Affairs and Information Services, Securities and Exchange
Commission, Washington, D.C. 20549, at prescribed rates. The Commission
maintains a web site (http://www.sec.gov) that contains the Statement of
Additional Information, the O'Shaughnessy Funds Prospectuses, the O'Shaughnessy
Funds Statement, other material incorporated by reference and other information
regarding the Funds.
LEGAL PROCEEDINGS
There are no material legal proceedings to which any of the Funds is a
party.
LEGAL OPINIONS
Certain legal matters in connection with the Reorganizations will be passed
upon for the Funds by Swidler Berlin Shereff Friedman, LLP, The Chrysler
Building, 405 Lexington Avenue, New York, New York.
EXPERTS
The financial highlights of the Funds included in this Proxy Statement and
Prospectus have been so included in reliance on the report of McGladrey &
Pullen, LLP, independent auditors, given their authority as experts in auditing
and accounting. The business address of McGladrey & Pullen, LLP is 555 Fifth
Avenue, New York, New York 10017-2416.
SHAREHOLDER PROPOSALS
A shareholder proposal intended to be presented at any subsequent meeting
of shareholders of an Acquired Fund must be received by such Acquired Fund in a
reasonable time before the Board of Directors' solicitation relating to such
meeting is to be made in order to be considered in such Acquired Fund's proxy
statement and form of proxy relating to the meeting.
By Order of the Board of Directors,
STEVEN J. PAGGIOLI
Secretary, O'Shaughnessy Funds, Inc.
37
<PAGE>
EXHIBIT I
AGREEMENT AND PLAN OF REORGANIZATION
<PAGE>
TABLE OF CONTENTS
Page No.
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1. Defined Terms; Sections and Exhibits; Miscellaneous Terms............ I-1
a. Definitions.................................................. I-1
b. Use of Defined Terms......................................... I-4
c. Sections and Exhibits........................................ I-4
d. Miscellaneous Terms.......................................... I-4
2. the Reorganization(s)................................................ I-4
a. Transfer of Assets........................................... I-4
b. Assumption of Liabilities.................................... I-4
c. Issuance and Valuation of Corresponding Shares............... I-5
d. Distribution of Corresponding Shares to Acquired Fund
e Shareholders................................................. I-5
f. Valuation Time............................................... I-5
g. Evidence of Transfer......................................... I-5
h. Termination.................................................. I-5
i. Separate Agreements; Reorganizations Not Conditioned
On Each Other................................................ I-6
3. Representations and Warranties of the Acquired Fund.................. I-6
a. Financial Statements......................................... I-6
b. Semi-annual Report to Shareholders........................... I-6
c. Prospectus and Statement of Additional Information........... I-6
d. Litigation................................................... I-6
e. Material Contracts........................................... I-6
f. Undisclosed Liabilities...................................... I-6
g. Taxes........................................................ I-6
h. Assets....................................................... I-7
i. Consents..................................................... I-7
j. N-14 Registration Statement.................................. I-7
k. Capitalization............................................... I-7
4. Representations and Warranties of the Acquiring Fund................. I-7
a. Financial Statements......................................... I-7
b. SemI-annual Report to Shareholders........................... I-8
c. Prospectus and Statement of Additional Information........... I-8
d. Litigation................................................... I-8
e. Material Contracts........................................... I-8
f. Undisclosed Liabilities...................................... I-8
g. Taxes........................................................ I-8
h. Consents..................................................... I-8
i. N-14 Registration Statement.................................. I-8
j. Capitalization............................................... I-9
k. Corresponding Shares......................................... I-9
5. Covenants............................................................ I-9
a. Special Shareholders' Meeting................................ I-9
b. Unaudited Financial Statements............................... I-9
c. Share Ledger Records of the Acquiring Fund.................. I-10
d. Conduct of Business......................................... I-10
e. Termination of the Acquired Fund............................ I-10
f. Filing of N-14 Registration Statement....................... I-10
g. Corresponding Shares........................................ I-10
h. Tax Returns................................................. I-10
i. Combined Proxy Statement and Prospectus Mailing............. I-11
j. Confirmations of Tax Basis.................................. I-11
k. Shareholder List............................................ I-11
l. the Acquiring Fund's Continued Existence.................... I-11
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6. Exchange Date....................................................... I-11
7. Conditions of the Acquired Fund..................................... I-11
a. Representations and Warranties.............................. I-11
b. Performance................................................. I-11
c. Shareholder Approval........................................ I-11
d. Approval of Board of Directors of O'Shaughnessy Funds....... I-11
e. Deliveries by the Acquiring Fund............................ I-12
f. No Adverse Change........................................... I-12
g. Absence of Litigation....................................... I-12
h. N-14 Registration Statement................................. I-12
i. Compliance With Laws; No Adverse Action or Decision......... I-12
j. Commission Orders or Interpretations........................ I-13
8. Conditions of the Acquiring Fund.................................... I-13
a. Representations and Warranties.............................. I-13
b. Performance................................................. I-13
c. Shareholder Approval........................................ I-13
d. Approval of Board of Directors of O'Shaughnessy Funds....... I-13
e. Deliveries by the Acquired Fund............................. I-13
f. No Adverse Change........................................... I-13
g. Absence of Litigation....................................... I-13
h. N-14 Registration Statement................................. I-14
i. Compliance With Laws; No Adverse Action or Decision......... I-14
j. Commission Orders or Interpretations........................ I-14
k. Assets...................................................... I-14
l. Dividends................................................... I-14
9. Termination, Postponement and Waivers............................... I-14
a. Termination of Agreement.................................... I-14
b. Commission Order............................................ I-15
c. Effect of Termination....................................... I-15
d. Waivers; Non-material Changes............................... I-15
10. Survival of Representations and Warranties; Indemnification......... I-15
a. Survival.................................................... I-15
b. Indemnification Obligations of the Acquired Fund............ I-15
c. Indemnification Obligations of the Acquiring Fund........... I-16
d. Indemnification Procedure................................... I-16
11. Other Matters....................................................... I-17
a. Legend...................................................... I-17
b. Further Assurances.......................................... I-17
c. Notices..................................................... I-17
d. Entire Agreement............................................ I-18
e. Amendment................................................... I-18
f. Governing Law............................................... I-18
g. Assignment.................................................. I-18
h. Fees and Expenses........................................... I-18
i. Severability................................................ I-18
j. Headings.................................................... I-18
k. Counterparts................................................ I-18
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<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made as of
the ___ day of November, 1999, by and between O'SHAUGHNESSY FUNDS, INC.
("O'Shaughnessy Funds") on behalf of each Acquired Fund (as defined herein) and
each Acquiring Fund (as defined herein), each a separate investment portfolio of
O'Shaughnessy Funds.
PLANS OF REORGANIZATION
WHEREAS, this Agreement constitutes a separate agreement and plan of
reorganization between each of the following group of parties: (i) the
O'Shaughnessy Dogs of the Market(TM) Fund (the "Dogs of the Market Fund") and
the O'Shaughnessy Cornerstone Value Fund (the "Cornerstone Value Fund," and
together with the Dogs of the Market Fund, the "Value Funds") and (ii) the
O'Shaughnessy Aggressive Growth Fund (the "Aggressive Growth Fund") and the
O'Shaughnessy Cornerstone Growth Fund (the "Cornerstone Growth Fund," and
together with the Aggressive Growth Fund, the "Growth Funds"). The Dogs of the
Market Fund and the Aggressive Growth Fund are sometimes referred to herein
collectively as the "Acquired Funds" and individually as an "Acquired Fund," as
the context requires. The Cornerstone Value Fund and the Cornerstone Growth Fund
are sometimes referred to herein collectively as the "Acquiring Funds" and
individually as an "Acquiring Fund," as the context requires;
WHEREAS, each reorganization will consist of (i) the acquisition of an
Acquired Fund's Assets (as defined herein), and assumption of that Acquired
Fund's Assumed Liabilities (as defined herein), by the respective Acquiring Fund
solely in exchange for an aggregate value of shares of such Acquiring Fund (the
"Corresponding Shares"), equal to the net asset value of such Acquired Fund's
Assets determined in accordance with Section 2(c) hereof, (ii) the subsequent
distribution by that Acquired Fund of such Acquiring Fund's Corresponding Shares
to its shareholders in exchange for such shareholders' respective shares of the
Acquired Fund in liquidation of the Acquired Fund, and (iii) the termination, as
promptly as practicable thereafter, of the Acquired Fund, all upon and subject
to the terms hereinafter set forth (each a "Reorganization" and collectively,
the "Reorganizations");
WHEREAS, it is intended that each Reorganization described herein shall be
a reorganization within the meaning of Section 368(a)(1)(C) of the Internal
Revenue Code of 1986, as amended (the "Code"), and any successor provision; and
WHEREAS, the consummation of one Reorganization is not conditioned upon the
consummation of the other Reorganization.
AGREEMENT
NOW, THEREFORE, in order to consummate each Reorganization and in
consideration of the premises and the covenants and agreements hereinafter set
forth, and for other good and valuable consideration, the receipt and adequacy
of which are hereby acknowledged, and intending to be legally bound, each
Acquired Fund and Acquiring Fund hereby agrees as follows:
1. DEFINED TERMS; SECTIONS AND EXHIBITS; MISCELLANEOUS TERMS.
a. DEFINITIONS. As used herein the following terms have the following
respective meanings (such definitions to be equally applicable to both the
singular and plural forms of the terms defined):
"ACQUIRED FUND" has the meaning ascribed thereto in the first
paragraph under the heading "Plans of Reorganization" hereof. For purposes of
this Agreement, the term "Acquired Fund" shall refer to the Dogs of the Market
Fund in respect of the Value Funds Reorganization and the Aggressive Growth Fund
in respect of the Growth Funds Reorganization.
<PAGE>
"ACQUIRING FUND" has the meaning ascribed thereto in the first
paragraph under the heading "Plans of Reorganization" hereof. For purposes of
this Agreement, the term "Acquiring Fund" shall refer to the Cornerstone Value
Fund in respect of the Value Funds Reorganization and the Cornerstone Growth
Fund in respect of the Growth Funds Reorganization.
"AGGRESSIVE GROWTH FUND" has the meaning ascribed thereto in the first
paragraph under the heading "Plans of Reorganization" hereof.
"AGREEMENT" has the meaning ascribed thereto in the introduction
hereof.
"ASSETS" has the meaning ascribed thereto in Section 2(a) hereof. For
purposes of this Agreement, the term "Assets" shall refer to the Assets of (i)
the Dogs of the Market Fund in the case of the Value Funds Reorganization and
(ii) the Aggressive Growth Fund in the case of the Growth Funds Reorganization.
"ASSUMED LIABILITIES" has the meaning ascribed thereto in Section 2(b)
hereof. For purposes of this Agreement, the term "Assumed Liabilities" shall
refer to the Assumed Liabilities of (i) the Dogs of the Market Fund in the case
of the Value Funds Reorganization and (ii) the Aggressive Growth Fund in the
case of the Growth Funds Reorganization.
"CODE" has the meaning ascribed thereto in the first paragraph under
the heading "Plans of Reorganization" hereof.
"COMMISSION" shall mean the Securities and Exchange Commission.
"CORNERSTONE GROWTH FUND" has the meaning ascribed thereto in the
first paragraph under the heading "Plans of Reorganization" hereof.
"CORNERSTONE VALUE FUND" has the meaning ascribed thereto in the first
paragraph under the heading "Plans of Reorganization" hereof.
"CORRESPONDING SHARES" has the meaning ascribed thereto in the second
paragraph under the heading "Plans of Reorganization" hereof. For purposes of
this Agreement, the term "Corresponding Shares" shall refer to the Corresponding
Shares of (i) the Cornerstone Value Fund in the case of the Value Funds
Reorganization and (ii) the Cornerstone Growth Fund in the case of the Growth
Funds Reorganization.
"DOGS OF THE MARKET FUND" has the meaning ascribed thereto in the
first paragraph under the heading "Plans of Reorganization" hereof.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended.
"EXCHANGE DATE" has the meaning ascribed thereto in Section 6 hereof.
"FUNDS" shall mean the Value Funds and the Growth Funds.
"GOVERNMENTAL AUTHORITY" shall mean any governmental or
quasi-governmental authority including, without limitation, any Federal, state,
territorial, county, municipal or other governmental or quasi-governmental
agency, board, branch, bureau, commission, court, arbitral body, department or
other instrumentality or political unit or subdivision, whether domestic or
foreign.
"GROWTH FUNDS REORGANIZATION" consists of (i) the acquisition of the
Aggressive Growth Fund's Assets, and assumption of the Aggressive Growth Fund's
Assumed Liabilities, by the Cornerstone Growth Fund solely in exchange for an
aggregate value of Corresponding Shares of the Cornerstone Growth Fund, equal to
the net asset value of the Aggressive Growth Fund's Assets determined in
accordance with Section 2(c) hereof, (ii) the subsequent distribution by the
Aggressive Growth Fund of such Corresponding Shares to its shareholders in
exchange for such shareholders' respective shares of the Aggressive Growth Fund
in liquidation of the Aggressive Growth Fund, and (iii) the termination, as
promptly as practicable thereafter, of the Aggressive Growth Fund.
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<PAGE>
"INDEMNIFIED PARTY" has the meaning ascribed thereto in Section 10(b)
hereof.
"INDEMNIFYING PARTY" has the meaning ascribed thereto in Section 10(b)
hereof.
"INVESTMENT COMPANY ACT" means the Investment Company Act of 1940, as
amended.
"INVESTMENTS" shall mean, with respect to each Person, (i) the
investments of such Person shown on the schedule of its investments as of the
date set forth therein, with such additions thereto and deletions therefrom as
may have arisen in the course of such Person's business up to such date; and
(ii) all other assets owned by such Person or liabilities incurred as of such
date.
"LIEN" shall mean any security agreement, financing statement (whether
or not filed), mortgage, lien (statutory or otherwise), charge, pledge,
hypothecation, conditional sales agreement, adverse claim, title retention
agreement or other security interest, encumbrance, restriction, deed of trust,
indenture, option, limitation, exception to or other title defect in or on any
interest or title of any vendor, lessor, lender or other secured party to or of
such Person under any conditional sale, lease, consignment, or bailment given
for security purposes, trust receipt or other title retention agreement with
respect to any property or asset of such Person, whether direct, indirect,
accrued or contingent.
"LOSSES" has the meaning ascribed thereto in Section 10(b) hereof.
"MATERIAL ADVERSE EFFECT" shall mean, with respect to any Person, any
event, circumstance or condition that, individually or when aggregated with all
other similar events, circumstances or conditions could reasonably be expected
to have, or has had, a material adverse effect on: (i) the business, property,
operations, condition (financial or otherwise), results of operations or
prospects of such Person or (ii) the ability of such Person to consummate the
transactions contemplated hereunder in the manner contemplated hereby, other
than, in each case, any change relating to the economy or securities markets in
general.
"N-14 REGISTRATION STATEMENT" has the meaning ascribed thereto in
Section 3(j) hereof.
"O'SHAUGHNESSY FUNDS" has the meaning ascribed thereto in the
introduction hereof.
"O'SHAUGHNESSY FUNDS STATEMENT OF ADDITIONAL INFORMATION" shall mean
the combined statement of additional information of the Funds, dated as of
November 30, 1998, as amended or supplemented.
"PERMITTED LIENS" shall mean, with respect to any Person, any Lien
arising by reason of (i) taxes, assessments, governmental charges or claims that
are either not yet delinquent, or being contested in good faith for which
adequate reserves have been recorded, (ii) the Federal or state securities laws,
and (iii) imperfections of title or encumbrances as do not materially detract
from the value or use of the Assets or materially affect title thereto.
"PERSON" shall mean any individual, corporation, limited liability
company, limited or general partnership, joint venture, association, joint stock
company, trust, unincorporated organization, or government or any agency or
political subdivision thereof.
"PROHIBITED ASSETS" has the meaning ascribed thereto in Section 2(a)
hereof. For purposes of this Agreement, the term "Prohibited Assets" shall refer
to the Prohibited Assets of (i) the Dogs of the Market Fund in the case of the
Value Funds Reorganization and (ii) the Aggressive Growth Fund in the case of
the Growth Funds Reorganization.
I-3
<PAGE>
"REORGANIZATION" and "REORGANIZATIONs" have the meanings ascribed
thereto in the first paragraph under the heading "Plans of Reorganization"
hereof. For purposes of this Agreement, the term "Reorganization" shall refer to
the Value Funds Reorganization or the Growth Fund Reorganization, as the context
requires.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SBSF" has the meaning ascribed thereto in Section 6 hereof.
"VALUATION TIME" has the meaning ascribed thereto in Section 2(f)
hereof.
"VALUE FUNDS REORGANIZATION" consists of (i) the acquisition of the
Dogs of the Market Fund's Assets, and assumption of the Dogs of the Market
Fund's Assumed Liabilities, by the Cornerstone Value Fund solely in exchange for
an aggregate value of Corresponding Shares of the Cornerstone Value Fund, equal
to the net asset value of the Dogs of the Market Fund's Assets determined in
accordance with Section 2(c) hereof, (ii) the subsequent distribution by the
Dogs of the Market Fund of such Corresponding Shares to its shareholders in
exchange for such shareholders' respective shares of the Dogs of the Market Fund
in liquidation of the Dogs of the Market Fund, and (iii) the termination, as
promptly as practicable thereafter, of the Dogs of the Market Fund.
b. USE OF DEFINED TERMS. Any defined term used in the plural shall refer
to all members of the relevant class, and any defined term used in the singular
shall refer to any one or more of the members of the relevant class. The use of
any gender shall be applicable to all genders.
c. SECTIONS AND EXHIBITS. References in this Agreement to Sections and
Exhibits are to Sections and Exhibits of and to this Agreement. The Exhibits, if
any, to this Agreement are hereby incorporated herein by this reference as if
fully set forth herein.
d. MISCELLANEOUS TERMS. The term "or" shall not be exclusive. The terms
"herein," "hereof," "hereto," "hereunder" and other terms similar to such terms
shall refer to this Agreement as a whole and not merely to the specific article,
section, paragraph or clause where such terms may appear. The term "including"
shall mean "including, but not limited to."
2. THE REORGANIZATION(S).
a. TRANSFER OF ASSETS. Subject to receiving the requisite approval of the
shareholders of the Acquired Fund, and to the other terms and conditions
contained herein, on the Exchange Date, the Acquired Fund shall convey, transfer
and deliver to the Acquiring Fund, and the Acquiring Fund shall purchase,
acquire and accept from the Acquired Fund, free and clear of all Liens (other
than Permitted Liens), substantially all of the assets (including interest
accrued as of the Valuation Time on debt instruments) of the Acquired Fund (as
to each Acquired Fund, such assets (excluding the Prohibited Assets) are
collectively referred to herein as the "Assets"). Notwithstanding anything to
the contrary in this Agreement, the Acquired Fund shall retain and shall not
convey, transfer or deliver to the Acquiring Fund, and the Acquiring Fund shall
not purchase, acquire or accept any Assets that the Acquiring Fund advises the
Acquired Fund in writing, in accordance with Section 5(h) hereof, it is not
permitted, or the Acquiring Fund reasonably believes to be unsuitable for it, to
acquire (collectively, the "Prohibited Assets").
b. ASSUMPTION OF LIABILITIES. Subject to receiving the requisite approval
of the shareholders of the Acquired Fund, and to the other terms and conditions
contained herein, on the Exchange Date, the Acquiring Fund will assume and agree
to pay, perform and discharge when due substantially all of the obligations and
liabilities of the Acquired Fund then existing, whether absolute, accrued,
contingent or otherwise (with respect to each Acquired Fund, collectively, the
"Assumed Liabilities"); PROVIDED that recourse for such liabilities will be
limited to the net Assets of the Acquired Fund acquired by the Acquiring Fund
hereunder.
I-4
<PAGE>
c. ISSUANCE AND VALUATION OF CORRESPONDING SHARES. Full Corresponding
Shares, and to the extent necessary, a fractional Corresponding Share, of an
aggregate net asset value equal to the net asset value of the Assets of the
Acquired Fund acquired by the Acquiring Fund hereunder, determined as
hereinafter provided, shall be issued by the Acquiring Fund to the Acquired Fund
in exchange for the Assets. The net asset value of each of the Acquired Fund and
the Acquiring Fund shall be determined in accordance with the procedures
described in the O'Shaughnessy Funds Statement of Additional Information as of
the Valuation Time. Such valuation and determination shall be made by the
Acquiring Fund in cooperation with the Acquired Fund. The Acquiring Fund shall
issue its Corresponding Shares to the Acquired Fund in one certificate or share
deposit receipt registered in the name of the Acquired Fund.
d. DISTRIBUTION OF CORRESPONDING SHARES TO ACQUIRED FUND SHAREHOLDERS.
Pursuant to this Agreement, as soon as practicable after the Valuation Time, the
Acquired Fund will distribute all Corresponding Shares received by it from the
Acquiring Fund in connection with the Reorganization to its shareholders in
exchange for their corresponding shares in the Acquired Fund. Such distribution
shall be accomplished by the opening of shareholder accounts on the share ledger
records of the Acquiring Fund in the amounts due the shareholders of the
Acquired Fund based on their respective holdings in the Acquired Fund as of the
Valuation Time and the delivery by the Acquired Fund of the certificate or share
deposit receipt evidencing the Corresponding Shares received by it from the
Acquiring Fund hereunder to Firstar Mutual Fund Services, LLC, as the transfer
agent; PROVIDED, HOWEVER, that the Acquiring Fund shall not permit any such
shareholder of the Acquired Fund (i) to receive dividends or other distributions
on Corresponding Shares in cash (although such dividends and distributions shall
be credited to the account of such shareholder established on the Acquiring
Fund's books in accordance with this Section), (ii) exercise exchange privileges
with respect to such Corresponding Shares, if any, or (iii) pledge or redeem
such Corresponding Shares unless such shareholder has delivered a certificate or
certificates evidencing his or her shares in the Acquired Fund accompanied by
duly executed stock powers, duly surrendered his or her outstanding receipts for
shares of the Acquired Fund or, in the event of lost, stolen or destroyed stock
certificates or receipts for shares, posted adequate bond or submitted a lost
certificate affidavit, as the case may be. The Acquired Fund shall, at its
expense, request its shareholders to deliver any such stock certificate(s),
surrender such receipts for shares, post adequate bond or submit a lost
certificate affidavit, as the case may be. In the event that a shareholder is
not permitted to receive dividends or other distributions on Corresponding
Shares in cash as provided in this Section, the Acquiring Fund shall pay such
dividends or other distributions in additional Corresponding Shares,
notwithstanding any election such shareholder may have made previously with
respect to the payment of dividends or other distributions on Corresponding
Shares.
e. INTEREST; PROCEEDS. The Acquired Fund will pay or cause to be paid to
the Acquiring Fund any interest or proceeds it receives on or after the Exchange
Date with respect to its Assets.
f. VALUATION TIME. The Valuation Time shall be [4:00 P.M.], Eastern Time,
on __________, 2000, or such earlier or later day and time as may be mutually
agreed upon in writing between the parties hereto (the "Valuation Time").
g. EVIDENCE OF TRANSFER. The Acquiring Fund and the Acquired Fund will
jointly file any instrument as may be required by the State of Maryland to
effect the transfer of the Assets to the Acquiring Fund.
h. TERMINATION. The Acquired Fund's existence as a separate portfolio of
O'Shaughnessy Funds will be terminated as soon as practicable following the
Exchange Date by making any required filings with the State of Maryland.
i. SEPARATE AGREEMENTS; REORGANIZATIONS NOT CONDITIONED ON EACH OTHER. Each
of the respective parties hereto hereby agrees that this Agreement shall
constitute a separate agreement and plan of reorganization between (i) the Value
Funds in respect of the Value Funds Reorganization and (ii) the Growth Funds in
respect of the Growth Funds Reorganization. The respective parties further agree
that the consummation of the Value Funds Reorganization shall not be conditioned
on the consummation of the Growth Funds Reorganization and the consummation of
the Growth Funds Reorganization shall not be conditioned on the consummation of
the Value Funds Reorganization.
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<PAGE>
3. REPRESENTATIONS AND WARRANTIES OF THE ACQUIRED FUND.
The Acquired Fund represents and warrants to the Acquiring Fund as follows:
a. FINANCIAL STATEMENTS. The Acquiring Fund has been furnished with an
accurate, correct and complete statement of assets and liabilities and a
schedule of Investments of the Acquired Fund, each as of September 30, 1998,
said financial statements having been examined by McGladrey & Pullen, LLP,
independent public accountants. Such examined financial statements fairly
present in all material respects the financial position of the Acquired Fund as
of the dates and for the periods referred to therein and in conformity with
generally accepted accounting principles applied on a consistent basis.
b. SEMI-ANNUAL REPORT TO SHAREHOLDERS. The Acquiring Fund has been
furnished with the Acquired Fund's Semi-Annual Report to Shareholders for the
six months ended March 31, 1999, and the unaudited financial statements
appearing therein fairly present in all material respects the financial position
of the Acquired Fund as of the dates and for the periods referred to therein and
in conformity with generally accepted accounting principles applied on a
consistent basis.
c. PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION. The Acquiring Fund
has been furnished with the Acquired Fund's Prospectus, dated November 30, 1998,
as amended or supplemented, and said Prospectus does not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading. Insofar as it relates
to the Acquired Fund, the O'Shaughnessy Funds Statement of Additional
Information does not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
d. LITIGATION. There are no material claims, actions, suits or legal,
administrative or other proceedings pending or, to the knowledge of the Acquired
Fund, threatened against the Acquired Fund that could reasonably be expected to
have a Material Adverse Effect on the Acquired Fund. The Acquired Fund is not
charged with or, to its knowledge, threatened with any violation, or
investigation of any possible violation, of any provisions of any Federal, state
or local law or regulation or administrative ruling relating to any aspect of
its business that could reasonably be expected to have a Material Adverse Effect
on the Acquired Fund.
e. MATERIAL CONTRACTS. There are no material contracts outstanding to which
O'Shaughnessy Funds, on behalf of the Acquired Fund, is a party that have not
been disclosed in the N-14 Registration Statement, the Acquired Fund's
Prospectus, the O'Shaughnessy Funds Statement of Additional Information or which
will not otherwise be disclosed to the Acquiring Fund prior to the Valuation
Time.
f. UNDISCLOSED LIABILITIES. To its knowledge, the Acquired Fund has no
material liabilities, contingent or otherwise, other than those shown on its
statements of assets and liabilities referred to herein, those incurred in the
ordinary course of its business since March 31, 1999, and those incurred in
connection with the Reorganization.
g. TAXES. The Acquired Fund has filed (or caused to be filed), or has
obtained extensions to file, all Federal, state and local tax returns which are
required to be filed by it, and has paid (or caused to be paid) or has obtained
extensions to pay, all taxes shown on said returns to be due and owing and all
assessments received by it, up to and including the taxable year in which the
Exchange Date occurs. All tax liabilities of the Acquired Fund have been
adequately provided for on its books, and no tax deficiency or liability of the
Acquired Fund has been asserted and no question with respect thereto has been
raised by the Internal Revenue Service or by any state or local tax authority
for taxes in excess of those already paid, up to and including the taxable year
in which the Exchange Date occurs.
h. ASSETS. The Acquired Fund has good and marketable title to the Assets,
free and clear of all Liens, except for Permitted Liens. The Acquired Fund is
the direct sole and exclusive owner of the Assets. At the Exchange Date, upon
consummation of the transactions contemplated hereby, the Acquiring Fund will
have good and marketable title to the Assets, free and clear of all Liens,
except for Permitted Liens.
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<PAGE>
i. CONSENTS. No filing or registration with, or consent, approval,
authorization or order of, any Person is required for the consummation by the
Acquired Fund of the Reorganization, except for (i) such as may be required
under the Securities Act, the Exchange Act, and the Investment Company Act or
state securities laws (which term as used herein shall include the laws of the
District of Columbia and Puerto Rico), (ii) the approval of not less than a
majority of the shares of the Acquired Fund entitled to vote thereon, and (iii)
the approval of a majority of the members of the Board of Directors of
O'Shaughnessy Funds.
j. N-14 REGISTRATION STATEMENT. The registration statement filed, or to be
filed, by O'Shaughnessy Funds on Form N-14 relating to the Corresponding Shares
to be issued pursuant to this Agreement, which includes the proxy statement of
the Acquired Fund and the prospectus of the Acquiring Fund with respect to the
transactions contemplated herein, and any supplement or amendment thereto or to
the documents therein (as amended, the "N-14 Registration Statement"), on the
effective date of the N-14 Registration Statement, at the time of the
shareholders' meeting referred to in Section 5(a) hereof and on the Exchange
Date, insofar as it relates to the Acquired Fund (i) complied, or will comply,
as the case may be, in all material respects, with the applicable provisions of
the Securities Act, the Exchange Act and the Investment Company Act and the
rules and regulations promulgated thereunder, and (ii) did not, or will not, as
the case may be, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading; PROVIDED, HOWEVER, that the representations and warranties in
this subsection shall apply only to statements in or omissions from the N-14
Registration Statement made in reliance upon and in conformity with information
furnished by the Acquired Fund for use in the N-14 Registration Statement as
provided in Section 5(f) hereof.
k. CAPITALIZATION. The Acquired Fund is authorized to issue 25,000,000,000
shares of a single class, par value $0.0001 per share. As of the date hereof,
the Acquired Fund has _______ shares (in the case of the Dogs of the Market
Fund) and _____ shares (in the case of the Aggressive Growth Fund) issued and
outstanding. All issued and outstanding shares of the Acquired Fund are duly
authorized, validly issued, fully paid and non-assessable and free of preemptive
rights. Except for in connection with any automatic investment and dividend and
distribution reinvestment plan available to its shareholders, there are no
options, warrants, subscriptions, calls or other rights, agreements or
commitments obligating the Acquired Fund to issue any of its shares or
securities convertible into its shares.
4. REPRESENTATIONS AND WARRANTIES OF THE ACQUIRING FUND.
The Acquiring Fund represents and warrants to the Acquired Fund as follows:
a. FINANCIAL STATEMENTS. The Acquired Fund has been furnished with an
accurate, correct and complete statement of assets and liabilities and a
schedule of Investments of the Acquiring Fund, each as of September 30, 1998,
said financial statements having been examined by McGladrey & Pullen, LLP,
independent public accountants. Such examined financial statements fairly
present in all material respects the financial position of the Acquiring Fund as
of the dates and for the periods referred to therein and in conformity with
generally accepted accounting principles applied on a consistent basis.
b. SEMI-ANNUAL REPORT TO SHAREHOLDERS. The Acquired Fund has been furnished
with the Acquiring Fund's Semi-Annual Report to Shareholders for the six months
ended March 31, 1999, and the unaudited financial statements appearing therein
fairly present in all material respects the financial position of the Acquiring
Fund as of the dates and for the periods referred to therein and in conformity
with generally accepted accounting principles applied on a consistent basis.
c. PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION. The Acquired Fund
has been furnished with the Acquiring Fund's Prospectus and said Prospectus does
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. Insofar as it relates to the Acquiring Fund, the O'Shaughnessy Funds
Statement of Additional Information does not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
d. LITIGATION. There are no material claims, actions, suits or legal,
administrative or other proceedings pending or, to the knowledge of the
Acquiring Fund, threatened against the Acquiring Fund that could reasonably be
expected to have a Material Adverse Effect on the Acquiring Fund. The Acquiring
Fund is not charged with or, to its knowledge, threatened with any violation, or
investigation of any possible violation, of any provisions of any Federal, state
or local law or regulation or administrative ruling relating to any aspect of
its business that could reasonably be expected to have a Material Adverse Effect
on the Acquiring Fund.
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e. MATERIAL CONTRACTS. There are no material contracts outstanding to which
O'Shaughnessy Funds, on behalf of the Acquiring Fund, is a party that have not
been disclosed in the N-14 Registration Statement, the Acquiring Fund's
Prospectus, or the O'Shaughnessy Funds Statement of Additional Information or
which will not otherwise be disclosed to the Acquired Fund prior to the
Valuation Time.
f. UNDISCLOSED LIABILITIES. To its knowledge, the Acquiring Fund has no
material liabilities, contingent or otherwise, other than those shown on its
statements of assets and liabilities referred to herein, those incurred in the
ordinary course of its business as an investment company since March 31, 1999
and those incurred in connection with the Reorganization.
g. TAXES. The Acquiring Fund has filed (or caused to be filed), or has
obtained extensions to file, all Federal, state and local tax returns which are
required to be filed by it, and has paid (or caused to be paid) or has obtained
extensions to pay, all taxes shown on said returns to be due and owing and all
assessments received by it, up to and including the taxable year in which the
Exchange Date occurs. All tax liabilities of the Acquiring Fund have been
adequately provided for on its books, and no tax deficiency or liability of the
Acquiring Fund has been asserted and no question with respect thereto has been
raised by the Internal Revenue Service or by any state or local tax authority
for taxes in excess of those already paid, up to and including the taxable year
in which the Exchange Date occurs.
h. CONSENTS. No filing or registration with, or consent, approval,
authorization or order of, any Person is required for the consummation by the
Acquiring Fund of the Reorganization, except for (i) such as may be required
under the Securities Act, the Exchange Act, and the Investment Company Act or
state securities laws (which term as used herein shall include the laws of the
District of Columbia and Puerto Rico) and (ii) the approval of a majority of the
members of the Board of Directors of O'Shaughnessy Funds.
i. N-14 REGISTRATION STATEMENT. The N-14 Registration Statement, on its
effective date, at the time of the shareholders' meeting referred to in Section
5(a) hereof and on the Exchange Date, insofar as it relates to the Acquiring
Fund (i) complied, or will comply, as the case may be, in all material respects,
with the applicable provisions of the Securities Act, the Exchange Act and the
Investment Company Act and the rules and regulations promulgated thereunder, and
(ii) did not, or will not, as the case may be, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading; PROVIDED, HOWEVER, that the
representations and warranties in this subsection shall apply only to statements
in or omissions from the N-14 Registration Statement made in reliance upon and
in conformity with information furnished by the Acquiring Fund for use in the
N-14 Registration Statement as provided in Section 5(f) hereof.
j. CAPITALIZATION. The Acquiring Fund is authorized to issue 25,000,000,000
shares of a single class, par value $0.0001 per share. As of the date hereof,
the Acquiring Fund has _______ shares (in the case of the Cornerstone Value
Fund) and ______ shares (in the case of the Cornerstone Growth Fund) issued and
outstanding. All issued and outstanding shares of the Acquiring Fund are duly
authorized, validly issued, fully paid and non-assessable and free of preemptive
rights. Except for in connection with any automatic investment and dividend and
distribution reinvestment plan available to its shareholders, there are no
options, warrants, subscriptions, calls or other rights, agreements or
commitments obligating the Acquiring Fund to issue any of its shares or
securities convertible into its shares.
k. CORRESPONDING SHARES.
i. The Corresponding Shares to be issued by the Acquiring Fund to the
Acquired Fund and subsequently distributed by the Acquired Fund to its
shareholders as provided in this Agreement have been duly and validly
authorized and, when issued and delivered pursuant to this Agreement, will
be legally and validly issued and will be fully paid and nonassessable and
will have full voting rights, and no shareholder of the Acquiring Fund will
have any preemptive right of subscription or purchase in respect thereof.
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ii. At or prior to the Exchange Date, the Corresponding Shares to be
issued by the Acquiring Fund to the Acquired Fund on the Exchange Date will
be duly qualified for offering to the public in all states of the United
States in which the sale of shares of the Acquiring Fund presently are
qualified, and there are a sufficient number of such shares registered
under the Securities Act, the Investment Company Act and with each
pertinent state securities commission to permit the transfers contemplated
by this Agreement to be consummated.
5. COVENANTS.
a. SPECIAL SHAREHOLDERS' MEETING. The Acquired Fund agrees to call a
special meeting of its shareholders as soon as practicable after the effective
date of the N-14 Registration Statement for the purpose of considering the
Reorganization as described in this Agreement.
b. UNAUDITED FINANCIAL STATEMENTS.
i. The Acquired Fund hereby agrees to furnish to the Acquiring Fund,
at or prior to the Exchange Date, for the purpose of determining the number
of Corresponding Shares to be issued by the Acquiring Fund to the Acquired
Fund pursuant to Section 2(c) hereof, an accurate, correct and complete
unaudited statement of assets and liabilities of the Acquired Fund with
values determined in accordance with Section 2(c) hereof and an unaudited
schedule of Investments of the Acquired Fund (including the respective
dates and costs of acquisition thereof), each as of the Valuation Time.
Such unaudited financial statements will fairly present in all material
respects the financial position of the Acquired Fund as of the dates and
for the periods referred to therein and in conformity with generally
accepted accounting principles applied on a consistent basis.
ii. The Acquiring Fund hereby agrees to furnish to the Acquired Fund,
at or prior to the Exchange Date, for the purpose of determining the number
of Corresponding Shares to be issued by the Acquiring Fund to the Acquired
Fund pursuant to Section 2(c) hereof, an accurate, correct and complete
unaudited statement of assets and liabilities of the Acquiring Fund with
values determined in accordance with Section 2(c) hereof and an unaudited
schedule of Investments of the Acquiring Fund (including the respective
dates and costs of acquisition thereof), each as of the Valuation Time.
Such unaudited financial statements will fairly present in all material
respects the financial position of the Acquiring Fund as of the dates and
for the periods referred to therein and in conformity with generally
accepted accounting principles applied on a consistent basis.
c. SHARE LEDGER RECORDS OF THE ACQUIRING FUND. The Acquiring Fund agrees,
as soon as practicable after the Valuation Time, to open shareholder accounts on
its share ledger records for the shareholders of the Acquired Fund in connection
with the distribution of Corresponding Shares by the Acquired Fund to such
shareholders in accordance with Section 2(c) hereof.
d. CONDUCT OF BUSINESS. The Acquired Fund and the Acquiring Fund covenant
and agree to operate their respective businesses as presently conducted between
the date hereof and the Exchange Date; PROVIDED, HOWEVER, that the Acquired Fund
shall be permitted to sell those Assets that constitute Prohibited Assets.
e. TERMINATION OF THE ACQUIRED FUND. O'Shaughnessy Funds agrees that
following the consummation of the Reorganization, (i) it will terminate the
existence of the Acquired Fund in accordance with the laws of the State of
Maryland and any other applicable law; (ii) it will not make on behalf of the
Acquired Fund any distributions of any Corresponding Shares other than to the
shareholders of the Acquired Fund and without first paying or adequately
providing for the payment of all of the liabilities of the Acquired Fund not
assumed hereunder, if any; and (iii) on and after the Exchange Date it shall not
conduct any business on behalf of the Acquired Fund except in connection with
the termination of the Acquired Fund
f. FILING OF N-14 REGISTRATION STATEMENT. O'Shaughnessy Funds will file the
N-14 Registration Statement with the Commission and will use its best efforts to
cause the N-14 Registration Statement to become effective as promptly as
practicable after the filing thereof.
g. CORRESPONDING SHARES. The Acquired Fund agrees that it will not sell or
otherwise dispose of any of the Corresponding Shares to be received by it from
the Acquiring Fund in connection with the Reorganization, except in distribution
to the shareholders of the Acquired Fund in accordance with the terms hereof.
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<PAGE>
h. TAX RETURNS. Each of the respective parties hereto agrees that by the
Exchange Date all of its Federal and other tax returns and reports required to
be filed on or before such date shall have been filed and all taxes shown as due
on said returns either shall have been paid or adequate liability reserves shall
have been provided for the payment of such taxes. In connection with this
provision, each of the respective parties hereto agree to cooperate with each
other in filing any tax return, amended return or claim for refund, determining
a liability for taxes or a right to a refund of taxes or participating in or
conducting any audit or other proceeding in respect of taxes. The Acquiring Fund
agrees to retain for a period of ten (10) years following the Exchange Date all
returns, schedules and work papers and all material records or other documents
relating to tax matters of the Acquiring Fund for its taxable period first
ending after the Exchange Date and for all prior taxable periods. Any
information obtained under this subsection shall be kept confidential except as
otherwise may be necessary in connection with the filing of returns or claims
for refund or in conducting an audit or other proceeding. After the Exchange
Date, the Acquired Fund shall prepare, or cause its agents to prepare, any
Federal, state or local tax returns, including any Forms 1099, required to be
filed by the Acquired Fund with respect to the Acquired Fund's final taxable
year ending with its complete liquidation and for any prior periods or taxable
years and further shall cause such tax returns and Forms 1099 to be duly filed
with the appropriate taxing authorities. Notwithstanding any of the foregoing,
any expenses incurred by an Acquired Fund (other than for payment of taxes) in
connection with the preparation and filing of said tax returns and Forms 1099
after the Exchange Date shall be borne by the Acquired Fund to the extent such
expenses have been accrued by the Acquired Fund in the ordinary course of
business without regard to the Reorganization; any excess expenses shall be
borne by O'Shaughnessy Capital Management, Inc. at the time such tax returns and
Forms 1099 are prepared.
i. COMBINED PROXY STATEMENT AND PROSPECTUS MAILING. The Acquired Fund
agrees to mail to its shareholders of record entitled to vote at the special
meeting of shareholders at which action is to be considered regarding this
Agreement, in sufficient time to comply with requirements as to notice thereof,
a combined Proxy Statement and Prospectus which complies in all material
respects with the applicable provisions of Section 14(a) of the Exchange Act and
Section 20(a) of the Investment Company Act, and the rules and regulations
promulgated thereunder.
j. CONFIRMATIONS OF TAX BASIS. The Acquired Fund will deliver to the
Acquiring Fund on the Exchange Date confirmations or other adequate evidence as
to the tax basis of each of the Assets delivered to the Acquiring Fund
hereunder, certified by PricewaterhouseCoopers, LLP.
k. SHAREHOLDER LIST. As soon as practicable after the close of business on
the Exchange Date, the Acquired Fund shall deliver to the Acquiring Fund a list
of the names and addresses of all of the shareholders of record of the Acquired
Fund on the Exchange Date and the number of shares of the Acquired Fund owned by
each such shareholder as of such date, certified to the best of its knowledge
and belief by the transfer agent or by O'Shaughnessy Funds on behalf of the
Acquired Fund.
l. THE ACQUIRING FUND'S CONTINUED EXISTENCE. Following the consummation of
the Reorganization, the Acquiring Fund expects, and agrees to use all reasonable
efforts, to stay in existence and continue its business as a separate portfolio
of an open-end management investment company registered under the Investment
Company Act.
6. EXCHANGE DATE. The closing of the transactions contemplated by this
Agreement shall be at the offices of Swidler Berlin Shereff Friedman, LLP
("SBSF"), The Chrysler Building, 405 Lexington Avenue, New York, New York,
at 10:00 A.M. on the next full business day following the Valuation Time,
or at such other place, time and date agreed to by each of the respective
parties hereto. The date and time upon which such closing is to take place
shall be referred to herein as the "Exchange Date." Except with respect to
Prohibited Assets, to the extent that any of the Assets, for any reason,
are not transferable on the Exchange Date, the Acquired Fund shall cause
such Assets to be transferred to the Acquiring Fund's account with Firstar
Bank Milwaukee at the earliest practicable date thereafter.
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<PAGE>
7. CONDITIONS OF THE ACQUIRED FUND.
The obligations of the Acquired Fund hereunder shall be subject to the
satisfaction, at or before the Exchange Date (or such other date specified
herein), of the conditions set forth below. The benefit of these conditions is
for the Acquired Fund only and may be waived, in whole or in part, by the
Acquired Fund at any time in its sole discretion.
a. REPRESENTATIONS AND WARRANTIES. The representations and warranties of
the Acquiring Fund made in this Agreement shall be true and correct in all
material respects when made, as of the Valuation Time and as of the Exchange
Date all with the same effect as if made at and as of such dates, except that
any representations and warranties that relate to a particular date or period
shall be true and correct in all material respects as of such date or period.
b. PERFORMANCE. The Acquiring Fund shall have performed, satisfied and
complied with all covenants, agreements and conditions required to be performed,
satisfied or complied with by it under this Agreement at or prior to the
Exchange Date.
c. SHAREHOLDER APPROVAL. This Agreement shall have been adopted, and the
Reorganization shall have been approved, by the affirmative vote of the holders
of not less than a majority of the shares of the Acquired Fund, issued and
outstanding and entitled to vote thereon, voting together as a single class.
d. APPROVAL OF BOARD OF DIRECTORS OF O'SHAUGHNESSY FUNDS. This Agreement
shall have been adopted and the Reorganization shall have been approved by the
Board of Directors of O'Shaughnessy Funds.
e. DELIVERIES BY THE ACQUIRING FUND. At or prior to the Exchange Date, the
Acquiring Fund shall deliver to the Acquired Fund, against receipt of the
Acquired Fund's Assets in accordance with Section 2(a) hereof, the following:
i. the unaudited financial statements of the Acquiring Fund required
by Section 5(b)(ii) hereof;
ii. an opinion of SBSF, in form and substance satisfactory to the
Acquired Fund, substantially to the effect that, for Federal income tax
purposes, (i) the transfer of the Assets to the Acquiring Fund in exchange
solely for the Corresponding Shares and the assumption by the Acquiring
Fund of the Assumed Liabilities as provided for in this Agreement should
constitute a reorganization within the meaning of Section 368(a)(1)(C) of
the Code, and (ii) assuming that such transfer, exchange and assumption
qualifies as a reorganization within the meaning of Section 368(a)(1)(C) of
the Code: (a) each of the respective parties hereto will be deemed to be a
"party" to the Reorganization within the meaning of Section 368(b) of the
Code; (b) in accordance with Section 361(a), 361(c)(1) and 357(a) of the
Code, no gain or loss will be recognized by the Acquired Fund on the
acquisition of the Assets, and assumption of the Assumed Liabilities, by
the Acquiring Fund solely in exchange for the Corresponding Shares or on
the distribution of the Corresponding Shares to the Acquired Fund's
shareholders as provided for in this Agreement; (c) under Section 1032 of
the Code, no gain or loss will be recognized by the Acquiring Fund on the
receipt of the Assets in exchange for the Corresponding Shares and the
assumption by the Acquiring Fund of the Assumed Liabilities as provided for
in this Agreement; (d) in accordance with Section 354(a)(1) of the Code, no
gain or loss will be recognized by a shareholder of the Acquired Fund on
the receipt of Corresponding Shares in the Reorganization solely in
exchange for its shares of the Acquired Fund; (e) in accordance with
Section 362(b) of the Code, the tax basis of the Assets in the hands of the
Acquiring Fund will be the same as the tax basis of such Assets in the
hands of the Acquired Fund immediately prior to the consummation of the
Reorganization; (f) in accordance with Section 358 of the Code, immediately
after the Reorganization, the tax basis of the Corresponding Shares
received by a shareholder of the Acquired Fund in the Reorganization will
be equal, in the aggregate, to the tax basis of the shares of the Acquired
Fund surrendered in exchange therefor; (g) in accordance with Section
1223(1) of the Code, the holding period of the Corresponding Shares
received by a shareholder of the Acquired Fund in the Reorganization will
include the holding period of the shares of the Acquired Fund immediately
prior to the Reorganization (provided that at the time of the
Reorganization the shares of the Acquired Fund were held as capital
assets); (h) in accordance with Section 1223(2) of the Code, the holding
period of the Assets in the hands of the Acquiring Fund will include the
holding period of such Assets in the hands of the Acquired Fund; and (i)
the taxable year of the Acquired Fund will end on the effective date of the
Reorganization and pursuant to Section 381(a) of the Code and regulations
thereunder, the Acquiring Fund will succeed to and take into account
certain tax attributes of the Acquired Fund, such as earnings and profits
and capital loss carryovers.
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<PAGE>
f. NO ADVERSE CHANGE. There shall have occurred no material adverse change
in the financial position of the Acquiring Fund since March 31, 1999 other than
changes in its portfolio securities since that date or changes in the market
value of its portfolio securities, each in the ordinary course of business.
g. ABSENCE OF LITIGATION. There shall not be pending before any
Governmental Authority any material litigation with respect to the matters
contemplated by this Agreement.
h. N-14 REGISTRATION STATEMENT. The N-14 Registration Statement shall have
become effective under the Securities Act, and no stop order suspending such
effectiveness shall have been instituted or, to the knowledge of any of the
respective parties hereto, contemplated by the Commission.
i. COMPLIANCE WITH LAWS; NO ADVERSE ACTION OR DECISION. Since the date
hereof, (i) no law, statute, ordinance, code, rule or regulation shall have been
promulgated, enacted or entered that restrains, enjoins, prevents, materially
delays, prohibits or otherwise makes illegal the performance of this Agreement,
the Reorganization or the consummation of any of the transactions contemplated
hereby and thereby; (ii) the Commission shall not have issued an unfavorable
advisory report under Section 25(b) of the Investment Company Act, nor
instituted or threatened to institute any proceeding seeking to enjoin
consummation of the Reorganization under Section 25(c) of the Investment Company
Act, and (iii) no other legal, administrative or other proceeding shall be
instituted or threatened by any Governmental Authority which would materially
affect the financial condition of the Acquiring Fund or that seeks to restrain,
enjoin, prevent, materially delay, prohibit or otherwise make illegal the
performance of this Agreement, the Reorganization or the consummation of any of
the transactions contemplated hereby or thereby.
j. COMMISSION ORDERS OR INTERPRETATIONS. The Acquired Fund shall have
received from the Commission such orders or interpretations as SBSF, as counsel
to the Acquired Fund, deems reasonably necessary or desirable under the
Securities Act and the Investment Company Act in connection with the
Reorganization; PROVIDED, that such counsel shall have requested such orders or
interpretations as promptly as practicable, and all such orders shall be in full
force and effect.
8. CONDITIONS OF THE ACQUIRING FUND.
The obligations of the Acquiring Fund hereunder shall be subject to the
satisfaction, at or before the Exchange Date (or such other date specified
herein), of the conditions set forth below. The benefit of these conditions is
for the Acquiring Fund only and may be waived, in whole or in part, by the
Acquiring Fund at any time in its sole discretion.
a. REPRESENTATIONS AND WARRANTIES. The representations and warranties of
the Acquired Fund made in this Agreement shall be true and correct in all
material respects when made, as of the Valuation Time and as of the Exchange
Date all with the same effect as if made at and as of such dates, except that
any representations and warranties that relate to a particular date or period
shall be true and correct in all material respects as of such date or period.
b. PERFORMANCE. The Acquired Fund shall have performed, satisfied and
complied with all covenants, agreements and conditions required to be performed,
satisfied or complied with by it under this Agreement at or prior to the
Exchange Date.
c. SHAREHOLDER APPROVAL. This Agreement shall have been adopted, and the
Reorganization shall have been approved, by the affirmative vote of the holders
of not less than a majority of the shares of the Acquired Fund, issued and
outstanding and entitled to vote thereon, voting together as a single class.
d. APPROVAL OF BOARD OF DIRECTORS OF O'SHAUGHNESSY FUNDS. This Agreement
shall have been adopted and the Reorganization shall have been approved by the
Board of Directors of O'Shaughnessy Funds.
e. DELIVERIES BY THE ACQUIRED FUND. At or prior to the Exchange Date, the
Acquired Fund shall deliver to the Acquiring Fund, against the assumption by the
Acquiring Fund of the Assumed Liabilities and the receipt of the Corresponding
Shares in accordance with Sections 2(b) and (c) hereof, respectively, the
following:
i. the unaudited financial statements of the Acquired Fund required by
Section 5(b)(i) hereof;
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ii. an opinion of SBSF, in form and substance satisfactory to the
Acquiring Fund, with respect to the matters specified in Section 7(e)(ii)
hereof.
f. NO ADVERSE CHANGE. There shall have occurred no material adverse change
in the financial position of the Acquired Fund since March 31, 1999 other than
changes in its portfolio securities since that date or changes in the market
value of its portfolio securities, each in the ordinary course of business.
g. ABSENCE OF LITIGATION. There shall not be pending before any
Governmental Authority any material litigation with respect to the matters
contemplated by this Agreement.
h. N-14 REGISTRATION STATEMENT. The N-14 Registration Statement shall have
become effective under the Securities Act, and no stop order suspending such
effectiveness shall have been instituted or, to the knowledge of any of the
respective parties hereto, contemplated by the Commission.
i. COMPLIANCE WITH LAWS; NO ADVERSE ACTION OR DECISION. Since the date
hereof, (i) no law, statute, ordinance, code, rule or regulation shall have been
promulgated, enacted or entered that restrains, enjoins, prevents, materially
delays, prohibits or otherwise makes illegal the performance of this Agreement,
the Reorganization or the consummation of any of the transactions contemplated
hereby and thereby; (ii) the Commission shall not have issued an unfavorable
advisory report under Section 25(b) of the Investment Company Act, nor
instituted or threatened to institute any proceeding seeking to enjoin
consummation of the Reorganization under Section 25(c) of the Investment Company
Act, and (iii) no other legal, administrative or other proceeding shall be
instituted or threatened by any Governmental Authority which would materially
affect the financial condition of the Acquired Fund or that seeks to restrain,
enjoin, prevent, materially delay, prohibit or otherwise make illegal the
performance of this Agreement, the Reorganization or the consummation of any of
the transactions contemplated hereby or thereby.
j. COMMISSION ORDERS OR INTERPRETATIONS. The Acquired Fund shall have
received from the Commission such orders or interpretations as SBSF, as counsel
to the Acquired Fund, deems reasonably necessary or desirable under the
Securities Act and the Investment Company Act in connection with the
Reorganization; PROVIDED, that such counsel shall have requested such orders or
interpretations as promptly as practicable, and all such orders shall be in full
force and effect.
k. ASSETS. The Assets to be transferred to the Acquiring Fund, or the
Assumed Liabilities to be assumed by the Acquiring Fund, hereunder shall not
include a significant amount of assets or liabilities, as applicable, which the
Acquired Fund, by reason of limitations in O'Shaughnessy Funds' Articles of
Incorporation or otherwise, may not properly acquire or assume, as applicable.
l. DIVIDENDS. Prior to the Exchange Date, the Acquired Fund shall have
declared a dividend or dividends which, together with all such previous
dividends, shall have the effect of distributing to its shareholders all of its
investment company taxable income for the period from [INSERT DATE] to and
including the Exchange Date, if any (computed without regard to any deduction
for dividends paid), and all of its net capital gain, if any, realized for the
period from [INSERT DATE] to and including the Exchange Date.
9. TERMINATION, POSTPONEMENT AND WAIVERS.
a. TERMINATION OF AGREEMENT. Notwithstanding anything contained in this
Agreement to the contrary, subject to Section 10(a) hereof, this Agreement may
be terminated and the Reorganization abandoned at any time (whether before or
after adoption thereof by the shareholders of the Acquired Fund) prior to the
Exchange Date, or the Exchange Date may be postponed, by notice in writing prior
to the Exchange Date
i. by either of the respective parties hereto if :
(1) the Boards of Directors of O'Shaughnessy Funds so agrees in
writing;
(2) the transactions contemplated by this Agreement have not
been consummated by [INSERT DATE]; PROVIDED, HOWEVER, that
the right to terminate or postpone this Agreement under this
Section 9(a)(i)(2) shall not be available to any party whose
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failure to fulfill any obligation under this Agreement has
been the cause of, or resulted in, the failure of
consummation of the transactions contemplated by this
Agreement on or before such date; or
(3) any Governmental Authority of competent jurisdiction shall
have issued any judgment, injunction, order, ruling or
decree or taken any other action restraining, enjoining or
otherwise prohibiting this Agreement, the Reorganization or
the consummation of any of the transactions contemplated
hereby or thereby and such judgment, injunction, order,
ruling, decree or other action becomes final and
non-appealable; PROVIDED, that the party seeking to
terminate this Agreement pursuant to this Section 9(a)(i)(3)
shall have used its reasonable best efforts to have such
judgment, injunction, order, ruling, decree or other action
lifted, vacated or denied.
ii. by an Acquired Fund if any condition of the Acquired Fund's
obligations set forth in Section 7 of this Agreement has not been fulfilled
or waived by it; or
iii. by an Acquiring Fund if any condition of the Acquiring Fund's
obligations set forth in Section 8 of this Agreement has not been fulfilled
or waived by it.
b. COMMISSION ORDER. If any order or orders of the Commission with respect
to this Agreement shall be issued prior to the Exchange Date and shall impose
any terms or conditions which are determined by action of the Board of Directors
of O'Shaughnessy Funds to be acceptable, such terms and conditions shall be
binding as if a part of this Agreement without further vote or approval of the
shareholders of the Acquired Fund, unless such terms and conditions shall result
in a change in the method of computing the number of Corresponding Shares to be
issued by the Acquiring Fund to the Acquired Fund in which event, unless such
terms and conditions shall have been included in the proxy solicitation
materials furnished to the shareholders of the Acquired Fund prior to the
meeting at which the Reorganization shall have been approved, this Agreement
shall not be consummated and shall terminate unless the Acquired Fund promptly
shall call a special meeting of shareholders at which such conditions so imposed
shall be submitted for approval and the requisite approval of such conditions
shall be obtained.
c. EFFECT OF TERMINATION. In the event of termination of this Agreement
pursuant to the provisions hereof, the same shall become null and void and have
no further force or effect, and there shall not be any liability on the part of
either of the respective parties hereto or Persons who are their directors,
trustees, officers, agents or shareholders in respect of this Agreement.
d. WAIVERS; NON-MATERIAL CHANGES. At any time prior to the Exchange Date,
any of the terms or conditions of this Agreement may be waived by the party
hereto that is entitled to the benefit thereof, if, in the judgment of such
party after consultation with its counsel, such action or waiver will not have a
material adverse effect on the benefits intended under this Agreement to the
shareholders of the respective party, on behalf of which such action is taken.
In addition, the respective parties hereto have delegated to their respective
investment adviser the ability to make non-material changes to this Agreement if
such investment adviser deems it to be in the best interests of the trust for
which it serves as investment adviser to do so.
10. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION.
a. SURVIVAL. The respective representations and warranties contained in
Sections 3 and 4 hereof shall expire with, and be terminated by, the
consummation of the Reorganization, and neither the Acquired Fund nor the
Acquiring Fund nor any of their officers, directors or trustees, agents or
shareholders shall have any liability with respect to such representations or
warranties after the Exchange Date. This provision shall not protect any
officer, director, trustee, agent or shareholder of the Acquired Fund or the
Acquiring Fund against any liability to the entity for which such Person serves
in such capacity, or to its shareholders, to which such Person would be subject
by reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties in the conduct of such office.
I-14
<PAGE>
b. INDEMNIFICATION OBLIGATIONS OF THE ACQUIRED FUND. The Acquired Fund
hereby agrees to indemnify and hold harmless the Acquiring Fund from and against
any and all losses, claims, damages, liabilities, costs (including reasonable
attorneys' fees) and expenses (including expenses of investigation)
(collectively, "Losses") which the Acquiring Fund may incur or sustain as a
result of, relating to or arising out of, (i) any corporate obligation of the
Acquired Fund, whether consisting of tax deficiencies or otherwise, required to
be paid by the Acquiring Fund and based upon a claim or claims against the
Acquired Fund which were omitted or not fairly reflected in the financial
statements delivered to the Acquiring Fund in connection with the
Reorganization; (ii) any breach or alleged breach in any material respect of any
warranty, or the inaccuracy in any material respect of any representation, as
the case may be, made by the Acquired Fund; (iii) the failure or threatened
failure, in any material respect, of the Acquired Fund to fulfill any agreement
or covenant of the Acquired Fund contained in this Agreement; or (iv) any claim
is made alleging that (a) the N-14 Registration Statement included any untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading or (b) the Proxy
Statement and Prospectus delivered to the shareholders of the Acquired Fund and
forming a part of the N-14 Registration Statement included any untrue statement
of a material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, except insofar as such
claim is based on written information furnished by the Acquiring Fund to the
Acquired Fund. The party being indemnified is referred to herein as the
"Indemnified Party" and the indemnifying party is referred to herein as the
"Indemnifying Party."
c. INDEMNIFICATION OBLIGATIONS OF THE ACQUIRING FUND. The Acquiring Fund
hereby agrees to indemnify and hold harmless the Acquired Fund from and against
any and all Losses which the Acquired Fund may incur or sustain as a result of,
relating to or arising out of, (i) any breach or alleged breach in any material
respect of any warranty, or the inaccuracy in any material respect of any
representation, as the case may be, made by the Acquiring Fund; (ii) the failure
or threatened failure, in any material respect, of the Acquiring Fund to fulfill
any agreement or covenant of the Acquiring Fund contained in this Agreement; or
(iii) any claim is made alleging that (a) the N-14 Registration Statement
included any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading or (b) the Proxy Statement and Prospectus delivered to shareholders
of the Acquired Fund and forming a part of the N-14 Registration Statement
included any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, except insofar as such claim is based on written information
furnished by the Acquired Fund to the Acquiring Fund.
d. INDEMNIFICATION PROCEDURE. In the event that any claim is made against
the Acquiring Fund in respect of which indemnity may be sought by the Acquiring
Fund from the Acquired Fund under Section 10(b) hereof, or in the event that any
claim is made against the Acquired Fund in respect of which indemnity may be
sought by the Acquired Fund from the Acquiring Fund under Section 10(c) hereof,
then the Indemnified Party, with reasonable promptness and before payment of
such claim, shall give written notice of such claim to the Indemnifying Party.
If no objection as to the validity of the claim is made in writing to the
Indemnified Party by the Indemnifying Party within thirty (30) days after the
giving of notice hereunder, then the Indemnified Party may pay such claim and
shall be entitled to reimbursement therefor, pursuant to this Agreement. If,
prior to the termination of such thirty-day period, objection in writing as to
the validity of such claim is made to the Indemnified Party, the Indemnified
Party shall withhold payment thereof until the validity of such claim is
established (i) to the satisfaction of the Indemnifying Party, or (ii) by a
final determination of a court of competent jurisdiction, whereupon the
Indemnified Party may pay such claim and shall be entitled to reimbursement
thereof, pursuant to this Agreement, or (iii) with respect to any tax claims,
within seven (7) calendar days following the earlier of (A) an agreement between
the Acquired Fund and the Acquiring Fund that an indemnity amount is payable,
(B) an assessment of a tax by a taxing authority, or (C) a "determination" as
defined in Section 1313(a) of the Code. For purposes of this Section, the term
"assessment" shall have the same meaning as used in Chapter 63 of the Code and
Treasury Regulations thereunder, or any comparable provision under the laws of
the appropriate taxing authority. In the event of any objection by the
Indemnifying Party, the Indemnifying Party promptly shall investigate the claim,
and if it is not satisfied with the validity thereof, the Indemnifying Party
shall conduct the defense against such claim. All costs and expenses incurred by
the Indemnifying Party in connection with such investigation and defense of such
claim shall be borne by it. These indemnification provisions are in addition to,
and not in limitation of, any other rights the parties may have under applicable
law.
I-15
<PAGE>
11. OTHER MATTERS.
a. LEGEND. Pursuant to Rule 145 under the Securities Act, and in connection
with the issuance of any shares to any Person who at the time of the
Reorganization is, to its knowledge, an affiliate of a party to the
Reorganization pursuant to Rule 145(c) of the Securities Act, the Acquiring Fund
will cause to be affixed upon the certificate(s) issued to such Person (if any)
a legend as follows:
THESE SHARES ARE SUBJECT TO RESTRICTIONS ON TRANSFER UNDER THE SECURITIES
ACT OF 1933 AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT TO THE
ISSUER THEREOF (OR ITS STATUTORY SUCCESSOR) OR ITS PRINCIPAL UNDERWRITER
UNLESS (I) A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER
THE SECURITIES ACT OF 1933 OR (II) IN THE OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE FUND, SUCH REGISTRATION IS NOT REQUIRED.
and, further, that stop transfer instructions will be issued to the Acquiring
Fund's transfer agent with respect to such shares. The Acquired Fund will
provide the Acquiring Fund on the Exchange Date with the name of any Acquired
Fund shareholder who is to the knowledge of the Acquired Fund an affiliate of it
on such date.
b. FURTHER ASSURANCES. Each party hereto covenants and agrees to provide
the other party hereto and its agents and counsel with any and all
documentation, information, assistance and cooperation that may become necessary
from time to time with respect to the transactions contemplated by this
Agreement.
c. NOTICES. Any notice, report or other communication hereunder shall be in
writing and shall be given to the Person entitled thereto by hand delivery,
prepaid certified mail or overnight service, addressed to the Acquired Fund or
the Acquiring Fund, as applicable, at the address set forth below. If the notice
is sent by certified mail, it shall be deemed to have been given to the Person
entitled thereto five (5) business days after being deposited in the United
States mail and if the notice is sent by overnight service, it shall be deemed
to have been given to the Person entitled thereto one (1) business day after it
was deposited with the courier service for delivery to that Person. Notice of
any change in any address listed below also shall be given in the manner set
forth above. Whenever the giving of notice is required, the giving of such
notice may be waived by the party entitled to receive such notice.
If to the Acquired Fund and/or the Acquiring Fund, to:
35 Mason Street
Greenwich, Connecticut 06830
Attention: James P. O'Shaughnessy
With a copy to:
Swidler Berlin Shereff Friedman, LLP
The Chrysler Building
405 Lexington Avenue
New York, New York 10174
Attention: Joel H. Goldberg, Esq.
d. ENTIRE AGREEMENT. This Agreement contains the entire agreement between
the parties hereto with respect to the matters contemplated herein and
supersedes all previous agreements or understandings between the parties related
to such matters.
e. AMENDMENT. Except as set forth in Section 9(d) hereof, this Agreement
may be amended, modified, superseded, canceled, renewed or extended, and the
terms or covenants hereof may be waived, only by a written instrument executed
by the respective parties hereto or, in the case of a waiver, by the party
waiving compliance. Except as otherwise specifically provided in this Agreement,
no waiver by either party hereto of any breach by the other party hereto of any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of a similar or dissimilar provision or condition at
the same or at any prior or subsequent time.
f. GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with, and the rights of the parties shall be governed by, the laws of
the State of [New York] applicable to agreements made and to be performed in
said state, without giving effect to the principles of conflict of laws thereof.
I-16
<PAGE>
g. ASSIGNMENT. This Agreement shall not be assigned by any of the parties
hereto, in whole or in part, whether by operation of law or otherwise, without
the prior written consent of the other party hereto. Any purported assignment
contrary to the terms hereof shall be null, void and of no effect.
h. FEES AND EXPENSES. With respect to expenses incurred in connection with
the Reorganization, (i) the Acquiring Fund shall pay all expenses incurred which
are solely attributable to the Acquiring Fund and the conduct of its business,
(ii) the Acquired Fund shall pay all expenses incurred which are solely
attributable to the Acquired Fund and the conduct of its business, and (iii) the
Acquired Fund and the Acquiring Fund shall pay all other expenses incurred in
connection with the Reorganization pro rata according to each fund's net assets
on the Valuation Date, including, but not limited to, all costs related to the
preparation and distribution of the N-14 Registration Statement. Such fees and
expenses shall include costs of preparing and filing a federal tax ruling
request (if applicable), legal and accounting fees, state securities fees (if
any), printing costs, filing fees, portfolio transfer taxes (if any), and any
similar expenses incurred in connection with the Reorganization. If for any
reason the Reorganization is not consummated, a party shall not be liable to the
other party hereto for any damages resulting therefrom, including, without
limitation, consequential damages, except to the extent that such party acted
with willful misfeasance, bad faith, willful misconduct or reckless disregard.
i. SEVERABILITY. Any term or provision of this Agreement which is invalid
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms and
provisions of this Agreement in any other jurisdiction.
j. HEADINGS. Headings to sections in this Agreement are intended solely for
convenience and no provision of this Agreement is to be construed by reference
to the heading of any section.
k. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which, when executed and delivered, shall be deemed to be
an original but all such counterparts together shall constitute but one
instrument.
I-17
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first set forth above.
With respect to the Value Funds Reorganization:
O'SHAUGHNESSY FUNDS, INC.,
on behalf of O'Shaughnessy Dogs of the
Market(TM) Fund
By:
------------------------------------
Name:
Title:
O'SHAUGHNESSY FUNDS, INC.,
on behalf of O'Shaughnessy Cornerstone
Value Fund
By:
------------------------------------
Name:
Title:
With respect to the Growth Funds Reorganization:
O'SHAUGHNESSY FUNDS, INC.,
on behalf of O'Shaughnessy Aggressive
Growth Fund
By:
------------------------------------
Name:
Title:
O'SHAUGHNESSY FUNDS, INC.,
on behalf of O'Shaughnessy Cornerstone
Growth Fund
By:
------------------------------------
Name:
Title:
I-18
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION, DATED NOVEMBER ___, 1999
O'SHAUGHNESSY FUNDS, INC.
O'SHAUGHNESSY DOGS OF THE MARKET(TM) FUND
O'SHAUGHNESSY AGGRESSIVE GROWTH FUND
35 MASON STREET
GREENWICH, CONNECTICUT 06830
----------
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Proxy Statement and Prospectus (the "Proxy
Statement and Prospectus"), dated November__, 1999, which has been filed by
O'Shaughnessy Funds, Inc. ("O'Shaughnessy Funds" or the "Registrant") relating
to the Reorganizations (as defined herein). Copies of the Proxy Statement and
Prospectus may be obtained at no charge by writing to the O'Shaughnessy Funds at
the address indicated above or by calling toll-free 1-877-OS-FUNDS. This
Statement of Additional Information has been incorporated by reference into the
Proxy Statement and Prospectus.
Unless otherwise indicated, capitalized terms used herein and not otherwise
defined have the same meanings as are given to them in the Proxy Statement and
Prospectus.
Further information about the O'Shaughnessy Funds is contained in the
Funds' Prospectuses and combined Statement of Additional Information, each dated
November 30, 1998, and the Semi-Annual Reports of the Funds for the six-month
period ended March 31, 1999. The Funds' combined Statement of Additional
Information, dated November 30, 1998, and the Semi-Annual Reports of the
Acquiring Funds for the six-month period ended March 31, 1999 are incorporated
herein by reference and accompany this Statement of Additional Information.
The Securities and Exchange Commission maintains a web site
(http://www.sec.gov) that contains the prospectuses and combined statement of
additional information of the Funds, other material incorporated by reference
and other information regarding the Funds.
TABLE OF CONTENTS
General Information..........................................................B-2
Financial Statements.........................................................B-2
Pro Forma Combined Statement of Assets and Liabilities for the
O'Shaughnessy Dogs of the Market(TM) Fund and O'Shaughnessy
Cornerstone Value Fund as of September 30, 1999 (Unaudited).............F-1
Pro Forma Combined Statement of Operations for the
O'Shaughnessy Dogs of the Market(TM) Fund and O'Shaughnessy
for the Cornerstone Value Fund year ended September 30, 1999
(Unaudited).............................................................F-2
The date of this Statement of Additional Information is ________________, 1999
B-1
<PAGE>
GENERAL INFORMATION
The shareholders of the O'Shaughnessy Dogs of the Market(TM) Fund (the
"Dogs of the Market Fund" or an "Acquired Fund") and O'Shaughnessy Aggressive
Growth Fund (the "Aggressive Growth Fund" or an "Acquired Fund," and together
with the Dogs of the Market Fund, the "Acquired Funds") of O'Shaughnessy Funds
are each being asked to approve an Agreement and Plan of Reorganization (the
"Plan"). The Plan provides for the acquisition by the O'Shaughnessy Cornerstone
Growth Fund (the "Cornerstone Growth Fund" or an "Acquiring Fund") of
substantially all of the assets, and assumption of substantially all of the
liabilities, of the Aggressive Growth Fund, solely in exchange for an equal
aggregate value of newly-issued shares of the O'Shaughnessy Cornerstone Growth
Fund. The Plan further provides for the acquisition by the O'Shaughnessy
Cornerstone Value Fund (the "Cornerstone Value Fund" or an "Acquired Fund" and
together with the Cornerstone Growth Fund, the "Acquiring Funds") of
substantially all of the assets, and assumption of substantially all of the
liabilities, of the Dogs of The Market Fund, solely in exchange for an equal
aggregate value of newly-issued shares of the O'Shaughnessy Cornerstone Value
Fund. Each such transaction is referred to herein as a "Reorganization" and
collectively, as the "Reorganizations." The consummation of a Reorganization is
not conditioned upon the consummation of the other Reorganization. The Acquired
Funds and the Acquiring Funds are sometimes collectively referred to herein as
the "Funds".
A Joint Special Meeting of the Acquired Funds' shareholders to consider the
Reorganizations will be held at the Stamford Marriott, 2 Stamford Forum,
Stamford, Connecticut on January 21, 2000, at 4:00 p.m., Eastern Time. The
approximate mailing date of the Proxy Statement and Prospectus is December __,
1999.
For further information about the Reorganizations, see the Combined Proxy
Statement and Prospectus.
FINANCIAL STATEMENTS
Unaudited Pro forma financial statements reflecting consummation of the
Value Funds Reorganization are included herein.
Audited financial statements and accompanying notes for the fiscal year
ended September 30, 1998 for the Funds and the independent auditor's report
thereon are incorporated herein by reference from the Funds' respective Annual
Report to Shareholders, which accompany this Statement of Additional
Information.
Unaudited financial statements and accompanying notes for the six months
ended March 31, 1999 for the Funds are incorporated by reference from the Funds'
respective Semi-Annual Report to Shareholders for the six-month period ended
March 31, 1999, which are incorporated herein by reference and accompany this
Statement of Additional Information.
B-2
<PAGE>
O'SHAUGHNESSY CORNERSTONE VALUE FUND
(COMBINED WITH DOGS OF THE MARKET FUND)
UNAUDITED PROFORMA STATEMENT OF ASSETS AND LIABILITIES
AS OF SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Pro Forma
Cornerstone Dogs of the Pro Forma Conrnerstone
Value Fund Market Fund Adjustments Value Fund
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Investments in securities, at value $ 25,949,235 17,667,126 43,616,361
Cash 10,744(1) 10,744
Receivables: 0
Portfolio securities sold 504,912 341,560 846,472
Fund shares sold 500 3,004 3,504
Dividends and interest 97,720 47,527 145,247
Other 5,005 3,500 8,505
Deferred organization costs 10,532 10,744 (10,744)(1) 10,532
Prepaid expenses and other 11,622 17,078 28,700
------------ ------------ ------------ ------------
Total assets 26,579,526 18,090,539 0 44,670,065
------------ ------------ ------------ ------------
LIABILITIES
Payables:
Fund shares repurchased 9,358 7,517 16,875
Fund advanced by custodian 233,414 317,354 550,768
Advisory fee 16,898 2,908 19,806
Administration fee 3,397 1,606 5,003
Accrued expenses 17,867 14,755 32,622
------------ ------------ ------------ ------------
Total liabilities 280,934 344,140 0 625,074
------------ ------------ ------------ ------------
NET ASSETS $ 26,298,592 17,746,399 0 44,044,991
============ ============ ============ ============
COMPONENTS OF NET ASSETS
Paid-in capital $ 24,814,069 16,996,655 1,552,944(2) 43,363,668
(Accumulated) Undistributed net
investment (loss) income 565,497 271,390 (271,390)(2) 565,497
(Accumulated) Undistributed net realized
(loss) gain on investment transactions 1,820,214 1,281,554 (1,281,554)(2) 1,820,214
Net unrealized appreciation (depreciation)
of investments (901,188) (803,200) (1,704,388)
------------ ------------ ------------ ------------
Net assets $ 26,298,592 17,746,399 0 44,044,991
============ ============ ============ ============
</TABLE>
- ----------
(1) Unamortized Organization Costs of the Acquired Fund to be liquidated on
effective date of the respective Reorganization.
(2) (Accumulated) Undistributed Net Investment Income and Gain to be
distributed and assumed to be reinvested in additional Fund shares.
(3) Assumed expense reductions during the period reflecting Combined Funds.
(4) Assumed expense subsidy not needed during period reflecting Combined Funds.
F-1
<PAGE>
O'SHAUGHNESSY CORNERSTONE VALUE FUND
(COMBINED WITH DOGS OF THE MARKET FUND)
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Pro Forma
Cornerstone Dogs of the Pro Forma Conrnerstone
Value Fund Market Fund Adjustments Value Fund
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Income
Dividends $ 968,020 567,835 1,535,855
Interest 8,380 2,862 11,242
Other 122,728 24,237 146,965
----------- ----------- ----------- -----------
Total income 1,099,128 594,934 0 1,694,062
----------- ----------- ----------- -----------
Expenses
Advisory fees 204,286 164,117 368,403
Transfer agent fees 32,449 26,293 58,742
Administration fees 37,053 32,127 69,180
Custodian fees 26,647 16,315 (5,000)(3) 37,962
Registration fees 20,878 25,793 (10,000)(3) 36,671
Accounting fees 21,768 20,985 (20,985)(3) 21,768
Audit fees 7,794 7,794 (7,794)(3) 7,794
Reports to shareholders 10,001 21,999 (10,000)(3) 22,000
Legal fees 4,000 2,000 (2,000)(3) 4,000
Insurance fees 2,218 2,052 4,270
Directors' fees 7,399 7,399 14,798
Miscellaneous fees 3,114 3,000 (3,000)(3) 3,114
Amortization of deferred organization costs 5,038 5,037 (5,037)(3) 5,038
----------- ----------- ----------- -----------
Total expenses 382,645 334,911 (63,816) 653,740
----------- ----------- ----------- -----------
Less: expense reimbursement (92,281) 92,281(4) 0
Net expenses 382,645 242,630 28,465 653,740
----------- ----------- ----------- -----------
NET INVESTMENT (LOSS) INCOME 716,483 352,304 (28,465) 1,040,322
----------- ----------- ----------- -----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain from security transactions 2,269,047 1,470,454 3,739,501
Net change in unrealized appreciation
of investments 553,549 694,626 1,248,175
----------- ----------- ----------- -----------
Net realized and unrealized gain
on investments 2,822,596 2,165,080 0 4,987,676
----------- ----------- ----------- -----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 3,539,079 2,517,384 (28,465) 6,027,998
=========== =========== =========== ===========
</TABLE>
- ----------
(1) Unamortized Organization Costs of the Acquired Fund to be liquidated on
effective date of the respective Reorganization.
(2) (Accumulated) Undistributed Net Investment Income and Gain to be
distributed and assumed to be reinvested in additional Fund shares.
(3) Assumed expense reductions during the period reflecting Combined Funds.
(4) Assumed expense subsidy not needed during period reflecting Combined Funds.
F-2
<PAGE>
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION
Each officer and director of O'Shaughnessy Funds shall be indemnified by
O'Shaughnessy Funds to the full extent permitted under the General Laws of the
State of Maryland, except that such indemnity shall not protect any such person
against any liability to O'Shaughnessy Funds or any stockholder thereof to which
such person would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office. Absent a court determination that an officer or director
seeking indemnification was not liable on the merits or guilty of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office, the decision by O'Shaughnessy Funds to
indemnify such person must be based upon the reasonable determination of
independent legal counsel or the vote of a majority of a quorum of the directors
who are neither "interested persons," as defined in Section 2(a)(19) of the
Investment Company Act, nor parties to the proceeding ("non-party independent
directors"), after review of the facts, that such officer or director is not
guilty of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office. Each officer and director
of O'Shaughnessy Funds claiming indemnification within the scope of this Article
V shall be entitled to advances from O'Shaughnessy Funds for payment of the
reasonable expenses incurred by him in connection with proceedings to which he
is a party in the manner and to the full extent permitted under the General Laws
of the State of Maryland without a preliminary determination as to his ultimate
entitlement to indemnification (except as set forth below); provided, however,
that the person seeking indemnification shall provide to O'Shaughnessy Funds a
written affirmation of his good faith belief that the standard of conduct
necessary for indemnification by O'Shaughnessy Funds has been met and a written
undertaking to repay any such advance, if it should ultimately be determined
that the standard of conduct has not been met, and provided further that at
least one of the following additional conditions is met: (a) the person seeking
indemnification shall provide a security in form and amount acceptable to
O'Shaughnessy Funds for his undertaking; (b) O'Shaughnessy Funds is insured
against losses arising by reason of the advance; (c) a majority of a quorum of
non-party independent directors, or independent legal counsel in a written
opinion, shall determine, based on a review of facts readily available to
O'Shaughnessy Funds at the time the advance is proposed to be made, that there
is reason to believe that the person seeking indemnification will ultimately be
found to be entitled to indemnification. O'Shaughnessy Funds may purchase
insurance on behalf of an officer or director protecting such person to the full
extent permitted under the General Laws of the State of Maryland, from liability
arising from his activities as officer or director of O'Shaughnessy Funds.
O'Shaughnessy Funds, however, may not purchase insurance on behalf of any
officer or director of O'Shaughnessy Funds that protects or purports to protect
such person from liability to O'Shaughnessy Funds or to its stockholders to
which such officer or director would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office. O'Shaughnessy Funds may indemnify, make
advances or purchase insurance to the extent provided in this Article V on
behalf of an employee or agent who is not an officer or director of
O'Shaughnessy Funds. The Registrant has purchased an insurance policy insuring
its officers and Directors against liabilities, and certain costs of defending
claims against such officers and Directors, to the extent such officers and
Directors are not found to have committed conduct constituting willful
misfeasance, bad faith, gross negligence or reckless disregard in the
performance of their duties. Article IV of the Management Agreement between the
Registrant and O'Shaughnessy Capital Management limits the liability of
O'Shaughnessy Capital Management to liabilities arising from willful
misfeasance, bad faith or gross negligence in the performance of their
C-1
<PAGE>
respective duties or from reckless disregard of their respective duties and
obligations. In Section 6(b) of the Distribution Agreement relating to the
securities being offered hereby, the Registrant agrees to indemnify the
Distributor and each person, if any, who controls the Distributor within the
meaning of the Securities Act of 1933 (the "Securities Act"), against certain
types of civil liabilities arising in connection with this Registration
Statement or the Proxy Statement andProspectus and Statement of Additional
Information. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to Directors, officers and controlling persons
of the Registrant and the principal underwriter pursuant to the foregoing
provisions or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a Director, officer,
or controlling person of the Registrant and the principal underwriter in
connection with the successful defense of any action, suit or proceeding) is
asserted by such Director, officer or controlling person or the principal
underwriter in connection with the shares being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
ITEM 16. EXHIBITS
Exhibit No.
1. (a) Articles of Incorporation of the Registrant (1)
(b) Articles of Amendment, dated July 2, 1996 (1)
2. Amended and Restated By-laws of the Registrant (2)
3. Not applicable
4. Form of Agreement and Plan of Reorganization (filed herewith as
Exhibit I to the Proxy Statement and Prospectus contained in this
Registration Statement)
5. Instrument defining rights of shareholders (incorporated by
reference to Exhibits 1(a), 1(b) and 2 above)
6. Management Agreement between the Registrant and O'Shaughnessy
Capital Management, Inc. (2)
7. Distribution Agreement between the Registrant and First Fund
Distributors, Inc. (2)
8. Not applicable
9. Custody Agreement between the Registrant and Firstar Trust Company
(2)
10. Not applicable
11. Opinion and consent of Swidler Berlin Shereff Friedman, LLP,
counsel to the Registrant (3)
12. Opinion and consent of Swidler Berlin Shereff Friedman, LLP,
counsel to the Registrant, regarding certain tax matters (3)
13. (a) Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between the Registrant and Firstar
Trust Company (2)
(b) Administration Agreement between the Registrant and Investment
Company Administration, LLC (2)
(c) Fund Accounting Agreement between the Registrant and Firstar Trust
Company (2)
14. Consent of McGladrey & Pullen, LLP
15. Not applicable
16. Power of Attorney (included on the signature page of this
Registration Statement)
C-2
<PAGE>
17 (a) Prospectus dated November 30, 1998 of the O'Shaughnessy
Cornerstone Value Fund and the O'Shaughnessy Cornerstone Growth
Fund
(b) Prospectus dated November 30, 1998 of the O'Shaughnessy Dogs of
the Market(TM)Fund
(c) Prospectus dated November 30, 1998 of the O'Shaughnessy Aggressive
Growth Fund
(d) Combined Statement of Additional Information dated November 30,
1998 of the Funds
(e) Combined Semi-Annual Report to Shareholders of the O'Shaughnessy
Cornerstone Value Fund and the O'Shaughnessy Cornerstone Growth
Fund for the six-month period ended March 31, 1999.
(f) Form of Proxy for the O'Shaughnessy Dogs of the Market(TM) Fund.
(g) Form of Proxy for the O'Shaughnessy Aggressive Growth Fund.
(h) President's Letter.
- ----------
(1) Previously filed with Registration Statement on Form N-1A (File No.
333-7595) on July 3, 1996, and incorporated herein by this reference.
(2) Previously filed with Pre-Effective Amendment No. 1 to the Registration
Statement on Form N-1A (File No. 333-7595) on October 9, 1996, and
incorporated herein by this reference.
(3) To be filed by amendment.
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant agrees to prior to any public reoffering of
the securities registered through the use of a prospectus which is a part of
this Registration Statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the Securities Act, the
reoffering prospectus will contain the information called for by the applicable
registration form for reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
(b) The undersigned Registrant agrees that every prospectus that is filed
under paragraph (a) above will be filed as part of an amendment to the
Registration Statement and will not be used until the amendment is effective,
and that, in determining any liability under the 1933 Act, each post-effective
amendment shall be deemed to be a new registration statement for the securities
offered therein, and the offering of the securities at that time shall be deemed
to be the initial bona fide offering of them.
C-3
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement has
been signed on behalf of the Registrant, in the city of Greenwich, and State of
Connecticut, on the 15th day of November, 1999.
O'SHAUGHNESSY FUNDS, INC.
(Registrant)
By: /s/ James P. O'Shaughnessy
------------------------------------
James P. O'Shaughnessy,
President
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned whose
signature appears below hereby constitutes and appoints James P. O'Shaughnessy,
Christopher Loveless and Daniel Kraninger and each of them (with full power of
each of them to act alone), his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution for him and on his behalf,
and in his name, place and stead, in any all capacities to execute and sign any
and all amendments or post-effective amendments to this Registration Statement,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact or any of them or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof and the Registrant hereby
confers like authority on its behalf.
As required by the Securities Act of 1933, this Registration Statement has
been signed by the following persons in the capacities and on the dates
indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ James P. O'Shaugnessy President (Chief Executive November 15, 1999
- ------------------------- Officer)
James P. O'Shaughnessy
/s/ James P. O'Shaugnesssy Treasurer (Chief Financial November 15, 1999
- ------------------------- and Accounting Officer)
James P. O'Shaughnessy
/s/ C. Flemming Heilmann Director November 15, 1999
- -------------------------
C. Flemming Heilmann
/s/ Joseph John Mcaleer Director November 15, 1999
- -------------------------
Joseph John McAleer
/s/ Robert E. Ix Director November 15, 1999
- -------------------------
Robert E. Ix
C-4
<PAGE>
EXHIBIT INDEX
EXHIBIT NO.
-----------
14 -- Consent of McGladrey & Pullen, LLP
17 (a) -- Prospectus dated November 30, 1998 of the O'Shaughnessy
Cornerstone Value Fund and the O'Shaughnessy Cornerstone Growth
Fund
(b) -- Prospectus dated November 30, 1998 of the O'Shaughnessy Dogs of
the Market(TM) Fund
(c) -- Prospectus dated November 30, 1998 of the O'Shaughnessy
Aggressive Growth Fund
(d) -- Combined Statement of Additional Information dated November 30,
1998 of the Funds
(e) -- Combined Semi-Annual Report to Shareholders of the O'Shaughnessy
Cornerstone Value Fund and the O'Shaughnessy Cornerstone Growth
Fund for the six-month period ended March 31, 1999
(f) -- Form of Proxy for the O'Shaughnessy Dogs of the Market(TM) Fund.
(g) -- Form of Proxy for the O'Shaughnessy Aggressive Growth Fund.
(h) -- President's letter.
McGLADREY & PULLEN, LLP
Certified Public Accountants and Consultants
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our reports dated October 23, 1998 on the financial
statements of O'Shaughnessy Dogs of the Market Fund, O'Shaughnessy Aggressive
Growth Fund, Cornerstone Value Fund and the Cornerstone Growth Fund, which
appear in the 1998 Annual Reports to Shareholders and which are incorporated
herein by reference in the Registration Statement on Form N-14 of the
O'Shaughnessy Funds, Inc. as filed with the Securities and Exchange Commission.
We also consent to the reference to our Firm in the captions "Financial
Highlights" and "Experts" in the Form N-14.
/s/ McGladrey & Pullen, LLP
McGladrey & Pullen, LLP
New York, New York
November 22, 1999
O'Shaughnessy Funds Inc.
Building New Standards For Investment Success
Cornerstone Growth Fund
Cornerstone Value Fund
35 Mason Street, Greenwich, Connecticut 06830
Toll-Free 877-OSFUNDS (673-8637)
www.osfunds.com
NASDQ Symbols: OSCGX (Cornerstone Growth Fund)
OSCVX (Cornerstone Value Fund)
THE FUNDS
O'Shaughnessy Cornerstone Growth Fund ("Cornerstone Growth Fund") and
O'Shaughnessy Cornerstone Value Fund ("Cornerstone Value Fund") (each a "Fund,"
and together, the "Funds") are separate investment portfolios or series of
O'Shaughnessy Funds, Inc., an open-end, diversified management investment
company or mutual fund.
INVESTMENT OBJECTIVE
The investment objective of the Cornerstone Growth Fund is to seek long-term
growth of capital. The investment objective of the Cornerstone Value Fund is to
seek total return, consisting of capital appreciation and current income.
STRATEGY INDEXING
Each Fund seeks to achieve its investment objective through a process of
Strategy Indexing which is pursued through the implementation of an investment
strategy developed by O'Shaughnessy Capital Management, Inc., the Funds'
investment manager (the "Manager"). The Funds will invest substantially all of
their assets in common stocks selected through such strategies.
The investment strategy of Cornerstone Growth Fund (the "Cornerstone Growth
Strategy") entails the selection of 50 common stocks from the O'Shaughnessy All
Stocks Universe which meet certain criteria, as described in this prospectus.
The investment strategy of Cornerstone Value Fund (the "Cornerstone Value
Strategy") entails the selection of 50 common stocks from the O'Shaughnessy
Market Leaders Universe which meet certain criteria, as described below. (The
Cornerstone Growth Strategy and the Cornerstone Value Strategy are each referred
to as a "Strategy.")
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
PROSPECTUS
November 30, 1998
<PAGE>
This Prospectus contains the information you should know about the Funds before
you invest. Please keep it for future reference. A statement containing
additional information about the Funds, dated November 30, 1998, has been filed
with the Securities and Exchange Commission and is incorporated by reference
into this Prospectus. It is available, at no charge, by calling or by writing
the Funds at the telephone number or address set forth above. The SEC maintains
an internet site (http://www.sec.gov) that contains the SAI, other material
incorporated by reference and other information about companies that file
electronically with the SEC. O'Shaughnessy
Capital Management, Inc. - Manager
First Fund Distributors, Inc. - Distributor
RISK/REWARD
Each Fund's Strategy provides a rigorous and disciplined approach to investing,
based on a buy and hold philosophy over the course of each year, and has, in the
Manager's judgment, the potential to provide superior returns. However, each
Fund intends to adhere to its respective Strategy (subject to applicable federal
tax requirements relating to mutual funds) regardless of the performance of the
stock market or other economic factors or indicators in a particular period,
which may result in losses to the Fund.
PURCHASE OF SHARES
Shares of the Funds will be offered to investors during the continuous offering
at a price equal to the next determined net asset value per share. There are no
fees or charges to purchase or sell shares or to reinvest dividends, however, a
fee applies to certain short-term redemptions, see "Information About Your
Account - Redemption of Shares". There are no Rule 12b-1 fees.
TABLE OF CONTENTS
About the Funds ............................................ 3
Financial Highlights ....................................... 5
Management and Organization of the Funds ................... 18
Information about Your Account ............................. 20
Information on Distributions and Taxes ..................... 27
Performance Information .................................... 28
Net Asset Value ............................................ 28
Other Shareholder Services ................................. 29
2
<PAGE>
ABOUT THE FUNDS
TRANSACTION AND FUND EXPENSES
The following table and example should help you understand the kinds of expenses
you will bear directly or indirectly as a Fund shareholder. In the table,
"Shareholder Transaction Expenses, shows that you pay no sales charges. All the
money you invest in the Funds goes to work for you, subject to the fees noted in
the table. "Annual Fund Operating Expenses shows how much it would cost to
operate each Fund for a year, based on estimated expenses through the end of
each Fund's first full year. These costs you pay indirectly, because they are
deducted from the Fund's total assets before the daily share price is calculated
and before dividends and other distributions are made. You will not see these
expenses on your account statement.
FEE TABLE
Shareholder Transaction Expenses:
Cornerstone Cornerstone
Growth Fund Value Fund
----------- ----------
Maximum Sales Charge Imposed on
Purchases (as a percentage of
offering price) None None
Maximum Sales Charge Imposed on
Dividend Reinvestments None None
Deferred Sales Charge (as a percentage
of original purchase price or redemption
proceeds, whichever is lower) None None
Redemption Fee (a) (on shares held
less than 90 days) 1.50% 1.50%
Exchange Fee (a) (b) (on shares held
less than 90 days) 1.50% 1.50%
Annual Fund Operating Expenses
(as a percentage of average net assets):
Cornerstone Cornerstone
Growth Fund Value Fund
----------- ----------
Management Fees (c) 0.74% 0.74%
Rule 12b-1 Fees None None
Other Expenses 0.42% 0.71%
Total Fund Operating Expenses 1.16% 1.45%
(a) A 1.5% redemption fee, payable to the Funds, will be assessed on shares
purchased and held for less than 90 days. Shareholders who effect
redemptions of Fund shares by wire transfer will pay a $12.00 wire transfer
fee. See "Information About Your Account - Redemption of Shares."
(b) Shareholders who effect exchanges of shares of a Fund for shares of another
fund by telephone in accordance with the exchange privilege will be charged
a $5.00 exchange fee in addition to any fees applicable as indicated in
footnote (a). See "Information About Your Account - Exchange Privilege."
(c) See "Management and Organization of the Funds - Management."
3
<PAGE>
Example: An investor would pay the following expenses on a $1,000 investment
assuming: (1) the operating expense ratio set forth in the table above; (2) a 5%
annual return through out the period; and (3) redemption at the end of the
period: Cornerstone
Cornerstone Growth Fund Value Fund
- ----------- ----------- ----------
One year $ 12 $ 15
Three years $ 37 $ 46
Five years $ 64 $ 80
Ten years $142 $176
The table and example are intended to assist investors in understanding the
costs and expenses that a shareholder in each Fund will bear directly or
indirectly. The example should not be considered a representation of past or
future expenses or annual rate of return, and actual expenses or annual rate of
return may be more or less than those shown.
4
<PAGE>
FINANCIAL HIGHLIGHTS
CORNERSTONE GROWTH FUND
Per Share Operating Performance
(For a share outstanding throughout the period)
Year November 1, 1996*
Ended through
September 30, 1998 September 30, 1997
------------------ ------------------
Net asset value, beginning of period $ 15.30 $ 10.00
------- -------
Income from investment operations:
Net investment (loss) income (0.07) (0.02)
Net realized & unrealized (loss) gain
on investments (3.88) 5.32
Total from investment operations (3.95) 5.30
Less distributions:
From net investment income -- --
From net realized capital gains (1.78) --
(1.78) --
------- -------
Net asset value, end of period $ 9.57 $ 15.30
======= =======
Total Return (27.63%) 53.05%**
Ratios/supplemental data:
Net assets, end of period (millions) $ 80.4 $ 91.3
Ratio of expenses to average net assets:
Before expense reimbursement 1.16% 1.63%+
After expense reimbursement -- 1.56%+
Ratio of net investment income
(loss) to average net assets:
Before expense reimbursement (0.86%) (1.19%)+
After expense reimbursement -- (1.12%)+
Portfolio turnover rate 119.98% 15.52%
* Commencement of operations.
** Not Annualized.
+ Annualized.
5
<PAGE>
FINANCIAL HIGHLIGHTS
CORNERSTONE VALUE FUND
Per Share Operating Performance
(For a share outstanding throughout the period)
Year November 1, 1996*
Ended through
September 30, 1998 September 30, 1997
------------------ ------------------
Net asset value, beginning of period $ 11.50 $ 10.00
------- -------
Income from investment operations:
Net investment (loss) income 0.21 0.15
Net realized & unrealized (loss) gain
on investments (0.70) 1.37
Total from investment operations (0.49) 1.52
Less distributions:
From net investment income (0.17) (0.02)
From net realized capital gains -- --
(0.17) (0.02)
------- -------
Net asset value, end of period $ 10.84 $ 11.50
======= =======
Total Return (4.32%) 15.21%**
Ratios/supplemental data:
Net assets, end of period (millions) $ 21.9 $ 13.5
Ratio of expenses to average net assets:
Before expense reimbursement 1.45% 2.66%
After expense reimbursement 1.45% 1.85%
Ratio of net investment income
(loss) to average net assets:
Before expense reimbursement 2.12% 1.93%
After expense reimbursement 2.12% 2.73%
Portfolio turnover rate 51.56% 2.01%
* Commencement of operations.
** Not Annualized.
+ Annualized.
6
<PAGE>
INVESTMENT OBJECTIVE AND STRATEGIES
To help you decide whether either or both of the Cornerstone Growth Fund and
Cornerstone Value Fund are appropriate for you, this section takes a closer look
at each Fund's investment objective and Strategy.
WHAT IS EACH FUND'S OBJECTIVE?
The investment objective of the Cornerstone Growth Fund is to seek long-term
growth of capital. The investment objective of the Cornerstone Value Fund is to
seek total return, consisting of capital appreciation and current income. There
can be no assurance that either Fund will achieve its investment objective.
HOW DOES EACH FUND ACHIEVE ITS OBJECTIVE?
The Cornerstone Growth Fund seeks to achieve its investment objective through a
process of Strategy Indexing , which is pursued through the implementation of
the Cornerstone Growth Strategy. The Cornerstone Value Fund seeks to achieve its
investment objective through a process of Strategy Indexing , which is pursued
through the implementation of the Cornerstone Value Strategy. Each Strategy was
developed by the Manager.
Other than assets temporarily maintained in cash or liquid short-term securities
pending investment, to meet redemption requests or to comply with federal tax
laws applicable to mutual funds, each Fund will invest substantially all of its
assets in common stocks selected through the respective Strategy, as described
more fully below.
WHAT IS THE CORNERSTONE GROWTH STRATEGY?
The Cornerstone Growth Strategy selects the 50 stocks with the highest one-year
price appreciation as of the date of purchase from the O'Shaughnessy All Stocks
Universe that also meet the following criteria: (i) annual earnings that are
higher than the previous year, (ii) a price-to-sales ratio below 1.5, and (iii)
historical trading volume sufficient to allow for the Fund to purchase the
required number of shares as of the Re-Balance Date (as defined in this
prospectus). A stock's price-to-sales ratio is computed by dividing the market
value of the stock by the issuer's most recent twelve month sales. See "How does
investment through the Cornerstone Growth Strategy and the Cornerstone Value
Strategy work?
WHAT IS THE O'SHAUGHNESSY ALL STOCKS UNIVERSE?
The O'Shaughnessy All Stocks Universe consists of all the domestic and foreign
common stocks in the Standard & Poor's Compustat ("S&P Compustat") database (the
"COMPUSTAT Database") with market capitalizations exceeding $172 million.
Currently, the COMPUSTAT Database consists of the stocks (including the American
Depository Receipts ("ADRs")) of 9,898 issuers, and the O'Shaughnessy All Stocks
Universe consists of the stocks of 3,762 issuers. What is the Cornerstone Value
Strategy?
The Cornerstone Value Strategy involves the selection of the 50 highest
dividend-yielding common stocks from the O'Shaughnessy Market Leaders Universe
that have historical trading volume sufficient to allow for the Fund to purchase
the required number of shares as of the Re-Balance Date (as defined below). See
"How does investment through the Cornerstone Growth Strategy and the Cornerstone
Value Strategy work?"
WHAT IS THE O'SHAUGHNESSY MARKET LEADERS UNIVERSE?
The O'Shaughnessy Market Leaders Universe consists of those domestic and foreign
stocks in the COMPUSTAT Database which are not power utility companies and which
have (i) market capitalizations exceeding the average of the COMPUSTAT Database;
(ii) twelve month sales which are fifty percent greater than the average for the
COMPUSTAT Database; (iii) a number of shares outstanding which exceeds the
average for the COMPUSTAT Database; and (iv) cash flow which exceeds the average
for the COMPUSTAT Database. Currently, the O'Shaughnessy Market Leaders Universe
consists of the stocks of 624 issuers.
7
<PAGE>
HOW DOES INVESTMENT THROUGH THE CORNERSTONE GROWTH STRATEGY AND THE CORNERSTONE
VALUE STRATEGY WORK?
Upon commencement of operations of the Cornerstone Growth Fund and Cornerstone
Value Fund, the Manager purchased 50 stocks for each Fund as dictated by the
Cornerstone Growth Strategy and the Cornerstone Value Strategy, respectively,
based on information as of commencement of operations of the Fund. Each Fund's
holdings of each stock in its portfolio were initially be weighted equally by
dollar amount. Thereafter, the Manager re-balances the portfolio of each Fund
annually in the first month of the succeeding year (the "Re-Balance Date"), in
accordance with the Fund's respective Strategy, based on information determined
on or about the immediately preceding December 31. That is, on the Re-Balance
Date of each year, stocks meeting the Strategy's criteria based on information
determined on or about immediately preceding December 31 will be purchased for
the Fund to the extent not then held, stocks which no longer meet the criteria
as of such date will be sold, and the holdings of all stocks in the Fund that
continue to meet the criteria will be appropriately increased or decreased to
result in equal weighting of all stocks in the portfolio.
When a Fund receives new cash flow from the sale of its shares over the course
of the year, such cash will first be used to the extent necessary to meet
redemptions. The balance of any such cash will be invested in the 50 stocks
selected for the Fund pursuant to the applicable Strategy as of the most recent
rebalancing of the Fund's portfolio, in proportion to the current weightings of
such stocks in the portfolio and without any intention to rebalance the
portfolio on an interim basis. It is anticipated that such purchases will
generally be made on a weekly basis, but may be on a more or less frequent basis
in the discretion of the Manager, depending on certain factors, including the
size of the Fund and the amount of cash to be invested. To the extent
redemptions exceed new cash flow into a Fund, the Fund will meet redemption
requests by selling securities on a pro rata basis, based on the current
weightings of such securities in the portfolio. Thus, interim purchases and
sales of securities between annual Re-Balance Dates will be based on current
portfolio weightings and will be made without regard to whether or not a
particular security continues to meet the Strategy's criteria.
WILL THE MANAGER DEVIATE FROM THE STRATEGIES?
The Manager is committed to a rigorous, disciplined approach and cannot
presently anticipate any circumstances which would cause it to diverge from the
Strategies described above in managing the Funds.
IS THERE ANYTHING ELSE I SHOULD KNOW ABOUT THE STRATEGIES?
Each Fund offers a disciplined approach to investing, based on a buy and hold
philosophy over the course of each year, which ignores market timing and rejects
active management. Each Fund will adhere to its respective Strategy regardless
of the performance of the stock market in a particular period.
The Manager anticipates that the 50 stocks held in each Fund's portfolio will
remain the same throughout the course of a year, despite any adverse
developments concerning an issuer, an industry, the economy or the stock market
generally. However, if during the course of a year it is determined that
earnings or other factual criteria that form the basis for selecting a security
are false or incorrect, the Manager reserves the right to replace such a
security with another meeting the criteria of the strategy. Also, due to
purchases and redemptions of Fund shares during the year, changes in the market
value of the stock positions held in a Fund's portfolio and compliance with the
federal tax laws, it is likely that stock positions will not be weighted equally
at all times during a year.
The Funds will be substantially fully invested in stocks selected as described
above at all times.
HOW CAN I DECIDE IF THE FUNDS ARE AN APPROPRIATE INVESTMENT FOR ME?
Consider your investment goals, your time horizon for achieving them, and your
tolerance of risk. The Funds are not appropriate investments for those who seek
short-term investments, since the Manager expects the benefits of investing in
the Funds to be derived from investing assets in accordance with the Cornerstone
8
<PAGE>
Growth Strategy and the Cornerstone Value Strategy over the long-term. See "What
is the historical performance of the Strategies?" below. A discussion of the
risks associated with investment in the Funds is contained in "Risk Factors"
below.
IS THERE OTHER INFORMATION I SHOULD REVIEW BEFORE MAKING A DECISION?
Be sure to review "Other Investment Policies and Practices" which discusses
certain additional investment practices of the Funds. In addition, historical
information relating to the performance of the Cornerstone Growth Strategy and
the Cornerstone Value Strategy over time is discussed below.
WHAT IS THE HISTORICAL PERFORMANCE OF THE STRATEGIES?
The following graphs and tables compare the actual performance of the S&P 500
Index (the "S&P 500"), the hypothetical performance of each the Cornerstone
Growth Strategy and Cornerstone Value Strategy for the historical periods
indicated and the actual performance of the Cornerstone Growth Fund and
Cornerstone Value Fund for 1997. Returns for each Strategy are the returns on a
hypothetical portfolio of stocks which was rebalanced annually in accordance
with such Strategy for the historical periods indicated. The Strategies have
been developed and tested solely by the Manager.
Actual performance of the Funds may differ from the quoted performance of the
Strategies for the following reasons: each Fund may not be fully invested at all
times; not all stocks in the Fund's portfolio may be weighted equally at all
times due to appreciation or depreciation in a stock's value; purchases and
sales of stocks for the Fund's portfolio are likely to occur between annual
rebalancings due to cash inflows and outflows (from purchases and redemptions of
Fund shares) during the year; in managing the Funds, the Manager may make
limited modifications to the Strategies as necessary to comply with federal tax
laws; and the returns of the Strategies do not reflect the advisory fees,
commission costs, expenses or taxes which would be borne by the Funds.
Because the returns for the Strategies are hypothetical, they do not represent
actual trading or the impact that material economic and market factors might
have had on the Manager's decision-making under actual circumstances. However,
except as described above, the Manager can presently foresee no circumstances
that would cause deviation from the Strategies in managing the Funds. All
returns contained in the graphs and charts below reflect reinvestment of
dividends and other earnings.
Cornerstone Cornerstone
Date S&P 500 Growth Fund Date S&P 500 Growth Fund
- ---- ------- ----------- ---- ------- -----------
31-Dec-52 10,000 10,000 31-Dec-75 78,352 259,334
31-Dec-53 9,901 10,040 31-Dec-76 97,031 343,618
31-Dec-54 15,111 15,733 31-Dec-77 90,064 434,333
31-Dec-55 19,880 20,515 31-Dec-78 95,973 600,683
31-Dec-56 21,184 24,208 31-Dec-79 113,670 833,147
31-Dec-57 18,900 19,875 31-Dec-80 150,522 1,355,530
31-Dec-58 27,096 30,369 31-Dec-81 143,131 1,233,532
31-Dec-59 30,336 37,688 31-Dec-82 173,776 1,691,173
31-Dec-60 30,479 42,436 31-Dec-83 212,892 2,244,186
31-Dec-61 38,675 64,121 31-Dec-84 226,241 2,199,303
31-Dec-62 35,298 53,093 31-Dec-85 299,000 3,134,006
31-Dec-63 43,346 64,136 31-Dec-86 354,225 3,688,725
31-Dec-64 50,490 83,377 31-Dec-87 372,751 3,489,534
31-Dec-65 56,776 120,146 31-Dec-88 435,410 4,525,926
31-Dec-66 51,064 120,026 31-Dec-89 572,521 5,603,096
31-Dec-67 63,309 220,007 31-Dec-90 554,372 5,418,194
31-Dec-68 70,311 331,110 31-Dec-91 723,733 8,203,146
31-Dec-69 64,335 238,068 31-Dec-92 779,243 10,294,948
31-Dec-70 66,915 231,878 31-Dec-93 857,090 13,414,317
31-Dec-71 76,490 306,311 31-Dec-94 868,318 12,703,358
31-Dec-72 91,008 366,655 31-Dec-95 1,187,858 15,015,370
31-Dec-73 77,666 265,825 31-Dec-96 1,461,897 19,748,214
31-Dec-74 57,108 188,470 31-Dec-97 1,949,586 25,929,405
9
<PAGE>
O'Shaughnessy Cornerstone Growth Strategy Index
vs. the S&P 500* (December 31, 1952 - December 31, 1997)
Cornerstone Cornerstone
Year Ending S&P 500 Growth Strategy Year Ending S&P 500 Growth Strategy
- ----------- ------- --------------- ----------- ------- ---------------
12/31/53 -0.99% 0.40% 12/31/76 23.84% 32.50%
12/31/54 52.62% 56.70% 12/31/77 -7.18% 26.40%
12/31/55 31.56% 30.40% 12/31/78 6.56% 38.30%
12/31/56 6.56% 18.00% 12/31/79 18.44% 38.70%
12/31/57 -10.78% -17.90% 12/31/80 32.42% 62.70%
12/31/58 43.36% 52.80% 12/31/81 -4.91% -9.00%
12/31/59 11.96% 24.10% 12/31/82 21.41% 37.10%
12/31/60 0.47% 12.60% 12/31/83 22.51% 32.70%
12/31/61 26.89% 51.10% 12/31/84 6.27% -2.00%
12/31/62 -8.73% -17.20% 12/31/85 32.16% 42.50%
12/31/63 22.80% 20.80% 12/31/86 18.47% 17.70%
12/31/64 16.48% 30.00% 12/31/87 5.23% -5.40%
12/31/65 12.45% 44.10% 12/31/88 16.81% 29.70%
12/31/66 -10.06% -0.10% 12/31/89 31.49% 23.80%
12/31/67 23.98% 83.30% 12/31/90 -3.17% -3.30%
12/31/68 11.06% 50.50% 12/31/91 30.55% 51.40%
12/31/69 -8.50% -28.10% 12/31/92 7.67% 25.50%
12/31/70 4.01% -2.60% 12/31/93 9.99% 30.30%
12/31/71 14.31% 32.10% 12/31/94 1.31% -5.30%
12/31/72 18.98% 19.70% 12/31/95 37.43% 18.20%
12/31/73 -14.66% -27.50% 12/31/96 23.07% 31.52%
12/31/74 -26.47% -29.10% 12/31/97 33.36% 31.30%
12/31/75 37.20% 37.60%
+ Returns for 1997 are actual for the Cornerstone Growth Fund, net of fees
and expenses.
* This Chart and the Index Performance Statistics and Comparisons represent
past performance of the S&P 500, an unmanaged index of securities, and the
Cornerstone Growth Startegy, but not the Cornerstone Growth Fund, applied
retroactively, and should not be considered indicative of future results.
The performance of the strategy shown is a hypothetical example of the
performance of the strategy found in the backtest, using an initial $10,000
value, if the Strategy had been in existence and employed from 1952 through
1996, together with the actual return of the O'Shaughnessy Cornerstone
Growth Fund for 1997. Performance of the Strategy and the S&P 500 do not
reflect advisory fees, commissions, expenses or taxes that the Fund bears.
The Strategy's performance as well as that of the S&P 500 would be lower if
such fees and expenses were deducted. Read the prospectus carefully before
investing.
10
<PAGE>
Cornerstone
Date S&P 500 Value Fund
---- ------- ----------
31-Dec-51 10,000 10,000
31-Dec-52 11,837 11,430
31-Dec-53 11,720 11,567
31-Dec-54 17,887 17,640
31-Dec-55 23,532 22,597
31-Dec-56 25,076 25,941
31-Dec-57 22,372 22,439
31-Dec-58 32,073 32,514
31-Dec-59 35,909 35,635
31-Dec-60 36,078 35,625
31-Dec-61 45,779 44,317
31-Dec-62 41,783 43,165
31-Dec-63 51,309 51,280
31-Dec-64 59,765 61,690
31-Dec-65 67,205 72,547
31-Dec-66 60,445 65,147
31-Dec-67 74,939 80,587
31-Dec-68 83,227 101,943
31-Dec-69 76,153 86,652
31-Dec-70 79,207 96,443
31-Dec-71 90,541 111,681
31-Dec-72 107,726 127,317
31-Dec-73 91,933 119,805
31-Dec-74 67,599 105,069
31-Dec-75 92,745 166,219
31-Dec-76 114,856 231,377
31-Dec-77 106,609 239,012
31-Dec-78 113,603 246,900
31-Dec-79 134,551 310,106
31-Dec-80 178,173 373,058
31-Dec-81 169,424 420,809
31-Dec-82 205,698 503,288
31-Dec-83 252,001 697,557
31-Dec-84 267,801 730,342
31-Dec-85 353,926 985,961
31-Dec-86 419,296 1,189,070
31-Dec-87 441,225 1,327,002
31-Dec-88 515,395 1,678,657
31-Dec-89 677,693 2,309,832
31-Dec-90 656,210 2,148,144
31-Dec-91 856,683 2,940,809
31-Dec-92 922,390 3,281,943
31-Dec-93 1,014,537 3,951,459
31-Dec-94 1,027,828 4,141,129
31-Dec-95 1,406,068 5,246,810
31-Dec-96 1,730,448 6,395,862
31-Dec-97 2,307,725 7,374,429
11
<PAGE>
O'Shaughnessy Cornerstone Value Strategy Index
vs. the S&P 500* (December 31, 1951 - December 31, 1997)
Cornerstone Cornerstone
Year Ending S&P 500 Value Strategy Year Ending S&P 500 Value Strategy
----------- ------- -------------- ----------- ------- --------------
12/31/52 18.37% 14.30% 12/31/75 37.20% 58.20%
12/31/53 -0.99% 1.20% 12/31/76 23.84% 39.20%
12/31/54 52.62% 52.50% 12/31/77 -7.18% 3.30%
12/31/55 31.56% 28.10% 12/31/78 6.56% 3.30%
12/31/56 6.56% 14.80% 12/31/79 18.44% 25.60%
12/31/57 -10.78% -13.50% 12/31/80 32.42% 20.30%
12/31/58 43.36% 44.90% 12/31/81 -4.91% 12.80%
12/31/59 11.96% 9.60% 12/31/82 21.41% 19.60%
12/31/60 0.47% -0.03% 12/31/83 22.51% 38.60%
12/31/61 26.89% 24.40% 12/31/84 6.27% 4.70%
12/31/62 -8.73% -2.60% 12/31/85 32.16% 35.00%
12/31/63 22.80% 18.80% 12/31/86 18.47% 20.60%
12/31/64 16.48% 20.30% 12/31/87 5.23% 11.60%
12/31/65 12.45% 17.60% 12/31/88 16.81% 26.50%
12/31/66 -10.06% -10.20% 12/31/89 31.49% 37.60%
12/31/67 23.98% 23.70% 12/31/90 -3.17% -7.00%
12/31/68 11.06% 26.50% 12/31/91 30.55% 36.90%
12/31/69 -8.50% -15.00% 12/31/92 7.67% 11.60%
12/31/70 4.01% 11.30% 12/31/93 9.99% 20.40%
12/31/71 14.31% 15.80% 12/31/94 1.31% 4.80%
12/31/72 18.98% 14.00% 12/31/95 37.43% 26.70%
12/31/73 -14.66% -5.90% 12/31/96 23.07% 21.90%
12/31/74 -26.47% -12.30% 12/31/97 33.36% 15.30%
+ Returns for 1997 are actual for the Cornerstone Value Fund, net of fees and
expenses.
* This Chart and the Index Performance Statistics and Comparisons represent
past performance of the S&P 500, an unmanged index of securities, and the
Cornerstone Value Strategy, but not the Cornerstone Value Fund, applied
retroactively, and should not be considered indicative of future results.
The performance of the strategy shown is a hypothetical example of the
performance of the strategy found in the backtest, using an intital $10,000
value, if the Strategy had been in existence and employed from 1951 through
1996, together with the actual return of the O'Shaughnessy Cornerstone
Value Fund for 1997. Performance of the Strategy and the S&P 500 do not
reflect advisory fees, commissions, expenses or taxes that the Fund bears.
The Strategy's performance as well as that of the S&P 500 would be lower if
such fees and expanses were deducted. Read the prospectus carefully before
investing.
12
<PAGE>
Summary results for S&P 500 and Hypothetical Results
for Cornerstone Growth Strategy Stocks,
December 31, 1952 - December 31, 1997.++
Cornerstone
S&P 500 Growth Strategy
------- ---------------
Arithmetic average+ 13.74% 21.93%
Standard deviation of return+ 16.91% 25.34%
Sharpe risk-adjusted ratio* 49.00 65.00
1-yr return** 33.36% 31.30%
3-yr compounded**+ 31.15% 26.85%
5-yr compounded**+ 20.24% 20.29%
10-yr compounded**+ 18.05% 22.21%
15-yr compounded**+ 17.52% 19.96%
20-yr compounded**+ 16.65% 22.69%
25-yr compounded**+ 13.06% 18.57%
30-yr compounded**+ 12.12% 17.23%
35-yr compounded**+ 12.16% 19.35%
40-yr compounded**+ 12.30% 19.64%
Compound Annual Return 12.44% 19.09%
$10,000 becomes : $1,958,565 $25,929,405
Maximum return 52.62% 83.30%
Minimum return -26.47% -29.10%
+ Returns for 1997 are actual for Cornerstone Growth Fund, net of fees and
expenses.
* The Sharpe risk-adjusted ratio (the "Sharpe ratio") takes a portfolio's
volatility, as measured by its standard deviation of return, into account.
The higher the Sharpe ratio, the better the portfolio's risk-adjusted
return. The Sharpe ratio is calculated by subtracting the risk free Treasury
bill return from the portfolio's return and then dividing that number by the
portfolio's overall standard deviation of return.
** Quoted return is for the most recent period ended December 31, 1997.
++ These Statistics and Comparisons represent past performance of the S&P 500,
an unmanaged index of securities, and the Cornerstone Growth Strategy, but
not the Cornerstone Growth Fund, applied retroactively, and should not be
considered indicative of future results. The performance of the strategy
shown is a hypothetical example of the performance of the strategy found in
the backtest, using an initial $10,000 value, if the Strategy had been in
existence and employed from 1952 through 1996, together with the actual
return of the O'Shaughnessy Cornerstone Growth Fund for 1997. Performance of
the Strategy and the S&P 500 do not reflect advisory fees, commissions,
expenses or taxes that the Fund bears. The Strategy's performance as well as
that of the S&P 500 would be lower if such fees and expenses were deducted.
Read the prospectus carefully before investing.
13
<PAGE>
Summary results for S&P 500 and Hypothetical Results
for Cornerstone Value Strategy Stocks
December 31, 1951 - December 31, 1997.++
Cornerstone
S&P 500 Value Strategy
------- --------------
Arithmetic average + 13.84% 16.65%
Standard deviation of return+ 16.73% 16.76%
Sharpe risk-adjusted ratio* 51.00 67.00
1-yr return**+ 33.36% 15.30%
3-yr compounded**+ 31.15% 21.21%
5-yr compounded**+ 20.24% 17.58%
10-yr compounded**+ 18.05% 18.71%
15-yr compounded**+ 17.52% 19.60%
20-yr compounded**+ 16.65% 18.70%
25-yr compounded**+ 13.06% 17.63%
30-yr compounded**+ 12.12% 16.25%
35-yr compounded**+ 12.16% 15.82%
40-yr compounded**+ 12.30% 15.59%
Compound Annual Return 12.57% 15.44%
$10,000 becomes+: $2,318,353 $7,374,429
Maximum return 52.62% 58.20%
Minimum return -26.47% -15.00%
+ Returns for 1997 are actual for the Cornerstone Value Fund, net of fees and
expenses.
* The Sharpe ratio takes a portfolio's volatility, as measured by its standard
deviation of return, into account. The higher the Sharpe ratio, the better
the portfolio's risk-adjusted return. The Sharpe ratio is calculated by
subtracting the risk free Treasury bill return from the portfolio's return
and then dividing that number by the portfolio's overall standard deviation
of return.
** Quoted return is for the most recent period ended December 31, 1997.
++ These Statistics and Comparisons represent past performance of the S&P 500,
an unmanaged index of securities, and the Cornerstone Value Strategy, but
not the Cornerstone Value Fund, applied retroactively, and should not be
considered indicative of future results. The performance of the strategy
shown is a hypothetical example of the performance of the strategy found in
the backtest, using an initial $10,000 value, if the Strategy had been in
existence and employed from 1952 through 1996, together with the actual
return of the O'Shaughnessy Cornerstone Value Fund for 1997. Performance of
the Strategy and the S&P 500 do not reflect advisory fees, commissions,
expenses or taxes that the Fund bears. The Strategy's performance as well as
that of the S&P 500 would be lower if such fees and expenses were deducted.
Read the prospectus carefully before investing.
14
<PAGE>
OTHER INVESTMENT POLICIES AND PRACTICES
This section takes a detailed look at other investment policies and practices of
the Funds. The Funds' investments are subject to further restrictions and risks
described in the Statement of Additional Information.
Shareholder approval is required to change a Fund's investment objective and
certain investment restrictions noted in the following section as "fundamental
policies." The Manager also follows certain "operating policies" which can be
changed without shareholder approval. However, significant changes in operating
policies are discussed with shareholders in Fund reports.
The Funds' holdings in certain kinds of investments cannot exceed maximum
percentages of total assets, which are set forth below. While these restrictions
provide a useful level of detail about a Fund's investments, investors should
not view them as an accurate gauge of the potential risk of such investments.
The net effect of a particular investment depends on its volatility and the size
of its overall return in relation to the performance of all the Fund's other
investments.
CASH AND SHORT-TERM SECURITIES. Each Fund may temporarily invest a portion of
its total assets in cash or liquid short-term securities pending investment of
such assets in stocks in accordance with the Fund's Strategy, to meet redemption
requests, and to the extent necessary to comply with the federal tax laws
applicable to regulated investment companies. The Manager will not use
investments in cash and short-term securities for temporary defensive purposes.
Short-term securities in which the Funds may invest include certificates of
deposit, commercial paper, notes, obligations issued or guaranteed by the U.S.
Government or any of its agencies or instrumentalities, and repurchase
agreements involving such securities. See "Repurchase Agreements," below.
The Manager does not expect assets invested in cash or liquid short-term
securities to exceed 5% of the Fund's total assets at any time.
REPURCHASE AGREEMENTS. As described above in "Cash and Short-Term Securities,"
each Fund may invest in short-term securities pursuant to repurchase agreements.
The Funds may only enter into repurchase agreements with a member bank of the
Federal Reserve System or well-established securities dealer in U.S. government
securities. In the event of a bankruptcy or default by the seller of the
repurchase agreement, the Fund may suffer delays and incur costs or possible
losses in liquidating the underlying security which is held as collateral, and
the Fund may incur a loss if the value of the collateral declines during this
period. As a matter of operating policy, the Fund may not invest more than 15%
of a Fund's total assets in repurchase agreements maturing in more than seven
days.
LENDING OF PORTFOLIO SECURITIES. Like other mutual funds, each Fund may from
time to time lend securities from its portfolio to banks, brokers and other
financial institutions to earn additional income. The principal risk is that the
borrower may default on its obligation to return borrowed securities, because of
insolvency or otherwise. In this event, the Fund could experience delays in
recovering its securities and capital. In accordance with applicable law, each
Fund may not lend portfolio securities representing in excess of 33 1/3% - Note
only - per SAI of its respective total assets. The lending policy is a
fundamental policy.
BORROWING. Each Fund may borrow money in an amount up to 33% of its respective
total assets from banks for extraordinary or emergency purposes such as meeting
anticipated redemptions, and may pledge assets in connection with such
borrowing. The borrowing policy is a fundamental policy.
INDUSTRY CONCENTRATION. Each Fund may not invest more than 25% of its total
assets in any one industry (excluding U.S. Government securities). If upon
rebalancing, the stocks selected by a Fund's Strategy would result in more than
25% of the Fund's total assets being invested in a single industry, the Manager
will be required to deviate from the Strategy in investing the portfolio so as
not to violate the Fund's concentration policy. The concentration policy is a
fundamental policy.
15
<PAGE>
HEDGING AND RETURN ENHANCEMENT STRATEGIES. The Fund is permitted to utilize
certain hedging and return enhancement strategies and techniques such as options
on securities and securities indices, futures contracts on securities and
securities indices and options on futures contracts, as described below.
Futures (a type of potentially high-risk derivative) are often used to manage or
hedge risk, because they enable the investor to buy or sell an asset in the
future at an agreed upon price. Options (another potentially high-risk
derivative) give the investor the right, but not the obligation, to buy or sell
an asset at a predetermined price in the future. The Fund may buy and sell
futures and options contracts for any number of reasons, including: to manage
its exposure to changes in securities prices; as an efficient means of adjusting
its overall exposure to certain markets; in an effort to enhance income; and to
protect the value of portfolio securities. The Fund may purchase, sell, or write
call and put options on securities, financial indices and futures.
Futures contracts and options may not always be successful hedges; their prices
can be highly volatile. Using them could lower the Fund's total return, and the
potential loss from the use of futures can exceed the Fund's initial investment
in such contracts.
As a matter of operating policy, initial margin deposits and premiums on options
used for nonhedging purpose will not equal more than 5% of the Fund's net asset
value.
FOREIGN SECURITIES. The Funds may invest in securities of foreign issuers,
either through (i) direct purchase of securities of foreign issuers or (ii)
purchase of American Depository Receipts ("ADRs") which are dollar-denominated
securities of foreign issuers traded in the U.S. Such investments increase
diversification of the Funds' portfolio and may enhance return, but they also
involve some special risks such as exposure to potentially adverse local
political and economic developments, nationalization and exchange controls;
potentially lower liquidity and higher volatility; possible problems arising
from regulatory practices that differ from U.S. standards; the imposition of
withholding taxes on income from such securities; confiscating taxation; and the
chance that fluctuations in foreign exchange rates will decrease the
investment's value (favorable changes can increase its value). These risks are
heightened for investment in developing countries and there is no limit on the
amount of the Fund's foreign investments that may be invested in such countries.
The Funds may invest in ADRs through both sponsored and unsponsored
arrangements. The issuers of unsponsored ADRs are not obligated to disclose
material information in the United States, and therefore, there may not be a
correlation between such information and the market value of the ADRs.
DIVERSIFICATION. In order to maintain each Fund's status as a diversified
investment company, with respect to 75% of the Fund's total assets: 1) not more
than 5% of the Fund's assets may be invested in the securities of a single
issuer (excluding U.S. Government Securities); and 2) the Fund may not hold more
than 10% of the outstanding voting securities of a single issuer. The
diversification policy is a fundamental policy.
PORTFOLIO TRANSACTIONS. In executing portfolio transactions, the Funds seek to
obtain the best net results, taking into account such factors as price
(including the applicable brokerage commission or dealer spread), size of order,
difficulty of execution, operational facilities of the firm involved and the
firm's risk in positioning a block of securities. While the Funds generally seek
reasonably competitive commission rates, the Funds do not necessarily pay the
lowest commission or spread available. In addition, consistent with the Conduct
Rules of the National Association of Securities Dealers, Inc., the Manager may
consider sales of shares of the Funds as a factor in the selection of brokers or
dealers to execute portfolio transactions for the Funds.
16
<PAGE>
PORTFOLIO TURNOVER. As described above, in accordance with each Fund's Strategy,
the Fund's portfolio will be rebalanced based on information on or about
December 31 of each year. That is, stocks meeting the respective Strategy's
criteria will be purchased for the portfolio to the extent not then held, stocks
which no longer meet the criteria will be sold, and the holdings of all stocks
in the portfolio that continue to meet the criteria will be appropriately
increased or decreased to result in equal weighting of all stocks in the
portfolio. Under normal conditions, the annual turnover rate should not exceed
100% and 50% for the Cornerstone Growth Fund and Cornerstone Value Fund,
respectively.
COMPUSTAT DATABASE. Although S&P Compustat obtains information for inclusion in
or for use in the COMPUSTAT Database from sources which S&P Compustat considers
reliable, S&P Compustat does not guarantee the accuracy or completeness of the
COMPUSTAT Database. S&P Compustat makes no warranty, express or implied, as to
the results to be obtained by the Funds, or any other persons or entity from the
use of the COMPUSTAT Database. S&P Compustat makes no express or implied
warranties, and expressly disclaims all warranties of merchantability or fitness
for a particular purpose with respect to the COMPUSTAT Database. "Standard &
Poor's" and "S&P" are trademarks of The McGraw-Hill Companies, Inc. The Funds
are not sponsored, endorsed, sold or promoted by S&P Compustat and S&P Compustat
makes no representation regarding the advisability of investing in the Funds.
RISK FACTORS
The Strategy Indexing utilized by each Fund provides a disciplined approach to
investing, based on a buy and hold philosophy during the course of each year,
which ignores market timing and rejects active management. Each Fund will adhere
to its respective Strategy (subject to applicable federal tax requirements
relating to mutual funds), despite any adverse developments concerning an
issuer, an industry, the economy or the stock market generally. This could
result in substantial losses to a Fund, if for example, the stocks selected for
a Fund's portfolio for a given year are experiencing financial difficulty, or
are out of favor in the market because of weak performance, poor earnings
forecast, negative publicity or general market cycles. The Funds are not
appropriate investments for those who are not comfortable with a Fund's
Strategy.
There can be no assurance that the market factors that caused the stocks held in
a Fund's portfolio to meet a Strategy's investment criteria as of rebalancing in
any given year will continue during such year until the next rebalancing, that
any negative conditions adversely affecting a stock's price will not develop
and/or deteriorate during a given year, or that share prices of a stock will not
decline during a given year.
As described above, each Fund's portfolio is rebalanced annually in accordance
with its respective Strategy. Rebalancing may result in elimination of better
performing assets from a Fund's portfolio and increases in investments in
securities with relatively lower total return.
WHAT ARE SOME POTENTIAL RISKS ASSOCIATED WITH INVESTING PRIMARILY IN COMMON
STOCKS?
The fundamental risk associated with any common stock fund is the risk that the
value of the stocks it holds might decrease. Stock values may fluctuate in
response to the activities of an individual company or in response to general
market and/or economic conditions. Historically, common stocks have provided
greater long-term returns and have entailed greater short-term risks than other
investment choices. Smaller or newer issuers are more likely to realize more
substantial growth as well as suffer more significant losses than larger or more
established issuers. Investments in such companies can be both more volatile and
more speculative. The Funds are not appropriate investments for those who are
unable or unwilling to assume the risk involved generally with investment in
common stocks.
ARE THERE ANY ADDITIONAL RISKS ASSOCIATED WITH INVESTMENT IN THE FUNDS?
There is no guarantee that the investment objective of a Fund will be achieved
or that the value of a shareholder's investment in the Fund will not decrease.
17
<PAGE>
MANAGEMENT AND ORGANIZATION OF THE FUNDS
MANAGEMENT
WHO RUNS THE FUNDS?
GENERAL OVERSIGHT. O'Shaughnessy Funds, Inc. is governed by a Board of Directors
that meets regularly to review the Funds' investment, performance, expenses, and
other business affairs. The Board elects the Funds' officers.
MANAGER. O'Shaughnessy Capital Management, Inc. acts as investment manager of
each Fund pursuant to a management agreement with O'Shaughnessy Funds on behalf
of the Fund (the "Management Agreement"). In its capacity as investment manager,
the Manager is responsible for selection and management of each Fund's portfolio
investments. For its services, each Fund pays the Manager a fee each month, at
the annual rate of 0.74% of the Fund's average daily net assets.
The Manager's office is located at 35 Mason Street, Greenwich, Connecticut
06830. O'Shaughnessy Capital Management, Inc. was incorporated in 1988. The
Manager serves as portfolio consultant to a unit investment trust and provides
investment advisory services to investment companies and individual and
institutional accounts with assets in excess of $800 million.
PORTFOLIO MANAGEMENT. James P. O'Shaughnessy has had the day-to-day
responsibility for managing the portfolio of each Fund and developing and
executing each Fund's investment program since the commencement of operations of
each Fund. For the past ten years, Mr. O'Shaughnessy has served as Chairman and
CEO of the Manager, and in such capacity, has managed equity accounts for high
net worth individuals and served as portfolio consultant to a unit investment
trust. Mr. O'Shaughnessy is recognized as a leading expert and pioneer in
quantitative equity analysis. He is the author of three financial books, Invest
Like the Best, What Works on Wall Street and How to Retire Rich.
DISTRIBUTOR. First Fund Distributors, Inc. (the "Distributor"), a registered
broker-dealer, acts as the principal distributor of the shares of the Funds. The
address of the Distributor is 4455 E. Camelback Road, Suite 261 E, Phoenix,
Arizona 85018. The Distributor provides distribution services to the Funds at no
cost to the Funds.
ADMINISTRATOR. Pursuant to an Administration Agreement, Investment Company
Administration, LLC (the "Administrator") serves as administrator of the Funds.
The Administrator provides certain administrative services, including, among
other responsibilities, coordinating relationships with independent contractors
and agents, preparing for signature by officers and filing of certain documents
required for compliance with applicable laws and regulations, preparing
financial statements, and arranging for the maintenance of books and records.
For its services, each Fund pays the Administrator a fee each month, at the
annual rate of 0.10% of the first $100 million of the Fund's average daily net
assets, 0.05% of the next $100 million of such net assets, and 0.03% of such net
assets over $200 million, with a minimum fee of $40,000 annually per Fund. The
address of the Administrator is 4455 E. Camelback Rd., Suite 261 E, Phoenix,
Arizona 85018. The Administrator and the Distributor are under common control
and are therefore considered affiliates of each other.
TRANSFER AGENT AND CUSTODIAN. Firstar Mutual Fund Services, LLC acts as the
Funds' transfer and dividend disbursing agent (the "Transfer Agent"). Firstar
Bank Milwaukee is the Funds' custodian (the "Custodian"). The address of the
Transfer Agent and Custodian is 615 E. Michigan Street, Third Floor, Milwaukee,
Wisconsin 53202.
18
<PAGE>
YEAR 2000 RISK. Like other business organizations around the world, the Fund
could be adversely affected if the computer systems used by its investment
manager and other service providers do not properly process and calculate
information related to dates beginning January 1, 2000. This is commonly known
as the "Year 2000 Issue." The Fund's manager has taken steps that it believes
are reasonably designed to address the Year 2000 Issue with respect to its own
computer systems and the Fund has obtained assurances from the Fund's other
service providers that they are taking comparable steps. However, there can be
no assurance that these actions will be sufficient to avoid any adverse impact
on the Fund.
HOW ARE EXPENSES OF THE FUNDS DETERMINED?
The Management Agreement identifies the expenses to be paid by each Fund. In
addition to the fees paid to the Manager, each Fund pays certain additional
expenses, including but not limited to, the following: shareholder service
expenses; custodial, accounting, legal, and audit fees; administrative fees;
costs of preparing and printing prospectuses and reports sent to shareholders;
registration fees and expenses; proxy and annual meeting expenses (if any); and
independent Director fees and expenses.
ORGANIZATION
HOW ARE THE FUNDS ORGANIZED?
The Funds are investment portfolios or series of O'Shaughnessy Funds. There are
two other investment portfolios of O'Shaughnessy Funds, shares of which are not
offered for sale through this Prospectus: O'Shaughnessy Aggressive Growth Fund
and O'Shaughnessy Dogs of the Market Fund (the "other O'Shaughnessy Funds"). The
charter of O'Shaughnessy Funds provides that the Board of Directors may issue
additional investment portfolios of shares and/or additional classes of shares
for each investment portfolio. O'Shaughnessy Funds was organized as a
corporation in Maryland on May 20, 1996.
WHAT IS MEANT BY "SHARES"?
As with all mutual funds, investors purchase shares when they invest in the
Funds. These shares are a part of the Funds' authorized capital stock, but share
certificates are not generally issued.
Each full share and fractional share entitles the shareholder to: receive a
proportional interest in the respective Fund's capital gain distributions; and
cast one vote per share on certain Fund matters, including the election of
Directors, changes in fundamental policies, or approval of changes in the
Management Agreement.
Shareholder inquiries may be addressed to each Fund at the address or telephone
number set forth on the cover page of this Prospectus.
DO THE FUNDS HAVE ANNUAL SHAREHOLDER MEETINGS?
The Funds are not required to hold annual meetings and do not intend to do so
except when certain matters, such as a change in a Fund's fundamental policies,
are to be decided. In addition, shareholders representing at least 10% of all
eligible votes may call a special meeting if they wish, for the purpose of
voting on the removal of any Fund Director. If a meeting is held and you cannot
attend, you can vote by proxy. Before the meeting, you will be sent proxy
materials that explain the issues to be decided and include a voting card for
you to mail back.
19
<PAGE>
INFORMATION ABOUT YOUR ACCOUNT
PURCHASE OF SHARES
The minimum initial investment in the Fund is $2,500 for regular accounts and
$250 for Individual Retirement Accounts. For corporate sponsored retirement
plans, there is no minimum initial investment. There is no minimum subsequent
investment requirement for any account, however, a $100 minimum exists for each
additional investment, made through the automatic investment plan.
Investors may make an initial purchase of shares and subsequent investments in a
Fund by mail or wire as described below. The Funds reserve the right in their
sole discretion to waive the minimum investment amounts, including in the case
of investments by employees and affiliates of the Manager and family members of
any of the foregoing, and Individual Retirement Accounts ("IRAs") of
shareholders of the Funds, and certain purchase programs made available to
clients of financial intermediaries eligible to sell shares of the Fund.
The Internal Revenue Service requires the correct reporting of social security
numbers or tax identification numbers. The failure to provide this information
will result in the rejection of an investor's Application.
HOW DO I PURCHASE SHARES BY MAIL?
For initial investments, please send a completed Application, together with a
check payable to O'Shaughnessy Cornerstone Value Fund or O'Shaughnessy
Cornerstone Growth Fund, as the case may be, to O'Shaughnessy Funds, Inc., c/o
Firstar Mutual Fund Services, LLC, at P.O. Box 701, Milwaukee, WI 53201-0701
(for Applications sent by U.S. mail) or 615 E. Michigan Street, Third Floor,
Milwaukee, WI 53202 (for Applications sent via overnight courier). Subsequent
investments must be accompanied by a letter indicating the name(s) in which the
account is registered and the account number or by the remittance portion of the
account statement and mailed to the address stated above.
HOW DO I PURCHASE SHARES BY WIRE?
If you are wiring funds, call the Fund at 877-OSFUNDS (673-8637) for an account
number if this is an initial investment or to inform the Transfer Agent that a
wire is expected if this is a subsequent investment.
For an initial investment, prior to or immediately after the funds are wired, a
completed Application should be sent to O'Shaughnessy Funds, Inc., c/o Firstar
Mutual Fund Services, LLC, at P.O. Box 701, Milwaukee, WI 53201-0701 (for
Applications sent by U.S. mail) or 615 E. Michigan Street, Third Floor,
Milwaukee, WI 53202 (for Applications sent via overnight courier). Instruct your
bank to wire federal funds to O'Shaughnessy Funds, c/o Firstar Mutual Fund
Services, LLC, ABA# 075000022, DDA# 112952137.
The wire should specify the name of the Fund, the name(s) in which the account
is registered, the shareholder's social security number or employer tax
identification number, the account number and the amount being wired. Please
indicate if this is an initial or subsequent investment. Wire purchases are
normally used only for large purchases (over $5,000). Your bank may charge you a
fee for sending the wire.
WHAT IS THE PURCHASE PRICE OF FUND SHARES AND WHEN DO PURCHASES BECOME
EFFECTIVE?
Purchases of Fund shares become effective and shares will be priced at the net
asset value per share ("NAV") next determined after the investor's check or wire
is received by the Transfer Agent. NAV for each Fund is calculated as of the
close of business on the New York Stock Exchange ("NYSE") (currently 4:00 pm,
Eastern time). If your request is received in correct form before 4:00 pm,
Eastern time, your transaction will be priced at that day's NAV. If your request
is received after 4:00 pm, it will be priced at the next business day's NAV.
Orders that request a particular day or price for your transaction or any other
special conditions cannot be accepted.
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The time at which transactions and shares are priced and the time until which
orders are accepted may be changed in case of an emergency or if the NYSE closes
at a time other than 4:00 pm, Eastern time.
The purchase order must include the documentation specified above. Please do not
send purchase orders to the Funds; the Funds forward purchase orders to the
Transfer Agent and a purchase will not become effective until the Transfer Agent
receives all the necessary documentation.
WHAT ARE THE CONDITIONS OF PURCHASE?
All purchase orders are subject to acceptance or rejection by the Funds or the
Distributor, in their sole discretion. The offering of shares may be suspended
whenever a Fund considers suspension desirable or when required by any order,
rule or regulation of any governmental body having jurisdiction. Checks and
money orders should be drawn on United States banks; the Funds and the
Distributor reserve the right to reject checks drawn on foreign banks.
The Transfer Agent will mail a confirmation of each completed purchase to the
investor. If an order is canceled because an investor's check does not clear,
the investor will be responsible for any loss incurred by the respective Fund,
the Transfer Agent, the Distributor, the Administrator or the Manager. If the
investor is already a shareholder, the Fund may redeem shares from the account
to cover any loss. If the investor is not a shareholder or if the loss is
greater than the value of the shareholder's account, the Distributor will be
responsible for any loss to the Fund, and will have the right to recover such
amount from the investor.
WHO DO I CONTACT IF I HAVE QUESTIONS ABOUT MY ACCOUNT OR NEED ADDITIONAL
INFORMATION CONCERNING INVESTMENT IN THE FUNDS?
If you have investment questions about the Funds, or if you would like any
additional information relating to an investment in the Funds, please call
877-OSFUNDS (673-8637) (toll-free), or write to the Distributor at First Fund
Distributors, Inc., 4455 E. Camelback Road, Suite 261 E, Phoenix AZ 85018. If
you are a shareholder and have questions about your account, or if you wish to
arrange for wire transactions, please call the Fund at (877-OSFUNDS (673- 8637).
Before telephoning, please be sure to have your account number and social
security number or employer tax identification number readily available.
WILL I RECEIVE SHARE CERTIFICATES FOR SHARES PURCHASED?
Share certificates will not be issued for shares unless the investor sends a
written request for certificates to O'Shaughnessy Funds, Inc., c/o Firstar
Mutual Fund Services, LLC at P.O. Box 701, Milwaukee, WI 53201-0701 (for
requests sent via U.S. mail) or 615 E. Michigan Street, Third Floor, Milwaukee,
WI 53202 (for requests sent via overnight courier). Share certificates are
issued only for full shares and may be redeposited in the shareholder's account
at any time. In order to facilitate redemptions and exchanges, most shareholders
elect not to receive certificates, since a shareholder wishing to redeem or
exchange shares represented by a certificate must surrender such certificate,
properly endorsed on the reverse side together with a signature guarantee. (See
"Redemption of Shares - When are signature guarantees required?" below). If a
certificate is lost, the shareholder may incur an expense in replacing it.
CAN I PURCHASE SHARES THROUGH BROKER-DEALERS OTHER THAN THE DISTRIBUTOR?
O'Shaughnessy Funds may enter into agreements with various outside brokers on
behalf of the Funds through which shareholders may purchase shares. Such shares
may be held by such outside brokers in an omnibus account rather than in the
name of the individual shareholder. The Manager may reimburse the outside
brokers for providing shareholder services to the omnibus accounts in an amount
equal to what the Fund would otherwise have paid to provide shareholder services
to each individual shareholder account.
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Investors may also arrange to purchase shares of each Fund through other outside
broker-dealers with which O'Shaughnessy Funds does not have an arrangement, and
such broker-dealers may purchase shares of the Fund by telephone if they have
made arrangements in advance with the Fund. To place a telephone order such
broker-dealer should call the Fund at 877-OSFUNDS (673-8637).
Purchases by broker-dealers become effective and shares will be priced as
described above. If an investor purchases shares through broker-dealers other
than the Distributor, such broker-dealers may charge the investor a service fee
that is reasonable for the service performed, bearing in mind that the investor
could have acquired or redeemed each Fund's shares directly without the payment
of any fee. No part of any such service fee will be received by the Distributor,
the Manager, the Administrator or the Funds.
EXCHANGE PRIVILEGE
Shares of each Fund may be exchanged for shares of each of the other
O'Shaughnessy Funds (i.e., O'Shaughnessy Aggressive Growth Fund and
O'Shaughnessy Dogs of the Market Fund and, as the case may be, O'Shaughnessy
Cornerstone Growth Fund or O'Shaughnessy Cornerstone Value Fund). Prospectuses
for the other O'Shaughnessy Funds may be obtained by writing to the Distributor
at 4455 E. Camelback Road, Suite 261 E, Phoenix AZ 85018, Attention:
O'Shaughnessy Funds, Inc. or by calling 877-OSFUNDS (673-8637) (toll-free).
You may also exchange shares of either Fund for shares of the Firstar Money
Market Fund, a money market mutual fund not affiliated with O'Shaughnessy Funds
or the Manager. Prior to making such an exchange, you should obtain and
carefully read the prospectus for the Firstar Money Market Fund. The exchange
privilege does not constitute an offering or recommendation on the part of the
Funds or the Manager of an investment in the Firstar Money Market Fund.
If you exchange into shares of the Firstar Money Market Fund you may establish
checkwriting privileges on the Firstar Money Market Fund. Contact the Fund at
877-OSFUNDS (673-8637) for a checkwriting application and signature card. The
exchange procedures are described below.
IS THERE ANY SALES CHARGE OR MINIMUM INVESTMENT APPLICABLE TO AN EXCHANGE?
Shareholders of the Funds may exchange their Fund shares, without the payment of
any sales or service charge unless the exchange is effected via telephone
instructions for which a $5.00 charge will be levied or on shares held less than
90 days for which a redemption fee will be charged (see "Information About Your
Account - Redemption of Shares"), for shares of any other fund into which an
exchange is permitted equal in value to the net asset value of the shares being
exchanged. All exchanges are subject to all applicable terms set forth in the
prospectus of the fund into which the exchange is being made. If a shareholder
exchanges shares through a broker-dealer other than the Distributor, such
broker-dealer may charge the shareholder a service fee, no part of which will be
received by the Distributor, the Manager, the Funds, or the fund into which the
exchange is being made.
AT WHAT PRICE IS AN EXCHANGE EFFECTED?
An exchange is effected at the respective net asset values of the two funds with
respect to which shares are being exchanged as next determined following receipt
by the fund into which the exchange is being made of all necessary documentation
in connection with the redemption of Fund shares as described below under
"Redemption of Shares - How do I redeem shares by mail?"
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DO CURRENT INSTRUCTIONS CONCERNING RECEIPT OF DIVIDENDS AND DISTRIBUTIONS CARRY
OVER TO EXCHANGED SHARES?
Dividend and distribution instructions with respect to exchanged shares will
remain the same as those given previously by the shareholders to the fund from
which the shareholder is exchanging the shares, unless the shareholder
designates a change in such instructions by writing to the Transfer Agent.
Please note that such changed instructions (i) must be signed by the registered
owners(s) of the shares, exactly as the account is registered and signature
guaranteed, and (ii) include the name of the account, the account number, and
the name of the fund for which instructions have changed.
WHAT ARE THE CONDITIONS APPLICABLE TO AN EXCHANGE?
Exchanges involving the redemption of shares recently purchased by personal,
corporate or government check will be permitted only after the respective Fund
has reasonable belief that the check has cleared, which may take up to fifteen
days after the purchase date. The exchange privilege is available only in states
where shares of the other O'Shaughnessy Funds or the Firstar Money Market Fund
may be sold legally.
Each of the Funds, the other O'Shaughnessy Funds and the Firstar Money Market
Fund reserves the right to reject any order to acquire its shares through
exchange or otherwise and to restrict or terminate the exchange privilege at any
time. If the exchange privilege is to be permanently terminated, each Fund will
provide its shareholders with written notice of such termination. Each Fund
reserves the right to suspend temporarily the telephone exchange privilege in
emergency circumstances or in cases where, in the judgment of the Fund,
continuation of the privilege would be detrimental to the Fund and its
shareholders as a whole. Such temporary suspension can be without prior
notification.
HOW CAN I MAKE EXCHANGES BY TELEPHONE?
Shareholders who have completed the section of the Fund's Application entitled
"Shareholder Privileges" are eligible to make telephone requests for exchanges
and may do so by telephoning the Fund at 877-OSFUNDS (673-8637). A shareholder
who has not completed the Shareholder Privileges section of the Application but
who wishes to become eligible to make telephone exchanges should designate a
change in such instructions by writing to the Transfer Agent. Please note that
such changed instructions must (i) be signed by the registered owner(s) of the
shares exactly as the account is registered and signature guaranteed, and (ii)
include the name of the account, the account number and the name of the Fund to
which the exchange instructions relate. See "Redemption of Share - How do I
redeem shares by telephone?" below, which describes the time of day at which
telephone redemptions and exchanges will be priced and processed. Telephone
requests for exchanges cannot be accepted with respect to shares represented by
certificates. Shares of the other O'Shaughnessy Funds or the Firstar Money
Market Fund acquired pursuant to a telephone request for exchange will be held
under the same account registration as the shares redeemed through the exchange.
The Funds will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. Neither the Funds nor any of their
service contractors will be liable for any loss or expense in acting on
telephone instructions that are reasonably believed to be genuine. In attempting
to confirm that telephone instructions are genuine, the Funds will use
procedures that are considered reasonable, including requesting a shareholder to
correctly state the account number, the names in which the account is
registered, the social security number(s) registered to the account, and certain
additional personal identification..
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Shareholders should be aware that, at times, the volume of telephone calls or
other factors beyond a Fund's control may make it difficult to reach the
Transfer Agent by telephone. This will be true particularly during periods of
drastic economic market changes. In such cases, shareholders should continue to
telephone or utilize the written exchange procedures described below.
Shareholders who effect exchanges of Fund shares by telephone will be charged a
$5.00 exchange fee.
HOW DO I MAKE EXCHANGES BY MAIL?
To exchange Fund shares by mail, send a written request for exchange signed by
the registered owner(s) of the shares, exactly as the account is registered, to
O'Shaughnessy Funds, Inc., c/o Firstar Mutual Fund Services, LLC, at P.O. Box
701, Milwaukee, WI 53201-0701 (for requests sent by U.S. mail) or 615 E.
Michigan Street, Third Floor, Milwaukee, WI 53202 (for requests sent via
overnight courier). The request for exchange should include the following
information: the name of the account, the account number, the number of Fund
shares or the dollar value of Fund shares to be exchanged, the shares of which
other fund (either another O'Shaughnessy Fund or the Firstar Money Market Fund)
shares of the Fund are to be exchanged for, and the name on the account and the
account number (if already established) with such other fund.
REDEMPTION OF SHARES
Shareholders can redeem their shares by giving instructions to the Transfer
Agent in writing or by telephone. As more fully described below, these
redemption instructions may have to be accompanied by additional documentation,
which may include a signature guarantee.
If a shareholder redeems shares through a broker-dealer other than the
Distributor, such broker-dealer may charge the shareholder a service fee, no
part of which will be received by the Distributor, the Manager, the
Administrator or the Funds.
HOW DO I REDEEM SHARES BY MAIL?
To redeem shares by mail, send a written request for redemption signed by the
registered owner(s) of the shares, exactly as the account is registered to
O'Shaughnessy Funds, Inc., c/o Firstar Mutual Fund Services, LLC, at P.O. Box
701, Milwaukee, WI 53201-0701 (for requests sent via U.S. mail) or 615 E.
Michigan Street, Third Floor, Milwaukee, WI 53202 (for requests sent via
overnight courier). The request for exchange should include the following: the
name of the account, the account number, the number of shares or the dollar
value of shares to be redeemed and whether proceeds are to be sent by mail or
wire, and if by wire, giving the wire instructions; (ii) duly endorsed share
certificates, if any have been issued for the shares redeemed; (iii) any
signature guarantees that are required as described below; and (iv) any
additional documents which might be required for redemptions by corporations,
executors, administrators, trustees, guardians or other similar shareholders.
Except as otherwise directed by a Fund in its discretion, the Transfer Agent
will not redeem shares until it has received all necessary documents; corporate
and institutional investors and fiduciaries should contact the Transfer Agent to
ascertain what additional documentation is required.
WHEN WOULD I PAY A REDEMPTION FEE?
The Funds can experience substantial price fluctuations and are intended for
long-term investors. Short-term "market timers" who engage in frequent purchases
and redemptions can disrupt the Funds' investment programs and create additional
transaction costs that are borne by all shareholders. For these reasons each
Fund will assess a 1.5% fee on redemptions (including exchanges) of Fund shares
purchased and held for less than 90 days.
Redemption fees will be paid to the Fund to help offset transaction costs. The
Fund will use the "first-in, first-out" (FIFO) method to determine the 90 day
holding period. Under this method, the date of redemption or exchange will be
compared with the earliest purchase date of shares held in the account. If this
holding period is less than 90 days, the fee will be assessed.
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The fee does not apply to any shares purchased through reinvested distributions
(dividends and capital gains) or to shares held in retirement plans such as
401(k), 403(b), 457, Koegh, profit sharing, SIMPLE IRA, SEP-IRA, and money
purchase pension accounts. These exceptions may not apply to shares held in
broker omnibus accounts. The fee does apply to shares held in IRA accounts and
to shares purchased through automatic investment plans (see "Other Shareholder
Services - Automatic Investment Plan").
MAY I SEND REDEMPTION REQUESTS TO THE FUNDS?
Please do not send redemption requests to the Funds. The Funds must forward all
redemption requests to the Transfer Agent and instructions for redemption will
not be effective until received by the Transfer Agent. Shares redeemed will be
priced at the net asset value per share next determined after acceptance of a
complete redemption request by the Transfer Agent. Redemption requests received
by the Transfer Agent after the close of the NYSE (currently 4:00 pm, Eastern
time) will be treated as though received on the next business day. The Transfer
Agent cannot accept redemption requests that specify a particular date for
redemption or special redemption conditions.
WHEN ARE SIGNATURE GUARANTEES REQUIRED?
Except as indicated below, all of the signatures on any request for redemption
or share certificates tendered for redemption must be guaranteed by a bank,
broker-dealer, credit union (if authorized under state law), securities exchange
or association, clearing agency or savings association. A notary public cannot
provide a signature guarantee.
The Funds will waive the signature guarantee requirement on a redemption request
that instructs that the proceeds be sent by mail if all of the following
conditions apply: (i) the redemption is for $10,000 or less; (ii) the redemption
check is payable to the shareholder(s) of record; (iii) the redemption check is
mailed to the shareholder(s) at the address of record; and (iv) no shares
represented by certificate are being redeemed. Share certificates submitted for
redemption or exchange must be properly endorsed and contain signature
guarantees. In addition, each Fund in its discretion may waive the signature
guarantee for employees and affiliates of the Manager, the Distributor and the
Administrator, and family members of the foregoing.
The requirement of a guaranteed signature protects against an unauthorized
person redeeming shares and obtaining the redemption proceeds.
HOW DO I REDEEM SHARES BY TELEPHONE?
Shareholders who have completed the section of the Fund Application entitled
"Shareholder Privileges" are eligible to make telephone requests for redemptions
(without charge) and may do so by telephoning the Fund at 877-OSFUNDS
(673-8637). A shareholder who has not completed the Shareholder Privileges
section of the Application but who wishes to become eligible to make telephone
redemptions, should designate a change in such instructions by writing to the
Transfer Agent. Please note that such changed instructions must (i) be signed by
the registered owner(s) of the shares exactly as the account is registered and
signature guaranteed, and (ii) include the name of the account, the account
number and the name of the Fund.
Telephone redemptions cannot be accepted with respect to shares represented by
certificates or for IRA accounts. In such cases, redemption can only be made by
mail as described above under "Redemption of Shares - How do I redeem shares by
mail?" Telephone requests for redemptions (or exchanges - see "Exchange
Privilege" above) received before the close of business of the NYSE (currently
4:00 pm, Eastern time) on a business day will be priced and processed as of the
close of business on that day; requests received after that time will be
processed as of the close of business on the next business day.
As noted above, the Funds will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine and may, along with their
service contractors, be liable for a failure to use such procedures. See
"Exchange Privilege - How can I make exchanges by telephone?" above.
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Shareholders should be aware that, at times, the volume of telephone calls or
other factors beyond a Fund's control may make it difficult to reach the
Transfer Agent by telephone. This will be true particularly during periods of
drastic economic or market changes. In the event of difficulty in reaching the
Transfer Agent, shareholders should continue to telephone or utilize the written
redemption procedures described above under "Redemption of Shares - How do I
redeem shares by mail?"
The Funds reserve the right to terminate the telephone redemption privilege at
any time and, if so terminated, will provide the shareholders with written
notice of such termination. Each Fund reserves the right to suspend temporarily
telephone redemptions in emergency circumstances or in cases where, in the
judgment of the Fund, continuation of the privilege would be detrimental to the
Fund and its shareholders as a whole. Such temporary suspension can be without
prior notification.
WHAT OPTIONS DO I HAVE IN RECEIVING REDEMPTION PROCEEDS?
Redemption proceeds may be sent to shareholders by mail or by wire as described
below. Wire redemptions will only be made if the Transfer Agent has received
appropriate written wire instructions. Because of fluctuations in the value of a
Fund's portfolio, the net asset value of shares redeemed may be more or less
than the investor's cost.
REDEMPTION BY MAIL. In the case of shareholders who request that their
redemption proceeds be sent by mail, the Transfer Agent mails checks for
redemption proceeds typically within one or two business days, but no later than
seven days, after it receives the request and all the necessary documents.
REDEMPTION BY WIRE. In the case of shareholders who request that their
redemption proceeds be sent by bank wire, the Transfer Agent typically wires
redemption proceeds the next business day, but no later than seven days, after
it receives the request and all necessary documents.
Wire redemptions will be made only if the Transfer Agent has received
appropriate written instructions from the shareholder either on the Fund
Application or by separate letter. A shareholder who has not indicated wire
instructions on the Application, but would like to have redemption proceeds
wired to a particular bank for each redemption request, should so designate by
writing to the Transfer Agent. Please note that such instructions must (i) be
signed by the registered owner(s) of the shares exactly as the account is
registered and signature guaranteed, and (ii) include the name of the account,
the account number and the name of the Fund to which the request relates.
A shareholder who would like to change the wire instructions indicated on the
Fund Application should designate a change in such instructions by writing to
the Transfer Agent and complying with the requirements set forth in the
preceding paragraph. There is a $1,000 minimum on redemption proceeds by bank
wire. Shareholders who effect redemptions by wire transfer will pay a $12.00
wire transfer fee to the Transfer Agent to cover costs associated with the
transfer. In addition, a shareholder's bank may impose a charge for receiving
wires.
WHEN WOULD THE PAYMENT OF PROCEEDS BE DELAYED?
Please note that shares paid for by personal, corporate or government check
cannot be redeemed before the respective Fund has reasonable belief that the
check has cleared, which may take up to fifteen days after payment of the
purchase price. This delay can be avoided by paying for shares by certified
check or bank-wire. An investor will be notified promptly by the Transfer Agent
if a redemption request cannot be accepted.
WOULD MY ACCOUNT EVER BE INVOLUNTARILY REDEEMED?
Due to the relatively high cost to the Funds of maintaining small accounts, we
ask you to maintain an account balance of at least $2,500. If your balance is
below $2,500 for three months or longer due to redemptions, we have the right to
close your account after giving you 60 days in which to increase your balance.
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INFORMATION ON DISTRIBUTIONS AND TAXES
DIVIDENDS AND OTHER DISTRIBUTIONS GENERALLY
Dividend and capital gain distributions are reinvested in additional shares of
the Funds in your account unless you select another option on your Application.
The advantage of reinvesting distributions arises from compounding; that is, you
receive dividends and capital gain distributions on an increasing number of
shares. Distributions not reinvested are paid by check or transmitted to your
bank account.
INCOME DIVIDENDS
Each Fund declares and pays dividends (if any) annually.
CAPITAL GAINS
A capital gain or loss is the difference between the purchase and sale price of
a security. If a Fund has net capital gains for the year (after subtracting any
capital losses), they are usually declared and paid in December to shareholders
of record on a specified date that month.
TAX INFORMATION
You need to be aware of the possible tax consequences when: (1) a Fund makes a
distribution to your account; (2) you sell Fund shares; or (3) you exchange
shares of a Fund for shares of one of the other O'Shaughnessy Funds or the
Firstar Money Market Fund. The following summary does not apply to retirement
accounts, such as IRAs, which are tax-deferred until you withdraw money from
them.
WILL I PAY TAXES ON REDEMPTIONS OR EXCHANGES OF FUND SHARES?
When you sell or exchange shares in a Fund, you may realize a gain or loss.
Unless you are a dealer in securities, such gain or loss will be capital gain or
loss. Consult your tax advisor concerning the tax rate applicable to your sale
or exchange of Fund shares.
A loss recognized on a sale or exchange of shares of the Fund will be disallowed
if other Fund shares are acquired (whether through automatic reinvestment of
dividends or otherwise) within a 61-day period beginning 30 days before and
ending 30 days after the date that the shares are disposed of. In such case, the
basis of the shares acquired will be adjusted to reflect the disallowed loss. In
addition, if you realize a loss on the sale or exchange of Fund shares held six
months or less, your short-term loss recognized is reclassified to long-term to
the extent of any long-term capital gain distribution received.
WILL I PAY TAXES ON FUND DISTRIBUTIONS?
Distributions of ordinary income and short-term capital gains are taxable as
ordinary income. The dividends of each Fund will be eligible for the 70%
deduction for dividends received by corporations only to the extent the Fund's
income consists of dividends paid by U.S. corporations. Distributions designated
as capital gains dividends are taxable as capital gains regardless of the length
of time shares of the Fund have been held.
WHAT ARE THE TAX EFFECTS OF BUYING SHARES BEFORE A DISTRIBUTION?
If you buy shares of a Fund shortly before or on the "record date" - the date
that establishes you as the person to receive the upcoming distribution - you
will receive, in the form of a taxable distribution, a portion of the money you
just invested. Therefore, you may wish to find out the Fund's record date(s)
before investing. Of course, a Fund's share price may, at any time, reflect
undistributed capital gains or unrealized appreciation.
The foregoing is a general and abbreviated summary of the applicable provisions
of the Code and Treasury regulations presently in effect, and does not address
the state and local tax consequences of an investment in the Funds. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
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regulations are subject to change by legislative or administrative action either
prospectively or retroactively. For additional information regarding the federal
income tax consequences of an investment in a Fund, see "Additional Information
about Dividends and Taxes" in the Statement of Additional Information.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, state, local or foreign taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Funds.
PERFORMANCE INFORMATION
This section should help you understand the terms used to describe Fund
performance. The Funds' annual report will contain additional performance
information and will be available upon request and without charge.
WHAT IS TOTAL RETURN?
This tells you how much an investment in a Fund has changed in value over a
given time period. It reflects any net increase or decrease in the share price
and assumes that all dividends and capital gains (if any) paid during the period
were reinvested in additional shares. Including reinvested distributions means
that total return numbers include the effect of compounding, i.e, you receive
income and capital gain distributions on an increasing number of shares.
Advertisements for a Fund may include cumulative or compound average annual
total return figures, which may be compared with various indices, other
performance measures, or other mutual funds.
WHAT IS CUMULATIVE TOTAL RETURN?
This is the actual rate of return on an investment for a specified period. A
cumulative return does not indicate how much the value of the investment may
have fluctuated between the beginning and the end of the period specified.
WHAT IS AVERAGE ANNUAL TOTAL RETURN?
This is always hypothetical. Working backward from the actual cumulative return,
it tells you what constant year-by-year return would have produced the actual,
cumulative return. By smoothing out all the variations in annual performance, it
gives you an idea of the investment's annual contribution to your portfolio
provided you held it for the entire period in question.
NET ASSET VALUE
The price at which each Fund's shares are purchased or redeemed is the Fund's
next determined net asset value per share. The net asset value per share is
calculated as of the close of the NYSE (currently 4:00 pm, Eastern time) on each
day that the NYSE is open for business and on each other day in which there is a
sufficient degree of trading in a Fund's portfolio securities that the current
net asset value of the Fund's shares may be materially affected by changes in
the value of the Fund's portfolio securities.
HOW IS NET ASSET VALUE DETERMINED?
Each Fund determines the net asset value per share by subtracting the Fund's
total liabilities from the Fund's total assets (the value of the securities that
the Fund holds plus cash and other assets), dividing the remainder by the total
number of shares outstanding, and adjusting the result to the nearest full cent.
HOW ARE THE SECURITIES HELD IN A FUND'S PORTFOLIO VALUED?
Securities listed on the NYSE, American Stock Exchange or other national
exchanges are valued at the last sale price on such exchange on the day as of
which the net asset value per share is to be calculated. Over-the-counter
28
<PAGE>
securities included in the NASDAQ National Market System are valued at the last
sale price. If there is no sale on a particular security on such day, it is
valued at the mean between the bid and asked prices. Other securities, to the
extent that market quotations are readily available, are valued at market value
in accordance with procedures established by the Board of Directors. Any
securities and other assets, for which market quotations are not readily
available, are valued in good faith in a manner determined by the Directors of
the Funds best to reflect their fair value.
OTHER SHAREHOLDER SERVICES
AUTOMATIC INVESTMENT PLAN
An Automatic Investment Plan allows a shareholder to make automatic monthly or
quarterly investments into a Fund account, in amounts of at least $100, by
having the Transfer Agent draw an automatic clearing house (ACH) debit
electronically against a shareholder's checking or savings account. A
shareholder may establish an Automatic Investment Plan by completing the
appropriate section on the Application for new accounts or by calling the Fund
at 877-OSFUNDS (673-8637) and requesting an Automatic Investment Plan
Application for existing accounts. A shareholder should be aware that a signed
Application should be received by the Transfer Agent at least 15 business days
prior to the initial transaction. The Transfer Agent will assess a $20 fee if
the automatic investment cannot be made due to insufficient funds, stop payment,
or for any other reason. The Fund cannot guarantee acceptance by your bank.
SYSTEMATIC CASH WITHDRAWAL PLAN
When an account of $10,000 or more is opened or when an existing account reaches
that size, a shareholder may participate in the Fund's Systematic Cash
Withdrawal Plan by filling out the appropriate part of the Application. Under
this plan, a shareholder may receive (or designate a third party to receive) a
monthly or quarterly check in a stated amount of not less than $50.00. Shares of
the respective Fund will be redeemed as necessary to meet withdrawal payments.
All participants must elect to have their dividends and capital gain
distributions reinvested automatically. A shareholder who decides later to use
this service should call the Fund at 877-OSFUNDS (673-8637).
REPORTS TO SHAREHOLDERS
Each time a shareholder invests, redeems, transfers or exchanges shares, or
receives a distribution, the Fund will send a confirmation of the transaction
which will include a summary of all of the shareholder's most recent
transactions.
At such time as prescribed by law, the Fund will send to each shareholder the
following reports (if they are applicable), which may be used in completing U.S.
income tax returns:
Form 1099-DIV Report taxable distributions during the preceding calendar year.
(If a shareholder did not receive taxable distributions in the previous year,
such shareholder will not be sent a 1099-DIV.)
Form 1099-B Reports redemption proceeds paid (including those resulting from
exchanges) during the preceding calendar year.
Form 1099-R Report distributions from retirement plan accounts during the
preceding calendar year. Form 5498 Reports contributions to IRAs for the
previous calendar year.
If an investor's shares are held by an outside broker in an omnibus account, it
is the responsibility of such outside broker to provide shareholders whose
shares are held in the omnibus account with any reports prescribed by law which
the shareholders require in order to complete their U.S. income tax returns.
Shareholders will also receive annual and semi-annual reports including the
financial statements of the Funds for the respective periods.
29
<PAGE>
RETIREMENT PLANS
Eligible investors may invest in the Fund under the following prototype
retirement plans:
"Education" Individual Retirement Account (IRA) "Traditional" Individual
Retirement Account (IRA) "Roth" Individual Retirement Account (IRA)
Simplified Employee Pension (SEP) for sole proprietors, partnerships and
corporations Profit-Sharing and Money Purchase Pension Plans for
corporations and their employees
AUTOMATIC REINVESTMENT PLAN
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund at the net
asset value per share at the close of business on the record date, unless
otherwise specified on the Application or requested by a shareholder in writing.
If the Transfer Agent does not receive a written request for subsequent
dividends and/or distributions to be paid in cash at least three full business
days prior to a given record date, the dividends and/or distributions to be paid
to a shareholder will be reinvested. If a shareholder elects to receive
dividends and distributions in cash and the U.S. Postal Service cannot deliver
the checks, or if the checks remain uncashed for six months, the shareholder's
distribution checks will be reinvested into the shareholder's account at the
then current net asset value.
No person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund, the Investment Adviser, the Administrator or
the Distributor. This Prospectus does not constitute an offering in any state in
which such offering may not lawfully be made.
30
<PAGE>
INVESTMENT MANAGER
O'Shaughnessy Capital Management, Inc.
35 Mason Street
Greenwich, Connecticut 06830
ADMINISTRATOR
Investment Company Administration, LLC
4455 E. Camelback Road, Suite 261 E
Phoenix, Arizona 85018
DISTRIBUTOR
First Fund Distributors, Inc.
4455 E. Camelback Road, Suite 261 E
Phoenix, Arizona 85018
TRANSFER AGENT
Firstar Mutual Fund Services, LLC
615 E. Michigan Street
Milwaukee, Wisconsin 53202
AUDITORS
McGladrey & Pullen, LLP
555 Fifth Avenue
New York, New York 10017-2416
LEGAL COUNSEL
Swidler Berlin Shereff Friedman, LLP
919 Third Avenue
New York, New York 10022
O'Shaughnessy Funds Inc.
Building New Standards For Investment Success
Dogs of the Market Fund(TM)
35 Mason Street, Greenwich, Connecticut 06830
Toll-Free 877-OSFUNDS (673-8637)
www.osfunds.com
NASDAQ Symbol: OSDGX
THE FUND
O'Shaughnessy Dogs of the Market Fund(TM) (the "Fund") is an investment
portfolio or series of O'Shaughnessy Funds, Inc., an open-end management
investment company with multiple portfolios or series available for investment.
INVESTMENT OBJECTIVE
The investment objective of the Fund is to seek total return, consisting of
capital appreciation and current income.
STRATEGY INDEXING
The Fund seeks to achieve its investment objective through a process of Strategy
Indexing(R) which is pursued through the implementation of an investment
strategy developed by O'Shaughnessy Capital Management, Inc., the Fund's
investment manager (the "Manager"). The Fund invests substantially all of its
assets in common stocks selected through this strategy.
The investment strategy of the Dogs of the Market Fund (the "Dogs of the Market
Strategy") entails the selection of 30 common stocks from the Dow Jones
Industrial Average and the S&P 400 Industrial Average which are high dividend
yielding common stocks of large well-established companies and meet certain
criteria as described in this prospectus. (The Dogs of the Market Strategy is
referred to as a "Strategy.") For a more detailed description of the Fund's
investment strategy, see "About the Fund - Investment Objective and Policies."
PURCHASE OF SHARES
Shares of the Fund will be offered to investors during the continuous offering
at a price equal to the next determined net asset value per share. There are no
fees or charges to purchase or sell shares or to reinvest dividends, however, a
fee applies to certain short-term redemptions, see "Information About Your
Account - Redemption of Shares". There are no Rule 12b-1 fees.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
PROSPECTUS
November 30, 1998
<PAGE>
This Prospectus contains the information you should know about the Fund before
you invest. Please keep it for future reference. A statement containing
additional information about the Fund, dated November 30, 1998 has been filed
with the Securities and Exchange Commission and is incorporated by reference
into this Prospectus. It is available, at no charge, by calling or by writing
the Fund at the telephone number or address set forth above. The SEC maintains
an internet site (http://www.sec.gov) that contains the SAI, other material
incorporated by reference and other information about companies that file
electronically with the SEC.
O'Shaughnessy Capital Management, Inc.
Manager
First Fund Distributors, Inc.
Distributor
TABLE OF CONTENTS
About the Fund ............................................. 3
Financial Highlights ....................................... 5
Management and Organization of the Fund .................... 12
Information about Your Account ............................. 14
Information on Distributions and Taxes ..................... 21
Performance Information .................................... 22
Net Asset Value ............................................ 22
Other Shareholder Services ................................. 23
2
<PAGE>
ABOUT THE FUND
TRANSACTION AND FUND EXPENSES
The following table and example should help you understand the kinds of expenses
you will bear directly or indirectly as a Fund shareholder. In the table,
"Shareholder Transaction Expenses," shows that you pay no sales charges. All the
money you invest in the Fund goes to work for you, subject to the fees noted in
the table. "Annual Fund Operating Expenses" shows how much it would cost to
operate the Fund for a year, based on estimated expenses through the end of the
Fund's first full year. These costs you pay indirectly, because they are
deducted from the Fund's total assets before the daily share price is calculated
and before dividends and other distributions are made. You will not see these
expenses on your account statement.
Fee Table
Shareholder Transaction Expenses:
Maximum Sales Charge Imposed on
Purchases (as a percentage of offering price) None
Maximum Sales Charge Imposed on
Dividend Reinvestments None
Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, whichever is lower) None
Redemption fee (a)
(on shares held less than 90 days) 1.50%
Exchange Fee (a) (b)
(on shares held less than 90 days) 1.50%
Annual Fund Operating Expenses
(as a percentage of average net assets):
Management Fees (c) (d) 0.74%
Rule 12b-1 Fees None
Other Expenses (d) 0.72%
Total Fund Operating Expenses (d) 1.46%
1.46% was the Fund's operating expense ratio for the fiscal year ended September
30, 1998. The Advisor is limiting the Fund's operating expense ratio to 1.09%
for the fiscal year ending September 30, 1999.
(a) A 1.5% redemption fee, payable to the Funds, will be assessed on shares
purchased and held for less than 90 days. Shareholders who effect
redemptions of Fund shares by wire transfer will pay a $12.00 wire transfer
fee. See "Information About Your Account - Redemption of Shares."
(b) Shareholders who effect exchanges of shares of the Fund for shares of
another fund by telephone in accordance with the exchange privilege will be
charged a $5.00 exchange fee in addition to any fees applicable as
indicated in footnote (a). See "Information About Your Account - Exchange
Privilege."
(c) See "Management and Organization of the Fund - Management."
(d) To limit the Fund's expenses, the Manager has voluntarily agreed to reduce
its fees or reimburse the Fund through at least September 30, 1999 to
ensure that the Fund's total operating expenses do not exceed 1.09% of
average net assets annually. Any such reductions made by the Manager in its
fees or reimbursement of expenses with respect to the Fund are subject to
reimbursement by the Fund to the Manager (recapture by the Manager),
provided the Fund is able to effect such reimbursement while keeping total
operating expenses at or below 1.09% of average net assets annually, and
that no reimbursement will be made after September 30, 2000. Any amounts
reimbursed will have the effect of increasing fees otherwise paid by the
Fund.
3
<PAGE>
EXAMPLE:
An investor would pay the following expenses on a $1,000 investment assuming:
(1) the operating expense ratio set forth in the table above; (2) a 5% annual
return throughout the period; and (3) redemption at the end of the period:
Cumulative Expenses Paid for the Period of:
One year $ 15
Three years $ 47
Five years $ 80
Ten years $176
The table and example are intended to assist investors in understanding the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The example should not be considered a representation of past or
future expenses or annual rate of return, and actual expenses or annual rate of
return may be more or less than those shown.
4
<PAGE>
FINANCIAL HIGHLIGHTS
The table that follows is included in the Fund's Annual Report and has been
audited by McGladrey & Pullen, LLP, Independent Certified Public Accountants.
Their reports on the financial statements and financial highlights are included
in the Annual Report. The financial statements and financial highlights are
incorporated by reference into (are legally a part of) the Fund's Statement of
Additional Information.
Per Share Operating Performance
(For a share outstanding throughout the period)
Year November 1, 1996*
Ended through
September 30, 1998 September 30, 1997
------------------ ------------------
Net asset value, beginning of period $ 11.96 $ 10.00
Income from investment operations:
Net investment income 0.10 0.10
Net realized & unrealized gain
on investments 0.02 1.87
Total from investment operations 0.12 1.97
Less distributions:
From net investment income (0.09) (0.01)
From net capital gains (0.59) (0.00)
Total distributions (0.68) (0.01)
Net asset value, end of period $ 11.40 $ 11.96
Total Return 0.74% 19.74%**
Ratios/supplemental data:
Net assets, end of period (millions) $ 22.6 $ 7.2
Ratio of expenses to average net assets:
Before expense reimbursement 1.46% 4.28%+
After expense reimbursement 1.46% 1.99%+
Ratio of net investment income
(loss) to average net assets:
Before expense reimbursement 1.24% (0.51%)+
After expense reimbursement 1.24% 1.78%+
Portfolio turnover rate 44.35% 118.44%
* Commencement of operations.
** Not Annualized.
+ Annualized.
INVESTMENT OBJECTIVE AND POLICIES
To help you decide whether the Fund is appropriate for you, this section takes a
closer look at the Fund's investment objective and policies.
WHAT IS THE FUND'S OBJECTIVE?
The investment objective of the Fund is to seek total return, consisting of
capital appreciation and current income. There can be no assurance that the Fund
will achieve its investment objective.
5
<PAGE>
HOW DOES THE FUND ACHIEVE ITS OBJECTIVE?
The Dogs of the Market Fund seeks to achieve its investment objective through a
process of Strategy Indexing(R), which is pursued through the implementation of
the Dogs of the Market Strategy. This Strategy was developed by the Manager.
Other than assets temporarily maintained in cash or liquid short-term securities
pending investment to meet redemption requests or to comply with federal tax
laws applicable to mutual funds, the Fund will invest substantially all of its
assets in common stocks selected through the Strategy as described more fully
below.
WHAT IS THE DOGS OF THE MARKET STRATEGY?
The Dogs of the Market Strategy selects thirty stocks using the following
selection criteria:
1. Ten stocks in the Fund's portfolio will be the highest yielding stocks from
the Dow Jones Industrial Average1 (the "Dow Dogs").
2. Twenty stocks will be the highest yielding stocks from the S&P 400 Industrial
Average that also have: a) market capitalization exceeding $1 billion and (b) an
issue of common stock outstanding rated A or higher by Standard & Poor's.
HOW DOES INVESTMENT THROUGH THE DOGS OF THE MARKET STRATEGY WORK?
Upon implementation of the Strategy, the Manager purchased 30 stocks for the
Fund as dictated by the Dogs of the Market Strategy, based on information as of
that date. The Fund's holdings of each stock in its portfolio were initially
weighted equally by dollar amount. Thereafter, the Manager re-balances the
portfolio of the Fund annually in the first month of the succeeding year (the
"Re-Balance Date"), in accordance with the Fund's Strategy, based on information
determined on or about the immediately preceding December 31. That is, on the
Re-Balance Date of each year, stocks meeting the Strategy's criteria based on
information determined on or about immediately preceding December 31 will be
purchased for the Fund to the extent not then held, stocks which no longer meet
the criteria as of such date will be sold, and the holdings of all stocks in the
Fund that continue to meet the criteria will be appropriately increased or
decreased to result in equal weighting of all stocks in the portfolio.
1. "Dow Jones Industrial Average" is a trademark of Dow Jones & Company, Inc.
("Dow Jones"). Neither the Fund nor the Manager is affiliated with, nor is the
Fund sponsored by Dow Jones. Dow Jones has not participated in any way in the
creation of the Fund or in the selection of stocks included in the Fund, nor has
Dow Jones reviewed or approved any information included in this Prospectus.
When the Fund receives new cash flow from the sale of its shares over the course
of the year, such cash will first be used to the extent necessary to meet
redemptions. The balance of any such cash will be invested in the 30 stocks
selected for the Fund pursuant to the Strategy as of the most recent rebalancing
of the Fund's portfolio, in proportion to the current weightings of such stocks
in the portfolio and without any intention to rebalance the portfolio on an
interim basis. It is anticipated that such purchases will generally be made on a
weekly basis, but may be on a more or less frequent basis in the discretion of
the Manager, depending on certain factors, including the size of the Fund and
the amount of cash to be invested. To the extent redemptions exceed new cash
flow into the Fund, the Fund will meet redemption requests by selling securities
on a pro rata basis, based on the current weightings of such securities in the
portfolio. Thus, interim purchases and sales of securities between annual
Re-Balance Dates will be based on current portfolio weightings and will be made
without regard to whether or not a particular security continues to meet the
Strategy's criteria.
WILL THE MANAGER DEVIATE FROM THE STRATEGY?
The Manager is committed to a rigorous, disciplined approach and cannot
presently anticipate any circumstances which would cause it to diverge from the
Strategy described above in managing the Fund.
6
<PAGE>
IS THERE ANYTHING ELSE I SHOULD KNOW ABOUT THE STRATEGY?
The Fund offers a disciplined approach to investing, based on a buy and hold
philosophy over the course of each year, which ignores market timing and rejects
active management. The Fund will adhere to its Strategy regardless of the
performance of the stock market in a particular period.
The Manager anticipates that the 30 stocks held in the Fund's portfolio will
remain the same throughout the course of a year, despite any adverse
developments concerning an issuer, an industry, the economy or the stock market
generally. However, if during the course of a year it is determined that
earnings or other factual criteria that form the basis for selecting a security
are false or incorrect, the Manager reserves the right to replace such a
security with another meeting the criteria of the Strategy. Also, due to
purchases and redemptions of Fund shares during the year, changes in the market
value of the stock positions held in the Fund's portfolio and compliance with
the federal tax laws, it is likely that stock positions will not be weighted
equally at all times during a year.
The Fund will be substantially fully invested in stocks selected as described
above at all times.
HOW CAN I DECIDE IF THE FUND IS AN APPROPRIATE INVESTMENT FOR ME?
Consider your investment goals, your time horizon for achieving them, and your
tolerance of risk. The Fund is not an appropriate investment for those who seek
short-term investments, since the Manager expects the benefits of investing in
the Fund to be derived from investing assets in accordance with the Strategy
over the long-term. See "What is the historical performance of the Strategy?"
below. A discussion of the risks associated with investment in the Fund is
contained in "Risk Factors" below.
IS THERE OTHER INFORMATION I SHOULD REVIEW BEFORE MAKING A DECISION?
Be sure to review "Other Investment Policies and Practices" which discusses
certain additional investment practices of the Fund. In addition, historical
information relating to the performance of the Strategy over time is discussed
below.
WHAT IS THE HISTORICAL PERFORMANCE OF THE STRATEGY?
The following graphs and tables compare the actual performance of the S&P 500
Index (the "S&P 500"), the hypothetical performance of the Strategy for the
historical periods indicated and the actual performance of the Dogs of the
Market Fund for 1997. Returns for the Strategy are the returns on a hypothetical
portfolio of stocks which was rebalanced annually in accordance with the
Strategy for the historical periods indicated. The Strategy has been developed
and tested solely by the Manager.
Actual performance of the Fund may differ from the quoted performance of the
Strategy for the following reasons: the Fund may not be fully invested at all
times; not all stocks in the Fund's portfolio may be weighted equally at all
times due to appreciation or depreciation in a stock's value; purchases and
sales of stocks for the Fund's portfolio are likely to occur between annual
rebalancings due to cash inflows and outflows (from purchases and redemptions of
Fund shares) during the year; in managing the Fund, the Manager may make limited
modifications to the Strategy as necessary to comply with federal tax laws; and
the returns of the Strategy do not reflect the advisory fees, commission costs,
expenses or taxes which would be borne by the Fund.
Because the returns for the Strategy are hypothetical, they do not represent
actual trading or the impact that material economic and market factors might
have had on the Manager's decision-making under actual circumstances. However,
except as described above, the Manager can presently foresee no circumstances
that would cause deviation from the Strategy in managing the Fund. All returns
contained in the graphs and charts below reflect reinvestment of dividends and
other earnings.
7
<PAGE>
Date S&P 500 Dogs of the Market Fund
---- ------- -----------------------
31-Dec-74 10,000 10,000
31-Dec-75 13,721 15,052
31-Dec-76 16,993 19,644
31-Dec-77 15,772 19,094
31-Dec-78 16,807 19,881
31-Dec-79 19,906 23,968
31-Dec-80 26,360 29,060
31-Dec-81 25,066 31,154
31-Dec-82 30,432 41,085
31-Dec-83 37,283 54,242
31-Dec-84 39,620 59,476
31-Dec-85 52,362 78,629
31-Dec-86 62,033 98,969
31-Dec-87 65,278 106,714
31-Dec-88 76,251 138,092
31-Dec-89 100,262 178,387
31-Dec-90 97,084 177,564
31-Dec-91 126,743 235,063
31-Dec-92 136,465 267,390
31-Dec-93 150,097 301,552
31-Dec-94 152,064 316,539
31-Dec-95 208,981 433,279
31-Dec-96 257,193 523,270
31-Dec-97 342,993 658,274
O'Shaughnessy Dogs of the Market Strategy Index
vs. the S&P 500* (December 31, 1974 - December 31, 1997)
Year Ending S&P 500 Dogs of the Market Strategy
----------- ------- ---------------------------
12/31/75 37.20% 50.52%
12/31/76 23.84% 30.51%
12/31/77 -7.18% -2.80%
12/31/78 6.56% 4.12%
12/31/79 18.44% 20.56%
12/31/80 32.42% 21.25%
12/31/81 -4.91% 7.20%
12/31/82 21.41% 31.88%
12/31/83 22.51% 32.02%
12/31/84 6.27% 9.65%
12/31/85 32.16% 32.20%
12/31/86 18.47% 25.87%
12/31/87 5.23% 7.83%
12/31/88 16.81% 29.40%
12/31/89 31.49% 29.18%
12/31/90 -3.17% -0.46%
12/31/91 30.55% 32.38%
12/31/92 7.67% 13.75%
12/31/93 9.99% 12.78%
12/31/94 1.31% 4.97%
12/31/95 37.43% 36.88%
12/31/96 23.07% 20.77%
12/31/97 33.36% 25.80%
- ----------
+ Returns for 1997 are actual for the Dogs of the Market Fund, net of fees
and expenses.
* This Chart and the Index Performance Statistics and Comparisons represent
past performance of the S&P 500, an unmanaged index of securities, and the
Dogs of the Market Strategy, but not the Dogs of the Market Fund, applied
retroactively, and should not be considered indicative of future results.
The performance of the strategy shown is a hypothetical example of the
performance of the strategy found in the backtest, using an initial $10,000
value, if the Strategy had been in existence and employed from 1974 through
1996, together with the actual return of the O'Shaughnessy Dogs of the
Market Fund for 1997. Performance of the Strategy and the S&P 500 do not
reflect advisory fees, commissions, expenses or taxes that the Fund bears.
The Strategy's performance as well as that of the S&P 500 would be lower if
such fees and expenses were deducted. Read the prospectus carefully before
investing.
8
<PAGE>
Summary results for S&P 500 and Hypothetical Results
for Dogs of the Market Strategy Stocks,
December 31, 1974 December 31, 1997.
These Performance Statistics and Comparisons represent past performance of the
S&P 500, an unmanaged index of securities, and the Dogs of the Market Strategy,
but not the Dogs of the Market Fund, applied retroactively, and should not be
considered indicative of future results. The performance of the strategy shown
is a hypothetical example of the performance of the strategy found in the
backtest, using an initial $10,000 value, if the Strategy had been in existence
and employed from 1974 through 1996, together with the actual return of the
O'Shaughnessy Dogs of the Market Fund for 1997. Performance of the Strategy and
the S&P 500 do not reflect advisory fees, commissions, expenses or taxes that
the Fund bears. The Strategy's performance as well as that of the S&P 500 would
be lower if such fees and expenses were deducted. Read the prospectus carefully
before investing.
S&P 500 Dogs of the Market Strategy
------- ---------------------------
Arithmetic average 17.43% 20.71%
Standard deviation
of return 13.68% 13.31%
Sharpe risk-adjusted ratio* 76.00 103.00
3-yr compounded** 31.15% 27.64%
5-yr compounded** 20.24% 19.74%
10-yr compounded* 18.05% 19.96%
15-yr compounded** 17.52% 20.31%
20-yr compounded** 16.65% 19.36%
Compound Annual Return 16.61% 19.97%
$10,000 becomes: $342,992.70 $658,274.25
- ----------
* The Sharpe ratio takes a portfolio's volatility, as measured by its
standard deviation of return, into account. The higher the Sharpe ratio,
the better the portfolio's risk-adjusted return. The Sharpe ratio is
calculated by subtracting the risk free Treasury bill return from the
portfolio's return and then dividing that number by the portfolio's overall
standard deviation of return.
** Quoted return is for the most recent period ended December 31, 1997.
+ Returns for 1997 are actual for the Dogs of the Market Fund, net of fees
and expenses.
OTHER INVESTMENT POLICIES AND PRACTICES
This section takes a detailed look at other investment policies and practices of
the Fund. The Fund's investments are subject to further restrictions and risks
described in the Statement of Additional Information.
Shareholder approval is required to change the Fund's investment objective and
certain investment restrictions noted in the following section as "fundamental
policies." The Manager also follows certain "operating policies" which can be
changed without shareholder approval. However, significant changes in operating
policies are discussed with shareholders in Fund reports.
The Fund's holdings in certain kinds of investments cannot exceed maximum
percentages of total assets, which are set forth below. While these restrictions
provide a useful level of detail about the Fund's investments, investors should
not view them as an accurate gauge of the potential risk of such investments.
The net effect of a particular investment depends on its volatility and the size
of its overall return in relation to the performance of all the Fund's other
investments.
CASH AND SHORT-TERM SECURITIES. The Fund may temporarily invest a portion of its
total assets in cash or liquid short-term securities pending investment of such
assets in stocks in accordance with the Fund's investment strategy and in order
9
<PAGE>
to meet redemption requests. The Fund may also invest a portion of its assets in
cash or liquid short-term securities for temporary defensive purposes, but is
under no obligation to do so. Short-term securities in which the Fund may invest
include certificates of deposit, commercial paper, notes, obligations issued or
guaranteed by the U.S. Government or any of its agencies or instrumentalities,
and repurchase agreements involving such securities. See "Repurchase
Agreements," below.
The Manager does not expect assets invested in cash or liquid short-term
securities to exceed 5% of the Fund's total assets at any time.
REPURCHASE AGREEMENTS. The Fund may invest in repurchase agreements. The Fund
may only enter into repurchase agreements with a member bank of the Federal
Reserve System or a well-established securities dealer in U.S. government
securities. In the event of a bankruptcy or default by the seller of the
repurchase agreement the Fund may suffer delays and incur costs or possible
losses in liquidating the underlying security which is held as collateral, and
the Fund may incur a loss if the value of the collateral declines during this
period. As a matter of operating policy, the Fund may not invest more than 15%
of its total assets in repurchase agreements maturing in more than seven days.
ILLIQUID SECURITIES. The Fund may invest up to 15% of its net assets in illiquid
securities. Illiquid securities are securities which cannot be readily resold
because of legal or contractual restrictions or which cannot otherwise be
marketed, redeemed, put to the issuer or a third party, or which do not mature
within seven days, or which the Manager, in accordance with guidelines approved
by the Board of Directors, has not determined to be liquid.
The Fund may purchase, without regard to the above limitation, securities that
are not registered under the Securities Act of 1933 (the "Securities Act") but
that can be offered and sold to "qualified institutional buyers" under Rule 144A
under the Securities Act, provided that the Board of Directors, or the Manager
pursuant to guidelines adopted by the Board, continuously determines, based on
the trading markets for the specific Rule 144A security, that it is liquid.
LENDING OF PORTFOLIO SECURITIES. Like other mutual funds, the Fund may from time
to time lend securities from its portfolio to banks, brokers and other financial
institutions to earn additional income. The principal risk is that the borrower
may default on its obligation to return borrowed securities, because of
insolvency or otherwise. In this event, the Fund could experience delays in
recovering its securities and capital. In accordance with applicable law, the
Fund may not lend portfolio securities representing in excess of 33 1/3% of its
total assets. The lending policy is a fundamental policy.
BORROWING. The Fund may borrow money from banks in an amount up to 33% of its
total assets for extraordinary or emergency purposes such as meeting anticipated
redemptions, and may pledge assets in connection with such borrowing. The
borrowing policy is a fundamental policy.
INDUSTRY CONCENTRATION. The Fund may not invest more than 25% of its total
assets in any one industry (excluding U.S. Government securities). The
concentration policy is a fundamental policy.
FOREIGN SECURITIES. The Fund may invest up to 25% of its total assets in
securities of foreign issuers, either through (i) direct purchase of securities
of foreign issuers or (ii) purchase of American Depository Receipts ("ADRs")
which are dollar-denominated securities of foreign issuers traded in the U.S.
Such investments increase diversification of the Fund's portfolio and may
enhance return, but they also involve some special risks such as exposure to
potentially adverse local political and economic developments, nationalization
and exchange controls; potentially lower liquidity and higher volatility;
possible problems arising from regulatory practices that differ from U.S.
standards; the imposition of withholding taxes on income from such securities;
confiscating taxation; and the chance that fluctuations in foreign exchange
rates will decrease the investment's value (favorable changes can increase its
value). These risks are heightened for investment in developing countries and
there is no limit on the amount of the Fund's foreign investments that may be
invested in such countries.
The Fund may invest in ADRs through both sponsored and unsponsored arrangements.
The issuers of unsponsored ADRs are not obligated to disclose material
information in the United States, and therefore, there may not be a correlation
between such information and the market value of the ADRs.
Hedging and Return Enhancement Strategies. The Fund is permitted to utilize
certain hedging and return enhancement strategies and techniques such as options
on securities and securities indices, futures contracts on securities and
securities indices and options on futures contracts, as described below.
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Futures (a type of potentially high-risk derivative) are often used to manage or
hedge risk, because they enable the investor to buy or sell an asset in the
future at an agreed upon price. Options (another potentially high-risk
derivative) give the investor the right, but not the obligation, to buy or sell
an asset at a predetermined price in the future. The Fund may buy and sell
futures and options contracts for any number of reasons, including: to manage
its exposure to changes in securities prices; as an efficient means of adjusting
its overall exposure to certain markets; in an effort to enhance income; and to
protect the value of portfolio securities. The Fund may purchase, sell, or write
call and put options on securities, financial indices and futures.
Futures contracts and options may not always be successful hedges; their prices
can be highly volatile. Using them could lower the Fund's total return, and the
potential loss from the use of futures can exceed the Fund's initial investment
in such contracts.
As a matter of operating policy, initial margin deposits and premiums on options
used for non-hedging purposes will not equal more than 5% of the Fund's net
asset value.
FIRM COMMITMENT AGREEMENTS AND WHEN-ISSUED PURCHASES. The Fund may purchase
securities under a firm commitment agreement or on a when-issued basis. Firm
commitment agreements and when-issued purchases call for the purchase of
securities at an agreed-upon price on a specified future date, and would be
used, for example, when a decline in the yield of securities of a given issuer
is anticipated. The Fund as purchaser assumes the risk of any decline in value
of the security beginning on the date of the agreement or purchase. The Fund
will not enter into such transactions for the purpose of leveraging, and
accordingly, will segregate liquid assets with its custodian equal (on a daily
market-to-market basis) to the amount of its commitment to purchase the
when-issued securities and securities subject to the firm commitment agreement.
WARRANTS. The Fund may invest in warrants, which are similar to options to
purchase securities at a specific price valid for a specific period of time. The
Fund may not invest more than 5% of its net assets (at the time of investment)
in warrants (other than those attached to other securities). If the market price
of the underlying security never exceeds the exercise price, the Fund will lose
the entire investment in the warrant. Moreover, if a warrant is not exercised
within the specified time period, it will become worthless and the Fund will
lose the purchase price and the right to purchase the underlying security.
DIVERSIFICATION. In order to maintain the Fund's status as a diversified
investment company, with respect to 75% of the Fund's total assets: 1) not more
than 5% of the Fund's assets may be invested in the securities of a single
issuer (excluding U.S. Government securities); and 2) the Fund may not hold more
than 10% of the outstanding voting securities of a single issuer. The
diversification policy is a fundamental policy.
PORTFOLIO TRANSACTIONS. In executing portfolio transactions, the Fund seeks to
obtain the best net results, taking into account such factors as price
(including the applicable brokerage commission or dealer spread), size of order,
difficulty of execution, operational facilities of the firm involved and the
firm's risk in positioning a block of securities. While the Fund generally seeks
reasonably competitive commission rates, the Fund does not necessarily pay the
lowest commission or spread available. In addition, consistent with the Conduct
Rules of the National Association of Securities Dealers, Inc., the Manager may
consider sales of shares of the Fund as a factor in the selection of brokers or
dealers to execute portfolio transactions for the Fund.
PORTFOLIO TURNOVER. The Fund anticipates that its annual turnover rate should
not exceed 50% under normal conditions. The portfolio turnover rate is
calculated by dividing the lesser of the Fund's annual sales or purchases of
portfolio securities (exclusive of purchases or sales of securities whose
maturities at the time of acquisition were one year or less) by the monthly
average value of the securities in the portfolio during the year. High portfolio
turnover involves correspondingly greater transaction costs in the form of
brokerage commissions and dealer spreads, which are borne directly by the Fund.
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RISK FACTORS
WHAT ARE SOME OF THE POTENTIAL RISKS ASSOCIATED WITH THE STRATEGY?
The Strategy Indexing utilized by the Fund provides a disciplined approach to
investing, based on a buy and hold philosophy during the course of each year,
which ignores market timing and rejects active management. The Fund will adhere
to its Strategy (subject to applicable federal tax requirements relating to
mutual funds), despite any adverse developments concerning an issuer, an
industry, the economy or the stock market generally. This could result in
substantial losses to the Fund, if for example, the stocks selected for the
Fund's portfolio for a given year are experiencing financial difficulty, or are
out of favor in the market because of weak performance, poor earnings forecast,
negative publicity or general market cycles. The Fund is not an appropriate
investment for those who are not comfortable with the Fund's Strategy.
There can be no assurance that the market factors that caused the stocks held in
the Fund's portfolio to meet the Strategy's investment criteria as of
rebalancing in any given year will continue during such year until the next
rebalancing, that any negative conditions adversely affecting a stock's price
will not develop and/or deteriorate during a given year, or that share prices of
a stock will not decline during a given year.
As described above, the Fund's portfolio is rebalanced annually in accordance
with its Strategy. Rebalancing may result in elimination of better performing
assets from the Fund's portfolio and increases in investments in securities with
relatively lower total return.
WHAT ARE SOME POTENTIAL RISKS ASSOCIATED WITH INVESTING PRIMARILY IN COMMON
STOCKS?
The fundamental risk associated with any common stock fund is the risk that the
value of the stocks it holds might decrease. Stock values may fluctuate in
response to the activities of an individual company or in response to general
market and/or economic conditions. Historically, common stocks have provided
greater long-term returns and have entailed greater short-term risks than other
investment choices. Smaller or newer issuers are more likely to realize more
substantial growth as well as suffer more significant losses than larger or more
established issuers. Investments in such companies can be both more volatile and
more speculative. The Fund is not an appropriate investment for those who are
unable or unwilling to assume the risk involved generally with investment in
common stocks.
ARE THERE ANY ADDITIONAL RISKS ASSOCIATED WITH INVESTMENT IN THE FUND?
There is no guarantee that the investment objective of the Fund will be achieved
or that the value of a shareholder's investment in the Fund will not decrease.
MANAGEMENT AND ORGANIZATION OF THE FUND
MANAGEMENT
WHO RUNS THE FUND?
GENERAL OVERSIGHT. O'Shaughnessy Funds, Inc. is governed by a Board of Directors
that meets regularly to review the Fund's investment, performance, expenses, and
other business affairs. The Board elects the Fund's officers.
MANAGER. O'Shaughnessy Capital Management, Inc. acts as investment manager of
the Fund pursuant to a management agreement with O'Shaughnessy Funds on behalf
of the Fund (the "Management Agreement"). In its capacity as investment manager,
the Manager is responsible for selection and management of the Fund's portfolio
investments. For its services, the Fund pays the Manager a fee each month, at
the annual rate of 0.74% of the Fund's average daily net assets.
The Manager's office is located at 35 Mason Street, Greenwich, Connecticut
06830. O'Shaughnessy Capital Management was incorporated in 1988. The Manager
serves as portfolio consultant to a unit investment trust and provides
investment advisory services to investment companies and individual and
institutional accounts with assets in excess of $800 million.
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PORTFOLIO MANAGEMENT. James P. O'Shaughnessy has had the day-to-day
responsibility for managing the Fund's portfolio and developing and executing
the Fund's investment program since inception of the Fund. For the past ten
years, Mr. O'Shaughnessy has served as Chairman and CEO of the Manager, and in
such capacity, has managed equity accounts for high net worth individuals and
served as portfolio consultant to a unit investment trust. Mr. O'Shaughnessy is
recognized as a leading expert and pioneer in quantitative equity analysis. He
is the author of three financial books, Invest Like the Best, What Works on Wall
Street and How to Retire Rich.
DISTRIBUTOR. First Fund Distributors, Inc. (the "Distributor"), a registered
broker-dealer, acts as the principal distributor of the shares of the Fund. The
address of the Distributor is 4455 E. Camelback Road, Suite 261 E, Phoenix,
Arizona 85018. The Distributor provides distribution services to the Fund at no
cost to the Fund.
ADMINISTRATOR. Pursuant to an Administration Agreement, Investment Company
Administration, LLC (the "Administrator") serves as administrator of the Fund.
The Administrator provides certain administrative services, including, among
other responsibilities, coordinating relationships with independent contractors
and agents, preparing for signature by officers and filing of certain documents
required for compliance with applicable laws and regulations, preparing
financial statements, and arranging for the maintenance of books and records.
For its services, the Fund pays the Administrator a fee each month, at the
annual rate of 0.10% of the first $100 million of the Fund's average daily net
assets, 0.05% of the next $100 million of such net assets, and 0.03% of such net
assets over $200 million, with a minimum fee of $40,000 annually. The address of
the Administrator is 4455 E. Camelback Rd., Suite 261 E, Phoenix, Arizona 85018.
The Administrator and the Distributor are under common control and are therefore
considered affiliates of each other.
TRANSFER AGENT AND CUSTODIAN. Firstar Mutual Fund Services, LLC acts as the
Fund's transfer and dividend disbursing agent (the "Transfer Agent"). Firstar
Bank Milwaukee is the Fund's custodian (the "Custodian"). The address of the
Transfer Agent and Custodian is 615 E. Michigan Street, Third Floor, Milwaukee,
Wisconsin 53202.
YEAR 2000 RISK. Like other business organizations around the world, the Fund
could be adversely affected if the computer systems used by its investment
manager and other service providers do not properly process and calculate
information related to dates beginning January 1, 2000. This is commonly known
as the "Year 2000 Issue." The Fund's manager has taken steps that it believes
are reasonably designed to address the Year 2000 Issue with respect to its own
computer systems and the Fund has obtained assurances from the Fund's other
service providers that they are taking comparable steps. However, there can be
no assurance that these actions will be sufficient to avoid any adverse impact
on the Fund.
HOW ARE FUND EXPENSES DETERMINED?
The Management Agreement identifies the expenses to be paid by the Fund. In
addition to the fees paid to the Manager, the Fund pays certain additional
expenses, including but not limited to, the following: shareholder service
expenses; custodial, accounting, legal, and audit fees; administrative fees;
costs of preparing and printing prospectuses and reports sent to shareholders;
registration fees and expenses; proxy and annual meeting expenses (if any); and
independent Director fees and expenses. The Manager has voluntarily agreed to
reduce fees payable to it by the Fund or reimburse the Fund to the extent
necessary to limit the Fund's aggregate annual operating expenses to 2.00% of
average net assets (the "expense cap"). Any such reductions made by the Manager
in its fees or reimbursement of expenses with respect to the Fund are subject to
recapture by the Manager provided the Fund is able to effect such recapture
while keeping total operating expenses at or below the annual expense cap, and
that no recapture will be made after September 30, 2000. Any amounts reimbursed
will have the effect of increasing fees otherwise paid by the Fund.
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ORGANIZATION
HOW IS THE FUND ORGANIZED?
The Fund is an investment portfolio or series of O'Shaughnessy Funds. There are
three other investment portfolios of O'Shaughnessy Funds, shares of which are
not offered for sale through this Prospectus: O'Shaughnessy Cornerstone Value
Fund, O'Shaughnessy Cornerstone Growth Fund and O'Shaughnessy Aggressive Growth
Fund (the "other O'Shaughnessy Funds"). The charter of O'Shaughnessy Funds
provides that the Board of Directors may issue additional investment portfolios
of shares and/or additional classes of shares for each investment portfolio.
O'Shaughnessy Funds was organized as a corporation in Maryland on May 20, 1996.
WHAT IS MEANT BY "SHARES"?
As with all mutual funds, investors purchase shares when they invest in the
Fund. These shares are a part of a Fund's authorized capital stock, but share
certificates are not generally issued.
Each full share and fractional share entitles the shareholder to: receive a
proportional interest in the Fund's capital gain distributions; and cast one
vote per share on certain Fund matters, including the election of Fund
Directors, changes in fundamental policies, or approval of changes in the Fund's
Management Agreement.
Shareholder inquiries may be addressed to the Fund at the address or telephone
number set forth on the cover page of this Prospectus.
DOES THE FUND HAVE ANNUAL SHAREHOLDER MEETINGS?
The Fund is not required to hold annual meetings and does not intend to do so
except when certain matters, such as a change in the Fund's fundamental
policies, are to be decided. In addition, shareholders representing at least 10%
of all eligible votes may call a special meeting if they wish, for the purpose
of voting on the removal of any Fund Director. If a meeting is held and you
cannot attend, you can vote by proxy. Before the meeting, the Fund will send you
proxy materials that explain the issues to be decided and include a voting card
for you to mail back.
INFORMATION ABOUT YOUR ACCOUNT
PURCHASE OF SHARES
The minimum initial investment in the Fund is $2,500 for regular accounts and
$250 for Individual Retirement Accounts. For corporate sponsored retirement
plans, there is no minimum initial investment. There is no minimum subsequent
investment requirement for any account, however, a $100 minimum exists for each
additional investment made through the automatic investment plan.
Investors may make an initial purchase of shares and subsequent investments in
the Fund by mail or wire as described below. The Fund reserves the right in its
sole discretion to waive the minimum investment amounts, including in the case
of investments by employees and affiliates of the Manager and family members of
any of the foregoing, and Individual Retirement Accounts ("IRAs") of
shareholders of the Fund, and certain purchase programs made available to
clients of financial intermediaries eligible to sell shares of the Fund.
The Internal Revenue Service requires the correct reporting of social security
numbers or tax identification numbers. The failure to provide this information
will result in the rejection of an investor's Application.
HOW DO I PURCHASE SHARES BY MAIL?
For initial investments, please send a completed Application, together with a
check payable to O'Shaughnessy Dogs of the Market Fund to O'Shaughnessy Funds,
Inc., c/o Firstar Mutual Fund Services, LLC, at P.O. Box 701, Milwaukee, WI
53201-0701 (for Applications sent by U.S. mail) or 615 E. Michigan Street, Third
Floor, Milwaukee, WI 53202 (for Applications sent via overnight courier).
Subsequent investments must be accompanied by a letter indicating the name(s) in
which the account is registered and the account number or by the remittance
portion of the account statement and mailed to the address stated above.
HOW DO I PURCHASE SHARES BY WIRE?
If you are wiring funds, call the Fund at 877-OSFUNDS (673-8637) for an account
number if this is an initial investment or to inform the Transfer Agent that a
wire is expected if this is a subsequent investment.
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For an initial investment, prior to or immediately after the funds are wired, a
completed Application should be sent to O'Shaughnessy Funds, Inc., c/o Firstar
Mutual Fund Services, LLC, at P.O. Box 701, Milwaukee, WI 53201-0701 (for
Applications sent by U.S. mail) or 615 E. Michigan Street, Third Floor,
Milwaukee, WI 53202 (for Applications sent via overnight courier). Instruct your
bank to wire federal funds to O'Shaughnessy Funds, c/o Firstar Mutual Fund
Services, LLC, ABA# 075000022, DDA # 112952137.
The wire should specify the name of the Fund, the name(s) in which the account
is registered, the shareholder's social security number or employer tax
identification number, the account number and the amount being wired. Please
indicate if this is an initial or subsequent investment. Wire purchases are
normally used only for large purchases (over $5,000). Your bank may charge you a
fee for sending the wire.
WHAT IS THE PURCHASE PRICE OF FUND SHARES AND WHEN DO PURCHASES BECOME
EFFECTIVE?
Purchases of Fund shares become effective and shares will be priced at the net
asset value per share ("NAV") next determined after the investor's check or wire
is received by the Transfer Agent. NAV for the Fund is calculated as of the
close of business on the New York Stock Exchange ("NYSE") (currently 4:00 pm,
Eastern time). If your request is received in correct form before 4:00 pm
Eastern time, your transaction will be priced at that day's NAV. If your request
is received after 4:00 pm, it will be priced at the next business day's NAV.
Orders that request a particular day or price for your transaction or any other
special conditions cannot be accepted.
The time at which transactions and shares are priced and the time until which
orders are accepted may be changed in case of an emergency or if the NYSE closes
at a time other than 4:00 pm, Eastern time.
The purchase order must include the documentation specified above. Please do not
send purchase orders to the Fund; the Fund forwards purchase orders to the
Transfer Agent and a purchase will not become effective until the Transfer Agent
receives all the necessary documentation.
WHAT ARE THE CONDITIONS OF PURCHASE?
All purchase orders are subject to acceptance or rejection by the Fund or the
Distributor, in their sole discretion. The offering of shares may be suspended
whenever the Fund considers suspension desirable or when required by any order,
rule or regulation of any governmental body having jurisdiction. Checks and
money orders should be drawn on United States banks; the Fund and the
Distributor reserve the right to reject checks drawn on foreign banks.
The Transfer Agent will mail a confirmation of each completed purchase to the
investor. If an order is canceled because an investor's check does not clear,
the investor will be responsible for any loss incurred by the Fund, the Transfer
Agent, the Distributor, the Administrator or the Manager. If the investor is
already a shareholder, the Fund may redeem shares from the account to cover any
loss. If the investor is not a shareholder or if the loss is greater than the
value of the shareholder's account, the Distributor will be responsible for any
loss to the Fund, and will have the right to recover such amount from the
investor.
WHO DO I CONTACT IF I HAVE QUESTIONS ABOUT MY ACCOUNT OR NEED ADDITIONAL
INFORMATION CONCERNING AN INVESTMENT IN THE FUND?
If you have investment questions about the Fund, or if you would like any
additional information relating to an investment in the Fund, please call
877-OSFUNDS (673-8637) (toll-free), or write to the Distributor at First Fund
Distributors, Inc., 4455 E. Camelback Road, Suite 261 E, Phoenix, Arizona,
85018. If you are a shareholder and have questions about your account, or if you
wish to arrange for wire transactions, please call the Fund at 877-OSFUNDS
(673-8637). Before telephoning, please be sure to have your account number and
social security number or employer tax identification number readily available.
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WILL I RECEIVE SHARE CERTIFICATES FOR SHARES PURCHASED?
Share certificates will not be issued for shares unless the investor sends a
written request for certificates to O'Shaughnessy Funds, Inc., c/o Firstar
Mutual Fund Services, LLC, at P.O. Box 701, Milwaukee, WI 53201-0701 (for
requests sent via U.S. mail) or 615 E. Michigan Street, Third Floor, Milwaukee,
WI 53202 (for requests sent via overnight courier). Share certificates are
issued only for full shares and may be redeposited in the shareholder's account
at any time. In order to facilitate redemptions and exchanges, most shareholders
elect not to receive certificates, since a shareholder wishing to redeem or
exchange shares represented by a certificate must surrender such certificate,
properly endorsed on the reverse side together with a signature guarantee. (See
"Redemption of Shares - When are signature guarantees required?" below). If a
certificate is lost, the shareholder may incur an expense in replacing it.
CAN I PURCHASE SHARES THROUGH BROKER-DEALERS OTHER THAN THE DISTRIBUTOR?
O'Shaughnessy Funds may enter into agreements with various outside brokers on
behalf of the Funds through which shareholders may purchase shares. Such shares
may be held by such outside brokers in an omnibus account rather than in the
name of the individual shareholder. The Manager may reimburse the outside
brokers for providing shareholder services to the omnibus accounts in an amount
equal to what the Fund would otherwise have paid to provide shareholder services
to each individual shareholder account.
Investors may also arrange to purchase shares of the Fund through other outside
broker-dealers with which O'Shaughnessy Funds does not have an arrangement, and
such broker-dealers may purchase shares of the Fund by telephone if they have
made arrangements in advance with the Fund. To place a telephone order such
broker-dealer should call the Fund at 877-OSFUNDS (673-8637).
Purchases by broker-dealers become effective and shares will be priced as
described above. If an investor purchases shares through broker-dealers other
than the Distributor, such broker-dealers may charge the investor a service fee
that is reasonable for the service performed, bearing in mind that the investor
could have acquired or redeemed the Fund's shares directly without the payment
of any fee. No part of any such service fee will be received by the Distributor,
the Manager, the Administrator or the Fund.
EXCHANGE PRIVILEGE
Shares of the Fund may be exchanged for shares of each of the other
O'Shaughnessy Funds (i.e., O'Shaughnessy Cornerstone Value Fund, O'Shaughnessy
Cornerstone Growth Fund and O'Shaughnessy Aggressive Growth Fund). Prospectuses
for the other O'Shaughnessy Funds may be obtained by writing to the Distributor
at 4455 E. Camelback Road, Suite 261 E, Phoenix AZ 85018, Attention:
O'Shaughnessy Funds, Inc. or by calling 877-OSFUNDS (673-8637) (toll-free).
You may also exchange shares of the Fund for shares of the Firstar Money Market
Fund, a money market mutual fund not affiliated with O'Shaughnessy Funds or the
Manager. Prior to making such an exchange, you should obtain and carefully read
the prospectus for the Firstar Money Market Fund. The exchange privilege does
not constitute an offering or recommendation on the part of the Fund or the
Manager of an investment in the Firstar Money Market Fund.
If you exchange into shares of the Firstar Money Market Fund you may establish
checkwriting privileges on the Firstar Money Market Fund. Contact the Fund at
877-OSFUNDS (673-8637) for a checkwriting application and signature card.
The exchange procedures are described below.
IS THERE ANY SALES CHARGE OR MINIMUM INVESTMENT APPLICABLE TO AN EXCHANGE?
Shareholders of the Fund may exchange their shares of the Fund, without the
payment of any sales or service charge unless the exchange is effected via
telephone instructions for which a $5.00 charge will be levied or on shares held
less than 90 days for which a redemption fee will be charged (see "Information
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About Your Account - Redemption of Shares"), for shares of any other fund into
which an exchange is permitted equal in value to the net asset value of the
shares being exchanged. All exchanges are subject to all applicable terms set
forth in the prospectus of the fund into which the exchange is being made. If a
shareholder exchanges shares through a broker-dealer other than the Distributor,
such broker-dealer may charge the shareholder a service fee, no part of which
will be received by the Distributor, the Manager, the Fund, or the fund into
which the exchange is being made.
AT WHAT PRICE IS AN EXCHANGE EFFECTED?
An exchange is effected at the respective net asset values of the two funds with
respect to which shares are being exchanged as next determined following receipt
by the fund into which the exchange is being made of all necessary documentation
in connection with the redemption of Fund shares as described below under
"Redemption of Shares - How do I redeem shares by mail?"
DO CURRENT INSTRUCTIONS CONCERNING RECEIPT OF DIVIDENDS AND DISTRIBUTIONS CARRY
OVER TO EXCHANGED SHARES?
Dividend and distribution instructions with respect to exchanged shares will
remain the same as those given previously by the shareholders to the fund from
which the shareholder is exchanging the shares, unless the shareholder
designates a change in such instructions by writing to the Transfer Agent.
Please note that such changed instructions (i) must be signed by the registered
owners(s) of the shares, exactly as the account is registered and signature
guaranteed, and (ii) include the name of the account, the account number, and
the name of the fund for which instructions have changed.
WHAT ARE THE CONDITIONS APPLICABLE TO AN EXCHANGE?
Exchanges involving the redemption of shares recently purchased by personal,
corporate or government check will be permitted only after the Fund has
reasonable belief that the check has cleared, which may take up to fifteen days
after the purchase date. The exchange privilege is available only in states
where shares of the other O'Shaughnessy Funds or the Firstar Money Market Fund
may be sold legally.
The Fund, the other O'Shaughnessy Funds and the Firstar Money Market Fund each
reserves the right to reject any order to acquire its shares through exchange or
otherwise and to restrict or terminate the exchange privilege at any time. If
the exchange privilege is to be permanently terminated, the Fund will provide
its shareholders with written notice of such termination. The Fund reserves the
right to suspend temporarily the telephone exchange privilege in emergency
circumstances or in cases where, in the judgment of the Fund, continuation of
the privilege would be detrimental to the Fund and its shareholders as a whole.
Such temporary suspension can be without prior notification.
HOW CAN I MAKE EXCHANGES BY TELEPHONE?
Shareholders who have completed the section of the Fund's Application entitled
"Shareholder Privileges" are eligible to make telephone requests for exchanges
and may do so by telephoning the Fund at 877-OSFUNDS (673-8637). A shareholder
who has not completed the Shareholder Privileges section of the Application but
who wishes to become eligible to make telephone exchanges should designate a
change in such instructions by writing to the Transfer Agent. Please note that
such changed instructions must (i) be signed by the registered owner(s) of the
shares exactly as the account is registered and signature guaranteed, and (ii)
include the name of the account, the account number and the name of the Fund.
See "Redemption of Shares - How do I redeem shares by telephone?" below, which
describes the time of day at which telephone redemptions and exchanges will be
priced and processed. Telephone requests for exchanges cannot be accepted with
respect to shares represented by certificates. Shares of the other O'Shaughnessy
Funds or Firstar Money Market Fund acquired pursuant to a telephone request for
exchange will be held under the same account registration as the shares redeemed
through the exchange.
The Fund will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. Neither the Fund nor any of its service
contractors will be liable for any loss or expense in acting on telephone
instructions that are reasonably believed to be genuine. In attempting to
confirm that telephone instructions are genuine, the Fund will use procedures
that are considered reasonable, including requesting a shareholder to correctly
state the account number, the name(s) in which the account is registered, the
social security number(s) registered to the account, and certain additional
personal identification. A full description of these procedures is contained in
the SAI.
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Shareholders should be aware that, at times, the volume of telephone calls or
other factors beyond the Fund's control may make it difficult to reach the
Transfer Agent by telephone. This will be true particularly during periods of
drastic economic market changes. In such cases, shareholders should continue to
telephone or utilize the written exchange procedures described below.
Shareholders who effect exchanges of Fund shares by telephone will be charged a
$5.00 exchange fee.
HOW DO I MAKE EXCHANGES BY MAIL?
To exchange shares by mail, send a written request for exchange signed by the
registered owner(s) of the shares, exactly as the account is registered to
O'Shaughnessy Funds, Inc., c/o Firstar Mutual Fund Services, LLC, at P.O. Box
701, Milwaukee, WI 53201-0701 (for requests sent by U.S. mail) or 615 E.
Michigan Street, Third Floor, Milwaukee, WI 53202 (for requests sent via
overnight courier). The request for exchange should include the following
information: the name of the account, the account number, the number of Fund
shares or the dollar value of Fund shares to be exchanged, the shares of which
other fund (either another O'Shaughnessy Fund or the Firstar Money Market Fund)
shares of the Fund are to be exchanged for, and the name on the account and the
account number (if already established) with such other fund.
REDEMPTION OF SHARES
Shareholders can redeem their shares by giving instructions to the Transfer
Agent in writing or by telephone. As more fully described below, these
redemption instructions may have to be accompanied by additional documentation,
which may include a signature guarantee.
If a shareholder redeems shares through a broker-dealer other than the
Distributor, such broker-dealer may charge the shareholder a service fee, no
part of which will be received by the Distributor, the Manager, the
Administrator or the Fund.
HOW DO I REDEEM SHARES BY MAIL?
To redeem shares by mail, send a written request for redemption signed by the
registered owner(s) of the shares, exactly as the account is registered to
O'Shaughnessy Funds, Inc., c/o Firstar Mutual Fund Services, LLC, at P.O. Box
701, Milwaukee, WI 53201-0701 (for requests sent by U.S. mail) or 615 E.
Michigan Street, Third Floor, Milwaukee, WI 53202 (for requests sent via
overnight courier). The request should include the following: the name of the
account, the account number, the number of shares or the dollar value of shares
to be redeemed and whether proceeds are to be sent by mail or wire, and if by
wire, giving the wire instructions; (ii) duly endorsed share certificates, if
any have been issued for the shares redeemed; (iii) any signature guarantees
that are required as described below; and (iv) any additional documents which
might be required for redemptions by corporations, executors, administrators,
trustees, guardians or other similar shareholders. Except as otherwise directed
by the Fund in its discretion, the Transfer Agent will not redeem shares until
it has received all necessary documents; corporate and institutional investors
and fiduciaries should contact the Transfer Agent to ascertain what additional
documentation is required.
WHEN WOULD I PAY A REDEMPTION FEE?
The Fund can experience substantial price fluctuations and are intended for
long-term investors. Short-term "market timers" who engage in frequent purchases
and redemptions can disrupt the Funds' investment programs and create additional
transaction costs that are borne by all shareholders. For these reasons, the
Fund will assess a 1.5% fee on redemptions (including exchanges) of Fund shares
purchased and held for less than 90 days.
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<PAGE>
Redemption fees will be paid to the Fund to help offset transaction costs. The
Fund will use the "first-in, first-out" (FIFO) method to determine the 90 day
holding period. Under this method, the date of redemption or exchange will be
compared with the earliest purchase date of shares held in the account. If this
holding period is less than 90 days, the fee will be assessed.
The fee does not apply to any shares purchased through reinvested distributions
(dividends and capital gains) or to shares held in retirement plans such as
401(k), 403(b), 457, Koegh, profit sharing, SIMPLE IRA, SEP-IRA, and money
purchase pension accounts. These exceptions may not apply to shares held in
broker omnibus accounts. The fee does apply to shares held in IRA accounts and
to shares purchased through automatic investment plans (see "Other Shareholder
Services - Automatic Investment Plan").
MAY I SEND REDEMPTION REQUESTS TO THE FUND?
Please do not send redemption requests to the Fund. The Fund must forward all
redemption requests to the Transfer Agent and instructions for redemption will
not be effective until received by the Transfer Agent. Shares redeemed will be
priced at the net asset value per share next determined after acceptance of a
complete redemption request by the Transfer Agent. Redemption requests received
by the Transfer Agent after the close of the NYSE (currently 4:00 pm, Eastern
time) will be treated as though received on the next business day. The Transfer
Agent cannot accept redemption requests that specify a particular date for
redemption or special redemption conditions.
WHEN ARE SIGNATURE GUARANTEES REQUIRED?
Except as indicated below, all of the signatures on any request for redemption
or share certificates tendered for redemption must be guaranteed by a bank,
broker-dealer, credit union (if authorized under state law), securities exchange
or association, clearing agency or savings association. A notary public cannot
provide a signature guarantee.
The Fund will waive the signature guarantee requirement on a redemption request
that instructs that the proceeds be sent by mail if all of the following
conditions apply: (i) the redemption is for $10,000 or less; (ii) the redemption
check is payable to the shareholder(s) of record; (iii) the redemption check is
mailed to the shareholder(s) at the address of record; and (iv) no shares
represented by certificate are being redeemed. Share certificates submitted for
redemption or exchange must be properly endorsed and contain signature
guarantees. In addition, the Fund in its discretion may waive the signature
guarantee for employees and affiliates of the Manager, the Distributor and the
Administrator, and family members of the foregoing.
The requirement of a guaranteed signature protects against an unauthorized
person redeeming shares and obtaining the redemption proceeds.
HOW DO I REDEEM SHARES BY TELEPHONE?
Shareholders who have completed the section of the Fund's Application entitled
"Shareholder Privileges" are eligible to make telephone requests for redemptions
(without charge) and may do so by telephoning the Fund at 877-OSFUNDS
(673-8637). A shareholder who has not completed the Shareholder Privileges
section of the Application but who wishes to become eligible to make telephone
redemptions, should designate a change in such instructions by writing to the
Transfer Agent. Please note that such changed instructions must (i) be signed by
the registered owner(s) of the shares exactly as the account is registered and
signature guaranteed, and (ii) include the name of the account, the account
number and the name of the Fund.
Telephone redemptions cannot be accepted with respect to shares represented by
certificates or for IRA accounts. In such cases, redemption can only be made by
mail as described above under "Redemption of Shares - How do I redeem shares by
mail?" Telephone requests for redemptions (or exchanges - see "Exchange
Privilege" above) received before the close of business on the NYSE (currently
4:00 pm, Eastern time) on a business day will be priced and processed as of the
close of business on that day; requests received after that time will be
processed as of the close of business on the next business day.
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<PAGE>
As noted above, the Fund will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. As long as such procedures
are followed, neither the Fund nor any of its service providers will be liable
for any loss, expense, or cost arising out of any telephone redemption request,
including any fraudulent or unauthorized requests that are reasonably believed
to be genuine. See "Exchange Privilege - How can I make exchanges by telephone?"
above.
Shareholders should be aware that, at times, the volume of telephone calls or
other factors beyond the Fund's control may make it difficult to reach the
Transfer Agent by telephone. This will be true particularly during periods of
drastic economic or market changes. In the event of difficulty in reaching the
Transfer Agent, shareholders should continue to telephone or utilize the written
redemption procedures described above under "Redemption of Shares - How do I
redeem shares by mail?"
The Fund reserves the right to terminate the telephone redemption privilege at
any time and, if so terminated, will provide the shareholders with written
notice of such termination. The Fund reserves the right to suspend temporarily
telephone redemptions in emergency circumstances or in cases where, in the
judgment of the Fund, continuation of the privilege would be detrimental to the
Fund and its shareholders as a whole. Such temporary suspension can be without
prior notification.
WHAT OPTIONS DO I HAVE IN RECEIVING REDEMPTION PROCEEDS?
Redemption proceeds may be sent to shareholders by mail or by wire as described
below. Wire redemptions will only be made if the Transfer Agent has received
appropriate written wire instructions. Because of fluctuations in the value of
the Fund's portfolio, the net asset value of shares redeemed may be more or less
than the investor's cost.
REDEMPTION BY MAIL. In the case of shareholders who request that their
redemption proceeds be sent by mail, the Transfer Agent mails checks for
redemption proceeds typically within one or two business days, but no later than
seven days, after it receives the request and all the necessary documents.
REDEMPTION BY WIRE. In the case of shareholders who request that their
redemption proceeds be sent by bank wire, the Transfer Agent typically wires
redemption proceeds the next business day, but no later than seven days, after
it receives the request and all necessary documents.
Wire redemptions will be made only if the Transfer Agent has received
appropriate written instructions from the shareholder either on the Fund's
Application or by separate letter. A shareholder who has not indicated wire
instructions on the Application, but would like to have redemption proceeds
wired to a particular bank for each redemption request, should so designate by
writing to the Transfer Agent. Please note that such instructions must (i) be
signed by the registered owner(s) of the shares exactly as the account is
registered and signature guaranteed, and (ii) include the name of the account,
the account number and the name of the Fund.
A shareholder who would like to change the wire instructions indicated on the
Application should designate a change in such instructions by writing to the
Transfer Agent and complying with the requirements set forth in the preceding
paragraph. There is a $1,000 minimum on redemption proceeds by bank wire.
Shareholders who effect redemptions by wire transfer will pay a $12.00 wire
transfer fee to the Transfer Agent to cover costs associated with the transfer.
In addition, a shareholder's bank may impose a charge for receiving wires.
WHEN WOULD THE PAYMENT OF PROCEEDS BE DELAYED?
Please note that shares paid for by personal, corporate or government check
cannot be redeemed before the Fund has reasonable belief that the check has
cleared, which may take up to fifteen days after payment of the purchase price.
This delay can be avoided by paying for shares by certified check or bank-wire.
An investor will be notified promptly by the Transfer Agent if a redemption
request cannot be accepted.
WOULD MY ACCOUNT EVER BE INVOLUNTARILY REDEEMED?
Due to the relatively high cost to the Fund of maintaining small accounts, we
ask you to maintain an account balance of at least $2,500. If your balance is
below $2,500 for three months or longer due to redemptions, we have the right to
close your account after giving you 60 days in which to increase your balance.
20
<PAGE>
INFORMATION ON DISTRIBUTIONS AND TAXES
DIVIDENDS AND OTHER DISTRIBUTIONS GENERALLY
Dividend and capital gain distributions are reinvested in additional Fund shares
in your account unless you select another option on your Application. The
advantage of reinvesting distributions arises from compounding; that is, you
receive dividends and capital gain distributions on an increasing number of
shares. Distributions not reinvested are paid by check or transmitted to your
bank account.
INCOME DIVIDENDS
The Fund declares and pays dividends (if any) annually.
CAPITAL GAINS
A capital gain or loss is the difference between the purchase and sale price of
a security. If the Fund has net capital gains for the year (after subtracting
any capital losses), they are usually declared and paid in December to
shareholders of record on a specified date that month.
TAX INFORMATION
You need to be aware of the possible tax consequences when: (1) the Fund makes a
distribution to your account; (2) you sell Fund shares; or (3) you exchange
shares of the Fund for shares of one of the other O'Shaughnessy Funds or the
Firstar Money Market Fund. The following summary does not apply to retirement
accounts, such as IRAs, which are tax-deferred until you withdraw money from
them.
WILL I PAY TAXES ON REDEMPTIONS OR EXCHANGES OF FUND SHARES?
When you sell or exchange shares in the Fund, you may realize a gain or loss.
Unless you are a dealer in securities, such gain or loss will be capital gain or
loss. Consult your tax advisor concerning the tax rate applicable to your sale
or exchange of Fund shares.
A loss recognized on a sale or exchange of shares of the Fund will be disallowed
if other Fund shares are acquired (whether through automatic reinvestment of
dividends or otherwise) within a 61-day period beginning 30 days before and
ending 30 days after the date that the shares are disposed of. In such case, the
basis of the shares acquired will be adjusted to reflect the disallowed loss. In
addition, if you realize a loss on the sale or exchange of Fund shares held six
months or less, your short-term loss recognized is reclassified to long-term to
the extent of any long-term capital gain distribution received.
WILL I PAY TAXES ON FUND DISTRIBUTIONS?
Distributions of ordinary income and short-term capital gains are taxable as
ordinary income. Distributions designated as capital gains dividends are taxable
as capital gains regardless of the length of time shares of the Fund have been
held. The dividends of the Fund will be eligible for the 70% deduction for
dividends received by corporations only to the extent the Fund's income consists
of dividends paid by U.S. corporations.
WHAT IS THE TAX EFFECT OF THE FUND'S INVESTMENT IN FOREIGN SECURITIES?
Pursuant to the Fund's investment objectives, the Fund may invest in foreign
securities. Foreign taxes may be paid by the Fund as a result of tax laws of
countries in which the Fund may invest. Income tax treaties between certain
countries and the United States may reduce or eliminate such taxes. It is
impossible to determine in advance the effective rate of foreign tax to which
the Fund will be subject, since the amount of Fund assets to be invested in
various countries is not known. Because the Fund limits its investment in
foreign securities, shareholders will not be entitled to claim foreign tax
credits with respect to their share of foreign taxes paid by the Fund on income
from investments of foreign securities held by the Fund.
21
<PAGE>
WHAT ARE THE TAX EFFECTS OF BUYING SHARES BEFORE A DISTRIBUTION?
If you buy shares shortly before or on the "record date" - the date that
establishes you as the person to receive the upcoming distribution - you will
receive, in the form of a taxable distribution, a portion of the money you just
invested. Therefore, you may wish to find out the Fund's record date(s) before
investing. Of course, a Fund's share price may, at any time, reflect
undistributed capital gains or unrealized appreciation.
The foregoing is a general and abbreviated summary of the applicable provisions
of the Code and Treasury regulations presently in effect, and does not address
the state and local tax consequences of an investment in the Fund. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative or administrative action either
prospectively or retroactively. For additional information regarding federal
income tax consequences of an investment in the Fund, see "Additional
Information About Dividends and Taxes" in the Statement of Additional
Information."
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, state, local or foreign taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
PERFORMANCE INFORMATION
This section should help you understand the terms used to describe Fund
performance. The Fund's annual report will contain additional performance
information and will be available upon request and without charge.
WHAT IS TOTAL RETURN?
This tells you how much an investment in the Fund has changed in value over a
given time period. It reflects any net increase or decrease in the share price
and assumes that all dividends and capital gains (if any) paid during the period
were reinvested in additional shares. Including reinvested distributions means
that total return numbers include the effect of compounding, i.e., you receive
income and capital gain distributions on an increasing number of shares.
Advertisements for the Fund may include cumulative or compound average annual
total return figures, which may be compared with various indices, other
performance measures, or other mutual funds.
WHAT IS CUMULATIVE TOTAL RETURN?
This is the actual rate of return on an investment for a specified period. A
cumulative return does not indicate how much the value of the investment may
have fluctuated between the beginning and the end of the period specified.
WHAT IS AVERAGE ANNUAL TOTAL RETURN?
This is always hypothetical. Working backward from the actual cumulative return,
it tells you what constant year-by-year return would have produced the actual,
cumulative return. By smoothing out all the variations in annual performance, it
gives you an idea of the investment's annual contribution to your portfolio
provided you held it for the entire period in question.
NET ASSET VALUE
The price at which the Fund's shares are purchased or redeemed is the Fund's
next determined net asset value per share. The net asset value per share is
calculated as of the close of the NYSE (currently 4:00 pm, Eastern time) on each
day that the NYSE is open for business and on each other day in which there is a
sufficient degree of trading in the Fund's portfolio securities that the current
net asset value of the Fund's shares may be materially affected by changes in
the value of the Fund's portfolio securities.
HOW IS NET ASSET VALUE DETERMINED?
The Fund determines the net asset value per share by subtracting the Fund's
total liabilities from the Fund's total assets (the value of the securities the
Fund holds plus cash and other assets), dividing the remainder by the total
number of shares outstanding, and adjusting the result to the nearest full cent.
22
<PAGE>
HOW ARE THE SECURITIES HELD IN THE FUND'S PORTFOLIO VALUED?
Securities listed on the NYSE, American Stock Exchange or other national
exchanges are valued at the last sale price on such exchange on the day as of
which the net asset value per share is to be calculated. Over-the-counter
securities included in the NASDAQ National Market System are valued at the last
sale price. If there is no sale on a particular security on such day, it is
valued at the mean between the bid and asked prices. Other securities, to the
extent that market quotations are readily available, are valued at market value
in accordance with procedures established by the Board of Directors. Any
securities and other assets, for which market quotations are not readily
available are valued in good faith in a manner determined by the Directors of
the Fund best to reflect their fair value.
OTHER SHAREHOLDER SERVICES
Automatic Investment Plan An Automatic Investment Plan allows a shareholder to
make automatic monthly or quarterly investments into a Fund account, in amounts
of at least $100, by having the Transfer Agent draw an automatic clearing house
(ACH) debit electronically against a shareholder's checking or savings account.
A shareholder may establish an Automatic Investment Plan by completing the
appropriate section on the Application for new accounts or by calling the Fund
at 877-OSFUNDS (673-8637) and requesting an Automatic Investment Plan
Application for existing accounts. A shareholder should be aware that a signed
Application should be received by the Transfer Agent at least 15 business days
prior to the initial transaction. The Transfer Agent will assess a $20 fee if
the automatic investment cannot be made due to insufficient funds, stop payment,
or for any other reason. The Fund cannot guarantee acceptance by your bank.
Systematic Cash Withdrawal Plan When an account of $10,000 or more is opened or
when an existing account reaches that size, a shareholder may participate in the
Fund's Systematic Cash Withdrawal Plan by filling out the appropriate part of
the Application. Under this plan, a shareholder may receive (or designate a
third party to receive) a monthly or quarterly check in a stated amount of not
less than $50. Fund shares will be redeemed as necessary to meet withdrawal
payments. All participants must elect to have their dividends and capital gain
distributions reinvested automatically. A shareholder who decides later to use
this service should call the Fund at 877-OSFUNDS (673-8637).
Reports to Shareholders Each time a shareholder invests, redeems, transfers or
exchanges shares, or receives a distribution, the Fund will send a confirmation
of the transaction which will include a summary of all of the shareholder's most
recent transactions.
At such time as prescribed by law, the Fund will send to each shareholder the
following reports (if they are applicable), which may be used in completing U.S.
income tax returns:
Form 1099-DIV Report taxable distributions during the preceding calendar year.
(If a shareholder did not receive taxable distributions in the previous year,
such shareholder will not be sent a 1099-DIV.)
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<PAGE>
Form 1099-B Reports redemption proceeds paid (including those resulting from
exchanges) during the preceding calendar year.
Form 1099-R Report distributions from retirement plan accounts during the
preceding calendar year.
Form 5498 Reports contributions to IRAs for the previous calendar year.
If an investor's shares are held by an outside broker in an omnibus account, it
is the responsibility of such outside broker to provide shareholders whose
shares are held in the omnibus account with any reports prescribed by law which
the shareholders require in order to complete their U.S. income tax returns.
Shareholders will also receive annual and semi-annual reports including the
financial statements of the Funds for the respective periods.
RETIREMENT PLANS
Eligible investors may invest in the Fund under the following prototype
retirement plans:
"Education" Individual Retirement Account (IRA)
"Traditional" Individual Retirement Account (IRA)
"Roth" Individual Retirement Account (IRA)
Simplified Employee Pension (SEP) for sole proprietors,
partnerships and corporations
Profit-Sharing and Money Purchase Pension Plans for corporations
and their employees
Automatic Reinvestment Plan For the convenience of investors, all dividends and
distributions are automatically reinvested in full and fractional shares of the
Fund at the net asset value per share at the close of business on the record
date, unless otherwise specified on the Application or requested by a
shareholder in writing. If the Transfer Agent does not receive a written request
for subsequent dividends and/or distributions to be paid in cash at least three
full business days prior to a given record date, the dividends and/or
distributions to be paid to a shareholder will be reinvested. If a shareholder
elects to receive dividends and distributions in cash and the U.S. Postal
Service cannot deliver the checks, or if the checks remain uncashed for six
months, the shareholder's distribution checks will be reinvested into the
shareholder's account at the then current net asset value.
No person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund, the Investment Adviser, the Administrator or
the Distributor. This Prospectus does not constitute an offering in any state in
which such offering may not lawfully be made.
24
<PAGE>
INVESTMENT MANAGER
O'Shaughnessy Capital Management, Inc.
35 Mason Street
Greenwich, Connecticut 06830
November 24, 1998
ADMINISTRATOR
Investment Company Administration, LLC
4455 E. Camelback Road, Suite 261 E
Phoenix, Arizona 85018
DISTRIBUTOR
First Fund Distributors, Inc.
4455 E. Camelback Road, Suite 261 E
Phoenix, Arizona 85018
TRANSFER AGENT
Firstar Mutual Fund Services, LLC
615 E. Michigan Street
Milwaukee, Wisconsin 53202
AUDITORS
McGladrey & Pullen, LLP
555 Fifth Avenue
New York, New York 10017-2416
LEGAL COUNSEL
Swidler Berlin Shereff Friedman, LLP
919 Third Avenue
New York, New York 10022
O'Shaughnessy Funds Inc.
Building New Standards for Investment Success
Aggressive Growth Fund
35 Mason Street, Greenwich, Connecticut 06830
Toll-Free 877-OSFUNDS (673-8637)
www.osfunds.com
NASDAQ Symbol: OSAGX
THE FUND
O'Shaughnessy Aggressive Growth Fund (the "Fund") is an investment portfolio or
series of O'Shaughnessy Funds, Inc., an open-end management investment company
with multiple portfolios or series available for investment.
INVESTMENT OBJECTIVE
The investment objective of the Fund is capital appreciation.
STRATEGY
The Fund seeks to achieve its objective through implementation of proprietary
aggressive growth models developed by O'Shaughnessy Capital Management, Inc.,
the Fund's investment manager (the "Manager").
The Fund's portfolio will generally consist of approximately 45 common stocks
selected by the Manager which meet certain criteria. For a more detailed
description of the Fund, see "About the Fund - Investment Objective and
Policies."
RISK/REWARD
Although the stocks in which the Fund may invest have, in the Manager's
judgment, the potential to provide superior return, such stocks are likely to be
subject to greater than average price volatility, which may result in
substantial declines in the Fund's share price. Accordingly, the Fund is
suitable only for the most aggressive investors. For a discussion of the
additional risks associated with an investment in the Fund, see "About the Fund
- -- Investment Objective and Policies."
PURCHASE OF SHARES
Shares of the Fund will be offered to investors during the continuous offering
at a price equal to the next determined net asset value per share. There are no
fees or charges to purchase or sell shares or to reinvest dividends, however, a
fee applies to certain short-term redemptions, see "Information About Your
Account - Redemption of Shares". There are no Rule 12b-1 fees.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
PROSPECTUS
November 30, 1998
<PAGE>
This Prospectus contains the information you should know about the Fund before
you invest. Please keep it for future reference. A statement containing
additional information about the Fund, dated November 30, 1998 has been filed
with the Securities and Exchange Commission and is incorporated by reference
into this Prospectus. It is available, at no charge, by calling or by writing
the Fund at the telephone number or address set forth above. The SEC maintains
an internet site (http://www.sec.gov) that contains the SAI, other material
incorporated by reference and other information about companies that file
electronically with the SEC.
O'Shaughnessy Capital Management, Inc.
Manager
First Fund Distributors, Inc.
Distributor
TABLE OF CONTENTS
About the Fund ............................................. 3
Financial Highlights ....................................... 5
Management and Organization of the Fund .................... 9
Information about Your Account ............................. 11
Information on Distributions and Taxes ..................... 18
Performance Information .................................... 19
Net Asset Value ............................................ 20
Other Shareholder Services ................................. 21
2
<PAGE>
ABOUT THE FUND
TRANSACTION AND FUND EXPENSES
The following table and example should help you understand the kinds of expenses
you will bear directly or indirectly as a Fund shareholder. In the table,
"Shareholder Transaction Expenses," shows that you pay no sales charges. All the
money you invest in the Fund goes to work for you, subject to the fees noted in
the table. "Annual Fund Operating Expenses" shows how much it would cost to
operate the Fund for a year, based on estimated expenses through the end of the
Fund's first full year. These costs you pay indirectly, because they are
deducted from the Fund's total assets before the daily share price is calculated
and before dividends and other distributions are made. You will not see these
expenses on your account statement.
FEE TABLE
Shareholder Transaction Expenses:
Maximum Sales Charge Imposed on
Purchases (as a percentage of offering price) None
Maximum Sales Charge Imposed on
Dividend Reinvestments None
Deferred Sales Charge (as a percentage of
original purchase price or redemption proceeds,
whichever is lower) None
Redemption fee (a)
(on shares held less than 90 days) 1.50%
Exchange Fee (a) (b)
(on shares held less than 90 days) 1.50%
Annual Fund Operating Expenses
(as a percentage of average net assets):
Management Fees (c) (d) 0.74%
Rule 12b-1 Fees None
Other Expenses (d) 1.26%
Total Fund Operating Expenses (d) 2.00%
- ----------
(a) A 1.5% redemption fee, payable to the Funds, will be assessed on shares
purchased and held for less than 90 days. Shareholders who effect
redemptions of Fund shares by wire transfer will pay a $12.00 wire transfer
fee. See "Information About Your Account - Redemption of Shares."
(b) Shareholders who effect exchanges of shares of the Fund for shares of
another fund by telephone in accordance with the exchange privilege will be
charged a $5.00 exchange fee in addition to any fees applicable as
indicated in footnote (a). See "Information About Your Account - Exchange
Privilege."
(c) See "Management and Organization of the Fund - Management."
(d) To limit the Fund's expenses, the Manager has voluntarily agreed to reduce
its fees or reimburse the Fund through at least September 30, 1999 to
ensure that the Fund's total operating expenses do not exceed 2.00% of
average net assets annually. Any such reductions made by the Manager in its
fees or reimbursement of expenses with respect to the Fund are subject to
reimbursement by the Fund to the Manager (recapture by the Manager),
provided the Fund is able to effect such reimbursement while keeping total
operating expenses at or below 2.00% of average net assets annually, and
that no reimbursement will be made after September 30, 2000. Any amounts
reimbursed will have the effect of increasing fees otherwise paid by the
Fund. In absence of any reimbursement, the expense ratio would have been
2.24% for the fiscal period ended September 30, 1998.
3
<PAGE>
EXAMPLE:
An investor would pay the following expenses on a $1,000 investment assuming:
(1) the operating expense ratio set forth in the table above; (2) a 5% annual
return throughout the period; and (3) redemption at the end of the period:
Cumulative Expenses Paid for the Period of:
One year $ 20
Three years $ 63
Five years $108
Ten years $236
The table and example are intended to assist investors in understanding the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The example should not be considered a representation of past or
future expenses or annual rate of return, and actual expenses or annual rate of
return may be more or less than those shown.
4
<PAGE>
FINANCIAL HIGHLIGHTS
The table that follows is included in the Fund's Annual Report and has been
audited by McGladrey & Pullen, LLP, Independent Certified Public Accountants.
Their reports on the financial statements and financial highlights are included
in the Annual Report. The financial statements and financial highlights are
incorporated by reference into (are legally a part of) the Fund's Statement of
Additional Information.
Per Share Operating Performance
(For a share outstanding throughout the period)
Year November 1, 1996*
Ended through
September 30, 1998 September 30, 1997
------------------ ------------------
Net asset value, beginning of period $ 14.29 $ 10.00
------- -------
Income from investment operations:
Net investment loss (0.15) (.06)
Net realized & unrealized
loss on investments (3.21)* 4.35
Total from investment operations (3.36) 4.29
Less distributions:
From net realized gains (0.20) --
------- -------
Net asset value, end of period $ 10.73 $ 14.29
------- -------
Total Return (23.70%) 42.90%**
======= =======
Ratios/supplemental data:
Net assets, end of period (millions) $ 8.3 $ 5.6
Ratio of expenses to average net assets:
Before expense reimbursement 2.24% 7.01%+
After expense reimbursement 2.00% 1.98%+
Ratio of net investment loss
to average net assets:
Before expense reimbursement (1.77%) (6.41%)+
After expense reimbursement (1.53%) (1.39%)+
Portfolio turnover rate 206.30% 104.77%
* Commencement of operations.
** Not Annualized.
+ Annualized.
5
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
To help you decide whether the Fund is appropriate for you, this section takes a
closer look at the Fund's investment objective and policies.
What is the Fund's objective? The investment objective of the Fund is capital
appreciation. There can be no assurance that the Fund will achieve its
investment objective.
What is the Fund's investment strategy? The Fund will seek to achieve its
objective through the implementation of proprietary aggressive growth models
developed by O'Shaughnessy Capital Management, Inc., the Fund's investment
manager (the "Manager").
The Fund's portfolio will generally consist of approximately 45 stocks, selected
through implementation of the Manager's proprietary aggressive growth models. At
the time of purchase, such stocks will generally possess the following
characteristics:
- - a market capitalization in excess of $150 million;
- - outstanding price performance during the last six months or one year period
prior to purchase;
- - high earnings gains during the one year period prior to purchase; and
- - expected high future earnings gains in the general consensus of market
analysts.
It is expected that the proprietary aggressive growth models used by the Manager
in selecting stocks for the Fund's portfolio will select stocks for investment
without regard to capitalization, except that the issuers must have market
capitalizations in excess of $150 million. The majority of these stocks will be
common stocks of domestic corporations and American Depository Receipts
("ADRs").
The Manager may invest the Fund's assets in stocks which do not meet all of the
above criteria, if, in the opinion of the Manager, such stocks possess
characteristics similar to stocks meeting such criteria. In addition, the
Manager may continue to hold a stock in the Fund's portfolio which no longer
meets the initial criteria for investment if the Manager believes such
investments are consistent with the Fund's investment objective.
What are the potential risks of investing primarily in common stocks? The
fundamental risk associated with any common stock fund is the risk that the
value of the stocks it holds might decrease. Stock values may fluctuate in
response to the activities of an individual company or in response to general
market and/or economic conditions. Historically, common stocks have provided
greater long-term returns and have entailed greater short-term risks than other
investment choices. Smaller or newer issuers are more likely to realize more
substantial growth as well as suffer more significant losses than larger or more
established issuers. Investments in such companies can be both more volatile and
more speculative.
OTHER INVESTMENT POLICIES AND PRACTICES
This section takes a detailed look at other investment policies and practices of
the Fund. The Fund's investments are subject to further restrictions and risks
described in the Statement of Additional Information.
Shareholder approval is required to change the Fund's investment objective and
certain investment restrictions noted in the following section as "fundamental
policies." The Manager also follows certain "operating policies" which can be
changed without shareholder approval. However, significant changes in operating
policies are discussed with shareholders in Fund reports.
The Fund's holdings in certain kinds of investments cannot exceed maximum
percentages of total assets, which are set forth below. While these restrictions
provide a useful level of detail about the Fund's investments, investors should
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not view them as an accurate gauge of the potential risk of such investments.
The net effect of a particular investment depends on its volatility and the size
of its overall return in relation to the performance of all the Fund's other
investments.
CASH AND SHORT-TERM SECURITIES. The Fund may temporarily invest a portion of its
total assets in cash or liquid short-term securities pending investment of such
assets in stocks in accordance with the Fund's investment strategy and in order
to meet redemption requests. The Fund may also invest a portion of its assets in
cash or liquid short-term securities for temporary defensive purposes, but is
under no obligation to do so. Short-term securities in which the Fund may invest
include certificates of deposit, commercial paper, notes, obligations issued or
guaranteed by the U.S. Government or any of its agencies or instrumentalities,
and repurchase agreements involving such securities. See "Repurchase
Agreements," below.
The Manager does not expect assets invested in cash or liquid short-term
securities to exceed 5% of the Fund's total assets at any time.
REPURCHASE AGREEMENTS. The Fund may invest in repurchase agreements. The Fund
may only enter into repurchase agreements with a member bank of the Federal
Reserve System or a well-established securities dealer in U.S. government
securities. In the event of a bankruptcy or default by the seller of the
repurchase agreement the Fund may suffer delays and incur costs or possible
losses in liquidating the underlying security which is held as collateral, and
the Fund may incur a loss if the value of the collateral declines during this
period. As a matter of operating policy, the Fund may not invest more than 15%
of its total assets in repurchase agreements maturing in more than seven days.
ILLIQUID SECURITIES. The Fund may invest up to 15% of its net assets in illiquid
securities. Illiquid securities are securities which cannot be readily resold
because of legal or contractual restrictions or which cannot otherwise be
marketed, redeemed, put to the issuer or a third party, or which do not mature
within seven days, or which the Manager, in accordance with guidelines approved
by the Board of Directors, has not determined to be liquid.
The Fund may purchase, without regard to the above limitation, securities that
are not registered under the Securities Act of 1933 (the "Securities Act") but
that can be offered and sold to "qualified institutional buyers" under Rule 144A
under the Securities Act, provided that the Board of Directors, or the Manager
pursuant to guidelines adopted by the Board, continuously determines, based on
the trading markets for the specific Rule 144A security, that it is liquid.
LENDING OF PORTFOLIO SECURITIES. Like other mutual funds, the Fund may from time
to time lend securities from its portfolio to banks, brokers and other financial
institutions to earn additional income. The principal risk is that the borrower
may default on its obligation to return borrowed securities, because of
insolvency or otherwise. In this event, the Fund could experience delays in
recovering its securities and capital. In accordance with applicable law, the
Fund may not lend portfolio securities representing in excess of 33 1/3% of its
total assets. The lending policy is a fundamental policy.
BORROWING. The Fund may borrow money from banks in an amount up to 33% of its
total assets for extraordinary or emergency purposes such as meeting anticipated
redemptions, and may pledge assets in connection with such borrowing. The
borrowing policy is a fundamental policy.
SMALL CAP STOCKS. It is anticipated that the Fund's portfolio will include small
cap stocks (i.e., stocks whose issuers have market capitalizations exceeding
$150 million but less than $1 billion). Small cap stocks may present greater
opportunities for capital appreciation and a higher degree of risk; they tend to
be more vulnerable to financial and other risks and thus are more volatile than
stocks of larger, more established companies. Because the Fund may invest in
stocks with greater than average volatility, which may result in substantial
declines in the Fund's share price, it is suitable only for the most aggressive
investors.
INDUSTRY CONCENTRATION. The Fund may not invest more than 25% of its total
assets in any one industry (excluding U.S. Government securities). The
concentration policy is a fundamental policy.
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FOREIGN SECURITIES. The Fund may invest up to 25% of its total assets in
securities of foreign issuers, either through (i) direct purchase of securities
of foreign issuers or (ii) purchase of American Depository Receipts ("ADRs")
which are dollar-denominated securities of foreign issuers traded in the U.S.
Such investments increase diversification of the Fund's portfolio and may
enhance return, but they also involve some special risks such as exposure to
potentially adverse local political and economic developments, nationalization
and exchange controls; potentially lower liquidity and higher volatility;
possible problems arising from regulatory practices that differ from U.S.
standards; the imposition of withholding taxes on income from such securities;
confiscating taxation; and the chance that fluctuations in foreign exchange
rates will decrease the investment's value (favorable changes can increase its
value). These risks are heightened for investment in developing countries and
there is no limit on the amount of the Fund's foreign investments that may be
invested in such countries.
The Fund may invest in ADRs through both sponsored and unsponsored arrangements.
The issuers of unsponsored ADRs are not obligated to disclose material
information in the United States, and therefore, there may not be a correlation
between such information and the market value of the ADRs.
HEDGING AND RETURN ENHANCEMENT STRATEGIES. The Fund is permitted to utilize
certain hedging and return enhancement strategies and techniques such as options
on securities and securities indices, futures contracts on securities and
securities indices and options on futures contracts, as described below.
Futures (a type of potentially high-risk derivative) are often used to manage or
hedge risk, because they enable the investor to buy or sell an asset in the
future at an agreed upon price. Options (another potentially high-risk
derivative) give the investor the right, but not the obligation, to buy or sell
an asset at a predetermined price in the future. The Fund may buy and sell
futures and options contracts for any number of reasons, including: to manage
its exposure to changes in securities prices; as an efficient means of adjusting
its overall exposure to certain markets; in an effort to enhance income; and to
protect the value of portfolio securities. The Fund may purchase, sell, or write
call and put options on securities, financial indices and futures.
Futures contracts and options may not always be successful hedges; their prices
can be highly volatile. Using them could lower the Fund's total return, and the
potential loss from the use of futures can exceed the Fund's initial investment
in such contracts.
As a matter of operating policy, initial margin deposits and premiums on options
used for non-hedging purposes will not equal more than 5% of the Fund's net
asset value.
FIRM COMMITMENT AGREEMENTS AND WHEN-ISSUED PURCHASES. The Fund may purchase
securities under a firm commitment agreement or on a when-issued basis. Firm
commitment agreements and when-issued purchases call for the purchase of
securities at an agreed-upon price on a specified future date, and would be
used, for example, when a decline in the yield of securities of a given issuer
is anticipated. The Fund as purchaser assumes the risk of any decline in value
of the security beginning on the date of the agreement or purchase. The Fund
will not enter into such transactions for the purpose of leveraging, and
accordingly, will segregate liquid assets with its custodian equal (on a daily
marked-to-market basis) to the amount of its commitment to purchase the
when-issued securities and securities subject to the firm commitment agreement.
WARRANTS. The Fund may invest in warrants, which are similar to options to
purchase securities at a specific price valid for a specific period of time. The
Fund may not invest more than 5% of its net assets (at the time of investment)
in warrants (other than those attached to other securities). If the market price
of the underlying security never exceeds the exercise price, the Fund will lose
the entire investment in the warrant. Moreover, if a warrant is not exercised
within the specified time period, it will become worthless and the Fund will
lose the purchase price and the right to purchase the underlying security.
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DIVERSIFICATION. In order to maintain the Fund's status as a diversified
investment company, with respect to 75% of the Fund's total assets: 1) not more
than 5% of the Fund's assets may be invested in the securities of a single
issuer (excluding U.S. Government securities); and 2) the Fund may not hold more
than 10% of the outstanding voting securities of a single issuer. The
diversification policy is a fundamental policy.
PORTFOLIO TRANSACTIONS. In executing portfolio transactions, the Fund seeks to
obtain the best net results, taking into account such factors as price
(including the applicable brokerage commission or dealer spread), size of order,
difficulty of execution, operational facilities of the firm involved and the
firm's risk in positioning a block of securities. While the Fund generally seeks
reasonably competitive commission rates, the Fund does not necessarily pay the
lowest commission or spread available. In addition, consistent with the Conduct
Rules of the National Association of Securities Dealers, Inc., the Manager may
consider sales of shares of the Fund as a factor in the selection of brokers or
dealers to execute portfolio transactions for the Fund.
PORTFOLIO TURNOVER. The Fund anticipates that its annual turnover rate should
not exceed 200% under normal conditions. The portfolio turnover rate is
calculated by dividing the lesser of the Fund's annual sales or purchases of
portfolio securities (exclusive of purchases or sales of securities whose
maturities at the time of acquisition were one year or less) by the monthly
average value of the securities in the portfolio during the year. High portfolio
turnover involves correspondingly greater transaction costs in the form of
brokerage commissions and dealer spreads, which the Fund bears.
MANAGEMENT AND ORGANIZATION OF THE FUND
MANAGEMENT
WHO RUNS THE FUND?
GENERAL OVERSIGHT. O'Shaughnessy Funds, Inc. is governed by a Board of Directors
that meets regularly to review the Fund's investment, performance, expenses, and
other business affairs. The Board elects the Fund's officers.
MANAGER. O'Shaughnessy Capital Management, Inc. acts as investment manager of
the Fund pursuant to a management agreement with O'Shaughnessy Funds on behalf
of the Fund (the "Management Agreement"). In its capacity as investment manager,
the Manager is responsible for selection and management of the Fund's portfolio
investments. For its services, the Fund pays the Manager a fee each month, at
the annual rate of 0.74% of the Fund's average daily net assets.
The Manager's office is located at 35 Mason Street, Greenwich, Connecticut
06830. O'Shaughnessy Capital Management was incorporated in 1988. The Manager
serves as portfolio consultant to a unit investment trust and provides
investment advisory services to investment companies and individual and
institutional accounts with assets in excess of $800 million.
PORTFOLIO MANAGEMENT. James P. O'Shaughnessy has had the day-to-day
responsibility for managing the Fund's portfolio and developing and executing
the Fund's investment program since commencement of operations of the Fund. For
the past ten years, Mr. O'Shaughnessy has served as Chairman and CEO of the
Manager, and in such capacity, has managed equity accounts for high net worth
individuals and served as portfolio consultant to a unit investment trust. Mr.
O'Shaughnessy is recognized as a leading expert and pioneer in quantitative
equity analysis. He is the author of three financial books, Invest Like the
Best, What Works on Wall Street and How to Retire Rich.
DISTRIBUTOR. First Fund Distributors, Inc. (the "Distributor"), a registered
broker-dealer, acts as the principal distributor of the shares of the Fund. The
address of the Distributor is 4455 E. Camelback Road, Suite 261 E, Phoenix,
Arizona 85018. The Distributor provides distribution services to the Fund at no
cost to the Fund.
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ADMINISTRATOR. Pursuant to an Administration Agreement, Investment Company
Administration, LLC (the "Administrator") serves as Administrator of the Fund.
The Administrator provides certain administrative services, including, among
other responsibilities, coordinating relationships with independent contractors
and agents, preparing for signature by officers and filing of certain documents
required for compliance with applicable laws and regulations, preparing
financial statements, and arranging for the maintenance of books and records.
For its services, the Fund pays the Administrator a fee each month, at the
annual rate of 0.10% of the first $100 million of the Fund's average daily net
assets, 0.05% of the next $100 million of such net assets, and 0.03% of such net
assets over $200 million, with a minimum fee of $40,000 annually. The address of
the Administrator is 4455 E. Camelback Rd., Suite 261 E, Phoenix, Arizona 85018.
The Administrator and the Distributor are under common control and are therefore
considered affiliates of each other.
TRANSFER AGENT AND CUSTODIAN. Firstar Mutual Fund Services, LLC acts as the
Fund's transfer and dividend disbursing agent (the "Transfer Agent"). Firstar
Bank Milwaukee is the Fund's custodian (the "Custodian"). The address of the
Transfer Agent and Custodian is 615 E. Michigan Street, Third Floor, Milwaukee,
Wisconsin 53202.
YEAR 2000 RISK. Like other business organizations around the world, the Fund
could be adversely affected if the computer systems used by its investment
manager and other service providers do not properly process and calculate
information related to dates beginning January 1, 2000. This is commonly known
as the "Year 2000 Issue." The Fund's manager has taken steps that it believes
are reasonably designed to address the Year 2000 Issue with respect to its own
computer systems and the Fund has obtained assurances from the Fund's other
service providers that they are taking comparable steps. However, there can be
no assurance that these actions will be sufficient to avoid any adverse impact
on the Fund.
HOW ARE FUND EXPENSES DETERMINED?
The Management Agreement identifies the expenses to be paid by the Fund. In
addition to the fees paid to the Manager, the Fund pays certain additional
expenses, including but not limited to, the following: shareholder service
expenses; custodial, accounting, legal, and audit fees; administrative fees;
costs of preparing and printing prospectuses and reports sent to shareholders;
registration fees and expenses; proxy and annual meeting expenses (if any); and
independent Director fees and expenses. The Manager has voluntarily agreed to
reduce fees payable to it by the Fund or reimburse the Fund to the extent
necessary to limit the Fund's aggregate annual operating expenses to 2.00% of
average net assets (the "expense cap"). Any such reductions made by the Manager
in its fees or reimbursement of expenses with respect to the Fund are subject to
recapture by the Manager provided the Fund is able to effect such recapture
while keeping total operating expenses at or below the annual expense cap, and
that no recapture will be made after September 30, 2000. Any amounts reimbursed
will have the effect of increasing fees otherwise paid by the Fund.
ORGANIZATION
HOW IS THE FUND ORGANIZED?
The Fund is an investment portfolio or series of O'Shaughnessy Funds. There are
three other investment portfolios of O'Shaughnessy Funds, shares of which are
not offered for sale through this Prospectus: O'Shaughnessy Cornerstone Value
Fund, O'Shaughnessy Cornerstone Growth Fund and O'Shaughnessy Dogs of the Market
Fund (the "other O'Shaughnessy Funds"). The charter of O'Shaughnessy Funds
provides that the Board of Directors may issue additional investment portfolios
of shares and/or additional classes of shares for each investment portfolio.
O'Shaughnessy Funds was organized as a corporation in Maryland on May 20, 1996.
WHAT IS MEANT BY "SHARES"?
As with all mutual funds, investors purchase shares when they invest in the
Fund. These shares are a part of a Fund's authorized capital stock, but share
certificates are not generally issued.
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Each full share and fractional share entitles the shareholder to: receive a
proportional interest in the Fund's capital gain distributions; and cast one
vote per share on certain Fund matters, including the election of Fund
Directors, changes in fundamental policies, or approval of changes in the Fund's
Management Agreement.
Shareholder inquiries may be addressed to the Fund at the address or telephone
number set forth on the cover page of this Prospectus.
DOES THE FUND HAVE ANNUAL SHAREHOLDER MEETINGS?
The Fund is not required to hold annual meetings and does not intend to do so
except when certain matters, such as a change in the Fund's fundamental
policies, are to be decided. In addition, shareholders representing at least 10%
of all eligible votes may call a special meeting if they wish, for the purpose
of voting on the removal of any Fund Director. If a meeting is held and you
cannot attend, you can vote by proxy. Before the meeting, the Fund will send you
proxy materials that explain the issues to be decided and include a voting card
for you to mail back.
INFORMATION ABOUT YOUR ACCOUNT
PURCHASE OF SHARES
The minimum initial investment in the Fund is $2,500 for regular accounts and
$250 for Individual Retirement Accounts. For corporate sponsored retirement
plans, there is no minimum initial investment. There is no minimum subsequent
investment requirement for any account, however, a $100 minimum exists for each
additional investment made through the automatic investment plan.
Investors may make an initial purchase of shares and subsequent investments in
the Fund by mail or wire as described below. The Fund reserves the right in its
sole discretion to waive the minimum investment amounts, including in the case
of investments by employees and affiliates of the Manager and family members of
any of the foregoing, and Individual Retirement Accounts ("IRAs") of
shareholders of the Fund, and certain purchase programs made available to
clients of financial intermediaries eligible to sell shares of the Fund.
The Internal Revenue Service requires the correct reporting of social security
numbers or tax identification numbers. The failure to provide this information
will result in the rejection of an investor's Application.
HOW DO I PURCHASE SHARES BY MAIL?
For initial investments, please send a completed Application, together with a
check payable to O'Shaughnessy Aggressive Growth Fund to O'Shaughnessy Funds,
Inc., c/o Firstar Mutual Fund Services, LLC, at P.O. Box 701, Milwaukee, WI
53201-0701 (for Applications sent by U.S. mail) or 615 E. Michigan Street, Third
Floor, Milwaukee, WI 53202 (for Applications sent via overnight courier).
Subsequent investments must be accompanied by a letter indicating the name(s) in
which the account is registered and the account number or by the remittance
portion of the account statement and mailed to the address stated above.
HOW DO I PURCHASE SHARES BY WIRE?
If you are wiring funds, call the Fund at 877-OSFUNDS (673-8637) for an account
number if this is an initial investment or to inform the Transfer Agent that a
wire is expected if this is a subsequent investment.
For an initial investment, prior to or immediately after the funds are wired, a
completed Application should be sent to O'Shaughnessy Funds, Inc., c/o Firstar
Mutual Fund Services, LLC, at P.O. Box 701, Milwaukee, WI 53201-0701 (for
Applications sent by U.S. mail) or 615 E. Michigan Street, Third Floor,
Milwaukee, WI 53202 (for Applications sent via overnight courier). Instruct your
bank to wire federal funds to O'Shaughnessy Funds, c/o Firstar Mutual Fund
Services, LLC, ABA# 075000022, DDA # 112952137.
The wire should specify the name of the Fund, the name(s) in which the account
is registered, the shareholder's social security number or employer tax
identification number, the account number and the amount being wired. Please
indicate if this is an initial or subsequent investment. Wire purchases are
normally used only for large purchases (over $5,000). Your bank may charge you a
fee for sending the wire.
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What is the purchase price of Fund shares and when do purchases become
effective? Purchases of Fund shares become effective and shares will be priced
at the net asset value per share ("NAV") next determined after the investor's
check or wire is received by the Transfer Agent. NAV for the Fund is calculated
as of the close of business on the New York Stock Exchange ("NYSE") (currently
4:00 pm, Eastern time). If your request is received in correct form before 4:00
pm, Eastern time, your transaction will be priced at that day's NAV. If your
request is received after 4:00 pm, it will be priced at the next business day's
NAV. Orders that request a particular day or price for your transaction or any
other special conditions cannot be accepted.
The time at which transactions and shares are priced and the time until which
orders are accepted may be changed in case of an emergency or if the NYSE closes
at a time other than 4:00 pm, Eastern time.
The purchase order must include the documentation specified above. Please do not
send purchase orders to the Fund; the Fund forwards purchase orders to the
Transfer Agent and a purchase will not become effective until the Transfer Agent
receives all the necessary documentation.
WHAT ARE THE CONDITIONS OF PURCHASE?
All purchase orders are subject to acceptance or rejection by the Fund or the
Distributor, in their sole discretion. The offering of shares may be suspended
whenever the Fund considers suspension desirable or when required by any order,
rule or regulation of any governmental body having jurisdiction. Checks and
money orders should be drawn on United States banks; the Fund and the
Distributor reserve the right to reject checks drawn on foreign banks.
The Transfer Agent will mail a confirmation of each completed purchase to the
investor. If an order is canceled because an investor's check does not clear,
the investor will be responsible for any loss incurred by the Fund, the Transfer
Agent, the Distributor, the Administrator or the Manager. If the investor is
already a shareholder, the Fund may redeem shares from the account to cover any
loss. If the investor is not a shareholder or if the loss is greater than the
value of the shareholder's account, the Distributor will be responsible for any
loss to the Fund, and will have the right to recover such amount from the
investor.
WHO DO I CONTACT IF I HAVE QUESTIONS ABOUT MY ACCOUNT OR NEED ADDITIONAL
INFORMATION CONCERNING AN INVESTMENT IN THE FUND?
If you have investment questions about the Fund, or if you would like any
additional information relating to an investment in the Fund, please call
877-OSFUNDS (673-8637) (toll-free), or write to the Distributor at First Fund
Distributors, Inc., 4455 E. Camelback Road, Suite 261 E, Phoenix AZ 85018. If
you are a shareholder and have questions about your account, or if you wish to
arrange for wire transactions, please call the Fund at 877-OSFUNDS (673-8637).
Before telephoning, please be sure to have your account number and social
security number or employer tax identification number readily available.
WILL I RECEIVE SHARE CERTIFICATES FOR SHARES PURCHASED?
Share certificates will not be issued for shares unless the investor sends a
written request for certificates to O'Shaughnessy Funds, Inc., c/o Firstar
Mutual Fund Services, LLC, at P.O. Box 701, Milwaukee, WI 53201-0701 (for
requests sent via U.S. mail) or 615 E. Michigan Street, Third Floor, Milwaukee,
WI 53202 (for requests sent via overnight courier). Share certificates are
issued only for full shares and may be redeposited in the shareholder's account
at any time. In order to facilitate redemptions and exchanges, most shareholders
elect not to receive certificates, since a shareholder wishing to redeem or
exchange shares represented by a certificate must surrender such certificate,
properly endorsed on the reverse side together with a signature guarantee. (See
"Redemption of Shares - When are signature guarantees required?" below). If a
certificate is lost, the shareholder may incur an expense in replacing it.
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CAN I PURCHASE SHARES THROUGH BROKER-DEALERS OTHER THAN THE DISTRIBUTOR?
O'Shaughnessy Funds may enter into agreements with various outside brokers on
behalf of the Funds through which shareholders may purchase shares. Such shares
may be held by such outside brokers in an omnibus account rather than in the
name of the individual shareholder. The Manager may reimburse the outside
brokers for providing shareholder services to the omnibus accounts in an amount
equal to what the Fund would otherwise have paid to provide shareholder services
to each individual shareholder account. Investors may also arrange to purchase
shares of the Fund through other outside broker-dealers with which O'Shaughnessy
Funds does not have an arrangement, and such broker-dealers may purchase shares
of the Fund by telephone if they have made arrangements in advance with the
Fund. To place a telephone order such broker-dealer should call the Fund at
877-OSFUNDS (673-8637). Purchases by broker-dealers become effective and shares
will be priced as described above. If an investor purchases shares through
broker-dealers other than the Distributor, such broker-dealers may charge the
investor a service fee that is reasonable for the service performed, bearing in
mind that the investor could have acquired or redeemed the Fund's shares
directly without the payment of any fee. No part of any such service fee will be
received by the Distributor, the Manager, the Administrator or the Fund.
EXCHANGE PRIVILEGE
Shares of the Fund may be exchanged for shares of each of the other
O'Shaughnessy Funds (i.e., O'Shaughnessy Cornerstone Value Fund, O'Shaughnessy
Cornerstone Growth Fund and O'Shaughnessy Dogs of the Market Fund). Prospectuses
for the other O'Shaughnessy Funds may be obtained by writing to the Distributor
at 4455 E. Camelback Road, Suite 261 E, Phoenix AZ 85018, Attention:
O'Shaughnessy Funds, Inc. or by calling 877-OSFUNDS (673-8637) (toll-free).
You may also exchange shares of the Fund for shares of the Firstar Money Market
Fund, a money market mutual fund not affiliated with O'Shaughnessy Funds or the
Manager. Prior to making such an exchange, you should obtain and carefully read
the prospectus for the Firstar Money Market Fund. The exchange privilege does
not constitute an offering or recommendation on the part of the Fund or the
Manager of an investment in the Firstar Money Market Fund.
If you exchange into shares of the Firstar Money Market Fund you may establish
checkwriting privileges on the Firstar Money Market Fund. Contact the Fund at
877-OSFUNDS (673-8637) for a checkwriting application and signature card.
THE EXCHANGE PROCEDURES ARE DESCRIBED BELOW.
Is there any sales charge or minimum investment applicable to an exchange?
Shareholders of the Fund may exchange their shares of the Fund, without the
payment of any sales or service charge unless the exchange is effected via
telephone instructions for which a $5.00 charge will be levied or on shares held
less than 90 days for which a redemption fee will be charged (see "Information
About Your Account - Redemption of Shares"), for shares of any other fund into
which an exchange is permitted equal in value to the net asset value of the
shares being exchanged. All exchanges are subject to all applicable terms set
forth in the prospectus of the fund into which the exchange is being made. If a
shareholder exchanges shares through a broker-dealer other than the Distributor,
such broker-dealer may charge the shareholder a service fee, no part of which
will be received by the Distributor, the Manager, the Fund, or the fund into
which the exchange is being made.
At what price is an exchange effected? An exchange is effected at the respective
net asset values of the two funds with respect to which shares are being
exchanged as next determined following receipt by the fund into which the
exchange is being made of all necessary documentation in connection with the
redemption of Fund shares as described below under "Redemption of Shares - How
do I redeem shares by mail?"
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DO CURRENT INSTRUCTIONS CONCERNING RECEIPT OF DIVIDENDS AND DISTRIBUTIONS CARRY
OVER TO EXCHANGED SHARES?
Dividend and distribution instructions with respect to exchanged shares will
remain the same as those given previously by the shareholders to the fund from
which the shareholder is exchanging the shares, unless the shareholder
designates a change in such instructions by writing to the Transfer Agent.
Please note that such changed instructions (i) must be signed by the registered
owners(s) of the shares, exactly as the account is registered and signature
guaranteed, and (ii) include the name of the account, the account number, and
the name of the fund for which instructions have changed.
WHAT ARE THE CONDITIONS APPLICABLE TO AN EXCHANGE?
Exchanges involving the redemption of shares recently purchased by personal,
corporate or government check will be permitted only after the Fund has
reasonable belief that the check has cleared, which may take up to fifteen days
after the purchase date. The exchange privilege is available only in states
where shares of the other O'Shaughnessy Funds or the Firstar Money Market Fund
may be sold legally.
The Fund, the other O'Shaughnessy Funds and the Firstar Money Market Fund each
reserves the right to reject any order to acquire its shares through exchange or
otherwise and to restrict or terminate the exchange privilege at any time. If
the exchange privilege is to be permanently terminated, the Fund will provide
its shareholders with written notice of such termination. The Fund reserves the
right to suspend temporarily the telephone exchange privilege in emergency
circumstances or in cases where, in the judgment of the Fund, continuation of
the privilege would be detrimental to the Fund and its shareholders as a whole.
Such temporary suspension can be without prior notification.
HOW CAN I MAKE EXCHANGES BY TELEPHONE?
Shareholders who have completed the section of the Fund's Application entitled
"Shareholder Privileges" are eligible to make telephone requests for exchanges
and may do so by telephoning the Fund at 877-OSFUNDS (673-8637). A shareholder
who has not completed the Shareholder Privileges section of the Application but
who wishes to become eligible to make telephone exchanges should designate a
change in such instructions by writing to the Transfer Agent. Please note that
such changed instructions must (i) be signed by the registered owner(s) of the
shares exactly as the account is registered and signature guaranteed, and (ii)
include the name of the account, the account number and the name of the Fund.
See "Redemption of Shares - How do I redeem shares by telephone?" below, which
describes the time of day at which telephone redemptions and exchanges will be
priced and processed. Telephone requests for exchanges cannot be accepted with
respect to shares represented by certificates. Shares of the other O'Shaughnessy
Funds or the Firstar Money Market Fund acquired pursuant to a telephone request
for exchange will be held under the same account registration as the shares
redeemed through the exchange.
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<PAGE>
The Fund will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. Neither the Fund nor any of its service
contractors will be liable for any loss or expense in acting on telephone
instructions that are reasonably believed to be genuine. In attempting to
confirm that telephone instructions are genuine, the Fund will use procedures
that are considered reasonable, including requesting a shareholder to correctly
state the account number, the name(s) in which the account is registered, the
social security number(s) registered to the account, and certain additional
personal identification.
Shareholders should be aware that, at times, the volume of telephone calls or
other factors beyond the Fund's control may make it difficult to reach the
Transfer Agent by telephone. This will be true particularly during periods of
drastic economic market changes. In such cases, shareholders should continue to
telephone or utilize the written exchange procedures described below.
Shareholders who effect exchanges of Fund shares by telephone will be charged a
$5.00 exchange fee.
HOW DO I MAKE EXCHANGES BY MAIL?
To exchange shares by mail, send a written request for exchange signed by the
registered owner(s) of the shares, exactly as the account is registered to
O'Shaughnessy Funds, Inc., c/o Firstar Mutual Fund Services, LLC, at P.O. Box
701, Milwaukee, WI 53201-0701 (for requests sent by U.S. mail) or 615 E.
Michigan Street, Third Floor, Milwaukee, WI 53202 (for requests sent via
overnight courier). The request for exchange should include the following
information: the name of the account, the account number, the number of Fund
shares or the dollar value of Fund shares to be exchanged, the shares of which
other fund (either another O'Shaughnessy Fund or the Firstar Money Market Fund)
that shares of the Fund are to be exchanged for, and the name on the account and
the account number (if already established) with such other fund.
REDEMPTION OF SHARES
Shareholders can redeem their shares by giving instructions to the Transfer
Agent in writing or by telephone. As more fully described below, these
redemption instructions may have to be accompanied by additional documentation,
which may include a signature guarantee.
If a shareholder redeems shares through a broker-dealer other than the
Distributor, such broker-dealer may charge the shareholder a service fee, no
part of which will be received by the Distributor, the Manager, the
Administrator or the Fund.
HOW DO I REDEEM SHARES BY MAIL?
To redeem shares by mail, send a written request for redemption signed by the
registered owner(s) of the shares, exactly as the account is registered to
O'Shaughnessy Funds, Inc., c/o Firstar Mutual Fund Services, LLC, at P.O. Box
701, Milwaukee, WI 53201-0701 (for requests sent by U.S. mail) or 615 E.
Michigan Street, Third Floor, Milwaukee, WI 53202 (for requests sent via
overnight courier). The request should include the following: the name of the
account, the account number, the number of shares or the dollar value of shares
to be redeemed and whether proceeds are to be sent by mail or wire, and if by
wire, giving the wire instructions; (ii) duly endorsed share certificates, if
any have been issued for the shares redeemed; (iii) any signature guarantees
that are required as described below; and (iv) any additional documents which
might be required for redemptions by corporations, executors, administrators,
trustees, guardians or other similar shareholders. Except as otherwise directed
by the Fund in its discretion, the Transfer Agent will not redeem shares until
it has received all necessary documents; corporate and institutional investors
and fiduciaries should contact the Transfer Agent to ascertain what additional
documentation is required.
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<PAGE>
WHEN WOULD I PAY A REDEMPTION FEE?
The Fund can experience substantial price fluctuations and are intended for
long-term investors. Short-term "market timers" who engage in frequent purchases
and redemptions can disrupt the Funds' investment programs and create additional
transaction costs that are borne by all shareholders. For these reasons, the
Fund will assess a 1.5% fee on redemptions (including exchanges) of Fund shares
purchased and held for less than 90 days.
Redemption fees will be paid to the Fund to help offset transaction costs. The
Fund will use the "first-in, first-out" (FIFO) method to determine the 90 day
holding period. Under this method, the date of redemption or exchange will be
compared with the earliest purchse date of shares held in the account. If this
holding period is less than 90 days, the fee will be assessed.
The fee does not apply to any shares purchased through reinvested distributions
(dividends and capital gains) or to shares held in retirement plans such as
401(k), 403(b), 457, Koegh, profit sharing, SIMPLE IRA, SEP-IRA, and money
purchase pension accounts. These exceptions may not apply to shares held in
broker omnibus accounts. The fee does apply to shares held in IRA accounts and
to shares purchased through automatic investment plans (see "Other Shareholder
Services - Automatic Investment Plan").
MAY I SEND REDEMPTION REQUESTS TO THE FUND?
Please do not send redemption requests to the Fund. The Fund must forward all
redemption requests to the Transfer Agent and instructions for redemption will
not be effective until received by the Transfer Agent. Shares redeemed will be
priced at the net asset value per share next determined after acceptance of a
complete redemption request by the Transfer Agent. Redemption requests received
by the Transfer Agent after the close of the NYSE (currently 4:00 pm, Eastern
time) will be treated as though received on the next business day. The Transfer
Agent cannot accept redemption requests that specify a particular date for
redemption or special redemption conditions.
WHEN ARE SIGNATURE GUARANTEES REQUIRED?
Except as indicated below, all of the signatures on any request for redemption
or share certificates tendered for redemption must be guaranteed by a bank,
broker-dealer, credit union (if authorized under state law), securities exchange
or association, clearing agency or savings association. A notary public cannot
provide a signature guarantee.
The Fund will waive the signature guarantee requirement on a redemption request
that instructs that the proceeds be sent by mail if all of the following
conditions apply: (i) the redemption is for $10,000 or less; (ii) the redemption
check is payable to the shareholder(s) of record; (iii) the redemption check is
mailed to the shareholder(s) at the address of record; and (iv) no shares
represented by certificate are being redeemed. Share certificates submitted for
redemption or exchange must be properly endorsed and contain signature
guarantees. In addition, the Fund in its discretion may waive the signature
guarantee for employees and affiliates of the Manager, the Distributor and the
Administrator, and family members of the foregoing.
The requirement of a guaranteed signature protects against an unauthorized
person redeeming shares and obtaining the redemption proceeds.
HOW DO I REDEEM SHARES BY TELEPHONE?
Shareholders who have completed the section of the Fund's Application entitled
"Shareholder Privileges" are eligible to make telephone requests for redemptions
(without charge) and may do so by telephoning the Fund at 877-OSFUNDS
(673-8637). A shareholder who has not completed the Shareholder Privileges
section of the Application but who wishes to become eligible to make telephone
redemptions, should designate a change in such instructions by writing to the
Transfer Agent. Please note that such changed instructions must (i) be signed by
the registered owner(s) of the shares exactly as the account is registered and
signature guaranteed, and (ii) include the name of the account, the account
number and the name of the Fund.
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<PAGE>
Telephone redemptions cannot be accepted with respect to shares represented by
certificates or for IRA accounts. In such cases, redemption can only be made by
mail as described above under "Redemption of Shares - How do I redeem shares by
mail?" Telephone requests for redemptions (or exchanges - see "Exchange
Privilege" above) received before the close of business on the NYSE (currently
4:00 pm, Eastern time) on a business day will be priced and processed as of the
close of business on that day; requests received after that time will be
processed as of the close of business on the next business day.
As noted above, the Fund will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine and may, along with their
service contractors, be liable for a failure to use such procedures. See
"Exchange Privilege - How can I make exchanges by telephone?" above.
Shareholders should be aware that, at times, the volume of telephone calls or
other factors beyond the Fund's control may make it difficult to reach the
Transfer Agent by telephone. This will be true particularly during periods of
drastic economic or market changes. In the event of difficulty in reaching the
Transfer Agent, shareholders should continue to telephone or utilize the written
redemption procedures described above under "Redemption of Shares - How do I
redeem shares by mail?"
The Fund reserves the right to terminate the telephone redemption privilege at
any time and, if so terminated, will provide the shareholders with written
notice of such termination. The Fund reserves the right to suspend temporarily
telephone redemptions in emergency circumstances or in cases where, in the
judgment of the Fund, continuation of the privilege would be detrimental to the
Fund and its shareholders as a whole. Such temporary suspension can be without
prior notification.
WHAT OPTIONS DO I HAVE IN RECEIVING REDEMPTION PROCEEDS?
Redemption proceeds may be sent to shareholders by mail or by wire as described
below. Wire redemptions will only be made if the Transfer Agent has received
appropriate written wire instructions. Because of fluctuations in the value of
the Fund's portfolio, the net asset value of shares redeemed may be more or less
than the investor's cost.
REDEMPTION BY MAIL. In the case of shareholders who request that their
redemption proceeds be sent by mail, the Transfer Agent mails checks for
redemption proceeds typically within one or two business days, but no later than
seven days, after it receives the request and all the necessary documents.
REDEMPTION BY WIRE. In the case of shareholders who request that their
redemption proceeds be sent by bank wire, the Transfer Agent typically wires
redemption proceeds the next business day, but no later than seven days, after
it receives the request and all necessary documents.
Wire redemptions will be made only if the Transfer Agent has received
appropriate written instructions from the shareholder either on the Fund's
Application or by separate letter. A shareholder who has not indicated wire
instructions on the Application, but would like to have redemption proceeds
wired to a particular bank for each redemption request, should so designate by
writing to the Transfer Agent. Please note that such instructions must (i) be
signed by the registered owner(s) of the shares exactly as the account is
registered and signature guaranteed, and (ii) include the name of the account,
the account number and the name of the Fund.
A shareholder who would like to change the wire instructions indicated on the
Application should designate a change in such instructions by writing to the
Transfer Agent and complying with the requirements set forth in the preceding
paragraph. There is a $1,000 minimum on redemption proceeds by bank wire.
Shareholders who effect redemptions by wire transfer will pay a $12.00 wire
transfer fee to the Transfer Agent to cover costs associated with the transfer.
In addition, a shareholder's bank may impose a charge for receiving wires.
17
<PAGE>
WHEN WOULD THE PAYMENT OF PROCEEDS BE DELAYED?
Please note that shares paid for by personal, corporate or government check
cannot be redeemed before the Fund has reasonable belief that the check has
cleared, which may take up to fifteen days after payment of the purchase price.
This delay can be avoided by paying for shares by certified check or bank-wire.
An investor will be notified promptly by the Transfer Agent if a redemption
request cannot be accepted.
WOULD MY ACCOUNT EVER BE INVOLUNTARILY REDEEMED?
Due to the relatively high cost to the Fund of maintaining small accounts, we
ask you to maintain an account balance of at least $2,500. If your balance is
below $2,500 for three months or longer due to redemptions, we have the right to
close your account after giving you 60 days in which to increase your balance.
INFORMATION ON DISTRIBUTIONS AND TAXES
DIVIDENDS AND OTHER DISTRIBUTIONS GENERALLY
Dividend and capital gain distributions are reinvested in additional Fund shares
in your account unless you select another option on your Application. The
advantage of reinvesting distributions arises from compounding; that is, you
receive dividends and capital gain distributions on an increasing number of
shares. Distributions not reinvested are paid by check or transmitted to your
bank account.
INCOME DIVIDENDS
The Fund declares and pays dividends (if any) annually.
CAPITAL GAINS
A capital gain or loss is the difference between the purchase and sale price of
a security. If the Fund has net capital gains for the year (after subtracting
any capital losses), they are usually declared and paid in December to
shareholders of record on a specified date that month.
TAX INFORMATION
You need to be aware of the possible tax consequences when: (1) the Fund makes a
distribution to your account; (2) you sell Fund shares; or (3) you exchange
shares of the Fund for shares of one of the other O'Shaughnessy Funds or the
Firstar Money Market Fund. The following summary does not apply to retirement
accounts, such as IRAs, which are tax-deferred until you withdraw money from
them.
Will I pay taxes on redemptions or exchanges of Fund shares? When you sell or
exchange shares in the Fund, you may realize a gain or loss. Unless you are a
dealer in securities, such gain or loss will be capital gain or loss. Consult
your tax advisor concerning the tax rate applicable to your sale or exchange of
Fund shares.
A loss recognized on a sale or exchange of shares of the Fund will be disallowed
if other Fund shares are acquired (whether through automatic reinvestment of
dividends or otherwise) within a 61-day period beginning 30 days before and
ending 30 days after the date that the shares are disposed of. In such case, the
basis of the shares acquired will be adjusted to reflect the disallowed loss. In
addition, if you realize a loss on the sale or exchange of Fund shares held six
months or less, your short-term loss recognized is reclassified to long-term to
the extent of any long-term capital gain distribution received.
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<PAGE>
WILL I PAY TAXES ON FUND DISTRIBUTIONS?
Distributions of ordinary income and short-term capital gains are taxable as
ordinary income. The dividends of the Fund will be eligible for the 70%
deduction for dividends received by corporations only to the extent the Fund's
income consists of dividends paid by U.S. corporations. Distributions designated
as capital gains dividends are taxable as capital gains regardless of the length
of time shares of the Fund have been held.
WHAT IS THE TAX EFFECT OF THE FUND'S INVESTMENT IN FOREIGN SECURITIES?
Pursuant to the Fund's investment objectives, the Fund may invest in foreign
securities through ADRs. Foreign taxes may be paid by the Fund as a result of
tax laws of countries in which the Fund may invest. Income tax treaties between
certain countries and the United States may reduce or eliminate such taxes. It
is impossible to determine in advance the effective rate of foreign tax to which
the Fund will be subject, since the amount of Fund assets to be invested in
various countries is not known. Because the Fund limits its investment in
foreign securities, shareholders will not be entitled to claim foreign tax
credits with respect to their share of foreign taxes paid by the Fund on income
from investments of foreign securities held by the Fund.
WHAT ARE THE TAX EFFECTS OF BUYING SHARES BEFORE A DISTRIBUTION?
If you buy shares shortly before or on the "record date" - the date that
establishes you as the person to receive the upcoming distribution - you will
receive, in the form of a taxable distribution, a portion of the money you just
invested. Therefore, you may wish to find out the Fund's record date(s) before
investing. Of course, a Fund's share price may, at any time, reflect
undistributed capital gains or unrealized appreciation.
The foregoing is a general and abbreviated summary of the applicable provisions
of the Code and Treasury regulations presently in effect, and does not address
the state and local tax consequences of an investment in the Fund. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative or administrative action either
prospectively or retroactively. For additional information regarding federal
income tax consequences of an investment in the Fund, see "Additional
Information About Dividends and Taxes" in the Statement of Additional
Information.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, state, local or foreign taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
PERFORMANCE INFORMATION
This section should help you understand the terms used to describe Fund
performance. The Fund's annual report will contain additional performance
information and will be available upon request and without charge.
WHAT IS TOTAL RETURN?
This tells you how much an investment in the Fund has changed in value over a
given time period. It reflects any net increase or decrease in the share price
and assumes that all dividends and capital gains (if any) paid during the period
were reinvested in additional shares. Including reinvested distributions means
that total return numbers include the effect of compounding, i.e, you receive
income and capital gain distributions on an increasing number of shares.
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<PAGE>
Advertisements for the Fund may include cumulative or compound average annual
total return figures, which may be compared with various indices, other
performance measures, or other mutual funds.
WHAT IS CUMULATIVE TOTAL RETURN?
This is the actual rate of return on an investment for a specified period. A
cumulative return does not indicate how much the value of the investment may
have fluctuated between the beginning and the end of the period specified.
WHAT IS AVERAGE ANNUAL TOTAL RETURN?
This is always hypothetical. Working backward from the actual cumulative return,
it tells you what constant year-by-year return would have produced the actual,
cumulative return. By smoothing out all the variations in annual performance, it
gives you an idea of the investment's annual contribution to your portfolio
provided you held it for the entire period in question.
NET ASSET VALUE
The price at which the Fund's shares are purchased or redeemed is the Fund's
next determined net asset value per share. The net asset value per share is
calculated as of the close of the NYSE (currently 4:00 pm, Eastern time) on each
day that the NYSE is open for business and on each other day in which there is a
sufficient degree of trading in the Fund's portfolio securities that the current
net asset value of the Fund's shares may be materially affected by changes in
the value of the Fund's portfolio securities.
HOW IS NET ASSET VALUE DETERMINED?
The Fund determines the net asset value per share by subtracting the Fund's
total liabilities from the Fund's total assets (the value of the securities the
Fund holds plus cash and other assets), dividing the remainder by the total
number of shares outstanding, and adjusting the result to the nearest full cent.
HOW ARE THE SECURITIES HELD IN THE FUND'S PORTFOLIO VALUED?
Securities listed on the NYSE, American Stock Exchange or other national
exchanges are valued at the last sale price on such exchange on the day as of
which the net asset value per share is to be calculated. Over-the-counter
securities included in the NASDAQ National Market System are valued at the last
sale price. If there is no sale on a particular security on such day, it is
valued at the mean between the bid and asked prices. Other securities, to the
extent that market quotations are readily available, are valued at market value
in accordance with procedures established by the Board of Directors. Any
securities and other assets for which market quotations are not readily
available are valued in good faith in a manner determined by the Directors of
the Fund best to reflect their fair value.
20
<PAGE>
OTHER SHAREHOLDER SERVICES
AUTOMATIC INVESTMENT PLAN
An Automatic Investment Plan allows a shareholder to make automatic monthly or
quarterly investments into a Fund account, in amounts of at least $100, by
having the Transfer Agent draw an automatic clearing house (ACH) debit
electronically against a shareholder's checking or savings account. A
shareholder may establish an Automatic Investment Plan by completing the
appropriate section on the Application Form for new accounts or by calling the
Fund at 877- OSFUNDS (673-8637) and requesting an Automatic Investment Plan
Application for existing accounts. A shareholder should be aware that a signed
Application should be received by the Transfer Agent at least 15 business days
prior to the initial transaction. The Transfer Agent will assess a $20.00 fee if
the automatic investment cannot be made due to insufficient funds, stop payment,
or for any other reason. The Fund cannot guarantee acceptance by your bank.
SYSTEMATIC CASH WITHDRAWAL PLAN
When an account of $10,000 or more is opened or when an existing account reaches
that size, a shareholder may participate in the Fund's Systematic Cash
Withdrawal Plan by filling out the appropriate part of the Application. Under
this plan, a shareholder may receive (or designate a third party to receive) a
monthly or quarterly check in a stated amount of not less than $50. Fund shares
will be redeemed as necessary to meet withdrawal payments. All participants must
elect to have their dividends and capital gain distributions reinvested
automatically. A shareholder who decides later to use this service should call
the Fund at 877-OSFUNDS (673-8637).
REPORTS TO SHAREHOLDERS
Each time a shareholder invests, redeems, transfers or exchanges shares, or
receives a distribution, the Fund will send a confirmation of the transaction
which will include a summary of all of the shareholder's most recent
transactions.
At such time as prescribed by law, the Fund will send to each shareholder the
following reports (if they are applicable), which may be used in completing U.S.
income tax returns:
Form 1099-DIV Report taxable distributions during the preceding calendar year.
(If a shareholder did not receive taxable distributions in the previous year,
such shareholder will not be sent a 1099-DIV.)
Form 1099-B Reports redemption proceeds paid (including those resulting from
exchanges) during the preceding calendar year.
Form 1099-R Report distributions from retirement plan accounts during the
preceding calendar year.
Form 5498 Reports contributions to IRAs for the previous calendar year.
If an investor's shares are held by an outside broker in an omnibus account, it
is the responsibility of such outside broker to provide shareholders whose
shares are held in the omnibus account with any reports prescribed by law which
the shareholders require in order to complete their U.S. income tax returns.
Shareholders will also receive annual and semi-annual reports including the
financial statements of the Funds for the respective periods.
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<PAGE>
RETIREMENT PLANS
Eligible investors may invest in the Fund under the following prototype
retirement plans:
"Education" Individual Retirement Account (IRA)
"Traditional" Individual Retirement Account (IRA)
"Roth" Individual Retirement Account (IRA)
Simplified Employee Pension (SEP) for sole proprietors,
partnerships and corporations
Profit-Sharing and Money Purchase Pension Plans for corporations
and their employees
AUTOMATIC REINVESTMENT PLAN
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund at the net
asset value per share at the close of business on the record date, unless
otherwise specified on the Application or requested by a shareholder in writing.
If the Transfer Agent does not receive a written request for subsequent
dividends and/or distributions to be paid in cash at least three full business
days prior to a given record date, the dividends and/or distributions to be paid
to a shareholder will be reinvested. If a shareholder elects to receive
dividends and distributions in cash and the U.S. Postal Service cannot deliver
the checks, or if the checks remain uncashed for six months, the shareholder's
distribution checks will be reinvested into the shareholder's account at the
then current net asset value.
No person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund, the Investment Adviser, the Administrator or
the Distributor. This Prospectus does not constitute an offering in any state in
which such offering may not lawfully be made.
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<PAGE>
INVESTMENT MANAGER
O'Shaughnessy Capital Management, Inc.
35 Mason Street
Greenwich, Connecticut 06830
ADMINISTRATOR
Investment Company Administration, LLC
4455 E. Camelback Road, Suite 261 E
Phoenix, Arizona 85018
DISTRIBUTOR
First Fund Distributors, Inc.
4455 E. Camelback Road, Suite 261 E
Phoenix, Arizona 85018
TRANSFER AGENT
Firstar Mutual Fund Services, LLC
615 E. Michigan Street
Milwaukee, Wisconsin 53202
AUDITORS
McGladrey & Pullen, LLP
555 Fifth Avenue
New York, New York 10017-2416
LEGAL COUNSEL
Swidler Berlin Shereff Friedman, LLP
919 Third Avenue
New York, New York 10022
O'SHAUGHNESSY FUNDS, INC.
(the "O'Shaughnessy Funds")
O'Shaughnessy Cornerstone Value Fund
O'Shaughnessy Cornerstone Growth Fund
O'Shaughnessy Aggressive Growth Fund
O'Shaughnessy Dogs of the MarketTM Fund
(each, a "Fund," and collectively, the "Funds")
STATEMENT OF ADDITIONAL INFORMATION
DATED NOVEMBER 30, 1998
35 Mason Street
Greenwich, Connecticut 06830
Telephone: 1-877-OSFUNDS
This Statement of Additional Information ("SAI") is not a prospectus and should
be read only in conjunction with the current Prospectus of each Fund (each, a
"Fund Prospectus"), dated November 30, 1998. A copy of each Fund Prospectus may
be obtained by calling or writing to the relevant Fund at the telephone number
or address shown above. This SAI is incorporated by reference into each Fund
Prospectus, as applicable.
B-1
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TABLE OF CONTENTS
INVESTMENT POLICIES AND LIMITATIONS ...................................... B-2
DIRECTORS AND OFFICERS ................................................... B-9
MANAGEMENT OF THE FUNDS .................................................. B-11
PORTFOLIO TRANSACTIONS ................................................... B-12
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION ........................... B-14
VALUATION OF SHARES ...................................................... B-14
ADDITIONAL INFORMATION ABOUT DIVIDENDS AND TAXES ......................... B-15
PERFORMANCE INFORMATION .................................................. B-16
OTHER INFORMATION ........................................................ B-18
FINANCIAL STATEMENTS OF THE FUNDS ........................................ B-19
OPTIONS AND FUTURES ...................................................... A-20
B-2
<PAGE>
INVESTMENT POLICIES AND LIMITATIONS
The following supplements the information contained in each Fund Prospectus
concerning the investment policies and limitations of O'Shaughnessy Cornerstone
Growth Fund ("Cornerstone Growth Fund"), O'Shaughnessy Cornerstone Value Fund
("Cornerstone Value Fund"), O'Shaughnessy Aggressive Growth Fund ("Aggressive
Growth Fund") and O'Shaughnessy Dogs of the Market TM Fund ("Dogs of the Market
Fund"). O'Shaughnessy Capital Management, Inc. (the "Manager") serves as
investment advisor to each Fund. See "Management of the Funds."
SPECIAL CONSIDERATIONS RELATING TO DEPOSITORY RECEIPTS. As noted in the
applicable Fund Prospectus, the Funds may each invest in the securities of
foreign issuers, including American Depository Receipts ("ADRs"). Generally,
ADRs, in registered form, are denominated in U.S. dollars and are designed for
use in the U.S. securities markets. ADRs are receipts typically issued by a U.S.
bank or trust company evidencing ownership of the underlying securities. For
purposes of the Funds' investment policies, ADRs are deemed to have the same
classification as the underlying securities they represent. Thus, an ADR
evidencing ownership of common stock will be treated as common stock.
Many of the foreign securities held in the form of depository receipts by
the Funds are not registered with the Securities and Exchange Commission
("SEC"), nor are the issuers thereof subject to its reporting requirements.
Accordingly, there may be less publicly available information concerning foreign
issuers of securities held by the Funds than is available concerning U.S.
companies. Foreign companies are not generally subject to uniform accounting,
auditing and financial reporting standards or to other regulatory requirements
comparable to those applicable to U.S. companies.
Investment income on certain foreign securities may be subject to foreign
withholding or other taxes that could reduce the return on these securities. Tax
treaties between the United States and foreign countries, however, may reduce or
eliminate the amount of foreign taxes to which a Fund would be subject.
ILLIQUID SECURITIES. The Aggressive Growth Fund may invest up to 15% of its
net assets in illiquid securities. The term illiquid securities for this purpose
means securities which cannot be readily resold because of legal and contractual
considerations or which cannot otherwise be marketed, redeemed, put to the
issuer or a third party, or which do not mature within seven days, or which the
Manager, in accordance with guidelines established by the Board of Directors,
has not determined to be liquid and includes, among other things, purchased
over-the-counter ("OTC") options and repurchase agreements maturing in more than
seven days. The assets used as cover for OTC options written by a Fund will be
considered illiquid unless the OTC options are sold to qualified dealers who
agree that the Fund may repurchase any OTC option it writes at a maximum price
to be calculated by a formula set forth in the option agreement. The cover for
an OTC option written subject to this procedure will be considered illiquid only
to the extent that the maximum repurchase price under the option formula exceeds
the intrinsic value of the option.
Restricted securities may be sold only in privately negotiated transactions
or in public offerings with respect to which a registration statement is in
effect under the Securities Act of 1933 ("1933 Act"). Where registration is
required, a Fund may be obligated to pay all or part of the registration
expenses and a considerable period may elapse between the time of the decision
to sell and the time the Fund may be permitted to sell a security under an
effective registration statement. If, during such a period, adverse market
conditions were to develop, the Fund might obtain a less favorable price than
prevailed when it decided to sell.
B-3
<PAGE>
In recent years a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including securities sold
in private placements, repurchase agreements, commercial paper, foreign
securities and corporate bonds and notes. These instruments are often restricted
securities because the securities are sold in transactions not requiring
registration. Institutional investors generally will not seek to sell these
instruments to the general public, but instead will often depend either on an
efficient institutional market in which such unregistered securities can be
readily resold or on an issuer's ability to honor a demand for repayment.
Therefore, the fact that there are contractual or legal restrictions on resale
to the general public or certain institutions is not dispositive of the
liquidity of such investments.
Rule 144A under the 1933 Act establishes a safe harbor from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional markets for restricted securities
that might develop as a result of Rule 144A could provide both readily
ascertainable values for restricted securities and the ability to liquidate an
investment to satisfy share redemption orders. Such markets might include
automated systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System sponsored
by the National Association of Securities Dealers, Inc. An insufficient number
of qualified buyers interested in purchasing Rule 144A-eligible restricted
securities held by a Fund, however, could affect adversely the marketability of
such Fund securities and a Fund might be unable to dispose of such securities
promptly or at favorable prices.
The Board of Directors has delegated the function of making day-to-day
determinations of liquidity to the Manager pursuant to guidelines approved by
the Board. The Manager takes into account a number of factors in reaching
liquidity decisions, including but not limited to: (1) the frequency of trades
for the security, (2) the number of dealers that make quotes for the security,
(3) the number of dealers that have undertaken to make a market in the security,
(4) the number of other potential purchasers and (5) the nature of the security
and how trading is effected (e.g., the time needed to sell the security, how
bids are solicited and the mechanics of transfer). The Manager monitors the
liquidity of restricted securities in each Fund and reports periodically on such
decisions to the Board of Directors.
REPURCHASE AGREEMENTS. Each Fund may enter into a repurchase agreement
through which an investor (such as the Fund) purchases a security (known as the
"underlying security") from a well-established securities dealer or bank that is
a member of the Federal Reserve System. Any such dealer or bank will be on the
Fund's approved list. Each Fund intends to enter into repurchase agreements only
with banks and dealers in transactions believed by the Manager to present
minimum credit risks in accordance with guidelines established by the Fund's
Board of Directors. The Manager will review and monitor the creditworthiness of
those institutions under the Board's general supervision.
B-4
<PAGE>
At the time of entering into the repurchase agreement the bank or
securities dealer agrees to repurchase the underlying security at the same
price, plus specified interest. Repurchase agreements are generally for a short
period of time, often less than a week. Repurchase agreements which do not
provide for payment within seven days will be treated as illiquid securities.
The Fund will only enter into repurchase agreements where (i) the underlying
securities are of the type (excluding maturity limitations) which the Fund's
investment guidelines would allow it to purchase directly, (ii) the market value
of the underlying security will at all times be equal to at least 102% of the
value of the repurchase agreement, and (iii) payment for the underlying security
is made only upon physical delivery or evidence of book-entry transfer to the
account of the Fund's custodian or a bank acting as agent. In the event of a
bankruptcy or other default of a seller of a repurchase agreement, the Fund
could experience both delays in liquidating the underlying security and losses,
including: (a) possible decline in the value of the underlying security during
the period while the Fund seeks to enforce its rights thereto; (b) possible
subnormal levels of income and lack of access to income during this period; and
(c) expenses of enforcing its rights.
LENDING OF FUND SECURITIES. In accordance with applicable law, each Fund
may lend portfolio securities (representing not more than 33 1/3% of its total
assets) to banks, broker-dealers or financial institutions that the Manager
deems qualified, but only when the borrower maintains with the Fund's custodian
bank collateral either in cash or money market instruments in an amount at least
equal to at least 102% of the market value of the securities loaned, determined
on a daily basis and adjusted accordingly. There may be risks of delay in
recovery of the securities or even loss of rights in the collateral should the
borrower of the securities fail financially. However, loans will only be made to
borrowers deemed by the Manager to be of good standing and when, in the judgment
of the Manager, the consideration which can be earned currently from such
securities loans justifies the attendant risk. All relevant facts and
circumstances, including the creditworthiness of the broker, dealer or
institution, will be considered in making decisions with respect to the lending
of securities, subject to review by the Board of Directors. During the period of
the loan the Manager will monitor all relevant facts and circumstances,
including the creditworthiness of the borrower. A Fund will retain authority to
terminate any loan at any time. A Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or money market instruments held as collateral to
the borrower or placing broker. A Fund will receive reasonable interest on the
loan or a flat fee from the borrower and amounts equivalent to any dividends,
interest or other distributions on the securities loaned. A Fund will regain
record ownership of loaned securities to exercise beneficial rights, such as
voting and subscription rights and rights to dividends, interest or other
distributions, when regaining such rights is considered to be in the Fund's
interest.
HEDGING AND RETURN ENHANCEMENT STRATEGIES. As discussed in the applicable
Fund Prospectus, the Funds may use a variety of financial instruments ("Hedging
Instruments"), including certain options, futures contracts (sometimes referred
to as "futures") and options on futures contracts, to attempt to hedge the
Fund's investments or attempt to enhance the Fund's income. The particular
Hedging Instruments are described in Appendix A to this SAI.
Hedging strategies can be broadly categorized as short hedges and long
hedges. A short hedge is a purchase or sale of a Hedging Instrument intended
partially or fully to offset potential declines in the value of one or more
investments held by a Fund. Thus, in a short hedge a Fund takes a position in a
Hedging Instrument whose price is expected to move in the opposite direction of
the price of the investment being hedged. For example, a Fund might purchase a
put option on a security to hedge against a potential decline in the value of
that security. If the price of the security declines below the exercise price of
the put, the Fund could exercise the put and thus limit its loss below the
exercise price to the premium paid plus transaction costs. In the alternative,
because the value of the put option can be expected to increase as the value of
the underlying security declines, the Fund might be able to close out the put
option and realize a gain to offset the decline in the value of the security.
B-5
<PAGE>
Conversely, a long hedge is a purchase or sale of a Hedging Instrument
intended partially or fully to offset potential increases in the acquisition
cost of one or more investments that a Fund intends to acquire. Thus, in a long
hedge a Fund takes a position in a Hedging Instrument whose price is expected to
move in the same direction as the price of the prospective investment being
hedged. For example, a Fund might purchase a call option on a security it
intends to purchase in order to hedge against an increase in the cost of the
security. If the price of the security increased above the exercise price of the
call, the Fund could exercise the call and thus limit its acquisition cost to
the exercise price plus the premium paid and transaction costs. Alternatively,
the Fund might be able to offset the price increase by closing out an
appreciated call option and realizing a gain.
Hedging Instruments on securities generally are used to hedge against price
movements in one or more particular securities positions that a Fund owns or
intends to acquire. Hedging Instruments on stock indices, in contrast, generally
are used to hedge against price movements in broad equity market sectors in
which the Fund has invested or expects to invest. Hedging Instruments on debt
securities may be used to hedge either individual securities or broad fixed
income market sectors.
The use of Hedging Instruments is subject to applicable regulations of the
SEC, the several options and futures exchanges upon which they are traded, the
Commodity Futures Trading Commission ("CFTC") and various state regulatory
authorities. In addition, a Fund's ability to use Hedging Instruments will be
limited by tax considerations. See "Additional Information about Dividends and
Taxes" below.
In addition to the products, strategies and risks described below and in
the applicable Fund Prospectus, the Manager expects to discover additional
opportunities in connection with options, futures contracts and other hedging
techniques. The Manager may utilize these opportunities to the extent that they
are consistent with the respective Fund's investment objectives and permitted by
the respective Fund's investment limitations and applicable regulatory
authorities. The applicable Fund Prospectus or this SAI will be supplemented to
the extent that new products or techniques involve materially different risks
than those described below or in the Fund Prospectus.
SPECIAL RISKS OF HEDGING STRATEGIES. The use of Hedging Instruments
involves special considerations and risks, as described below. Risks pertaining
to particular Hedging Instruments are described in the sections that follow.
(1) Successful use of most Hedging Instruments depends upon the Manager's
ability to predict movements of the overall securities and interest rate
markets, which requires different skills than predicting changes in the price of
individual securities. While the Manager is experienced in the use of Hedging
Instruments, there can be no assurance that any particular hedging strategy
adopted will succeed.
(2) There might be imperfect correlation, or even no correlation, between
price movements of a Hedging Instrument and price movements of the investments
being hedged. For example, if the value of a Hedging Instrument used in a short
hedge increased by less than the decline in value of the hedged investment, the
hedge would not be fully successful. Such a lack of correlation might occur due
to factors unrelated to the value of the investments being hedged, such as
speculative or other pressures on the markets in which Hedging Instruments are
traded. The effectiveness of hedges using Hedging Instruments on indices will
depend on the degree of correlation between price movements in the index and
price movements in the securities being hedged.
B-6
<PAGE>
(3) Hedging strategies, if successful, can reduce risk of loss by wholly or
partially offsetting the negative effect of unfavorable price movements in the
investments being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if a Fund entered into a short
hedge because the Manager projected a decline in the price of a security held by
a Fund, and the price of that security increased instead, the gain from that
increase might be wholly or partially offset by a decline in the price of the
Hedging Instrument. Moreover, if the price of the Hedging Instrument declined by
more than the increase in the price of the security, the Fund could suffer a
loss. In either such case, the Fund would have been in a better position had it
not hedged at all.
(4) As described below, a Fund might be required to maintain assets as
cover, maintain segregated accounts or make margin payments when it takes
positions in Hedging Instruments involving obligations to third parties (i.e.,
Hedging Instruments other than purchased options). If a Fund were unable to
close out its positions in such Hedging Instruments, it might be required to
continue to maintain such assets or accounts or make such payments until the
position expired or matured. These requirements might impair a Fund's ability to
sell a Fund security or make an investment at a time when it would otherwise be
favorable to do so, or require that a Fund sell a portfolio security at a
disadvantageous time. A Fund's ability to close out a position in a Hedging
Instrument prior to expiration or maturity depends on the existence of a liquid
secondary market or, in the absence of such a market, the ability and
willingness of a contra party to enter into a transaction closing out the
position. Therefore, there is no assurance that any hedging position can be
closed out at a time and price that is favorable to the Fund.
COVER FOR HEDGING STRATEGIES. Transactions using Hedging Instruments, other
than purchased options, expose a Fund to an obligation to another party. A Fund
will not enter into any such transactions unless it owns either (1) an
offsetting covered position in securities, or other options or futures
contracts, or (2) cash, receivables and short-term debt securities, with a value
sufficient at all times to cover its potential obligations to the extent not
covered as provided in (1) above. Each Fund will comply with Securities and
Exchange Commission ("SEC") guidelines regarding cover for hedging transactions
and will, if the guidelines so require, set aside cash, U.S. Government
securities or other liquid, high-grade debt securities in a segregated account
with its custodian in the prescribed amount.
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding Hedging Instrument is open, unless they are
replaced with similar assets. As a result, the commitment of a large portion of
a Fund's assets to cover or segregated accounts could impede Fund management or
the Fund's ability to meet redemption requests or other current obligations.
OPTIONS. The Funds may purchase put and/or call options, and write (sell)
covered put and call options on equity and stock indices. The purchase of call
options serves as a long hedge, and the purchase of put options serves as a
short hedge. Writing covered put or call options can enable a Fund to enhance
income by reason of the premiums paid by the purchasers of such options.
However, if the market price of the security underlying a covered put option
declines to less than the exercise price of the option, minus the premium
received, the Fund would expect to suffer a loss. Writing covered call options
serves as a limited short hedge, because declines in the value of the hedged
investment would be offset to the extent of the premium received for writing the
option. However, if the security appreciates to a price higher than the exercise
price of the call option, it can be expected that the option will be exercised
and the Fund will be obligated to sell the security at less than its market
value. If the covered call option is an OTC option, the securities or other
assets used as cover would be considered illiquid to the extent described above
under "Investment Policies and Restrictions -- Illiquid Securities."
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options normally have expiration dates
of up to nine months. Options that expire unexercised have no value.
B-7
<PAGE>
A Fund may effectively terminate its right or obligation under an option by
entering into a closing transaction. For example, a Fund may terminate its
obligation under a call option that it had written by purchasing an identical
call option; this is known as a closing purchase transaction. Conversely, a Fund
may terminate a position in a put or call option it had purchased by writing an
identical put or call option; this is known as a closing sale transaction.
The Funds may purchase or write exchange-traded and/or OTC options.
Currently, many options on equity securities are exchange-traded.
Exchange-traded options in the United States are issued by a clearing
organization affiliated with the exchange on which the option is listed which,
in effect, guarantees completion of every exchange-traded option transaction. In
contrast, OTC options are contracts between the Fund and its contra party
(usually a securities dealer or a bank) with no clearing organization guarantee.
Thus, when the Fund purchases or writes an OTC option, it relies on the party
from whom it purchased the option or to whom it has written the option (the
"contra party") to make or take delivery of the underlying investment upon
exercise of the option. Failure by the contra party to do so would result in the
loss of any premium paid by the Fund as well as the loss of any expected
benefits of the transaction.
A Fund's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. Each Fund intends to
purchase or write only those exchange-traded options for which there appears to
be a liquid secondary market. However, there can be no assurance that such a
market will exist at any particular time. Closing transactions can be made for
OTC options only by negotiating directly with the contra party, or by a
transaction in the secondary market if any such market exists. Although a Fund
will enter into OTC options only with contra parties that are expected to be
capable of entering into closing transactions with the Fund, there is no
assurance that the Fund will in fact be able to close out an OTC option position
at a favorable price prior to expiration. In the event of insolvency of the
contra party, the Fund might be unable to close out an OTC option position at
any time prior to its expiration.
If the Fund were unable to effect a closing transaction for an option it
had purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call option
written by a Fund could cause material losses because the Fund would be unable
to sell the investment used as cover for the written option until the option
expires or is exercised.
FUTURES. The purchase of futures or call options thereon can serve as a
long hedge, and the sale of futures or the purchase of put options thereon can
serve as a short hedge. Writing covered call options on futures contracts can
serve as a limited short hedge, using a strategy similar to that used for
writing covered call options on securities and indices.
Futures strategies also can be used to manage the average duration of a
Fund. If the Manager wishes to shorten the average duration of a Fund, the Fund
may sell a futures contract or a call option thereon, or purchase a put option
on that futures contract. If the Manager wishes to lengthen the average duration
of a Fund, the Fund may buy a futures contract or a call option thereon.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract a Fund is required to deposit in a segregated
account with its custodian, in the name of the futures broker through whom the
transaction was effected, initial margin consisting of liquid assets in an
amount generally equal to 10% or less of the contract value. Margin must also be
deposited when writing a call option on a futures contract, in accordance with
applicable exchange rules. Unlike margin in securities transactions, initial
margin on futures contracts does not represent a borrowing, but rather is in the
nature of a performance bond or good-faith deposit that is returned to the Fund
at the termination of the transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high volatility, a
Fund may be required by an exchange to increase the level of its initial margin
payment, and initial margin requirements might be increased generally in the
future by regulatory action.
B-8
<PAGE>
Subsequent variation margin payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
marking to market. Variation margin does not involve borrowing, but rather
represents a daily settlement of the Fund's obligations to or from a futures
broker. When a Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when a Fund purchases or
sells a futures contract or writes a call option thereon, it is subject to daily
variation margin calls that could be substantial in the event of adverse price
movements. If the Fund has insufficient cash to meet daily variation margin
requirements, it might need to sell securities at a time when such sales are
disadvantageous.
Holders and writers of futures positions and options on futures can enter
into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument held or written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
Each Fund intends to enter into futures transactions only on exchanges or boards
of trade where there appears to be a liquid secondary market. However, there can
be no assurance that such a market will exist for a particular contract at a
particular time. Secondary markets for options on futures are currently in the
development stage, and no Fund will trade options on futures on any exchange or
board of trade unless, in the Manager's opinion, the markets for such options
have developed sufficiently that the liquidity risks for such options are not
greater than the corresponding risks for futures.
Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a future or related option can vary from the
previous day's settlement price; once that limit is reached, no trades may be
made that day at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of
unfavorable positions.
If a Fund were unable to liquidate a futures or related options position
due to the absence of a liquid secondary market or the imposition of price
limits, it could incur substantial losses. The Fund would continue to be subject
to market risk with respect to the position. In addition, except in the case of
purchased options, the Fund would continue to be required to make daily
variation margin payments and might be required to maintain the position being
hedged by the future or option or to maintain cash or securities in a segregated
account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and related options markets
are subject to daily variation margin calls and might be compelled to liquidate
futures or related options positions whose prices are moving unfavorably to
avoid being subject to further calls. These liquidations could increase price
volatility of the instruments and distort the normal price relationship between
the futures or options and the investments being hedged. Also, because initial
margin deposit requirements in the futures market are less onerous than margin
requirements in the securities markets, there might be increased participation
by speculators in the futures markets. This participation also might cause
temporary price distortions. In addition, activities of large traders in both
the futures and securities markets involving arbitrage, program trading and
other investment strategies might result in temporary price distortions.
B-9
<PAGE>
LIMITATIONS ON THE USE OF FUTURES. The Funds have represented to the CFTC
that they: (1) will use future contracts and options thereon traded on a
commodities exchange solely in bona fide hedging transactions or, alternatively
(2) will not enter into futures contracts and options thereon traded on a
commodities exchange for which the aggregate initial margin and premiums exceed
5% of the liquidation value of a Fund's portfolio (calculated in accordance with
CFTC regulations). As a matter of operating policy, initial margin deposits and
premiums on options used for non-hedging purposes will not equal more than 5% of
a Fund's net asset value.
INVESTMENT LIMITATIONS. The investment restrictions set forth below are
fundamental policies of each Fund, which cannot be changed with respect to a
Fund without the approval of the holders of a majority of the outstanding voting
securities of that Fund, as defined in the Investment Company Act of 1940 (the
"1940 Act"), as the lesser of: (1) 67% or more of the Fund's voting securities
present at a meeting of shareholders, if the holders of more than 50% of the
Fund's outstanding shares are present in person or by proxy, or (2) more than
50% of the outstanding shares. Unless otherwise indicated, all percentage
limitations apply to each Fund on an individual basis, and apply only at the
time an investment is made; a later increase or decrease in percentage resulting
from changes in values or net assets will not be deemed to be an investment that
is contrary to these restrictions, except for the policies regarding borrowing
and illiquid securities or as otherwise noted. Pursuant to such restrictions and
policies, no Fund may:
(1) make an investment in any one industry if the investment would cause
the aggregate value of the Fund's investment in such industry to exceed 25% of
the Fund's total assets, except that this policy does not apply to obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
("U.S. Government securities"), certificates of deposit and bankers'
acceptances.
(2) purchase securities of any one issuer (except U.S. Government
securities), if as a result at the time of purchase more than 5% of the Fund's
total assets would be invested in such issuer, or the Fund would own or hold 10%
or more of the outstanding voting securities of that issuer, except that 25% of
the total assets of the Fund may be invested without regard to this limitation;
(3) purchase securities on margin, except for short-term credit necessary
for clearance of Fund transactions and except that a Fund that may use options
or futures strategies and may make margin deposits in connection with its use of
options, futures contracts and options on futures contracts;
(4) purchase or sell real estate, except that, to the extent permitted by
applicable law, a Fund may invest in securities secured by real estate or
interests therein or issued by companies which invest in real estate or
interests therein;
(5) purchase or sell commodities or commodity contracts, except to the
extent described in the Fund Prospectus and this SAI with respect to futures and
related options;
(6) make loans, except through loans of Fund securities and repurchase
agreements, provided that for purposes of this restriction the acquisition of
bonds, debentures or other corporate debt securities and investment in
government obligations, short-term commercial paper, certificates of deposit,
bankers' acceptances and other fixed income securities as described in the
applicable Fund Prospectus and this SAI shall not be deemed to be the making of
a loan, and provided further that the lending of Fund securities and repurchase
agreements may be made only in accordance with applicable law and the applicable
Fund Prospectus and this SAI as it may be amended from time to time;
B-10
<PAGE>
(7) borrow money or issue senior securities, except that each Fund may
borrow in an amount up to 33-1/3% of its respective total assets from banks for
extraordinary or emergency purposes such as meeting anticipated redemptions, and
may pledge its assets in connection with such borrowing. The Fund may not pledge
its assets other than to secure such borrowings or, to the extent permitted by
the Fund's investment policies as set forth in the applicable Fund Prospectus
and this SAI, as they may be amended from time to time, in connection with
hedging transactions, short-sales, when-issued and forward commitment
transactions and similar investment strategies. For purposes of this
restriction, the deposit of initial or maintenance margin in connection with
futures contracts will not be deemed to be a pledge of the assets of a Fund.
(8) underwrite securities of the issuers except insofar as the Fund
technically may be deemed to be an underwriter under the Securities Act of 1933
Act, as amended, in selling portfolio securities.
The following investment restrictions (or operating policies) may be
changed in respect of a Fund by the Board of Directors without shareholder
approval. No Fund may:
(a) make investments for the purpose of exercising control or management;
(b) make short sales of securities or maintain a short position, except to
the extent permitted by applicable law;
(c) purchase securities of other investment companies, except to the extent
such purchases are permitted by applicable law;
(d) invest in securities which cannot be readily resold because of legal or
contractual restrictions or which cannot otherwise be marketed, redeemed or put
to the issuer or a third party, if at the time of acquisition more than 15% of
its net assets would be invested in such securities. This restriction shall not
apply to securities which mature within seven days or securities which the Board
of Directors has otherwise determined to be liquid pursuant to applicable law.
Securities purchased in accordance with Rule 144A under the Securities Act of
1933, as amended (a "Rule 144A security") and determined to be liquid by them
Board of Directors are not subject to the limitations set forth in this
investment restriction (d). The foregoing operating policy applies only to
Aggressive Growth Fund since the Cornerstone Growth Fund, Cornerstone Value
Fund, and Dogs of the Market Fund do not invest in illiquid securities;
(e) write, purchase or sell puts, calls straddles, spreads or combinations
thereof, except to the extent permitted in the applicable Fund Prospectus and
this SAI, as they may be amended from time to time.
B-11
<PAGE>
DIRECTORS AND OFFICERS
The Directors and officers of O'Shaughnessy Funds, their business addresses and
principal occupations during the past five years are listed below. Unless
otherwise indicated, each person's address is 60 Mason Street, Greenwich,
Connecticut 06830.
<TABLE>
<CAPTION>
Name, Age and Address Position with the Fund Other Business Activities in Past 5 Years
- --------------------- ---------------------- -----------------------------------------
<S> <C> <C>
James P. O'Shaughnessy* Director, President and President of O'Shaughnessy Capital
Age: 38 Treasurer Management,Inc., 1988 - present; author
O'Shaughnessy Capital of "Invest Like the Best", "What Works
Management, Inc. on Wall Street", and "How to Retire Rich."
C. Flemming Heilmann Director President and Director, Danish American,
Age: 59 N.Y.; Former Chairman and
CEO, Brockway Standard, Inc.,
1989-1994; Director: Porter Chadburn,
Inc.; Porter Chadburn, plc; Wheaton,
Inc.; Danish American Chamber of
Commerce, N.Y.; American Friends of
Cambridge University; Trustee: Royal
Wessanen Group U.S. Trust.
Robert E. Ix Director Retired Chairman and Chief Executive
Age: 68 Officer of Cadbury Schweppes, Inc.;
Director, Loctite Corp.
Joseph John McAleer Director Founder and President, MCA Associates,
Age: 68 Inc. (shipbroker), 1983-present; General
Partner, Sixtus Limited Partnership;
President and Director, Salesian Sisters
Partners Circle; Trustee, American
Merchant Marine Museum Foundation
Steven J. Paggioli Vice President and Executive Vice President and Director,
Age 48 Secretary Wadsworth Group since 1986; Vice
President of First Fund Distributors, Inc.
since 1989; Vice President of Investment
Company Administration, LLC since 1990.
</TABLE>
* Interested person, as defined in the 1940 Act.
Pursuant to the terms of the Management Agreement (defined below) with
O'Shaughnessy Funds on behalf of the Funds, the Manager pays the compensation of
all officers and Directors who are affiliated persons of the Manager. Pursuant
to the terms of the Administration Agreement (defined below), the Administrator
pays the compensation of all officers that are affiliated persons of the
Administrator.
O'Shaughnessy Funds pays Directors who are not interested persons of the
O'Shaughnessy Funds (each, a "disinterested Director") fees for serving as
Directors. Specifically, O'Shaughnessy Funds pay each disinterested Director a
$9,750 annual retainer paid quarterly, together with such Director's
out-of-pocket expenses relating to attendance at meetings. Each Fund pays one
quarter of the foregoing fees.
B-12
<PAGE>
The following table sets forth the aggregate compensation the Funds paid to
the disinterested Directors for the fiscal year ended September 30, 1998.
Aggregate Pension or Retirement
Compensation Benefits Accrued as Total Compensation
Name of Director From Funds* Part of Fund Expenses From Fund Complex*
- ---------------- ----------- --------------------- ------------------
C. Flemming Heilmann $ 8,124 None $ 8,124
Robert E. Ix $ 8,124 None $ 8,124
Joseph John McAleer $ 8,124 None $ 8,124
During the fiscal period ended September 30, 1998, aggregate directors fees
and expenses in the amount of $24,372 were allocated to the Funds.
Because the Manager and the Administrator perform substantially all of the
services necessary for the operation of the Funds, the Funds require no
employees. No officer, director or employee of the Manager or the Administrator
receives any compensation from the Funds for acting as a Director or officer.
As of the date of this SAI, the officers and Directors of the O'Shaughnessy
Funds as a group (5 persons) owned an aggregate of less than 1% of the
outstanding shares of each Fund.
MANAGEMENT OF THE FUNDS
THE MANAGER. The Manager acts as the investment manager of each Fund
pursuant to a management agreement with O'Shaughnessy Funds on behalf of each
Fund (the "Management Agreement"). Under the Management Agreement, O'Shaughnessy
Funds pays the Manager a fee in respect of each Fund, computed daily and payable
monthly, according to the schedule set forth in the applicable Fund Prospectus.
The Manager is wholly owned and controlled by James P. O'Shaughnessy and his
immediate family.
Pursuant to the Management Agreement, the Manager is responsible for
investment management of each Fund's portfolio, subject to general oversight by
the Board of Directors, and provides the Funds with office space. In addition,
the Manager is obligated to keep certain books and records of the Funds. In
connection therewith, the Manager furnishes each Fund with those ordinary
clerical and bookkeeping services which are not being furnished by the Funds'
custodian, administrator or transfer and dividend disbursing agent.
Under the terms of the Management Agreement, each Fund bears all expenses
incurred in its operation that are not specifically assumed by the Manager,
Investment Company Administration, LLC, the Fund's administrator (the
"Administrator"), or First Fund Distributors, Inc., the Funds' distributor (the
"Distributor"). General expenses of O'Shaughnessy Funds not readily identifiable
as belonging to one of the Funds are allocated among the Funds by or under the
direction of the Board of Directors in such manner as the Board determines to be
fair and equitable. Expenses borne by each Fund include, but are not limited to,
the following (or the Fund's allocated share of the following): (1) the cost
(including brokerage commissions, if any) of securities purchased or sold by the
Fund and any losses incurred in connection therewith; (2) investment management
fees; (3) organizational expenses; (4) filing fees and expenses relating to the
registration and qualification of O'Shaughnessy Funds or the shares of a Fund
under federal or state securities laws and maintenance of such registrations and
qualifications; (5) fees and expenses payable to disinterested Directors; (6)
taxes (including any income or franchise taxes) and governmental fees; (7) costs
of any liability, directors' and officers' insurance and fidelity bonds; (8)
legal, accounting and auditing expenses; (9) charges of custodian, transfer
agents and other agents; (10) expenses of setting in type and providing a
camera-ready copy of the Fund Prospectus and supplements thereto, expenses of
setting in type and printing or otherwise reproducing statements of additional
information and supplements thereto and reports and proxy materials for existing
shareholders; (11) any extraordinary expenses (including fees and disbursements
of counsel) incurred by O'Shaughnessy Funds or the Fund; (12) fees, voluntary
assessments and other expenses incurred in connection with membership in
investment company organizations; and (13) costs of meetings of shareholders.
The Manager may voluntarily waive its management fee or subsidize other Fund
expenses. This may have the effect of increasing a Fund's return.
B-13
<PAGE>
Under the Management Agreement, the Manager will not be liable for any
error of judgment or mistake of law or for any loss suffered by O'Shaughnessy
Funds or any Fund in connection with the performance of the Management
Agreement, except a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of the Manager in the performance of its duties or from
reckless disregard of its duties and obligations thereunder.
The Management Agreement has an initial term of two years and may be
renewed from year to year thereafter so long as such continuance is specifically
approved at least annually in accordance with the requirements of the 1940 Act.
The Management Agreement provides that it will terminate in the event of its
assignment (as defined in the 1940 Act). The Management Agreement may be
terminated by O'Shaughnessy Funds in respect of a Fund or by the Manager upon 60
days' prior written notice.
During the fiscal year ended September 30, 1997, Aggressive Growth Fund,
Cornerstone Growth Fund, Cornerstone Value Fund and Dogs of the Market Fund paid
$17,218, $92,933, $42,147 and $26,765, respectively, in advisory fees. For the
same period, the Manager waived fees and reimbursed expenses of the Aggressive
Growth Fund, Cornerstone Growth Fund, Cornerstone Value Fund and Dogs of the
Market Fund in the amounts of $87,309, $8,879, $46,300 and $71,199,
respectively.
During the fiscal year ended September 30, 1998, Aggressive Growth Fund,
Cornerstone Growth Fund, Cornerstone Value Fund and Dogs of the Market Fund paid
$93,549, $573,605, $152,188 and $126,357, respectively, in advisory fees. For
the same period, the Manager reimbursed fees and expenses of the Aggressive
Growth Fund in the amount of $22,305.
THE ADMINISTRATOR. O'Shaughnessy Funds, on behalf of the Funds, has
retained the Administrator to provide administration services to each Fund. The
Administration Agreement provides that the Administrator will furnish the Funds
with various administrative services including, among others: the preparation
and coordination of reports to the Board of Directors; preparation and filing of
securities and other regulatory filings (including state securities filings),
marketing materials, tax returns and shareholder reports; review and payment of
Fund expenses; monitoring and oversight of the activities of the Funds' other
servicing agents (i.e. transfer agent, custodian, accountants, etc.); and
maintaining books and records of the Funds; administering shareholder accounts.
In addition, the Administrator may provide personnel to serve as officers of
O'Shaughnessy Funds. The salaries and other expenses of providing such personnel
are borne by the Administrator. For its services, each Fund pays the
Administrator a fee each month at the annual rate of 0.10% of the first $100
million of a Fund's average daily net assets, 0.05% of the next $100 million of
such net assets, and 0.03% of such net assets over $200 million, with a minimum
fee of $40,000 annually per portfolio. During the fiscal years ended September
30, 1997 and 1998, the Administrator received a total of $64,377 and $122,789,
respectively, in administration fees from the Funds.
THE DISTRIBUTOR. O'Shaughnessy Funds, on behalf of the Funds, has retained
First Fund Distributors, Inc. to provide distribution-related services to each
Fund in connection with the continuous offering of the Fund's shares. The
Distributor provides such services to the Funds at no cost to the Funds. The
Distributor may distribute the shares of the Funds through other broker-dealers
with which it has entered into selected dealer agreements.
B-14
<PAGE>
CODE OF ETHICS. The Board of Directors of O'Shaughnessy Funds has adopted a
Code of Ethics under Rule 17j-1 of the 1940 Act. The Code restricts the
investing activities of O'Shaughnessy Funds officers, Directors and advisory
persons and, as described below, imposes additional, more onerous restrictions
on Fund investment personnel.
All persons covered by the Code of Ethics are required to preclear any
personal securities investment (with limited exceptions, such as government
securities) and must comply with ongoing requirements concerning record keeping
and disclosure of personal securities investments. The preclearance requirement
and associated procedures are designed to identify any prohibition or limitation
applicable to a proposed investment. In addition, all persons covered by the
Code of Ethics are prohibited from purchasing or selling any security which, to
such person's knowledge, is being purchased or sold (as the case may be), or is
being considered for purchase or sale, by a Fund. Investment personnel are
subject to additional restrictions such as a ban on acquiring securities in an
initial public offering, "blackout periods" which prohibit trading by investment
personnel of a Fund within periods of trading by the Fund in the same security
and a ban on short-term trading in securities.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors, the Manager is
responsible for the execution of Fund transactions and the allocation of
brokerage transactions for the respective Funds. As a general matter in
executing Fund transactions, the Manager may employ or deal with such brokers or
dealers as may, in the Manager's best judgment, provide prompt and reliable
execution of the transaction at favorable security prices and reasonable
commission rates. In selecting brokers or dealers, the Manager will consider all
relevant factors, including the price (including the applicable brokerage
commission or dealer spread), size of the order, nature of the market for the
security, timing of the transaction, the reputation, experience and financial
stability of the broker-dealer, the quality of service, difficulty of execution
and operational facilities of the firm involved and in the case of securities,
the firm's risk in positioning a block of securities. Prices paid to dealers in
principal transactions through which most debt securities and some equity
securities are traded generally include a spread, which is the difference
between the prices at which the dealer is willing to purchase and sell a
specific security at that time. Each Fund that invests in securities traded in
the OTC markets will engage primarily in transactions with the dealers who make
markets in such securities, unless a better price or execution could be obtained
by using a broker. A Fund has no obligation to deal with any broker or group of
brokers in the execution of Fund transactions.
The Manager may select broker-dealers which provide it with research
services and may cause a Fund to pay such broker-dealers commissions which
exceed those other broker-dealers may have charged, if in its view the
commissions are reasonable in relation to the value of the brokerage and/or
research services provided by the broker-dealer. Research services furnished by
brokers through which a Fund effects securities transactions may be used by the
Manager in advising other funds or accounts and, conversely, research services
furnished to the Manager by brokers in connection with other funds or accounts
the Manager advises may be used by the Manager in advising a Fund. Information
and research received from such brokers will be in addition to, and not in lieu
of, the services required to be performed by the manager under the Management
Agreement. The Funds may purchase and sell Fund portfolio securities to and from
dealers who provide the Fund with research services. Fund transactions will not
be directed to dealers solely on the basis of research services provided.
B-15
<PAGE>
Investment decisions for each Fund and for other investment accounts
managed by the Manager are made independently of each other in light of
differing considerations for the various accounts. However, the same investment
decision may be made for a Fund and one or more of such accounts. In such cases,
simultaneous transactions are inevitable. Purchases or sales are then allocated
between the Fund and such other account(s) as to amount according to a formula
deemed equitable to the Fund and such account(s). While in some cases this
practice could have a detrimental effect upon the price or value of the security
as far as a Fund is concerned, or upon its ability to complete its entire order,
in other cases it is believed that coordination and the ability to participate
in volume transactions will be beneficial to the Fund.
The Funds paid the following amounts in portfolio brokerage commissions:
Fiscal Year Fiscal Year
Ended Ended
September 30, 1997 September 30, 1998
------------------ ------------------
Aggressive Growth $ 15,035 $ 56,518
Cornerstone Growth 134,182 313,452
Cornerstone Value 18,816 41,323
Dogs of the Market 12,893 31,508
PORTFOLIO TURNOVER. For reporting purposes, a Fund's portfolio turnover
rate is calculated by dividing the lesser of purchases or sales of portfolio
securities for the fiscal year by the monthly average of the value of the
portfolio securities owned by the Fund during the fiscal year. In determining
such portfolio turnover, securities with maturities at the time of acquisition
of one year or less are excluded. The Manager will adjust a Fund's assets as it
deems advisable, and portfolio turnover will not be a limiting factor should the
Manager deem it advisable for a Fund to purchase or sell securities.
As described above, the Funds may engage in options transactions. The
options activities of a Fund may affect its turnover rate, the amount of
brokerage commissions paid by a Fund and the realization of net short-term
capital gains. High portfolio turnover (100% or more) involves correspondingly
greater brokerage commissions, other transaction costs, and a possible increase
in short-term capital gains or losses. See "Valuation of Shares" and "Additional
Information about Distributions and Taxes" below.
The exercise of calls written by a Fund may cause the Fund to sell
portfolio securities, thus increasing its turnover rate. The exercise of puts
also may cause a sale of securities and increase turnover; although such
exercise is within the Fund's control, holding a protective put might cause the
Fund to sell the underlying securities for reasons which would not exist in the
absence of the put. A Fund will pay a brokerage commission each time it buys or
sells a security in connection with the exercise of a put or call. Some
commissions may be higher than those which would apply to direct purchases or
sales of portfolio securities. Additional information concerning portfolio
turnover, including anticipated portfolio turnover rates for each Fund, is
contained in the relevant Fund Prospectus.
B-16
<PAGE>
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Reference is made to "Information About Your Account -- Purchase of Shares;
- -- Redemption of Shares" in each Fund Prospectus for additional information
about purchase and redemption of Fund shares. You may purchase and redeem shares
of each Fund on each day on which the New York Stock Exchange, Inc. ("NYSE") is
open for trading ("Business Day"). Currently, the NYSE is closed on New Year's
Day, Martin Luther King. Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Such purchases
and redemptions of the shares of each Fund are effected at their respective net
asset values per share determined as of the close of the NYSE (normally 4:00
P.M., Eastern time) on that Business Day. The time at which the transactions are
priced may be changed in case of an emergency or if the NYSE closes at a time
other than 4:00 P.M., Eastern time.
O'Shaughnessy Funds may suspend redemption privileges of shares of any Fund
or postpone the date of payment during any period (1) when the NYSE is closed or
trading on the NYSE is restricted as determined by the SEC, (2) when an
emergency exists, as defined by the SEC, that makes it not reasonably
practicable for O'Shaughnessy Funds to dispose of securities owned by it or to
determine fairly the value of its assets or (3) as the SEC may otherwise permit.
The redemption price may be more or less than the shareholder's cost, depending
on the market value of the Fund's securities at the time.
O'Shaughnessy Funds will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. O'Shaughnessy Funds uses
some or all of the following procedures to process telephone redemptions: (1)
requesting a shareholder to correctly state some or all of the following
information: account number, name(s), social security number registered to the
account, personal identification, banking institution, bank account number and
the name in which the bank account is registered; (2) recording all telephone
transactions; and (3) sending written confirmation of each transaction to the
registered owner.
The payment of the redemption price may be made in money or in kind, or
partly in money and partly in kind, as determined by the Directors. However,
each Fund has elected to be governed by Rule 18f-1 under the 1940 Act pursuant
to which the Fund is obligated to redeem shares solely in money up to the lesser
of $250,000 or 1% of the net asset value of the Fund during any 90-day period
for any one shareholder. While the Rule is in effect, such election may not be
revoked without the approval of the SEC. It is contemplated that if the Fund
should redeem in kind, securities distributed would be valued as described below
under "Net Asset Value," and investors would incur brokerage commissions in
disposing of such securities. If a Fund redeems in kind, the Fund will not
distribute depository receipts representing foreign securities.
VALUATION OF SHARES
The net asset value for the shares of each Fund will be determined on each
day the NYSE is open for trading. The net assets of each Fund are valued as of
the close of the NYSE (normally 4:00 P.M., Eastern time) on each Business Day.
Each Fund's net asset value per share is calculated separately.
B-17
<PAGE>
For all Funds, the net asset value per share is computed by dividing the
value of the securities held by the Fund plus any cash or other assets, less its
liabilities, by the number of outstanding shares of the Fund, and adjusting the
result to the nearest full cent. Securities listed on the NYSE, American Stock
Exchange or other national exchanges are valued at the last sale price on such
exchange on the day as of which the net asset value per share is to be
calculated. Over-the-counter securities included in the NASDAQ National Market
System are valued at the last sale price. Bonds and other fixed-income
securities are valued using market quotations provided by dealers, and also may
be valued on the basis of prices provided by pricing services when the Board of
Directors believes that such prices reflect the fair market value of such
securities. If there is no sale in a particular security on such day, it is
valued at the mean between the bid and asked prices. Other securities, to the
extent that market quotations are readily available, are valued at market value
in accordance with procedures established by the Board of Directors. Any other
securities and other assets for which market quotations are not readily
available are valued in good faith in a manner determined by the Board of
Directors best to reflect their full value.
When market quotations for options and futures positions held by the Funds
are readily available, those positions are valued based upon such quotations.
Market quotations are not generally available for options traded in the OTC
market. When market quotations for options and futures positions, or any other
securities or assets of the Funds, are not available, they are valued at fair
value as determined in good faith by or under the direction of the Board of
Directors. When practicable, such determinations are based upon appraisals
received from a pricing service using a computerized matrix system or appraisals
derived from information concerning the security or similar securities received
from recognized dealers in those securities.
When a Fund writes a put or call option, the amount of the premium is
included in the Fund's assets and an equal amount is included in its
liabilities. The liability thereafter is adjusted to the current market value of
the option. The premium paid for an option purchased by a Fund is recorded as an
asset and subsequently adjusted to market value.
ADDITIONAL INFORMATION ABOUT DIVIDENDS AND TAXES
Each Fund is treated as a separate corporation for federal income tax
purposes. In order to qualify (or to continue to qualify) for treatment as a
regulated investment company ("RIC") under the Internal Revenue Code (the
"Code"), each Fund must distribute to its shareholders each taxable year at
least 90% of its investment company taxable income (consisting generally of net
investment income and net short-term capital gain) for such taxable year and
must meet several additional requirements. With respect to each Fund, these
requirements include the following: (1) the Fund must derive at least 90% of its
gross income each taxable year from dividends, interest, payments with respect
to securities loans and gains from the sale or other disposition of stock or
securities or other income (including gains from options and futures) derived
with respect to its business of investing in stock or securities ("Income
Requirement");(2) at the close of each quarter of the Fund's taxable year, at
least 50% of the value of its total assets must be represented by cash and cash
items, U.S. Government securities, securities of other RICs and other
securities, with these other securities limited, in respect of any one issuer,
to an amount that does not exceed 5% of the value of the Fund's total assets and
that does not represent more than 10% of the outstanding voting securities of
the issuer; (3) at the close of each quarter of the Fund's taxable year, not
more than 25% of the value of its total assets may be invested in securities
(other than U.S. Government securities or the securities of other RICs) of any
one issuer; and (4) the Fund must distribute during its taxable year at least
90% of its investment company taxable income plus 90% of its net tax-exempt
interest income, if any.
B-18
<PAGE>
The use of hedging and related income strategies, such as writing and
purchasing options and futures contracts, involves complex rules that will
determine for income tax purposes the character and timing of recognition of the
income received in connection therewith by each Fund eligible to use such
strategies. Income from transactions in options and futures derived by a Fund
with respect to its business of investing in securities, will qualify as
permissible income under the Income Requirement. However, income from the
disposition of options and futures contracts will be subject to the 30% Test if
they are held for less than three months.
If a Fund satisfies certain requirements, any increase in value on a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
30% Test. Thus, only the net gain (if any) from the designated hedge will be
included in gross income for purposes of that Test. Each Fund will consider
whether it should seek to qualify for this treatment for its hedging
transactions. To the extent a Fund does not qualify for this treatment, it may
be forced to defer the closing out of certain options and futures contracts
beyond the time when it otherwise would be advantageous to do so, in order for
the Fund to qualify or continue to qualify as a RIC.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. Each Fund anticipates that it will make sufficient
timely distributions to avoid imposition of the excise tax.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gains distributions
and redemption payments ("backup withholding"). Generally, shareholders subject
to backup withholding will be those for whom a certified taxpayer identification
number is not on file with the respective Fund or who, to that Fund's knowledge,
have furnished an incorrect number. When establishing an account, an investor
must certify under penalty of perjury that such number is correct and that such
shareholder is not otherwise subject to backup withholding.
Ordinary income dividends paid by a Fund to shareholders who are
non-resident aliens or foreign entities generally will be subject to a 30%
United States withholding tax under existing provisions of the Code applicable
to foreign individuals and entities unless a reduced rate of withholding or a
withholding exemption is provided under applicable treaty law. Non-resident
shareholders are urged to consult their own tax advisers concerning the
applicability of the United States withholding tax.
A shareholder who holds shares as a capital asset generally will recognize
a capital gain or loss upon the sale or exchange of such shares, which capital
gain or loss will be a long-term capital gain or loss if such shares are held
for more than one year. However, any loss realized by a shareholder who held
shares for six months or less will be treated as a long-term capital loss to the
extent of any distributions of net capital gains received by the shareholder
with respect to such shares.
B-19
<PAGE>
A loss realized on a sale or exchange of shares of a Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Dividends and capital gains distributions may also be subject
to state and local taxes.
The foregoing is only a general summary of some of the important federal
income tax considerations generally affecting the Funds and their shareholders.
No attempt is made to present a complete explanation of the federal tax
treatment of the Funds' activities. See the applicable Fund Prospectus for
further tax information.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, state and local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in a
Fund.
PERFORMANCE INFORMATION
Performance information is computed separately for each Fund in accordance
with the formulas described below. At any time in the future, total return may
be higher or lower than in the past and there can be no assurance that any
historical results will continue.
Certain historical performance information for the Cornerstone Value
Strategy and the Cornerstone Growth Strategy, the respective investment
strategies of the Cornerstone Growth Fund and Cornerstone Value Fund, is
included in the Fund Prospectus relating to the Cornerstone Value and
Cornerstone Growth Funds. See "Performance Information" in the Funds'
Prospectus.
Calculation of Total Return and Average Annual Total Return. Total Return
with respect to the shares of a Fund is a measure of the change in value of an
investment in the Fund over the period covered, which assumes that any dividends
or capital gains distributions are reinvested in that Fund's shares immediately
rather than paid to the investor in cash. The formula for Total Return with
respect to a Fund's shares used herein includes four steps: (1) adding to the
total number of shares purchased by a hypothetical $1,000 investment the number
of shares which would have been purchased if all dividends and distributions
paid or distributed during the period had been immediately reinvested; (2)
calculating the value of the hypothetical initial investment of $1,000 as of the
end of the period by multiplying the total number of shares on the last trading
day of the period by the net asset value per share on the last trading day of
the period; (3) assuming redemption at the end of the period; and (4) dividing
this account value for the hypothetical investor by the initial $1,000
investment. Average Annual Total Return is measured by annualizing Total Return
over the period.
PERFORMANCE COMPARISONS. Each Fund may from time to time include the Total
Return and the Average Annual Total Return of its shares in advertisements or in
information furnished to shareholders.
The following are the Funds' average annual total returns for the period
ending September 30, 1998*:
From Inception
(November 1, 1996) One Year
------------------ --------
Aggressive Growth 4.62% -23.70%
Cornerstone Growth 5.48 -27.63
Cornerstone Value 5.22 -4.32
Dogs of the Market 10.29 0.74
* Certain expenses of the Aggressive Growth Fund have been waived or reimbursed
from inception through September 30, 1998 and certain expenses of the
Cornerstone Value Fund and Dogs of the Market Fund have been waived or
reimbursed from inception through September 30, 1997. Accordingly return figures
are higher than they would have been had such expenses not been waived or
reimbursed.
B-20
<PAGE>
Each Fund may from time to time also include the ranking of its performance
figures relative to such figures for groups of mutual funds categorized by
Lipper Analytical Services ("Lipper") as having the same or similar investment
objectives or by similar services that monitor the performance of mutual funds.
Each Fund may also from time to time compare its performance to average mutual
fund performance figures compiled by Lipper in Lipper Performance Analysis.
Advertisements or information furnished to present shareholders or prospective
investors may also include evaluations of a Fund published by nationally
recognized ranking services and by financial publications that are nationally
recognized such as Barron's, Business Week, CDA Technologies, Inc., Changing
Times, Consumer's Digest, Dow Jones Industrial Average, Financial Planning,
Financial Times, Financial World, Forbes, Fortune, Hulbert's Financial Digest,
Institutional Investor, Investors Daily, Money, Morningstar Mutual Funds, The
New York Times, Personal Investor, Stanger's Investment Adviser, Value Line, The
Wall Street Journal, Wiesenberger Investment Company Service and USA Today.
The performance figures described above may also be used to compare the
performance of a Fund's shares against certain widely recognized standards or
indices for stock market performance. The following are the indices against
which the Funds may compare performance:
The Standard & Poor's Composite Index of 500 Stocks (the "S&P 500 Index")
is a market value-weighted and unmanaged index showing the changes in the
aggregate market value of 500 stocks relative to the base period 1941-43. The
S&P 500 Index is composed almost entirely of common stocks of companies listed
on the NYSE, although the common stocks of a few companies listed on the
American Stock Exchange or traded OTC are included. The 500 companies
represented include industrial, transportation and financial services concerns.
The S&P 500 Index represents about 80% of the market value of all issues traded
on the NYSE.
The Wilshire 5000 Equity Index (or its component indices) represents the
return on the market value of all common equity securities for which daily
pricing is available. Comparisons of performance assume reinvestment of
dividends.
The National Association of Securities Dealers Automated Quotation System
(NASDAQ) Composite Index covers 4,500 stocks traded over the counter. It
represents many small company stocks but is heavily influenced by about 100 of
the largest NASDAQ stocks. It is a value-weighted index calculated on price
change only and does not include income.
The Value Line (Geometric) Index is an unweighted index of the
approximately 1,700 stocks followed by the Value Line Investment Survey.
The Russell 2000/Small Stock Index comprises the smallest 2000 stocks in
the Russell 3000 Index, and represents approximately 11% of the Russell 3000
Index's market capitalization. The Russell 3000 Index comprises the 3,000
largest U.S. companies by market capitalization. The smallest company has a
market value of roughly $20 million.
In reports or other communications to shareholders, O'Shaughnessy Funds may
also describe general economic and market conditions affecting the Funds and may
compare the performance of the Funds with: (1) that of mutual funds included in
the rankings prepared by Lipper or similar investment services that monitor the
performance of mutual funds, (2) IBC/Donoghue's Money Fund Report, (3) other
appropriate indices of investment securities and averages for peer universes of
funds which are described in this Statement of Additional Information, or (4)
data developed by the Manager derived from such indices or averages.
B-21
<PAGE>
OTHER INFORMATION
The Funds are organized as separate investment portfolios or series of the
O'Shaughnessy Funds, a Maryland corporation which was incorporated on May 20,
1996 under the name "O'Shaughnessy Funds, Inc."
The Articles of Incorporation of O'Shaughnessy Funds authorize the Board of
Directors to classify and reclassify any and all shares which are then unissued
into any number of classes, each class consisting of such number of shares and
having such designations, powers, preferences, rights, qualifications,
limitations, and restrictions, as shall be determined by the Board, subject to
the 1940 Act and other applicable law, and provided that the authorized shares
of any class shall not be decreased below the number then outstanding and the
authorized shares of all classes shall not exceed the amount set forth in the
Articles of Incorporation, as in effect from time to time.
REGISTRATION STATEMENT. This SAI and the Fund Prospectuses do not contain
all the information included in the Registration Statement filed with the SEC
under the 1933 Act with respect to the securities offered by the Fund
Prospectuses. The Registration Statement, including the exhibits filed
therewith, may be examined at the office of the SEC in Washington, D.C.
Statements contained in this SAI and the Fund Prospectuses as to the
contents of any contract or other document are not complete and, in each
instance, reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement of which this SAI and the Fund
Prospectuses form a part, each such statement being qualified in all respects by
such reference.
COUNSEL. The law firm of Swidler, Berlin, Shereff, Friedman, LLP, 919 Third
Avenue, New York, New York 10022, counsel to the Funds, has passed upon the
legality of the shares offered by the Fund Prospectuses. McGladrey & Pullen,
LLP, 555 Fifth Avenue, New York, New York 10017-2416, serves as independent
auditors for the Funds.
TRANSFER AGENT, CUSTODIAN AND FUND ACCOUNTANT. Firstar Mutual Fund
Services, LLC ("Firstar"), 615 E. Michigan Street, Milwaukee, Wisconsin 53202,
serves as transfer agent, custodian and fund accountant for the Funds. As
custodian, Firstar will be responsible for, among other things, receipt of and
disbursement funds from the Fund's account, establishment of segregated accounts
as necessary, and transfer, exchange and delivery of Fund portfolio securities.
As fund accountant, Firstar will provide the Funds with various services
including: portfolio and tax accounting, valuation, expense accrual and payment,
compliance control and financial reporting.
As of November 9, 1998, the following shareholders owned more than 5% of the
outstanding voting securities of:
AGGRESSIVE GROWTH:
Charles Schwab & Co., Inc. for Exclusive Benefit of Customers,
San Francisco, CA 94104; 21.43%
CORNERSTONE VALUE:
Charles Schwab & Co., Inc. for Exclusive Benefit of Customers,
San Francisco, CA 94104; 42.56%
B-22
<PAGE>
FINANCIAL STATEMENTS OF THE FUNDS
McGladrey & Pullen, LLP, 555 Fifth Avenue, New York, New York 10017-2416,
serves as independent auditors of the Funds. McGladrey & Pullen, on an annual
basis, will audit the financial statements prepared by the Manager and express
an opinion on such financial statements based on their audits.
The audited financial statements for the Funds for the period ended
September 30, 1998 are incorporated by reference herein and appear in the annual
reports of the Funds, copies of which are available at no charge by calling
1-800-797-0773.
B-23
<PAGE>
APPENDIX A
OPTIONS AND FUTURES
The Funds may use the following Hedging Instruments:
OPTIONS ON SECURITIES -- A call option is a short-term contract pursuant to
which the purchaser of the option, in return for a premium, has the right to buy
the security underlying the option at a specified price at any time during the
term of the option. The writer of the call option, who receives the premium, has
the obligation, upon exercise of the option during the option term, to deliver
the underlying security against payment of the exercise price. A put option is a
similar contract that gives its purchaser, in return for a premium, the right to
sell the underlying security at a specified price during the option term. The
writer of the put option, who receives the premium, has the obligation, upon
exercise of the option during the option term, to buy the underlying security at
the exercise price.
OPTIONS ON SECURITIES INDICES -- A securities index assigns relative values
to the securities included in the index and fluctuates with changes in the
market values of those securities. A securities index option operates in the
same way as a more traditional stock option, except that exercise of a
securities index option is effected with cash payment and does not involve
delivery of securities. Thus, upon exercise of a securities index option, the
purchaser will realize, and the writer will pay, an amount based on the
difference between the exercise price and the closing price of the securities
index.
STOCK INDEX FUTURES CONTRACTS -- A stock index futures contract is a
bilateral agreement pursuant to which one party agrees to accept, and the other
party agrees to make, delivery of an amount of cash equal to a specified dollar
amount times the difference between the stock index value at the close of
trading of the contract and the price at which the futures contract is
originally struck. No physical delivery of the stocks comprising the index is
made. Generally, contracts are closed out prior to the expiration date of the
contract.
INTEREST RATE FUTURES CONTRACTS -- Interest rates futures contracts are
bilateral agreements pursuant to which one party agrees to make, and the other
party agrees to accept, delivery of a specified type of debt security at a
specified future time and at a specified price. Although such futures contracts
by their terms call for actual delivery or acceptance of debt securities, in
most cases, the contracts are closed out before the settlement date without the
making or taking of delivery.
B-24
[LOGO] O'SHAUGHNESSY
FUNDS INC.
BUILDING
NEW STANDARDS
FOR INVESTMENT
SUCCESS
CORNERSTONE GROWTH FUND
CORNERSTONE VALUE FUND
SEMI-ANNUAL REPORT
MARCH 31, 1999
<PAGE>
O'SHAUGHNESSY CORNERSTONE GROWTH FUND
O'SHAUGHNESSY CORNERSTONE VALUE FUND
May 11, 1999
Dear Fellow Shareholder:
Enclosed is the Semi-annual Report for the O'Shaughnessy Cornerstone Growth and
Cornerstone Value Funds. The Report contains financial statements for the Funds
during the six-month period ended March 31, 1999 and the Fund's portfolio on
that date. For the period of October 1, 1998 to March 31, 1999, our Cornerstone
Growth and Value Funds had a return of 14.42% and 13.58% respectively.
The Chinese have a saying (which is considered a curse): "May you live in
interesting times." After the upside down market of the last few years, I
understand WHY it's a curse. For the last year and a half, the market has been
very interesting indeed. Everything that has historically led to disastrous
returns in the stock market has been rewarded, while everything that has
historically led to superior returns has gone nowhere. We've seen a market where
wrong is right; where inexperienced plungers have prospered while seasoned
investors have suffered; where the higher the valuation, the higher the price
moved. In 1998, just a handful of large-cap growth stocks were responsible for
virtually all the S&P 500's rise. And so it continued during the first quarter
of 1999, with just a few large-cap growth stocks and the Anything.com stocks
continuing to soar while everything else was left behind.
The good news is that this narrow rally left a huge contingent of
extraordinarily cheap small and cyclical stocks positioned to jump should
investor sentiment shift. For while the rally in the nifty few large-cap growth
stocks left them dramatically overvalued, the lack of movement in everything
else led to valuations that looked better and better--in some instances, you
could buy stocks with forecasted double digit earnings growth for almost single
digit PE ratios. Bargains like these eventually become too compelling for
investors to ignore.
I believe that we are just now seeing a movement back into value and smaller
stocks. Our Cornerstone Value Fund, rich in undervalued cyclical stocks sporting
high dividend yields, jumped 13.69% in April 1999. That certainly seems like a
change in investor sentiment to me! Over the same period, the Cornerstone Growth
Fund rose 6.12% while the S&P 500 rose 3.87%.
Yet despite this strong short-term showing, we remain focused on the long-term.
The Cornerstone Value Fund's strong performance in April points to the futility
of trying to time the market or your investment style, because no one could have
predicted it. And it underscores why your focus should be not on what a fund
does over a month but what you can expect it to do over the time that you hold
it. That's where the real power of Strategy Indexing(R) has always been--and
always will be.
<PAGE>
2
O'SHAUGHNESSY CORNERSTONE GROWTH FUND
O'SHAUGHNESSY CORNERSTONE VALUE FUND
As always, I hope that together, we can reach our long-term goals by sticking
with our time-tested investment strategies.
Sincerely,
/s/ James P. O'Shaughnessy
James P. O'Shaughnessy
The S&P 500 Composite Stock Price Index is an unmanaged capitalization-weighted
index of 500 stocks designed to represent the broad domestic economy. Indexes do
no incur expenses and are not available for investment.
The Cornerstone Growth Fund's and Cornerstone Value Fund's annual average total
returns from inception on November 1, 1996 through March 31, 1999 were 10.32%
and 9.76%, respectively. The Cornerstone Growth Fund's and Cornerstone Value
Fund's one-year total returns through March 31, 1999 were (15.51)% and (3.21)%,
respectively.
Performance Figures of the Funds and indexes referenced represent past
performance and are not indicative of future performance of the Funds or the
indexes. Share value will fluctuate so that an investor's shares, when redeemed,
may be worth more or less than the original investment.
The Fund is distributed by First Fund Distributors, Inc., Phoenix, AZ. Member
NASD.
<PAGE>
3
O'SHAUGHNESSY CORNERSTONE GROWTH FUND
TOP TEN PORTFOLIO HOLDINGS AT MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
Percent of Net Assets
- --------------------------------------------------------------------------------
1) Echostar Communications Corporation................ 3.59%
2) Optical Coating Laboratory, Inc.................... 3.58%
3) Best Buy Co., Inc.................................. 3.42%
4) Quicksilver, Inc................................... 2.95%
5) Calpine Corporation................................ 2.86%
6) Costco Companies, Inc.............................. 2.68%
7) Gateway 2000, Inc.................................. 2.67%
8) Express Scripts, Inc............................... 2.60%
9) Flextronics International Limited.................. 2.57%
10) Insituform Technologies, Inc....................... 2.56%
O'SHAUGHNESSY CORNERSTONE VALUE FUND
TOP TEN PORTFOLIO HOLDINGS AT MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
Percent of Net Assets
- --------------------------------------------------------------------------------
1) Telefonos de Mexico-ADR............................ 2.63%
2) British Steel PLC.................................. 2.49%
3) Anglo American Corporation of South Africa Ltd..... 2.45%
4) Fortune Brands, Inc................................ 2.44%
5) Imperial Petroleum, Inc............................ 2.35%
6) National Australia Bank Ltd........................ 2.34%
7) BankAmerica Corporation............................ 2.32%
8) Deere & Company.................................... 2.30%
9) Rio Tinto PLC-ADR.................................. 2.25%
10) BankBoston Corporation............................. 2.23%
<PAGE>
O'SHAUGHNESSY CORNERSTONE GROWTH FUND
PORTFOLIO OF INVESTMENTS AT MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
Shares COMMON STOCKS: 99.82% Market Value
- --------------------------------------------------------------------------------
ADVERTISING: 1.69%
192,900 E4L, Inc.*........................................ $ 1,627,594
-----------
AIRLINES: 1.50%
76,000 Amtran, Inc.*..................................... 1,444,000
-----------
APPAREL: 4.11%
67,300 Quicksilver, Inc.................................. 2,843,425
55,000 Tropical Sportswear Int'l Corporation............. 1,120,625
-----------
3,964,050
-----------
COMPUTERS: 7.77%
48,800 Apple Computer, Inc............................... 1,753,750
20,700 CDW Computer Centers, Inc.*....................... 1,428,300
31,400 Computer Sciences Corporation..................... 1,732,888
37,600 Gateway 2000, Inc.*............................... 2,577,950
-----------
7,492,888
-----------
COSMETICS / PERSONAL CARE: 2.36%
24,100 The Estee Lauder Companies Inc.................... 2,277,450
-----------
DISTRIBUTION / WHOLESALE: 1.56%
75,300 Miami Computer Supply Corporation................. 1,501,294
-----------
ELECTRIC: 2.86%
75,800 Calpine Corporation*.............................. 2,761,963
-----------
ELECTRONICS: 6.15%
48,700 Flextronics International Limited................. 2,483,700
71,900 Optical Coating Laboratory, Inc................... 3,451,200
-----------
5,934,900
-----------
ENGINEERING AND CONSTRUCTION: 5.82%
54,400 Granite Construction Incorporated*................ 1,271,600
141,300 Insituform Technologies, Inc.*.................... 2,472,750
47,500 Jacobs Engineering Group Inc.*.................... 1,873,281
-----------
5,617,631
-----------
FOOD: 3.64%
33,100 Safeway Inc.*..................................... 1,698,444
161,100 The Grand Union Company*.......................... 1,812,375
-----------
3,510,819
-----------
<PAGE>
5
O'SHAUGHNESSY CORNERSTONE GROWTH FUND
PORTFOLIO OF INVESTMENTS AT MARCH 31, 1999 (UNAUDITED), CONTINUED
- --------------------------------------------------------------------------------
Shares Market Value
- --------------------------------------------------------------------------------
HEALTH CARE: 1.85%
23,500 Wellpoint Healthcare Networks Inc................. $ 1,781,594
-----------
HOME BUILDERS: 1.88%
43,000 NVR, Inc.*........................................ 1,811,375
-----------
HOME FURNISHINGS: 2.07%
33,000 Maytag Corporation................................ 1,992,375
-----------
INSURANCE: 5.05%
34,500 LandAmerica Financial Group, Inc.................. 1,000,500
42,350 Reinsurance Group of America, Incorporated........ 1,802,522
33,200 Stewart Information Services Corporation.......... 1,114,275
60,200 The First American Financial Corporation*......... 951,913
-----------
4,869,209
-----------
MACHINERY - CONSTRUCTION AND MINING: 2.12%
66,300 Astec Industries, Inc.*........................... 2,047,013
-----------
MACHINERY - DIVERSIFIED: 2.02%
70,700 Specialty Equipment Companies, Inc.*.............. 1,953,088
-----------
MEDIA: 2.43%
27,900 Viacom Inc., Class B.............................. 2,341,856
-----------
MISCELLANEOUS MANUFACTURING: 1.47%
67,100 Myers Industries, Inc............................. 1,417,488
-----------
MOBILE HOME BUILDERS: 3.62%
75,100 Monaco Coach Corporation.......................... 1,731,994
125,900 Winnebago Industries, Inc......................... 1,762,600
-----------
3,494,594
-----------
PHARMACEUTICALS: 6.84%
-----------
58,200 Alphama Inc., Class A............................. 2,284,350
63,300 Bindley Western Industries, Inc................... 1,808,006
29,200 Express Scripts, Inc.*............................ 2,509,375
-----------
6,601,731
-----------
RESTAURANTS: 1.77%
98,200 Ruby Tuesday, Inc................................. 1,706,225
-----------
<PAGE>
6
O'SHAUGHNESSY CORNERSTONE GROWTH FUND
PORTFOLIO OF INVESTMENTS AT MARCH 31, 1999 (UNAUDITED), CONTINUED
- --------------------------------------------------------------------------------
Shares Market Value
- --------------------------------------------------------------------------------
RETAIL: 20.29%
51,700 AnnTalor, Inc.*................................... $ 2,284,494
63,400 Best Buy Co., Inc.*............................... 3,296,800
71,400 Brinker International, Inc........................ 1,843,013
28,200 Costco Companies, Inc.*........................... 2,582,063
37,900 CVS Corporation................................... 1,800,250
141,900 Musicland Stores Corporation*..................... 1,250,494
115,300 Sonic Automotive, Inc.*........................... 1,787,150
71,300 The TJX Companies, Inc............................ 2,424,200
25,000 Walmart Stores, Inc............................... 2,304,688
-----------
19,573,150
-----------
SOFTWARE: 1.53%
429,600 Corel Corporation*................................ 1,476,750
-----------
TELECOMMUNICATION EQUIPMENT: 1.01%
51,600 Superior TeleCom Inc.............................. 973,950
-----------
TELECOMMUNICATIONS: 3.59%
42,400 Echostar Communications Corporation*.............. 3,460,900
-----------
TEXTILES: 1.53%
49,300 Mohawk Industries, Inc............................ 1,479,000
-----------
TOYS / GAMES / HOBBIES: 1.80%
397,800 The Topps Company, Inc............................ 1,740,375
-----------
TRANSPORTATION: 1.51%
43,900 Landstar System, Inc.*............................ 1,454,188
-----------
Total Common Stocks (cost $99,676,571)............ 96,307,447
-----------
Other Assets less Liabilities: 0.18%.............. 173,355
-----------
TOTAL NET ASSETS: 100.00% ........................ $96,480,802
===========
See Notes to Financial Statements.
<PAGE>
7
O'SHAUGHNESSY CORNERSTONE VALUE FUND
PORTFOLIO OF INVESTMENTS AT MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
Shares COMMON STOCKS: 99.50% Market Value
- --------------------------------------------------------------------------------
AUTO MANUFACTURERS: 1.93%
8,400 Ford Motor Company................................ $ 476,700
-----------
AUTO PARTS AND EQUIPMENT: 1.88%
12,200 Dana Corporation.................................. 463,600
-----------
BANKS: 16.54%
9,600 Banc One Corporation.............................. 528,600
8,100 BankAmerica Corporation........................... 572,063
12,700 BankBoston Corporation............................ 550,069
8,100 First Union Corporation........................... 432,844
15,300 KeyCorp........................................... 463,781
6,400 National Australia Bank Ltd.-ADR.................. 577,600
9,300 PNC Bank Corp..................................... 516,731
11,300 Summit Bancorp.................................... 440,700
-----------
4,082,388
-----------
BEVERAGES: 1.96%
10,600 Diageo PLC-ADR.................................... 484,950
-----------
CHEMICALS: 3.86%
10,700 Eastman Chemical Company.......................... 450,069
5,400 The Dow Chemical Company.......................... 503,213
-----------
953,281
-----------
DISTRIBUTION / WHOLESALE: 1.72%
14,700 Genuine Parts Company............................. 423,544
-----------
FINANCIAL SERVICES: 1.87%
10,500 Union Planters Corporation........................ 461,344
-----------
FOOD: 1.90%
6,200 General Mills, Inc................................ 468,488
-----------
FOREST PRODUCTS & PAPER: 3.73%
18,200 Westvaco Corporation.............................. 382,200
9,700 Weyerhaeuser Company.............................. 538,350
-----------
920,550
-----------
HOLDING COMPANIES - DIVERSIFIED: 1.56%
25,900 Tomkins PLC-ADR................................... 385,263
-----------
<PAGE>
8
O'SHAUGHNESSY CORNERSTONE VALUE FUND
PORTFOLIO OF INVESTMENTS AT MARCH 31, 1999 (UNAUDITED), CONTINUED
- --------------------------------------------------------------------------------
Shares Market Value
- --------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS / WARES: 2.44%
15,600 Fortune Brands, Inc............................... $ 603,525
-----------
INSURANCE: 3.65%
11,600 SAFECO Corporation................................ 469,075
13,900 The St. Paul Companies, Inc....................... 431,769
-----------
900,844
-----------
IRON / STEEL: 6.72%
23,200 Allegheny Teledyne Incorporated................... 439,350
17,400 Anglo American Corporation of South Africa
Ltd.-ADR.......................................... 604,650
30,400 British Steel PLC-ADR............................. 613,700
-----------
1,657,700
-----------
MACHINERY - DIVERSIFIED: 2.30%
14,700 Deere & Company................................... 567,788
-----------
MINING: 2.25%
10,100 Rio Tinto PLC-ADR................................. 555,500
-----------
MISCELLANEOUS MANUFACTURING: 5.25%
10,200 Cooper Industries, Inc............................ 434,775
6,500 Minnesota Mining and Manufacturing Company........ 459,875
14,400 Tenneco Inc....................................... 402,300
-----------
1,296,950
-----------
OIL & GAS PRODUCERS: 23.16%
7,200 Atlantic Richfield Company........................ 525,600
5,133 BP Amoco-ADR...................................... 518,112
5,900 Chevron Corporation............................... 521,781
30,300 Imperial Petroleum, Inc........................... 579,488
28,400 Occidental Petroleum Corporation.................. 511,200
11,300 Phillips Petroleum Company........................ 533,925
13,000 Shell Transport and Trading Company............... 528,125
13,700 Sunoco, Inc....................................... 494,056
9,200 Texaco, Inc....................................... 522,100
16,600 USX-Marathon Group................................ 456,500
16,700 YPF Sociedad Anonima-ADR.......................... 527,094
-----------
5,717,981
-----------
PACKAGING AND CONTAINERS: 1.84%
15,900 Crown Cork & Seal Company, Inc.................... 454,144
-----------
<PAGE>
9
O'SHAUGHNESSY CORNERSTONE VALUE FUND
PORTFOLIO OF INVESTMENTS AT MARCH 31, 1999 (UNAUDITED), CONTINUED
- --------------------------------------------------------------------------------
Shares Market Value
- --------------------------------------------------------------------------------
RETAIL: 1.71%
10,400 J.C. Penny Company................................ $ 421,200
-----------
TELEPHONE: 8.40%
26,900 Compania Anonima Nacional Telefonos de
Venezuela-ADR..................................... 489,244
16,700 Telefonica de Argentina S.A.-ADR.................. 505,175
9,900 Telefonos de Mexico-ADR........................... 648,450
7,800 U S West, Inc..................................... 429,488
-----------
2,072,356
-----------
TOBACCO: 3.01%
9,300 Philip Morris Companies Inc....................... 327,244
16,600 RJR Nabisco Holdings Corp......................... 415,000
-----------
742,244
-----------
TRANSPORTATION: 1.83%
11,600 CSX Corporation................................... 451,675
-----------
Total Common Stocks (cost $24,649,672)............ 24,562,012
-----------
Other Assets less Liabilities: 0.50%.............. 123,366
-----------
TOTAL NET ASSETS: 100.0% ......................... $24,685,378
===========
See Notes to Financial Statements.
<PAGE>
10
O'SHAUGHNESSY CORNERSTONE GROWTH FUND
O'SHAUGHNESSY CORNERSTONE VALUE FUND
STATEMENT OF ASSETS AND LIABILITIES AT MARCH 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
CORNERSTONE CORNERSTONE
GROWTH FUND VALUE FUND
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments in securities, at value (identified cost
$99,676,571 and $24,649,672, respectively) ............... $ 96,307,447 $ 24,562,012
Receivables:
Portfolio securities sold ................................ 129,427 147,175
Fund shares sold ......................................... 483,917 22,744
Dividends and interest ................................... 25,888 92,742
Other .................................................... 8,202 5,005
Deferred organization costs ................................ 13,057 13,057
Prepaid expenses and other ................................. 42,676 12,652
------------- ------------
Total assets .......................................... 97,010,614 24,855,387
------------- ------------
LIABILITIES
Payables:
Fund shares repurchased .................................. 50,346 8
Funds advanced by custodian .............................. 390,260 139,599
Advisory fee ............................................. 62,793 15,351
Administration fee ....................................... 8,418 3,397
Accrued expenses ........................................... 17,995 11,854
------------- ------------
Total liabilities ..................................... 529,812 170,009
------------- ------------
NET ASSETS .................................................. $ 96,480,802 $ 24,685,378
============= ============
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION
PRICE PER SHARE
[$96,480,802/8,809,707 and $24,685,378/2,138,501
shares outstanding, respectively; 25,000,000,000
shares (par value $.0001) authorized] .................... $ 10.95 $ 11.54
============= ============
SOURCE OF NET ASSETS
Paid-in capital ............................................ $ 111,208,563 $ 23,803,126
(Accumulated) Undistributed net investment (loss)
income ................................................... (369,020) 145,582
(Accumulated) Undistributed net realized (loss)
gain on investment transactions .......................... (10,989,617) 824,330
Net unrealized depreciation of investments ................. (3,369,124) (87,660)
------------- ------------
Net assets ............................................ $ 96,480,802 $ 24,685,378
============= ============
</TABLE>
See Notes to Financial Statements.
<PAGE>
11
O'SHAUGHNESSY CORNERSTONE GROWTH FUND
O'SHAUGHNESSY CORNERSTONE VALUE FUND
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
CORNERSTONE CORNERSTONE
GROWTH FUND VALUE FUND
- --------------------------------------------------------------------------------
INVESTMENT INCOME
Income:
Dividends (net of foreign witholding tax of
$0 and $11,338, respectively) .............. $ 109,332 $ 428,907
Interest ..................................... 10,149 2,080
Securities lending ........................... 93,646 41,338
------------ ----------
Total income ............................ 213,127 472,325
------------ ----------
Expenses:
Advisory fees ................................ 371,812 88,326
Administration fees (Note 3) ................. 49,039 16,998
Custodian and accounting fees ................ 45,792 21,773
Transfer agent fees .......................... 41,307 13,742
Registration fees ............................ 30,846 14,844
Professional fees ............................ 18,181 5,903
Reports to shareholders ...................... 10,969 4,987
Other ........................................ 8,000 2,983
Directors' fees .............................. 3,689 3,689
Amortization of deferred organization costs .. 2,512 2,512
------------ ----------
Total expenses .......................... 582,147 175,757
------------ ----------
NET INVESTMENT (LOSS) INCOME .......... (369,020) 296,568
------------ ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized (loss) gain from security
transactions ............................... (1,999,159) 1,273,163
Net change in unrealized appreciation of
investments ................................ 14,399,083 1,367,077
------------ ----------
Net realized and unrealized gain on
investments ........................... 12,399,924 2,640,240
------------ ----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS ..................... $ 12,030,904 $2,936,808
============ ==========
See Notes to Financial Statements.
<PAGE>
12
O'SHAUGHNESSY CORNERSTONE GROWTH FUND
O'SHAUGHNESSY CORNERSTONE VALUE FUND
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
- ----------------------------------------------------------------------------------------------------------------
CORNERSTONE GROWTH FUND CORNERSTONE VALUE FUND
-------------------------------- -------------------------------
Six Months Ended Year Ended Six Months Ended Year Ended
March 31, 1999# Sept. 30, 1998 March 31, 1999# Sept. 30, 1998
--------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS
Net investment (loss) income ................ $ (369,020) $ (665,794) $ 296,568 $ 437,383
Net realized (loss) gain from security
transactions .............................. (1,999,159) (1,821,292) 1,273,163 561,340
Net change in unrealized depreciation
on investments ............................ 14,399,083 (27,903,738) 1,367,077 (2,626,376)
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS ............. 12,030,904 (30,390,824) 2,936,808 (1,627,653)
------------ ------------ ------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS
Net investment income ....................... -- -- (511,737) (231,740)
Net realized gains from security transactions -- (7,364,392) (1,009,259) (2,470)
------------ ------------ ------------ ------------
TOTAL DISTRIBUTIONS ..................... -- (7,364,392) (1,520,996) (234,210)
------------ ------------ ------------ ------------
CAPITAL SHARE TRANSACTIONS
Net increase in net assets derived from
capital shares transactions (a) ........... 4,071,249 (26,875,315) 1,343,173 10,318,880
------------ ------------ ------------ ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS . 16,102,153 (10,879,901) 2,758,985 8,457,017
NET ASSETS
Beginning of period ......................... 80,378,649 91,258,550 21,926,393 13,469,376
------------ ------------ ------------ ------------
END OF PERIOD (including undistributed
net investment (loss) income of ($369,020),
$0, $146,582, and $360,751, respectively) . $ 98,480,802 $ 80,378,649 $ 24,685,378 $ 21,926,393
============ ============ ============ ============
(a) A summary of capital shares transactions is as follows:
Six Months Ended Year Ended
March 31, 1999# September 30, 1998
--------------------------- ------------------------------
CORNERSTONE GROWTH FUND Shares Value Shares Value
---------- ------------ ---------- ------------
Shares sold .................................. 4,213,135 $ 45,256,173 9,244,626 $ 116,802,209
Shares issued on reinvestment of distributions -- -- 631,833 7,164,991
Shares redeemed .............................. (3,802,385) (41,184,924) (7,444,063) (97,091,885)
---------- ------------ ---------- ------------
Net increase ................................. 410,750 $ 4,071,249 2,432,396 $ 26,875,315
========== ============ ========== =============
CORNERSTONE VALUE FUND
Shares sold .................................. 667,797 $ 7,674,718 1,691,812 $ 20,010,395
Shares issued on reinvestment of distributions 124,352 1,412,633 19,959 226,714
Shares redeemed .............................. (677,050) (7,744,178) (859,354) (9,918,229)
---------- ------------ ---------- ------------
Net increase ................................. 115,099 $ 1,343,173 852,417 $ 10,318,880
========== ============ ========== =============
</TABLE>
#Unaudited
<PAGE>
13
O'SHAUGHNESSY CORNERSTONE GROWTH FUND
O'SHAUGHNESSY CORNERSTONE VALUE FUND
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
PER SHARE OPERATING PERFORMANCE (FOR A CAPITAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- ------------------------------------------------------------------------------------------------------------------
CORNERSTONE GROWTH FUND CORNERSTONE VALUE FUND
------------------------------------- -----------------------------------
Six Months Year Nov. 1, 1996* Six Months Year Nov. 1, 1996*
Ended Ended through Ended Ended through
Mar. 31,# Sept. 30, Sept. 30, Mar. 31,# Sept. 30, Sept. 30,
1999 1998 1997 1999 1998 1997
---------- --------- ------------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period .................. $ 9.57 $ 15.30 $ 10.00 $ 10.84 $ 11.50 $ 10.00
------ ------- ------- ------- ------- -------
Income from investment operations:
Net investment (loss) income ......... (0.04) (0.07) (0.02) 0.15 0.21 0.15
Net realized and unrealized (loss)
gain on investments ................ 1.42 (3.88) 5.32 1.31 (0.70) 1.37
------ ------- ------- ------- ------- -------
Total from investment operations ....... 1.38 (3.95) 5.30 1.46 (0.49) 1.52
------ ------- ------- ------- ------- -------
Less distributions:
From net investment income ........... -- -- -- (0.26) (0.17) (0.02)
From net capital gains ............... -- (1.78) -- (0.50) -- --
------ ------- ------- ------- ------- -------
Total distributions .................... -- (1.78) -- (0.76) (0.17) (0.02)
------ ------- ------- ------- ------- -------
Net asset value, end of period ......... $10.95 $ 9.57 $ 15.30 $ 11.54 $ 10.84 $ 11.50
====== ======= ======= ======= ======= =======
TOTAL RETURN ........................... 14.42% (27.63%) 53.05%** 13.58% (4.32%) 15.21%**
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (millions) $ 96.5 $ 80.4 $ 91.3 $ 24.9 $ 21.9 $ 13.5
Ratio of expenses to average net assets:
Before expense reimbursement........ 1.16%++ 1.16% 1.63%++ 1.45%++ 1.45% 2.66%++
After expense reimbursement......... 1.16%++ 1.16% 1.56%++ 1.45%++ 1.45% 1.85%++
Ratio of net investment (loss) income to
average net assets:
Before expense reimbursement........ (0.73%)++ (0.86%) (1.19%)++ 2.45%++ 2.12% 1.93%++
After expense reimbursement......... (0.73%)++ (0.86%) (1.12%)++ 2.45%++ 2.12% 2.73%++
Portfolio turnover rate................. 124.47% 119.98% 15.52% 95.81% 51.56% 2.01%
</TABLE>
#Unaudited.
*Commencement of operations.
**Not Annualized.
++Annualized.
<PAGE>
14
O'SHAUGHNESSY CORNERSTONE GROWTH FUND
O'SHAUGHNESSY CORNERSTONE VALUE FUND
NOTES TO FINANCIAL STATEMENTS AT MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION
The O'Shaughnessy Cornerstone Growth Fund and O'Shaughnessy Cornerstone
Value Fund (the "Funds") are each a series of shares of O'Shaughnessy Funds,
Inc., which is registered under the Investment Company Act of 1940 as a
diversified, open-end management investment company. The Funds began operations
on November 1, 1996.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Funds. These policies are in conformity with generally accepted
accounting principles.
A. SECURITY VALUATION: The Funds' investments are carried at market
value. Securities listed on an exchange or quoted on a National Market
System are valued at the last sale price. Other securities are valued
at the mean between the last bid and asked prices. Securities for
which market quotations are not readily available, if any, are valued
following procedures approved by the Board of Directors. Short-term
investments are valued at amortized cost, which approximates market
value.
B. FEDERAL INCOME TAXES: It is each Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no federal income tax
provision is required.
C. SECURITY TRANSACTIONS, DIVIDENDS AND DISTRIBUTIONS: Security
transactions are accounted for on the trade date. Dividend income and
distributions to shareholders are recorded on the ex-dividend date.
Realized gains and losses on securities sold are determined under the
identified cost basis.
D. DEFERRED ORGANIZATION COSTS: The Funds have each incurred expenses of
$25,191 in connection with their organization. These costs have been
deferred and are being amortized on a straight-line basis over a
period of sixty months from the date the Fund commenced investment
operations.
E. USE OF ESTIMATES: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial
statements and the reported amounts of increases and decreases in net
assets during the reporting period. Actual results could differ from
those estimates.
NOTE 3 - INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
For the six months ended March 31, 1999, O'Shaughnessy Capital Management,
Inc. (the "Advisor") provided the Funds with investment management services
under an Investment Advisory Agreement. The Advisor furnished all investment
advice, office space, facilities, and provides most of the personnel needed
<PAGE>
15
O'SHAUGHNESSY CORNERSTONE GROWTH FUND
O'SHAUGHNESSY CORNERSTONE VALUE FUND
NOTES TO FINANCIAL STATEMENTS, Continued
- --------------------------------------------------------------------------------
by the Funds. As compensation for its services, the Advisor is entitled to a
monthly fee from each Fund at the annual rate of 0.74 % based upon the average
daily net assets of the Funds.
The Funds are responsible for their own operating expenses. The Advisor has
agreed to reduce fees payable to it by the Funds or reimburse the Funds to the
extent necessary to limit each Fund's aggregate annual operating expenses to
2.00% of average net assets (the "expense cap"). Any such reductions made by the
Advisor in its fees or reimbursement of Fund expenses, which are the Fund's
obligation, are subject to recapture by the Advisor provided the Fund is able to
effect such recapture while keeping total operating expenses at or below the
annual expense cap. No recapture will be made after September 30, 2000. Any
amounts reimbursed will have the effect of increasing fees otherwise paid by the
Fund. No reimbursed expense were subject to recapture by the Advisor from the
Cornerstone Growth Fund at March 31, 1999. Cumulative reimbursed expenses
subject to recapture by the Advisor from the Cornerstone Value Fund totaled
$46,300 at March 31, 1999.
Investment Company Administration, L.L.C. (the "Administrator") acts as the
Funds' Administrator under an Administration Agreement. The Administrator
prepares various federal and state regulatory filings, reports and returns for
the Funds; prepares reports and materials to be supplied to the trustees;
monitors the activities of the Funds' custodian, transfer agent and accountants;
coordinates the preparation and payment of the Funds' expenses and reviews the
Funds' expense accruals. For its services, the Administrator receives a monthly
fee per portfolio at the following annual rate:
Under $100 million - 0.10% of average daily net assets, subject to a
minimum fee of $40,000 annually
$100 to $200 million - 0.05% of average daily net assets
Over $200 million - 0.03% of average daily net assets
First Fund Distributors, Inc. (the "Distributor") acts as the Funds'
principal underwriter in a continuous public offering of the Funds' shares. The
Distributor is an affiliate of the Administrator.
Certain officers of the Funds are also officers and/or directors of the
Administrator and the Distributor.
NOTE 4 - PURCHASES AND SALES OF SECURITIES
For the six months ended March 31, 1999, the cost of purchases and the
proceeds from sales of securities, excluding short-term securities, for the
Cornerstone Growth Fund were $129,142,792 and $125,684,666, respectively.
For the six months ended March 31, 1999, the cost of purchases and the
proceeds from sales of securities, excluding short-term securities, for the
Cornerstone Value Fund were $23,214,401 and $22,961,540, respectively.
NOTE 5 - SECURITIES LENDING
For the six months ended March 31, 1999, for the Cornerstone Growth Fund
and Cornerstone Value Fund, respectively, loaned securities valued at $9,658,137
and $1,765,294 to certain brokers, dealers and other financial institutions who
pay the Funds negotiated lenders' fees. For collateral, the Funds received
$9,851,300 and $1,800,600, respectively, an amount equal to at 102% of the
market value of the loaned
<PAGE>
16
O'SHAUGHNESSY CORNERSTONE GROWTH FUND
O'SHAUGHNESSY CORNERSTONE VALUE FUND
NOTES TO FINANCIAL STATEMENTS AT MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
securities, marked-to-market daily. The risks to the Funds, of lending their
securities, include delay in recovery of securities loaned or loss of rights in
the collateral should the borrower of the securities fail financially.
NOTE 6 - INCOME TAXES
At March 31, 1999, the cost of securities for income tax purposes in the
Cornerstone Growth Fund was approximately $99,824,582. Unrealized appreciation
and depreciation of securities were as follows:
Gross unrealized appreciation.......................... $5,996,585
Gross unrealized depreciation.......................... (9,365,709)
-----------
Net unrealized depreciation...................... $(3,369,124)
===========
At March 31, 1999, the cost of securities for income tax purposes in the
Cornerstone Value Fund was approximately $24,776,763. Unrealized appreciation
and depreciation of securities were as follows:
Gross unrealized appreciation.......................... $ 1,332,547
Gross unrealized depreciation.......................... (1,420,207)
-----------
Net unrealized depreciation...................... $ (87,660)
===========
<PAGE>
Cornerstone Growth Fund
Cornerstone Value Fund
SEMI-ANNUAL REPORT
MARCH 31, 1999
INVESTMENT ADVISOR
O'Shaughnessy Capital Management, Inc.
35 Mason Street
Greenwich, Connecticut 06830
ADMINISTRATOR
Investment Company Administration, L.L.C.
4455 E. Camelback Road, Suite 261 E
Phoenix, Arizona 85018
DISTRIBUTOR
First Fund Distributors, Inc.
4455 E. Camelback Road, Suite 261 E
Phoenix, Arizona 85018
TRANSFER AGENT
Firstar Mutual Fund Services, LLC
615 E. Michigan Street
Milwaukee, Wisconsin 53202
INDEPENDENT AUDITOR
McGladrey & Pullen, LLP
555 Fifth Avenue
New York, New York 10017
LEGAL COUNSEL
Swidler Berlin Shereff Friedman, LLP
919 Third Avenue
New York, New York 10022
This report is intended for shareholders of O'Shaughnessy Cornerstone Growth
Fund and O'Shaughnessy Cornerstone Value Fund and may not be used as sales
literature unless preceded or accompanied by a current prospectus. Past
performance results shown in this report should not be considered a
representation of future performance. Share price and returns will fluctuate so
that shares, when redeemed, may be more or less than their original cost.
Statements and other information herein are dated and are subject to change.
O'SHAUGHNESSY DOGS OF THE MARKET FUND
OF O'SHAUGHNESSY FUNDS, INC.
35 MASON STREET
GREENWICH, CONNECTICUT 06830
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF O'SHAUGHNESSY
FUNDS, INC.
The undersigned hereby appoints James P. O'Shaughnessy, Christopher
Loveless and Daniel Kraninger as proxies, each with the power to appoint his
substitute, and hereby authorizes each of them to represent and to vote, as
designated on the reverse hereof, all of the shares of the O'Shaughnessy Dogs of
the Market Fund (the "Fund") held of record by the undersigned on December 7,
1999, at a Special Meeting of Shareholders of the Fund to be held on January 21,
2000 or any adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER HEREIN
DIRECTED BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED FOR PROPOSAL 1.
By signing and dating the reverse side of this card, you authorize the
proxies to vote each proposal as marked, or if not marked, to vote "FOR" each
proposal, and to use their discretion to vote for any other matter as may
properly come before the meeting or any adjournment thereof. If you do not
intend to personally attend the meeting, please complete and return this card at
once in the enclosed envelope.
(Continued and to be signed on the reverse side)
<PAGE>
1. To approve the Agreement and Plan FOR [ ] AGAINST [ ] ABSTAIN [ ]
of Reorganization between the
O'Shaughnessy Dogs of the Market Fund
and the O'Shaughnessy Cornerstone
Value Fund.
2. In their discretion, the named Please sign exactly as name appears
proxies may vote to transact such hereon. When shares are held by joint
other business as properly may come tenants, both should sign. When
before the meeting or any adjournment signing as attorney or as executor,
thereof. administrator, trustee or guardian,
please give full title as such. If a
corporation, please sign in full
corporate name by president or other
authorized officer. If a partnership,
please sign in partnership name by
authorized persons.
Dated:________________________________
PLEASE MARK BOXES /X/ OR [X] IN BLUE X_____________________________________
OR BLACK INK. SIGN, DATE AND RETURN Signature
THE PROXY CARD PROMPTLY USING THE
ENCLOSED ENVELOPE. X_____________________________________
Signature, if held jointly
O'SHAUGHNESSY AGGRESSIVE GROWTH FUND
OF O'SHAUGHNESSY FUNDS, INC.
35 MASON STREET
GREENWICH, CONNECTICUT 06830
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF O'SHAUGHNESSY
FUNDS, INC.
The undersigned hereby appoints James P. O'Shaughnessy, Christopher
Loveless and Daniel Kraninger as proxies, each with the power to appoint his
substitute, and hereby authorizes each of them to represent and to vote, as
designated on the reverse hereof, all of the shares of the Aggressive Growth
Fund (the "Fund") held of record by the undersigned on December 7, 1999, at a
Special Meeting of Shareholders of the Fund to be held on January 21, 2000 or
any adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER HEREIN
DIRECTED BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED FOR PROPOSAL 1.
By signing and dating the reverse side of this card, you authorize the
proxies to vote each proposal as marked, or if not marked, to vote "FOR" each
proposal, and to use their discretion to vote for any other matter as may
properly come before the meeting or any adjournment thereof. If you do not
intend to personally attend the meeting, please complete and return this card at
once in the enclosed envelope.
(Continued and to be signed on the reverse side)
<PAGE>
1. To approve the Agreement and Plan FOR [ ] AGAINST [ ] ABSTAIN [ ]
of Reorganization between the
O'Shaughnessy Aggressive Growth Fund
and the O'Shaughnessy Cornerstone
Growth Fund.
2. In their discretion, the named Please sign exactly as name appears
proxies may vote to transact such hereon. When shares are held by joint
other business as properly may come tenants, both should sign. When
before the meeting or any adjournment signing as attorney or as executor,
thereof. administrator, trustee or guardian,
please give full title as such. If a
corporation, please sign in full
corporate name by president or other
authorized officer. If a partnership,
please sign in partnership name by
authorized persons.
Dated:________________________________
PLEASE MARK BOXES /X/ OR [X] IN BLUE X_____________________________________
OR BLACK INK. SIGN, DATE AND RETURN Signature
THE PROXY CARD PROMPTLY USING THE
ENCLOSED ENVELOPE. X_____________________________________
Signature, if held jointly
Dear Shareholders:
According to John Rekenthaler, Morningstar's Director of Research, "Costs are
the most powerful determinant of fund performance within [a] category...There
are no other criteria you could specify that will give you as clear a pattern as
this." I think he is right.
For this primary reason, I'm asking you to vote in favor of reorganizing the
Aggressive Growth Fund into the Cornerstone Growth Fund and the Dogs of the
Market Fund into the Cornerstone Value Fund.
When we started the O'Shaughnessy Funds three years ago, we voluntarily capped
each fund's expense ratio at 2%. Our goal was to lower our expense ratios as our
Funds increased in size. Just as in most businesses, each of our Funds faces
potential economies of scale, with fixed costs that remain the same regardless
of their size. As a result, our Funds need to be relatively large if we want to
operate them for a reasonable and competitive cost. It was our hope that as
people learned about us, our Funds' assets would increase to levels that allowed
us to reduce their expense ratios.
Unfortunately, that didn't happen with our Dogs of the Market Fund and
Aggressive Growth Fund. O'Shaughnessy Capital Management has been subsidizing
both these Funds for the last three years by waiving a portion of our advisory
fee and paying for some of these Funds' operating expenses.
In order to address the cost issue head on, we have determined that it is in the
best interest of our shareholders to combine our two higher fee Funds into our
Cornerstone Funds, which have achieved lower expense ratios because of their
higher asset levels. As a direct result of the additional assets, we expect that
the two surviving Cornerstone Funds will enjoy even lower expense ratios than
they have currently.
As of October 31, 1999, the current annualized expense ratios for all four
O'Shaughnessy Funds were as follows:
1. Aggressive Growth Fund 1.99%
2. Dogs of the Market 1.94%
3. Cornerstone Growth Fund 1.16%
4. Cornerstone Value Fund 1.57%
We believe reorganizing our Funds will help lower costs without sacrificing
investor objectives. Indeed, the Dogs of the Market and Cornerstone Value Funds
have similar investment objectives, as stated in their prospectuses, and each
uses high dividend yield as the final criterion for security selection. Each
invests in large blue chip companies with high dividend yields, with the hope
that the higher dividend yield identifies companies that are temporarily
undervalued. The biggest difference is the universe from which we select the
stocks in each Fund. The Dogs of the Market Fund buys 20 stocks from the S&P
Industrial Average with high yields plus the 10 highest yielding stocks from the
Dow Jones Industrial Average.(TM) The Cornerstone Value Fund, on the other hand,
buys the 50 stocks from the broader O'Shaughnessy Market Leaders Universe with
the highest yields.
Statistically, the Dogs of the Market and Cornerstone Value Funds are very
similar as well. An additional benefit of the reorganization to shareholders of
the Dogs of the Market Fund will be that the surviving Cornerstone Value Fund
will have a higher dividend yield. As of October 31, 1999, the Dogs of the
Market Fund's yield was 2.62% compared to Cornerstone Value's 3.61%, a
difference of 0.99%.
Finally, in light of the recent changes made in the Dow Jones Industrial
Average, we think that the Cornerstone Value Fund now employs a more prudent way
to select high yielding blue chips.
<PAGE>
I believe that our Aggressive Growth Fund and Cornerstone Growth Fund also are
highly similar, even though Aggressive Growth's investment objective is capital
appreciation whereas Cornerstone Growth's is long-term growth of capital (the
two objectives are essentially the same). Aggressive Growth Fund's stocks are
selected using eight separate quantitative models, with all but one of them
using price momentum as the final selection criterion. Cornerstone Growth also
uses price momentum as its final criterion for stock selection. Statistically,
the Funds are also very similar. Note some key variables:
Price to Earnings Median Market Median Price
Ratio (P/E) Capitalization to sales Ratio
----------------- -------------- --------------
Aggressive Growth 24.46 $1.7 Billion 1.22
Cornerstone Growth 22.00 $767 Million 0.85
Finally, the Aggressive Growth shareholders should experience a lower rate of
turnover in Cornerstone Growth while attempting to achieve similar objectives.
I believe that lower costs are of the greatest benefit for you as fellow
shareholders. We also expect this to be a tax-free reorganization, meaning no
gains will be realized for shareholders when their shares are exchanged in
connection with this action.
For all these reasons, I urge you to vote in favor of the reorganization and
thank you for your continued support and trust.
Sincerely,
James P. O'Shaughnessy
