(HENNESSY BALANCED FUND LOGO)
THE HENNESSY FUNDS, INC.
SEMIANNUAL REPORT
DECEMBER 31, 1996
THE COURTYARD SQUARE
750 GRANT AVE., SUITE 100
NOVATO, CA 94945
(415) 899-1555
1 (800) 966-4354
HENNESSY
BALANCED FUND
February 1997
Dear Shareholder:
As you will notice from the enclosed Financial Highlights, our assets have grown
65% to over $11 million since July 1, 1996. The heightened interest in the "Dogs
of the Dow" theory continues to attract investors to the Hennessy Balanced Fund.
We feel the appeal of this investment strategy will broaden our asset base
during 1997 and into the future.
From July to December 1996, the net return, including reinvestment of dividends
was 6.58%, and since the Fund's inception on March 8, 1996 through December 31,
1996 the Fund grew 10.25%, net of all expenses. On a more personal note, all of
us at the Hennessy Balanced Fund would like to thank you for your investments
and referrals. We are also grateful to the media community for their wonderful
coverage of our Fund and for the exposure that coverage provided. With all of
your continued support, I know the Fund will continue to prosper for the benefit
of all shareholders.
Once again, thank you for your trust and confidence, and if you have any
questions or comments please 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
DECEMBER 31, 1996
(UNAUDITED)
ASSETS:
Investments, at value (cost $10,635,501) $11,328,999
Income receivable 16,190
Organization costs, net of accumulated amortization 21,390
Other assets 19,863
----------
Total Assets 11,386,442
-----------
LIABILITIES:
Accrued dividends payable 64,624
Accrued expenses 9,648
Due to Adviser 1,941
-----------
Total Liabilities 76,213
-----------
NET ASSETS $11,310,229
===========
NET ASSETS CONSIST OF:
Capital stock $10,621,276
Undistributed net investment income (4,452)
Undistributed accumulated net realized losses on investments (84)
Unrealized net appreciation on investments 693,489
-----------
Total Net Assets $11,310,229
===========
Shares outstanding (100,000,000 shares authorized,
$.0001 par value) 1,042,322
Net asset value per share $10.85
===========
See notes to the financial statements.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1996
(UNAUDITED)
INVESTMENT INCOME:
Dividend income $75,543
Interest income 124,829
--------
200,372
--------
EXPENSES:
Investment advisory fees 38,787
Administration fees 17,162
Shareholder servicing and accounting costs 28,414
Distribution fees 11,612
Custody fees 2,368
Federal and state registration fees 10,238
Professional fees 12,893
Reports to shareholders 4,674
Amortization of organization costs 3,018
Directors' fees and expenses 609
Other 3,287
--------
Total expenses before waiver and reimbursement 133,062
Less: Waiver of expenses and reimbursement from Adviser (45,886)
--------
Net Expenses 87,176
--------
NET INVESTMENT INCOME 113,196
--------
UNREALIZED GAIN:
Change in unrealized appreciation on investments 641,780
--------
Net gain on investments 641,780
--------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $754,976
========
See notes to the financial statements.
STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS MARCH 8, 1996(1)
ENDED THROUGH <F1>
DECEMBER 31, 1996 JUNE 30, 1996
--------------------------------
(UNAUDITED)
OPERATIONS:
Net investment income $113,196 $39,461
Net realized loss on investments -- (84)
Change in unrealized appreciation on investments 641,780 51,709
---------- ---------
Net increase in net assets resulting from operations 754,976 91,086
---------- ---------
CAPITAL SHARE TRANSACTIONS:
Shares sold 4,381,495 6,679,173
Shares issued to holders in reinvestment of dividends 90,028 --
---------- ---------
4,471,523 6,679,173
Shares redeemed (625,079) (4,340)
---------- ---------
Net increase 3,846,444 6,674,833
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (157,110) --
---------- ---------
TOTAL INCREASE IN NET ASSETS 4,444,310 6,765,919
Beginning of period 6,865,919 100,000
---------- ---------
End of period (including undistributed
net investment income of $(4,452), $39,461) $11,310,229 $6,865,919
========== =========
(1)<F1>Commencement of operations.
See notes to the financial statements.
FINANCIAL HIGHLIGHTS
MARCH 8,
SIX MONTHS 1996(1)<F2>
ENDED THROUGH
DECEMBER 31, JUNE 30,
1996 1996
------------ ---------
(UNAUDITED)
Per share data:
Net asset value, beginning of period $10.18 $10.00
Income from investment operations:
Net investment income 0.11 0.06
Net unrealized gains on securities 0.73 0.12
------- -------
Total from investment operations 0.84 0.18
Less dividends from net investment income (0.17) --
------- -------
Net asset value, end of period $10.85 $10.18
======= =======
Total Return(2)<F3> 8.30% 1.80%
Supplemental data and ratios:
Net assets, in thousands, end of period $11,310 $6,866
Ratio of net expenses to average net assets(3,4)<F4><F5> 1.90% 1.90%
Ratio of net investment income to average
net assets(3,4)<F4><F5> 2.46% 2.99%
Portfolio turnover rate(5)<F6> -- --
Average commission rate $0.0609 $0.0611
(1)<F2>Commencement of operations.
(2)<F3>Not annualized.
(3)<F4>Annualized.
(4)<F5>Absent fee waivers, the ratio of expenses to average net assets would
have been 2.89% and the ratio of net investment income to average net assets
would have been 1.46%.
(5)<F6>During the period there were no sales of securities other than short-term
securities which are not factored into this calculation.
See notes to the financial statements.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1996
NUMBER
OF SHARES VALUE
--------- -----
COMMON STOCKS -- 49.4%
AUTOMOBILES & TRUCKS -- 4.5%
9,075 General Motors Corporation $505,931
-----------
BANK & BANK HOLDING COMPANIES -- 5.0%
5,750 J.P. Morgan and Co. Incorporated 561,344
-----------
CAPITAL GOODS -- 0.6%
925 Caterpillar, Inc. 69,606
-----------
CHEMICALS -- 4.9%
5,900 E. I. du Pont de Nemours and Company 556,813
-----------
DRUGS -- 0.1%
150 Merck &Company, Inc. 11,887
-----------
ELECTRICAL -- 3.3%
3,725 General Electric Company 368,309
-----------
ENERGY -- 14.7%
8,350 Chevron Corporation 542,750
5,850 Exxon Corporation 573,300
5,575 Texaco, Inc. 547,047
-----------
1,663,097
-----------
FOOD, BEVERAGE & TOBACCO -- 5.2%
5,265 Philip Morris Companies, Inc. 592,971
-----------
MANUFACTURING -- 5.3%
7,300 Minnesota Mining and Manufacturing Company 604,988
-----------
PAPER & FOREST PRODUCTS -- 4.3%
12,000 International Paper Company 484,500
-----------
TELECOMMUNICATIONS -- 1.5%
3,125 AT&T Corporation 135,937
537 Imation Corporation*<F7> 15,103
315 Lucent Technologies, Inc.**<F8> 14,569
-----------
165,609
-----------
TOTAL COMMON STOCKS
(Cost $4,894,631) 5,585,055
-----------
PAR VALUE VALUE
--------- -----
SHORT-TERM INVESTMENTS -- 50.8%
U.S. GOVERNMENT -- 44.8%
U.S. Treasury Bills:
$1,360,000 4.94%, 3/6/97 $1,348,170
635,000 5.06%, 4/3/97 626,894
975,000 5.11%, 5/1/97 958,660
473,000 5.15%, 5/29/97 463,188
316,000 5.18%, 6/26/97 308,197
90,000 5.24%, 7/24/97 87,407
369,000 5.26%, 8/21/97 356,901
526,000 5.28%, 9/18/97 506,662
262,000 5.31%, 10/16/97 251,327
168,000 5.44%, 11/13/97 160,341
-----------
5,067,747
-----------
CASH AND CASH EQUIVALENTS -- 6.0%
VARIABLE RATE DEMAND NOTES -- 6.0%
379,450 American Family, 5.51% 379,450
296,487 Johnson Controls, Inc., 5.53% 296,487
260 Warner-Lambert Co., 5.48% 260
-----------
676,197
-----------
Total Short-Term Investments
(Cost $5,740,870) 5,743,944
-----------
Total Investments -- 100.2%
(Cost $10,635,501) 11,328,999
-----------
Other Assets, less Liabilities -- (0.2%) (18,770)
-----------
NET ASSETS -- 100.0% $11,310,229
==========
*<F7>Spinoff from Minnesota Mining and Manufacturing and is not part of the
top ten dividend yielding stocks.
**<F8>Spinoff from AT&T Corporation and is not part of the top ten dividend
yielding stocks.
See notes to the financial statements.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 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 sale 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:
JULY 1, 1996 THROUGH MARCH 8, 1996 THROUGH
DECEMBER 31, 1996 JUNE 30, 1996
-------------------- ---------------------
AMOUNT SHARES AMOUNT SHARES
-------- ------- ------- -------
Shares sold $4,381,495 416,458 $6,679,173 674,872
Shares issued to holders as
reinvestment of dividends 90,028 8,741 -- --
---------- -------- --------- --------
4,471,523 425,199 6,679,173 674,872
Shares redeemed (625,079) (57,317) (4,340) (432)
---------- -------- --------- --------
Net increase $3,846,444 367,882 $6,674,833 674,440
========== ======== ========= =======
4). INVESTMENT TRANSACTIONS
The aggregate purchases, excluding short-term investments, for the Fund, for
the period ended December 31, 1996, were $1,640,808. There were no sales of
securities other than short-term securities.
At December 31, 1996, gross unrealized appreciation and depreciation on
investments for federal income tax purposes was as follows:
Appreciation..................... $693,498
Depreciation..................... (0)
--------
Net unrealized appreciation on investments $693,498
========
At December 31, 1996, the cost of investments for federal income tax purposes
was $10,635,501.
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 shareholders 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. Additionally, the
Fund will limit 12b-1 fees paid during the fiscal year ended June 30, 1997, to
0.25% 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.
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
J. Dennis 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
