(THE HENNESSY FUND LOGO)
HENNESSY BALANCED FUND
The Hennessy Funds, Inc.
ANNUAL REPORT
June 30, 1997
The Courtyard Square
750 Grant Ave., Suite 100
Novato, CA 94945
(415) 899-1555
1 (800) 966-4354
HENNESSY BALANCED FUND
August 1997
Dear Shareholders:
No one can forecast short-term market direction. At this time last year, the Dow
Jones Industrial Average (DJIA) was closing in on the 6,000 point level, and now
the index is sprinting toward 10,000. Even with our Balanced position, the Fund
is performing well in this "hot" market - our average annual return is 17.70%.
Our disciplined investment approach is geared toward long-term investment values
by adhering to our "Dogs of the Dow" plus One Year U.S. T-Bills strategy. During
the recent fiscal year the "Dogs of the Dow" slightly underperformed the DJIA.
This will happen from time to time. However, we are confident that by
maintaining our strategy we will continue to perform well in an up market, but
---
more importantly, we will limit our exposure to big losses in a down market. Our
- ----------------
philosophy is that it's not what you make on the upside, it's what you protect
on the downside.
As you will see in this annual report, our assets have grown to $18 million, an
average of about $1 million per month since our Fund began in March of 1996. We
would also like to point out the graph depicting our return versus the DJIA, the
Standard & Poor's 500 Stock Index and the Merrill Lynch One Year Treasury Bill
Index. While our Fund is lagging behind the DJIA and the S&P, our return is
almost 3 times the Merrill Lynch One Year Treasury Bill Index.
We look forward to continuing our relationship with you in the years ahead and
helping you to achieve your investment goals. Thank you again for making the
Hennessy Balanced Fund part of your investment portfolio.
Best wishes,
/s/ Neil J. Hennessy
Neil J. Hennessy
President & Portfolio Manager
Hennessy Dow Jones Merrill Lynch One Standard &
Balanced Industrial Year Treasury Poor's 500
date Fund Average Bill Index Stock Index
- ------- -------- ---------- ---------- -----------
3/31/96 10,000 10,000 10,000 10,000
6/30/96 10,181 10,089 10,155 10,329
6/30/97 11,982 13,983 10,783 13,914
This chart assumes an initial investment of $10,000, made on 3/8/96 (inception).
Performance reflects fee waivers in effect. In the absence of fee waivers, total
return would be reduced. Returns shown include the reinvestment of all dividend
and other distributions. Past performance is not predictive of future
performance. Investment return and principal value will fluctuate, so that your
shares, when redeemed, may be worth more or less than their original cost.
AVERAGE ANNUAL RATE OF RETURN(%)
FOR PERIODS ENDED JUNE 30, 1997
SINCE INCEPTION
1 YEAR 3/8/96
------- ---------------
Hennessy Balanced Fund 17.70% 14.74%
Dow Jones Industrial Average 38.59% 26.34%
Merrill Lynch One Year Treasury Bill Index 6.22% 7.83%
Standard & Poor's 500 Stock Index 34.70% 28.55%
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997
ASSETS:
Investments, at value (cost $16,171,584) $17,746,693
Income receivable 29,210
Organization costs, net of accumulated amortization 28,563
Other assets 14,970
-----------
Total Assets 17,819,436
-----------
LIABILITIES:
Accrued dividends payable 93,714
Accrued expenses and other payables 71,794
Due to Adviser 15,204
-----------
Total Liabilities 180,712
-----------
NET ASSETS $17,638,724
===========
NET ASSETS CONSIST OF:
Capital stock $15,908,057
Accumulated undistributed net investment income 1,001
Accumulated undistributed net realized gains on investments 154,557
Unrealized net appreciation on investments 1,575,109
-----------
Total Net Assets $17,638,724
===========
Shares outstanding (100,000,000 shares authorized,
$.0001 par value) 1,511,510
Net asset value per share $11.67
==========
See notes to the financial statements.
STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1997
INVESTMENT INCOME:
Dividend income $186,731
Interest income 325,103
---------
Total investment income 511,834
---------
EXPENSES:
Investment advisory fees 100,537
Administration fees 31,299
Shareholder servicing and accounting costs 58,180
Distribution fees 29,774
Custody fees 5,132
Federal and state registration fees 22,448
Professional fees 20,453
Reports to shareholders 9,199
Amortization of organization costs 8,703
Directors' fees and expenses 2,304
Other 5,663
---------
Total expenses before waiver and reimbursement 293,692
Less: Waiver of expenses and reimbursement from Adviser (68,330)
---------
Net Expenses 225,362
---------
NET INVESTMENT INCOME 286,472
---------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gains on investments 154,641
Change in unrealized appreciation on investments 1,523,400
---------
Net gain on investments 1,678,041
---------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,964,513
=========
See notes to the financial statements.
STATEMENT OF CHANGES IN NET ASSETS
MARCH 8, 1996(1)<F1>
YEAR ENDED THROUGH
JUNE 30, 1997 JUNE 30, 1996
------------ -------------
OPERATIONS:
Net investment income $286,472 $39,461
Net realized gain (loss) on investments 154,641 (84)
Change in unrealized appreciation on
investments 1,523,400 51,709
---------- ----------
Net increase in net assets resulting
from operations 1,964,513 91,086
---------- ----------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (324,932) --
---------- ----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares subscribed 10,583,276 6,679,173
Shares issued to holders in reinvestment
of dividends 225,392 --
Cost of shares redeemed (1,675,444) (4,340)
---------- ----------
Net increase in net assets resulting
from capital share transactions 9,133,224 6,674,833
---------- ----------
TOTAL INCREASE IN NET ASSETS 10,772,805 6,765,919
NET ASSETS:
Beginning of period 6,865,919 100,000
---------- ----------
End of period (including undistributed net
investment income of
$1,001 and $39,461, respectively) $17,638,724 $6,865,919
=========== ==========
(1)<F1>Commencement of operations.
See notes to the financial statements.
FINANCIAL HIGHLIGHTS
MARCH 8, 1996(1)<F2>
YEAR ENDED THROUGH
JUNE 30, 1997 JUNE 30, 1996
------------- --------------
PER SHARE DATA:
Net asset value, beginning of period $10.18 $10.00
Income from investment operations:
Net investment income 0.23 0.06
Net realized and unrealized gains on
securities 1.55 0.12
------- ------
Total from investment operations 1.78 0.18
Less dividends from net investment income (0.29) --
------- ------
Net asset value, end of period $11.67 $10.18
======= =======
TOTAL RETURN 17.70% 1.80%(2)<F3>
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands, end of period $17,639 $6,866
Ratio of net expenses to average net
assets (4)<F5> 1.90% 1.90%(3)<F4>
Ratio of net investment income to average
net assets (5)<F6> 2.41% 2.99%(3)<F4>
Portfolio turnover rate 20.01% --(6)<F7>
Average commission rate (7)<F8> $0.0606 $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 2.48% and 4.04% for the periods ended June 30, 1997 and June 30, 1996,
respectively.
(5)<F6>Absent fee waivers, the ratio of net investment income to average net
assets would have been 1.84% and 0.85% for the periods ended
June 30, 1997 and June 30, 1996, respectively.
(6)<F7>For the period March 8, 1996 through June 30, 1996, there were no sales
of securities other than short-term securities which are not factored into this
calculation.
(7)<F8>Edward J. Hennessy, Inc., an affiliated broker, received commissions of
$5,573 and $2,934 for transactions related to the purchase of securities held by
the Fund for the periods ended June 30, 1997 and June 30, 1996, respectively.
See notes to the financial statements.
SCHEDULE OF INVESTMENTS
JUNE 30, 1997
NUMBER
OF SHARES VALUE
--------- -----
COMMON STOCKS -- 49.5%
AUTOMOBILES & TRUCKS -- 4.5%
14,150 General Motors Corporation $787,978
----------
BANK & BANK HOLDING COMPANIES -- 4.7%
7,925 J.P. Morgan and Co. Incorporated 827,172
----------
CAPITAL GOODS -- 0.3%
450 Caterpillar, Inc. 48,319
----------
CHEMICALS -- 5.4%
15,200 E. I. du Pont de Nemours and Company 955,700
----------
COMPUTERS -- 0.1%
195 NCR Corporation*<F9> 5,801
----------
CONSUMER DURABLES -- 2.3%
5,400 Eastman Kodak Company 414,450
----------
DRUGS -- 0.1%
150 Merck & Company, Inc. 15,525
----------
ENERGY -- 11.9%
11,750 Chevron Corporation 868,766
15,325 Exxon Corporation 942,488
2,625 Texaco, Inc. 285,469
----------
2,096,723
----------
FOOD, BEVERAGE & TOBACCO -- 5.0%
20,150 Philip Morris Companies, Inc. 894,156
----------
MANUFACTURING -- 5.4%
9,375 Minnesota Mining and Manufacturing Company 956,250
----------
PAPER & FOREST PRODUCTS -- 5.0%
18,125 International Paper Company 880,195
----------
RUBBER & TIRES -- 0.6%
1,850 Goodyear Tire & Rubber Company 117,128
----------
TELECOMMUNICATIONS -- 4.2%
20,500 AT&T Corporation 718,781
45 Imation Corporation**<F10> 1,187
315 Lucent Technologies, Inc.*<F9> 22,700
----------
742,668
----------
TOTAL COMMON STOCKS (Cost $7,173,229) 8,742,065
----------
PAR VALUE VALUE
--------- ------
SHORT-TERM INVESTMENTS -- 51.1%
U.S. GOVERNMENT -- 43.4%
U.S. Treasury Bills:
$90,000 5.36%, 7/24/97 $89,698
369,000 5.25%, 8/21/97 366,200
526,000 5.05%, 9/18/97 520,125
262,000 4.96%, 10/16/97 257,997
168,000 5.15%, 11/13/97 164,755
316,000 5.13%, 1/08/98 307,366
421,000 5.13%, 2/05/98 407,682
1,266,000 5.35%, 3/05/98 1,220,397
2,088,000 5.52%, 4/02/98 2,003,785
1,505,000 5.47%, 4/30/98 1,437,865
916,000 5.30%, 5/28/98 870,942
----------
7,646,812
----------
VARIABLE RATE DEMAND NOTES -- 7.7%
606,442 American Family, 5.26% 606,442
648,461 Johnson Controls, Inc., 5.53% 648,461
102,913 Wisconsin Electric Power Company, 5.30% 102,913
----------
1,357,816
----------
TOTAL SHORT-TERM INVESTMENTS (Cost $8,998,355) 9,004,628
----------
TOTAL INVESTMENTS -- 100.6% (Cost $16,171,584) 17,746,693
----------
Other Assets, less Liabilities -- (0.6%) (107,969)
----------
NET ASSETS -- 100.0% $17,638,724
==========
*<F9>Spinoff from AT&T Corporation and is not part of the top ten dividend
yielding stocks.
**<F10>Spinoff from Minnesota Mining and Manufacturing and is not part of the
top ten dividend yielding stocks.
See notes to the financial statements.
NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 1997
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. Bi-monthly, the Fund will determine the ten highest
yielding common stocks in the Dow Jones Industrial Average. All purchases of
common stocks following such determination, until the next determination, will
be of the ten highest yielding common stocks so determined. The Fund intends to
hold any common stock purchased for approximately one year, including common
stocks that are no longer one of the ten highest yielding common stocks in 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 $38,758 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 and debt securities 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 shareowners and otherwise comply with the provisions of the Internal
Revenue Code applicable to regulated investment companies. Net investment
income and realized gains and losses for federal income tax purposes may differ
from that reported on the financial statements because of temporary book and tax
basis differences. Distributions from net realized gains for book purposes may
include short-term capital gains which are included as ordinary income to
shareholders for tax purposes. Temporary differences are primarily the result
of wash sales treatment for tax reporting purposes.
c). Income and Expenses -- The Fund is charged for those expenses that are
directly attributable to the portfolio, such as advisory, administration and
certain shareowner service fees.
d). Distributions to Shareowners -- Dividends from net investment income are
declared and paid 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 shareowner 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 amount 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 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(1)<F11>
YEAR ENDED THROUGH
JUNE 30, 1997 JUNE 30, 1996
----------------------------------------------------
AMOUNT SHARES AMOUNT SHARES
------- ------- ------- -------
Shares sold $10,583,276 966,462 $6,679,173 674,872
Shares issued to
holders as
reinvestment
of dividends 225,392 21,090 -- --
Shares redeemed (1,675,444) (150,483) (4,340) (431)
---------- -------- ---------- --------
Net increase $9,133,224 837,069 $6,674,833 674,440
========== ======= ========== ========
(1)<F11>Commencement of operations.
4). INVESTMENT TRANSACTIONS
The aggregate purchases and sales, excluding short-term investments, for the
Fund, for the period ended June 30, 1997, were $4,937,465 and $1,018,122,
respectively.
At June 30, 1997, gross unrealized appreciation and depreciation on
investments for federal income tax purposes was as follows:
Appreciation $1,624,106
(Depreciation) (58,513)
---------
Net unrealized appreciation
on investments $1,565,593
=========
At June 30, 1997, the cost of investments for federal income tax purposes was
$16,181,400.
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. The Fund limited 12b-1 fees
paid during the fiscal year ended June 30, 1997, to 0.25% of the Fund's average
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 shareowners 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
The Shareholder and Board of Directors
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, 1997, and the related statement of operations for the year then ended,
statement of changes in net assets and financial highlights for the year ended
June 30, 1997 and 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 audits.
We conducted our audits 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, 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 presents fairly, in all material respects, the financial position of the
Fund as of June 30, 1997 and the results of its operations for the year then
ended, changes in its net assets and the financial highlights for each of the
periods referred to above, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Milwaukee, Wisconsin
July 11, 1997
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
