HENNESSY BALANCED FUND
THE HENNESSY FUNDS, INC.
ANNUAL REPORT
June 30, 1996
The Courtyard Square
750 Grant Ave., Suite 100
Novato, CA 94945
(415) 899-1555
1 (800) 966-4354
HENNESSY
BALANCED FUND
August 1996
Dear Shareholder:
With so many different mutual funds to choose from, all of us at the Hennessy
Balanced Fund want to thank you for your investment, trust, and confidence in
our newly created Balanced Fund.
As you know, our philosophy consists of a simple investment approach coupled
with high quality securities. The use of this type of investment strategy
should bode well for our shareholders as more investors learn about our fund and
how we manage it.
Since inception on March 8, 1996, the Fund has grown and has out-performed the
Dow Jones Industrial Average with a net return of 1.80% through June 30, 1996,
versus a 0.24% for the Dow. Although the market will continue to be volatile in
the future, we believe by adhering to our Balanced Investment Strategy (50% in
1-yr. U.S. Government T-Bills and 50% in the ten highest yielding Dow Jones
Industrial Average securities) we will be able to produce a return comparable to
the market, with less risk and volatility.
Once again, thank you, and if you have any questions or comments, please do not
hesitate to contact us at 1-800-966-4354. We are here to serve you.
Best Wishes,
/s/ Neil J. Hennessy
Neil J. Hennessy
President & Portfolio Manager
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1996
ASSETS:
Investments, at value (cost $6,788,609)...........$6,840,318
Income receivable......................................7,583
Organization costs, net of
accumulated amortization.............................24,408
Other assets..........................................24,875
--------
Total Assets....................................6,897,184
---------
LIABILITIES:
Accrued expenses......................................12,476
Due to Adviser........................................18,789
---------
Total Liabilities..................................31,265
---------
NET ASSETS...........................................$6,865,919
---------
---------
NET ASSETS CONSIST OF:
Capital stock.....................................$6,774,833
Undistributed net investment income...................39,461
Undistributed accumulated net realized
losses on investments..................................(84)
Unrealized net appreciation on investments............51,709
---------
Total Net Assets...............................$6,865,919
---------
---------
Shares outstanding (100,000,000 shares
authorized, $.0001 par value).......................674,440
Net asset value per share.............................$10.18
---------
---------
See notes to the financial statements.
STATEMENT OF OPERATIONS
MARCH 8, 1996(1)<F1> THROUGH JUNE 30, 1996
INVESTMENT INCOME:
Dividend income......................................$21,471
Interest income.......................................43,049
-------
64,520
-------
EXPENSES:
Investment advisory fees..............................11,212
Administration fees....................................5,308
Shareholder servicing and accounting costs.............7,602
Distribution fees......................................9,891
Custody fees...........................................2,556
Federal and state registration fees....................3,474
Professional fees......................................6,999
Reports to shareholders................................2,874
Amortization of organization costs.....................1,492
Directors' fees and expenses.............................246
Other..................................................1,620
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Total expenses before waiver and reimbursement .......53,274
Less: Waiver of expenses and
reimbursement from Adviser.........................(28,215)
-------
Net Expenses.......................................25,059
-------
NET INVESTMENT INCOME....................................39,461
-------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized loss on investments........................(84)
Change in unrealized appreciation on investments......51,709
-------
Net gain on investments............................51,625
-------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS.............................$91,086
-------
-------
(1)<F1>Commencement of operations.
See notes to the financial statements.
STATEMENT OF CHANGES IN NET ASSETS
MARCH 8, 1996(1)<F2>THROUGH JUNE 30, 1996
OPERATIONS:
Net investment income................................$39,461
Net realized loss on investments........................(84)
Change in unrealized appreciation on investments......51,709
--------
Net increase in net assets
resulting from operations............................91,086
---------
CAPITAL SHARE TRANSACTIONS:
Shares sold........................................6,679,173
Shares redeemed......................................(4,340)
---------
Net Increase.......................................6,674,833
TOTAL INCREASE IN NET ASSETS..........................6,765,919
NET ASSETS:
Beginning of period..................................100,000
---------
End of period (including undistributed
net investment income of $39,461)................$6,865,919
----------
----------
(1)<F2>Commencement of operations.
See notes to the financial statements.
FINANCIAL HIGHLIGHTS
MARCH 8, 1996(1)<F3> THROUGH JUNE 30, 1996
Per share data:
Net asset value, beginning of period..................$10.00
Income from investment operations:
Net investment income...................................0.06
Net realized and unrealized gains on securities.........0.12
------
Total from investment operations.....................0.18
Net asset value, end of period...........................$10.18
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-------
Total Return...........................................1.80%(2)<F4>
Supplemental data and ratios:
Net assets, in thousands, end of period...............$6,866
Ratio of net expenses to
average net assets..............................1.90%(3)<F5>(4)<F6>
Ratio of net investment income to
average net assets..............................2.99%(3)<F5>(4)<F6>
Portfolio turnover rate................................--(5)<F7>
Average commission rate...........................$0.0611(6)<F8>
(1)<F3>Commencement of operations.
(2)<F4>Not annualized.
(3)<F5>Annualized.
(4)<F6>Absent fee waivers, the ratio of expenses to average net assets would
have been 4.04% and the ratio of net investment income to average net assets
would have been 0.85%.
(5)<F7>During the period there were no sales of securities other than
short-term securities which are not factored into this calculation.
(6)<F8>Edward J. Hennessy, Inc., an affiliated broker, received commissions of
$2,934 for transactions related to the purchase of securities held by the Fund.
See notes to the financial statements.
SCHEDULE OF INVESTMENTS
JUNE 30, 1996
NUMBER
OF SHARES VALUE
- --------- -----
COMMON STOCKS -- 48.2%
AUTOMOBILES & TRUCKS -- 4.4%
5,825 General Motors Corporation $305,084
---------
BANK & BANK HOLDING COMPANIES -- 4.8%
3,875 J.P. Morgan and Co. Incorporated 327,922
---------
CAPITAL GOODS -- 0.5%
475 Caterpillar, Inc. 32,181
---------
CHEMICALS -- 4.6%
3,975 E. I. du Pont de Nemours and Company 314,522
---------
ELECTRICAL -- 4.7%
3,725 General Electric Company 322,212
--------
ENERGY -- 14.5%
5,675 Chevron Corporation 334,825
3,925 Exxon Corporation 340,984
3,825 Texaco, Inc. 320,822
--------
996,631
---------
FOOD, BEVERAGE & TOBACCO -- 5.4%
3,540 Philip Morris Companies, Inc. 368,160
---------
MANUFACTURING -- 4.9%
4,925 Minnesota Mining and Manufacturing Company 339,825
---------
PAPER & FOREST PRODUCTS -- 4.4%
8,250 International Paper Company 304,219
---------
Total Common Stocks
(Cost $3,253,886) 3,310,756
---------
PAR VALUE VALUE
- --------- -----
SHORT-TERM INVESTMENTS -- 51.4%
U.S. GOVERNMENT -- 48.1%
U.S. Treasury Bills:
$1,360,000 5.11%, 3/6/97 $1,310,532
635,000 5.22%, 4/3/97 609,149
975,000 5.36%, 5/1/97 930,705
473,000 5.64%, 5/29/97 449,576
----------
3,299,962
----------
VARIABLE RATE DEMAND NOTES, DUE UPON DEMAND -- 3.3%
FOOD -- 0.2%
16,405 General Mills, Inc., 5.14% 16,405
---------
TECHNOLOGY -- 2.1%
93,722 American Family, 5.15% 93,722
47,131 Pitney Bowes Credit Corporation, 5.14% 47,131
---------
140,853
---------
UTILITIES -- 1.0%
72,342 Wisconsin Electric Power Company, 5.19% 72,342
---------
Total Short-Term Investments
(Cost $3,534,723) 3,529,562
---------
Total Investments -- 99.6%
(Cost $6,788,609) 6,840,318
---------
Other Assets, less Liabilities -- 0.4% 25,601
----------
NET ASSETS -- 100.0% $6,865,919
---------
---------
See notes to the financial statements.
NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 1996
1). ORGANIZATION
The Hennessy Funds, Inc. -- Hennessy Balanced Fund (the "Fund") was organized
as a Maryland corporation on January 11, 1996. The Fund is an open-end, non-
diversified company registered under the Investment Company Act of 1940, as
amended. The objectives of the Hennessy Balanced Fund are capital appreciation
and current income. The investment strategy involves investing approximately
one half of the portfolio's assets in one-year Treasury Bills and the other half
in the top ten dividend yielding stocks of the Dow Jones Industrial Average.
Between the date of organization and the commencement of investment
operations on March 8, 1996, the Fund had no operations other than incurring
organizational expenses. These costs aggregated $25,900 which were paid by the
adviser and are being amortized over the period of benefit, but not to exceed
sixty months from the date the Fund commenced investment operations.
2). SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements. These policies are in
conformity with generally accepted accounting principles.
a). Investment Valuation - Securities which are traded on a national or
recognized stock exchange are valued at the last sale price on the securities
exchange on which such securities are primarily traded. Exchange-traded
securities for which there were no transactions that day are valued at the most
recent bid prices. Instruments with a remaining maturity of 60 days or less are
valued on an amortized cost basis.
b). Federal Income Taxes - Provision for federal income taxes or excise taxes
has not been made since the Fund has elected to be taxed as a "regulated
investment company" and intends to distribute substantially all taxable income
to its shareholders and otherwise comply with the provisions of the Internal
Revenue Code applicable to regulated investment companies.
c). Income and Expenses - The Fund is charged for those expenses that are
directly attributable to the portfolio, such as advisory, administration and
certain shareholder service fees.
d). Distributions to Shareholders - Beginning with the third quarter of the
Fund's operations, the Fund intends to declare and distribute dividends from net
investment income on a calendar quarter basis. Distributions of net realized
capital gains, if any, will be declared at least annually.
e). Security Transactions and Income - Investment and shareholder transactions
are accounted for no later than the first business day after trade date. The
Fund determines the gain or loss realized from the investment transactions by
comparing the original cost of the security lot sold with the net sales
proceeds. Dividend income is recognized on the ex-dividend date and interest
income is recognized on an accrual basis.
f). 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 and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported change in net assets during the
reporting period. Actual results could differ from those estimates.
3). CAPITAL SHARE TRANSACTIONS
The Fund is authorized to issue 100,000,000 shares with $0.0001 par value.
Transactions in shares of the Fund were as follows:
MARCH 8, 1996 THROUGH JUNE 30, 1996
-----------------------------------
AMOUNT SHARES
------ ------
Shares sold..................... $6,679,173 674,872
Shares redeemed................. (4,340) (432)
--------- --------
Net increase.................... $6,674,833 674,440
--------- --------
--------- --------
4). INVESTMENT TRANSACTIONS
The aggregate purchases, excluding short-term investments, for the Fund, for
the period ended June 30, 1996, were $3,253,886. There were no sales of
securities other than short-term securities.
At June 30, 1996, gross unrealized appreciation and depreciation on
investments for federal income tax purposes was as follows:
Appreciation..................... $51,709
(Depreciation)................... (0)
-------
Net unrealized appreciation on investments $51,709
-------
-------
At June 30, 1996, the cost of investments for federal income tax purposes was
$6,788,609.
5). INVESTMENT ADVISORY AND OTHER AGREEMENTS
The Hennessy Funds, Inc. -- Hennessy Balanced Fund has entered into an
investment advisory agreement with The Hennessy Management Co., L.P. (the
"Adviser"). The Adviser is a California limited partnership organized on
October 24, 1995, for the purpose of becoming the Fund's investment adviser.
The general partner of the Adviser is Edward J. Hennessy, Incorporated
("Hennessy"). Hennessy is a registered broker-dealer and investment adviser.
Hennessy was organized in 1989 and is controlled by Neil J. Hennessy, who is a
director and the president of Hennessy.
Pursuant to the Advisory Agreement, the Adviser is entitled to receive a fee,
calculated daily and payable monthly, at an annual rate not to exceed 0.85% of
the Fund's average daily net assets.
The Fund has adopted a plan pursuant to Rule 12b-1 which authorizes payments
in connection with the distribution of Fund shares at an annual rate not to
exceed 0.75% of the Fund's average daily net assets. Amounts paid under the Plan
may be spent on any activities or expenses primarily intended to result in the
sale of shares, including but not limited to, advertising, compensation for
sales and marketing activities or financial institutions and others such as
dealers and distributors, shareholder account servicing, the printing and
mailing of prospectuses to other than current shareholder and the printing and
mailing of sales literature.
The Adviser has voluntarily agreed to waive its investment advisory fee to
the extent necessary to ensure that combined investment advisory fees and 12b-1
fees do not exceed 0.85% of the Fund's average net assets.
Firstar Trust Company, a subsidiary of Firstar Corporation, a publicly held
bank holding company, serves as custodian, transfer agent, dividend disbursing
agent, administrator and accounting services agent for the Fund.
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of The Hennessy Funds, Inc.:
We have audited the accompanying statement of assets and liabilities of Hennessy
Balanced Fund (the "Fund"), including the schedule of investments, as of June
30, 1996, and the related statement of operations, statement of changes in net
assets and financial highlights for the period from March 8, 1996 (commencement
of investment operations) through June 30, 1996. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
financial highlights. Our procedures included confirmation of securities owned
as of June 30, 1996, by correspondence with the custodian. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Fund as of June 30, 1996 and the results of its operations, changes in its net
assets and the financial highlights for the period from March 8, 1996
(commencement of investment operations) through June 30, 1996, in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Milwaukee, Wisconsin
July 12, 1996
INVESTMENT ADVISER
The Hennessy Management Co., L.P.
The Courtyard Square
750 Grant Avenue, Suite 100
Novato, CA 94945
ADMINISTRATOR, TRANSFER AGENT, DIVIDEND
PAYING AGENT, SHAREHOLDER
SERVICING AGENT & CUSTODIAN
Firstar Trust Company
P.O. Box 701
Milwaukee, WI 53201-0701
(800) 261-6950
DIRECTORS
Neil J. Hennessy
Brian A. Hennessy
Robert T. Doyle
Rodger D. Offenbach
John D. DeSousa
COUNSEL
Foley & Lardner
777 East Wisconsin Avenue
Milwaukee, WI 53202-5367
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
777 East Wisconsin Avenue
Milwaukee, WI 53202
