HENNESSY BALANCED
FUND
----------
ANNUAL REPORT
JUNE 30, 1998
(Hennessy Funds logo)
Hennessy Funds
THE HENNESSY FUNDS, INC.
The Courtyard Square
750 Grant Avenue, Suite 100
Novato, California 94945
(415) 899-1555
1 (800) 966-4354
Email: [email protected]
Symbol: HBFBX
August 1998
Dear Shareholders:
There are now over 8,000 mutual fund companies that an investor may select from,
and we would like to take this opportunity to thank you for choosing the
Hennessy Balanced Fund.
In last year's annual report, I stated that it's not what you make on the
upside, it's what you protect on the downside. This philosophy has proven true
during several volatile swings in the financial markets. The period from July
to December 1997 saw the Dow Jones Industrial Average move up and down and even
fall 554.36 points on October 27, 1997 to record its first 10.0% drop in seven
years. During the large drops in October, when the Dow recorded an almost 8.0%
loss, our Fund fell only 0.8%. (A less than 1.0% drop including all expenses.)
The financial markets also saw volatile times during the first weeks of 1998 as
the Market dropped close to 2.0% while the Balanced Fund only fell 0.4%.
Two interesting developments occurred just prior to the fund's fiscal year end.
General Motors Corporation, one of our largest holdings, was faced with the
financial repercussions of an Auto Workers' strike. General Motors stock price
declined 11.4% in June alone. The second occurrence added insult to injury as
another of our large holdings, AT&T Corporation, announced its intention to
acquire Tele-Communications, Inc. (a cable and telecommunications company) for
approximately $48 billion and then subsequently saw its own stock drop in value
by almost 12.6%. Despite these drops in share price, we are maintaining our
investment objective: Hennessy Balanced Fund returned 8.8% from July 1, 1997 to
June 30, 1998. The fund is seeing some good returns, with less risk, as the
fixed income portion of our BALANCED portfolio stabilizes the volatile swings in
the stock market.
As our fund grows-up (we will celebrate our 3rd anniversary in March) we
recognize that our model is working, and that with the "Dogs of the Dow"
strategy, you are not "barking up the wrong tree."
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
<TABLE>
Merrill Lynch
Hennessy Dow Jones One Year Standard & Poor's
date Balanced Fund Industrial Average Treasury Bill Index 500 Stock Index
<S> <C> <C> <C> <C>
3/8/96 * <F1> $10,000 $10,000 $10,000 $10,000
3/31/96 $10,020 $9,937 $10,010 $9,911
4/30/96 $10,010 $9,910 $10,045 $10,057
5/31/96 $10,180 $10,077 $10,081 $10,317
6/30/96 $10,180 $10,111 $10,134 $10,356
7/31/96 $10,130 $9,897 $10,173 $9,899
8/31/96 $10,210 $10,087 $10,221 $10,107
9/30/96 $10,407 $10,583 $10,291 $10,676
10/31/96 $10,680 $10,856 $10,366 $10,971
11/30/96 $11,004 $11,779 $10,417 $11,800
12/31/96 $11,026 $11,667 $10,453 $11,566
1/31/97 $11,341 $12,332 $10,504 $12,289
2/28/97 $11,433 $12,486 $10,543 $12,385
3/31/97 $11,297 $11,972 $10,569 $11,876
4/30/97 $11,440 $12,754 $10,632 $12,585
5/31/97 $11,798 $13,375 $10,698 $13,352
6/30/97 $11,985 $14,014 $10,761 $13,950
7/31/97 $12,304 $15,029 $10,838 $15,060
8/31/97 $12,129 $13,966 $10,872 $14,216
9/30/97 $12,421 $14,576 $10,930 $14,995
10/31/97 $12,204 $13,660 $10,990 $14,494
11/30/97 $12,462 $14,398 $11,022 $15,165
12/31/97 $12,462 $14,576 $11,075 $15,425
1/31/98 $12,357 $14,577 $11,147 $15,596
2/28/98 $12,789 $15,797 $11,175 $16,721
3/31/98 $13,068 $16,287 $11,232 $17,577
4/30/98 $13,174 $16,783 $11,285 $17,754
5/31/98 $13,142 $16,519 $11,330 $17,449
6/30/98 $13,040 $16,637 $11,385 $18,157
* <F1> inception date
</TABLE>
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 YEAR ENDED JUNE 30, 1998
-------------------------------------
SINCE INCEPTION
1 YEAR 3/8/96
------ --------------
Hennessy Balanced Fund 8.80% 12.14%
Dow Jones Industrial Average 18.71% 24.59%
Merrill Lynch One Year Treasury Bill Index 5.80% 5.76%
Standard & Poor's 500 Stock Index 30.16% 29.39%
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1998
ASSETS:
Investments, at value (cost $21,536,258) $23,486,160
Income receivable 44,738
Organization costs, net of accumulated amortization 20,810
Other assets 19,048
------------
Total Assets 23,570,756
-----------
LIABILITIES:
Accrued expenses and other payables 58,527
Due to Adviser 16,263
------------
Total Liabilities 74,790
------------
NET ASSETS $23,495,966
------------
------------
NET ASSETS CONSIST OF:
Capital stock $20,848,875
Accumulated undistributed net investment income 2,564
Accumulated undistributed net realized gains on investments 694,625
Unrealized net appreciation on investments 1,949,902
------------
Total Net Assets $23,495,966
------------
------------
Shares outstanding (100,000,000 shares
authorized, $.0001 par value) 1,921,889
Net asset value per share $ 12.23
------------
------------
See notes to the financial statements.
STATEMENT OF OPERATIONS
Year Ended June 30, 1998
INVESTMENT INCOME:
Dividend income $ 280,420
Interest income 591,158
------------
Total investment income 871,578
------------
EXPENSES:
Investment advisory fees 181,174
Administration fees 32,474
Shareholder servicing and accounting costs 55,286
Distribution fees 159,859
Custody fees 7,950
Federal and state registration fees 30,193
Professional fees 20,811
Reports to shareholders 5,185
Amortization of organization costs 7,753
Directors' fees and expenses 3,044
Other 6,165
------------
Total expenses before waiver 509,894
Less: Waiver of expenses by Adviser (159,859)
------------
Net expenses 350,035
------------
NET INVESTMENT INCOME 521,543
------------
REALIZED AND UNREALIZED GAINS:
Net realized gains on investments 834,648
Change in unrealized appreciation on investments 374,793
------------
Net gain on investments 1,209,441
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,730,984
------------
------------
See notes to the financial statements.
<TABLE>
STATEMENT OF CHANGES IN NET ASSETS
Year Ended Year Ended
June 30, 1998 June 30, 1997
-------------- ---------------
<S> <C> <C>
OPERATIONS:
Net investment income $ 521,543 $ 286,472
Net realized gains on investments 834,648 154,641
Change in unrealized appreciation on investments 374,793 1,523,400
------------- -------------
Net increase in net assets resulting from operations 1,730,984 1,964,513
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (519,980) (324,932)
From net realized gains (294,580) --
------------- -------------
(814,560) (324,932)
------------- -------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares subscribed 6,284,327 10,583,276
Shares issued to holders in reinvestment of dividends 883,883 225,392
Cost of shares redeemed (2,227,392) (1,675,444)
------------- -------------
Net increase in net assets resulting from
capital share transactions 4,940,818 9,133,224
------------- -------------
TOTAL INCREASE IN NET ASSETS 5,857,242 10,772,805
NET ASSETS:
Beginning of period 17,638,724 6,865,919
------------- -------------
End of period (including undistributed net investment
income of $2,564 and $1,001, respectively) $23,495,966 $17,638,724
------------- -------------
------------- -------------
CHANGES IN SHARES OUTSTANDING:
Shares sold 520,307 966,462
Shares issued to holders as reinvestment of dividends 73,694 21,090
Shares redeemed (183,622) (150,483)
------------- -------------
Net increase 410,379 837,069
------------- -------------
------------- -------------
</TABLE>
See notes to the financial statements.
<TABLE>
FINANCIAL HIGHLIGHTS
March 8, 1996(1)
<F2>
Year ended Year ended through
June 30, 1998 June 30, 1997 June 30, 1996
-------------- -------------- --------------
<S> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period $11.67 $10.18 $10.00
Income from investment operations:
Net investment income 0.29 0.23 0.06
Net realized and unrealized gains on securities 0.73 1.55 0.12
------- ------- -------
Total from investment operations 1.02 1.78 0.18
Less Distributions:
Dividends from net investment income (0.29) (0.29) --
Dividends from realized capital gains (0.17) -- --
------- ------- -------
Total distributions (0.46) (0.29) --
------- ------- -------
Net asset value, end of period $12.23 $11.67 $10.18
------- ------- -------
------- ------- -------
TOTAL RETURN 8.80% 17.70% 1.80% (2)<F3>
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands, end of period $23,496 $17,639 $ 6,866
Ratio of net expenses to average net assets:
Before expense reimbursement 2.39% 2.48% 4.04% (3)<F4>
After expense reimbursement 1.64% 1.90% 1.90% (3)<F4>
Ratio of net investment income (loss) to average net assets:
Before expense reimbursement 1.69% 1.84% 0.85% (3)<F4>
After expense reimbursement 2.44% 2.41% 2.99% (3)<F4>
Portfolio turnover rate 23.24% 20.01% -- (4)<F5>
(1)<F2> Commencement of operations.
(2)<F3> Not annualized.
(3)<F4> Annualized.
(4)<F5> 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.
</TABLE>
See notes to the financial statements.
SCHEDULE OF INVESTMENTS
June 30, 1998
Number
of Shares Value
- ---------- ------
COMMON STOCKS -- 44.3%
AUTOMOBILES & TRUCKS -- 4.4%
15,400 General Motors Corporation $ 1,028,912
------------
BANK & BANK HOLDING COMPANY -- 4.1%
8,300 J.P. Morgan and Co. Incorporated 972,138
------------
CAPITAL GOODS -- 1.2%
5,425 Caterpillar, Inc. 286,847
------------
CHEMICALS -- 3.9%
9,975 E. I. du Pont de Nemours and Company 744,384
3,150 Union Carbide Corporation 168,131
------------
912,515
------------
CONSUMER DURABLES -- 4.8%
15,475 Eastman Kodak Company 1,130,642
------------
DRUGS -- 0.8%
1,325 Merck & Company, Inc. 177,219
------------
ENERGY -- 9.1%
12,575 Chevron Corporation 1,044,511
15,475 Exxon Corporation 1,103,561
------------
2,148,072
------------
FOOD, BEVERAGE & TOBACCO -- 4.2%
24,850 Philip Morris Companies, Inc. 978,469
------------
MANUFACTURING -- 3.9%
11,050 Minnesota Mining and Manufacturing Company 908,172
------------
PAPER & FOREST PRODUCTS -- 2.8%
15,550 International Paper Company 668,650
------------
RETAIL -- 0.1%
575 Sears, Roebuck and Co. 35,111
------------
RUBBER & TIRES -- 0.2%
650 Goodyear Tire & Rubber Company 41,884
------------
TECHNOLOGY -- 0.1%
353 Raytheon Company - Class A 20,342
------------
TELECOMMUNICATIONS -- 4.7%
19,275 AT&T Corporation 1,101,084
------------
TOTAL COMMON STOCKS (COST $8,705,420) 10,410,057
------------
SHORT-TERM INVESTMENTS -- 55.7%
U.S. GOVERNMENT -- 41.0%
U.S. Treasury Bills:
$ 290,000 5.16%, 7/23/98 289,098
738,000 5.22%, 8/20/98 732,723
946,000 5.00%, 9/17/98 935,895
605,000 5.08%, 10/15/98 596,075
264,000 5.10%, 11/12/98 259,057
419,000 5.14%, 12/10/98 409,440
658,000 5.15%, 2/04/99 637,759
1,235,000 5.16%, 3/04/99 1,192,044
2,152,000 5.17%, 4/01/99 2,068,465
1,524,000 5.18%, 4/29/99 1,458,670
1,103,000 5.19%, 5/27/99 1,051,233
------------
9,630,459
------------
VARIABLE RATE DEMAND NOTES -- 14.7%
866,993 General Mills, Inc., 5.27% 866,993
909,827 Pitney Bowes, Inc., 5.27% 909,827
760,930 American Family, 5.27% 760,930
907,894 Johnson Controls, Inc., 5.27% 907,894
------------
3,445,644
------------
TOTAL SHORT-TERM INVESTMENTS (COST $12,830,838) 13,076,103
------------
TOTAL INVESTMENTS -- 100.0% (COST $21,536,258) 23,486,160
------------
Other Assets, less Liabilities -- 0.0% 9,806
------------
NET ASSETS -- 100.0% $23,495,966
------------
------------
See notes to the financial statements.
NOTES TO THE FINANCIAL STATEMENTS
June 30, 1998
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 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 recorded on the 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). INVESTMENT TRANSACTIONS
The aggregate purchases and sales, excluding short-term investments, for the
Fund, for the year ended June 30, 1998, were $2,840,453 and $2,393,648,
respectively.
At June 30, 1998, gross unrealized appreciation and depreciation on
investments for federal income tax purposes was as follows:
Appreciation $2,082,012
(Depreciation) (135,859)
----------
Net unrealized appreciation
on investments $1,946,153
----------
----------
At June 30, 1998, the cost of investments for federal income tax purposes was
$21,540,007.
4). 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.
Edward J. Hennessy received commissions of $5,009 for transactions related to
the purchase and sales of securities held by the Fund for the year ending June
30, 1998. 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. 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% (0.60% investment advisory fee and 0.25% 12b-1 fees) of
the Fund's average net assets. The Adviser will not seek reimbursement for any
waived investment advisory fee or 12b-1 fees for the year ended June 30, 1998.
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, 1998, and the related statement of operations for the year then ended,
statements of changes in net assets for the two year period then ended and
financial highlights for the periods presented herein. 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 audits provide 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, 1998 and the results of its operations, 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 16, 1998
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
