(HENNESSY BALANCED FUND Logo)
THE HENNESSY FUNDS, INC.
SEMIANNUAL REPORT
DECEMBER 31, 1997
THE COURTYARD SQUARE
750 GRANT AVE., SUITE 100
NOVATO, CA 94945
(415) 899-1555
1 (800) 966-4354
Email: [email protected]
Symbol: HBFBX
(HENNESSY BALANCED FUND LOGO)
February 1998
Dear Shareholders:
From July to December 1997 the Financial Markets were very volatile. The Dow
Jones Industrial Average moved up and down and even fell 554.36 points on
October 27, 1997 to record its first 10% drop in seven years. A sign of things
to come? Perhaps not, but the Hennessy Balanced Fund proved that if the market
decides to swing, we can swing back. During the large drops in October, when
the Dow recorded an almost 8% loss, our Fund fell only 0.80%. We are keeping
our promises to our investors: we want to capture returns of the stock market,
with less risk and volatility, and we are delivering. The Hennessy Balanced
Fund returned 3.99% during the last six months of 1997. We also made a promise
to lower our expense ratio as our assets grew, and we did. For the year ending
June 30, 1998 the total fund operating expenses will not exceed 1.68%, and it
will continue to fall as our assets increase.
We would like to extend a continued note of gratitude to all of our investors,
and we look forward to continuing our relationship with you in the years ahead.
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
date Hennessy Dow Jones Merrill Lynch Standard &
Balanced Industrial One Year Index Poor's 500
Fund Average Treasury Bill Stock Index
3/31/96 $10,000 $10,000 $10,000 $10,000
6/30/96 $10,180 $10,089 $10,134 $10,329
9/30/96 $10,407 $10,560 $10,290 $10,649
12/31/96 $11,025 $11,641 $10,453 $11,536
3/31/97 $11,295 $11,946 $10,569 $11,845
6/30/97 $11,982 $13,984 $10,761 $13,914
9/30/97 $12,418 $14,545 $10,930 $14,956
12/31/97 $12,459 $14,544 $11,075 $15,385
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 DECEMBER 31, 1997
SINCE INCEPTION
1 YEAR 3/8/96
------ ---------------
Hennessy Balanced Fund 13.01% 12.85%
Dow Jones Industrial Average 24.94% 22.87%
Merrill Lynch One Year Treasury Bill Index 5.95% 5.77%
Standard & Poor's 500 Stock Index 33.36% 26.72%
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
(UNAUDITED)
ASSETS:
Investments, at value (cost $19,561,564) $21,473,126
Income receivable 36,200
Organization costs, net of accumulated amortization 24,655
Other assets 16,861
-----------
Total Assets 21,550,842
-----------
LIABILITIES:
Accrued expenses and other payables 33,422
Due to Adviser 54,139
-----------
Total Liabilities 87,561
-----------
NET ASSETS $21,463,281
-----------
-----------
NET ASSETS CONSIST OF:
Capital stock $19,539,517
Accumulated undistributed net investment income (13,920)
Accumulated undistributed net realized gains on investments 26,122
Unrealized net appreciation on investments 1,911,562
-----------
Total Net Assets $21,463,281
-----------
-----------
Shares outstanding (100,000,000 shares authorized,
$.0001 par value) 1,814,315
Net asset value per share $ 11.83
-----------
-----------
See notes to financial statements.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1997
(UNAUDITED)
INVESTMENT INCOME:
Dividend income $ 139,050
Interest income 277,144
-----------
Total investment income 416,194
-----------
EXPENSES:
Investment advisory fees 85,288
Administration fees 16,401
Shareholder servicing and accounting costs 24,899
Distribution fees 75,254
Custody fees 4,411
Federal and state registration fees 22,408
Professional fees 9,509
Reports to shareholders 5,285
Amortization of organization costs 3,908
Directors' fees and expenses 1,463
Other 2,431
-----------
Total expenses before waiver 251,257
Less: Waiver of expenses by Adviser (75,254)
-----------
Net expenses 176,003
-----------
NET INVESTMENT INCOME 240,191
-----------
REALIZED AND UNREALIZED GAINS:
Net realized gains on investments 152,682
Change in unrealized appreciation on investments 336,453
-----------
Net gain on investments 489,135
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 729,326
-----------
-----------
See notes to financial statements.
STATEMENT OF CHANGES IN NET ASSETS
SIX MONTH YEAR
ENDED ENDED
DECEMBER 31, JUNE 30,
1997 1997
----------- ---------
(UNAUDITED)
OPERATIONS:
Net investment income $ 240,191 $ 286,472
Net realized gain on investments 152,682 154,641
Change in unrealized appreciation on investments 336,453 1,523,400
---------- ----------
Net increase in net assets resulting from
operations 729,326 1,964,513
---------- ----------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (255,112) (324,932)
From net realized gains (281,117) --
---------- ----------
(536,229) (324,932)
---------- ----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares subscribed 3,630,466 10,583,276
Shares issued to holders in reinvestment
of dividends 611,663 225,392
Cost of shares redeemed (610,669)(1,675,444)
---------- ----------
Net increase in net assets resulting from
capital share transactions 3,631,460 9,133,224
---------- ----------
TOTAL INCREASE IN NET ASSETS 3,824,557 10,772,805
NET ASSETS:
Beginning of period 17,638,724 6,865,919
---------- ----------
End of period (including undistributed
net investment income of
($13,920) and $1,001, respectively) $21,463,281$17,638,724
---------- ----------
---------- ----------
See notes to the financial statements.
FINANCIAL HIGHLIGHTS
MARCH 8,
SIX MONTHS 1996(1)<F1>
ENDED YEAR ENDED THROUGH
DECEMBER 31, JUNE 30, JUNE 30,
1997 1997 1996
------------ ---------- ----------
(UNAUDITED)
PER SHARE DATA:
Net asset value, beginning
of period $11.67 $10.18 $10.00
Income from investment operations:
Net investment income 0.14 0.23 0.06
Net realized and unrealized gains
on securities 0.33 1.55 0.12
------ ------ ------
Total from investment operations 0.47 1.78 0.18
Less Distributions:
Dividends from net investment income (0.15) (0.29) --
Distributions from realized capital
gains (0.16) -- --
------ ------ ------
Total Distributions (0.31) (0.29) 0.00
------ ------ ------
Net asset value, end of period $11.83 $11.67 $10.18
------ ------ ------
------ ------ ------
TOTAL RETURN: 3.99% (2) 17.70% 1.80% (2)
<F2> <F2>
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands, end of
period $21,463 $17,639 $ 6,866
Ratio of net expenses to average
net assets (4)<F4> 1.75% (3) 1.90% 1.90% (3)
<F3> <F3>
Ratio of net investment income to
average net assets (5)<F5> 2.39% (3) 2.41% 2.99% (3)
<F3> <F3>
Portfolio turnover rate 4.99% 20.01% -- (6)
<F6>
Average commission rate (7)<F7> $0.0607 $0.0606 $0.0611
(1)<F1> Commencement of operations.
(2)<F2> Not annualized.
(3)<F3> Annualized.
(4)<F4> Absent fee waivers, the ratio of expenses to average net assets would
have been 2.50% and 2.98%, and 4.54% for the periods ended December 31,
1997, June 30, 1997, and June 30, 1996, respectively.
(5)<F5> Absent fee waivers, the ratio of net investment income to average net
assets would have been 1.64%, 1.34%, and 0.35% for the periods ended
December 31, 1997, June 30, 1997 and June 30, 1996, respectively.
(6)<F6> 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)<F7> Edward J. Hennessy, Inc., an affiliated broker, received commissions
of $2,218, $5,573, and $2,934 for transactions related to the purchase
of securities held by the Fund for the periods ended December 31, 1997,
June 30, 1997, and June 30, 1996, respectively.
See notes to the financial statements.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1997
(UNAUDITED)
NUMBER
OF SHARES
OR PAR VALUE VALUE
- ------------- -----
COMMON STOCKS -- 48.9%
AUTOMOBILES & TRUCKS -- 4.6%
16,425 General Motors Corporation $ 995,766
----------
BANK & BANK HOLDING COMPANIES -- 4.8%
9,150 J.P. Morgan and Co. Incorporated 1,032,806
----------
CAPITAL GOODS -- 0.1%
550 Caterpillar, Inc. 26,709
----------
CHEMICALS -- 4.9%
16,575 E. I. du Pont de Nemours and Company 955,536
1,250 Union Carbide Corporation 53,672
----------
1,049,208
----------
CONSUMER DURABLES -- 3.0%
10,750 Eastman Kodak Company 653,734
----------
DRUGS -- 0.7%
1,325 Merck & Company, Inc. 140,781
----------
ENERGY -- 10.1%
13,325 Chevron Corporation 1,026,025
17,000 Exxon Corporation 1,040,187
1,750 Texaco, Inc. 95,156
----------
2,161,368
----------
FOOD, BEVERAGE & TOBACCO -- 4.9%
23,000 Philip Morris Companies, Inc. 1,042,187
----------
MANUFACTURING -- 4.1%
10,650 Minnesota Mining and Manufacturing Company 873,966
----------
PAPER & FOREST PRODUCTS -- 3.3%
16,350 International Paper Company 705,094
----------
RETAIL -- 0.1%
575 Sears, Roebuck and Company 26,019
----------
RUBBER & TIRES -- 0.7%
2,500 Goodyear Tire & Rubber Company 159,063
----------
TECHNOLOGY -- 0.2%
1,047 Raytheon Company 51,630
----------
TELECOMMUNICATIONS -- 7.4%
25,875 AT &T Corporation 1,584,844
----------
Total Common Stocks (Cost $8,593,334) 10,503,175
----------
SHORT-TERM INVESTMENTS -- 51.1%
U.S. GOVERNMENT -- 46.4%
U.S. Treasury Bills:
$ 316,000 5.44%, 1/8/98 315,684
421,000 5.13%, 2/5/98 418,902
1,266,000 5.52%, 3/5/98 1,254,772
2,088,000 5.85%, 4/2/98 2,060,804
1,505,000 5.78%, 4/30/98 1,479,349
916,000 5.65%, 5/28/98 896,534
815,000 5.55%, 6/25/98 794,437
290,000 5.22%, 7/23/98 281,457
738,000 5.24%, 8/20/98 713,199
946,000 5.22%, 9/17/98 910,475
605,000 5.19%, 10/15/98 579,958
264,000 5.23%, 11/12/98 251,911
----------
9,957,482
----------
VARIABLE RATE DEMAND NOTES -- 4.7%
215,296 General Mills, Inc., 5.33% 215,296
797,173 Johnson Controls, Inc., 5.33% 797,173
----------
1,012,469
----------
TOTAL SHORT-TERM INVESTMENTS
(Cost $10,968,230) 10,969,951
----------
TOTAL INVESTMENTS -- 100.0%
(Cost $19,561,564) 21,473,126
----------
Liabilities, less Other Assets -- (0.0%) (9,845)
----------
NET ASSETS -- 100.0% $21,463,281
----------
----------
See notes to the financial statements.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1997 (UNAUDITED)
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:
SIX MONTHS
ENDED YEAR ENDED
DECEMBER 31, JUNE 30,
1997 1997
---------------------- ----------------
(UNAUDITED)
AMOUNT SHARES AMOUNT SHARES
------ ------ ------ ------
Shares
sold $3,630,466 302,229 $10,583,276 966,462
Shares issued
to holders
as reinvest-
mentof divi-
dends 611,663 51,515 225,392 21,090
Shares
redeemed (610,669) (50,939) (1,675,444) (150,483)
-------- ------- ---------- --------
Net increase $3,631,460 302,805 $9,133,224 837,069
-------- ------- ---------- --------
-------- ------- ---------- --------
4). INVESTMENT TRANSACTIONS
The aggregate purchases and sales, excluding short-term investments, for the
Fund, for the six months ended December 31, 1997, were $1,795,337 and $339,232,
respectively.
At December 31, 1997, gross unrealized appreciation and depreciation on
investments for federal income tax purposes was as follows:
Appreciation $2,104,318
(Depreciation) (196,495)
-----------
Net unrealized
appreciation
on investments $1,907,823
-----------
-----------
At December 31, 1997, the cost of investments for federal income tax
purposes was $19,565,303.
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 ending June 30, 1998, to 0.25% of the Fund's average
daily net assets. Payments incurred in one plan year may be carried over to
future plan years. At December 31, 1997, there were $10,706 of unreimbursed
distribution expenses to be carried over into future plan years. 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.
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
