STATEMENT OF ADDITIONAL INFORMATION October 31, 1999
FOR THE
HENNESSY BALANCED FUND
HENNESSY LEVERAGED DOGS FUND
THE HENNESSY FUNDS, INC.
The Courtyard Square
750 Grant Avenue
Suite 100
Novato, California 94945
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the Prospectus for The Hennessy Funds, Inc., dated
October 31, 1999. Requests for copies of the Prospectus for the Fund should be
made by writing to The Hennessy Funds, Inc., The Courtyard Square, 750 Grant
Avenue, Suite 100, Novato, California 94945, Attention: Corporate Secretary, or
by calling 1-800-966-4354.
The following financial statements are incorporated by reference to the
Annual Report, dated June 30, 1999 of The Hennessy Funds, Inc. (File No.
811-7493) as filed with the Securities and Exchange Commission on August 30,
1999:
o Independent Auditors' Report
o Statements of Assets and Liabilities
o Statements of Operations
o Statements of Changes in Net Assets
o Financial Highlights
o Schedules of Investments
o Notes to the Financial Statements
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The Hennessy Funds, Inc.
TABLE OF CONTENTS
Page No.
GENERAL INFORMATION AND HISTORY..............................................1
INVESTMENT RESTRICTIONS......................................................1
INVESTMENT CONSIDERATIONS....................................................3
DIRECTORS AND OFFICERS OF THE CORPORATION....................................6
OWNERSHIP OF MANAGEMENT AND PRINCIPAL
SHAREHOLDERS................................................................7
INVESTMENT ADVISERS, ADMINISTRATOR,
CUSTODIAN, TRANSFER AGENT AND
ACCOUNTING SERVICES AGENT....................... ...........................8
DETERMINATION OF NET ASSET VALUE............................................11
DISTRIBUTION OF SHARES......................................................12
AUTOMATIC INVESTMENT PLAN AND
TELEPHONE PURCHASES........................................................14
REDEMPTION OF SHARES........................................................14
SYSTEMATIC WITHDRAWAL PLAN..................................................14
EXCHANGING SHARES...........................................................15
ALLOCATION OF PORTFOLIO BROKERAGE...........................................16
TAXES ......................................................................17
SHAREHOLDER MEETINGS........................................................18
PERFORMANCE INFORMATION.....................................................19
INDEPENDENT AUDITORS........................................................22
CAPITAL STRUCTURE...........................................................22
DESCRIPTION OF SECURITIES RATINGS...........................................23
No person has been authorized to give any information or to make any
representations other than those contained in this Statement of Additional
Information and the Prospectus dated October 31, 1999 and, if given or made,
such information or representations may not be relied upon as having been
authorized by The Hennessy Funds, Inc.
This Statement of Additional Information does not constitute an offer to sell
securities.
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GENERAL INFORMATION AND HISTORY
The Hennessy Funds, Inc., a Maryland corporation incorporated on
January 11, 1996 (the "Corporation"), is an open-end management investment
company consisting of two non-diversified portfolios, Hennessy Balanced Fund
(the "Balanced Fund") and Hennessy Leveraged Dogs Fund (the "Leveraged Dogs
Fund") (collectively, the "Funds"). The Corporation is registered under the
Investment Company Act of 1940 (the "Act").
INVESTMENT RESTRICTIONS
Each of the Funds has adopted the following investment restrictions
which are matters of fundamental policy and cannot be changed without approval
of the holders of the lesser of: (i) 67% of that Fund's shares present or
represented at a shareholder's meeting at which the holders of more than 50% of
such shares are present or represented; or (ii) more than 50% of the outstanding
shares of that Fund.
1. Neither Fund will purchase securities of any issuer if the
purchase would cause more than 5% of the value of that Fund's total
assets to be invested in securities of such issuer (except securities
of the U.S. government or any agency or instrumentality thereof), or
purchase more than 10% of the outstanding voting securities of any one
issuer, except that up to 50% of each Fund's total assets may be
invested without regard to these limitations.
2. Neither Fund will sell securities short.
3. Neither Fund will purchase securities on margin (except for
such short term credits as are necessary for the clearance of
transactions) or write put or call options.
4. The Balanced Fund may not borrow money or issue senior
securities except for temporary bank borrowings (not exceeding 10% of
the Balanced Fund's total assets) or for emergency or extraordinary
purposes. The Balanced Fund will not borrow money for the purpose of
investing in securities and the Balanced Fund will not purchase any
portfolio securities so long as any borrowed amounts remain
outstanding. The Leveraged Dogs Fund may borrow money or issue senior
securities to the extent permitted by the Act.
5. Neither Fund will pledge or hypothecate its assets, except
to secure permitted borrowings.
6. Neither Fund will act as an underwriter or distributor of
securities other than of its shares (except to the extent that a Fund
may be deemed to be an underwriter within the meaning of the Securities
Act of 1933, as amended, in the disposition of restricted securities).
7. Neither Fund will make loans, including loans of
securities, except it may acquire debt securities from the issuer or
others which are publicly
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distributed or are of a type normally acquired by institutional
investors and enter into repurchase agreements.
8. Neither Fund will invest 25% or more of its total assets at
the time of purchase in securities of issuers whose principal business
activities are in the same industry.
9. Neither Fund will make investments for the purpose of
exercising control or management of any company.
10. Neither Fund will purchase or sell real estate or real
estate mortgage loans and neither will make any investments in real
estate limited partnerships.
11. Neither Fund will purchase or sell commodities or
commodity contracts.
12. Neither Fund will purchase or sell any interest in any
oil, gas or other mineral exploration or development program, including
any oil, gas or mineral leases.
Each of the Funds has adopted certain other investment restrictions
which are not fundamental policies and which may be changed by the Corporation's
Board of Directors without shareholder approval. These additional restrictions
are as follows:
1. Neither Fund will acquire or retain any security issued by
a company, an officer or director of which is an officer or director of
the Corporation or an officer, director or other affiliated person of a
Fund's investment adviser.
2. Neither Fund will invest in securities of any issuer which
has a record of less than three (3) years of continuous operation,
including the operation of any predecessor business of a company which
came into existence as a result of a merger, consolidation,
reorganization or purchase of substantially all of the assets of such
predecessor business.
3. Neither Fund will purchase illiquid securities.
4. Neither Fund will purchase the securities of other
investment companies except: (a) as part of a plan of merger,
consolidation or reorganization approved by the shareholders of that
Fund; or (b) securities of registered open-end investment companies
that invest exclusively in high quality, short-term debt securities. No
purchases described in (b) will be made if as a result of such
purchases (i) that Fund and its affiliated persons would hold more than
3% of any class of securities, including voting securities, of any
registered investment company; (ii) more than 5% of that Fund's net
assets would be invested in shares of any one registered investment
company; and (iii) more than 10% of that Fund's net assets would be
invested in shares of registered investment companies.
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The aforementioned percentage restrictions on investment or utilization
of assets refer to the percentage at the time an investment is made. If these
restrictions are adhered to at the time an investment is made, and such
percentage subsequently changes as a result of changing market values or some
similar event, no violation of a Fund's investment restrictions will be deemed
to have occurred. Any changes in the Fund's investment restrictions made by the
Board of Directors will be communicated to shareholders prior to their
implementation.
INVESTMENT CONSIDERATIONS
The Dow Jones Industrial Average
Effective November 1, 1999, the Dow Jones Industrial Average ("DJIA")
will consist of the following 30 common stocks:
AlliedSignal Inc. The Home Depot, Inc.
Aluminum Co. of America (ALCOA) Intel Corp.
American Express Co. International Business
Machines Corp. (IBM)
AT&T Corp. International Paper Co.
The Boeing Co. Johnson & Johnson
Caterpillar Inc. McDonald's Corp.
Citigroup Inc. Merck & Co., Inc.
The Coca-Cola Company Microsoft Corp.
The Walt Disney Company Minnesota Mining & Manufacturing
Co.(3M)
E.I du Pont De Nemours & Co., Inc. J.P. Morgan & Co., Inc.
Eastman Kodak Co. Philip Morris Cos.
Exxon Corp. Procter & Gamble Co.
General Electric Co. SBC Communications Inc.
General Motors Corp. United Technologies Corp.
Hewlett-Packard Co. Wal-Mart Stores, Inc.
The DJIA is the property of Dow Jones & Company, Inc. Dow Jones & Company, Inc.
is not affiliated with either Fund, either Fund's investment adviser, or Edward
J. Hennessy, Inc., the general partner to each Fund's investment adviser. Dow
Jones & Company, Inc. has not participated in any way in the creation of the
Funds or in the selection of stocks included in the Funds and has not approved
any information included herein related thereto.
The first DJIA, consisting of 12 stocks, was published in The Wall
Street Journal in 1896. The list grew to 20 stocks in 1916 and to 30 stocks on
October 1, 1928.
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Dow Jones & Company, Inc. from time to time changes the stocks comprising the
DJIA, although such changes are infrequent.
Each Fund's investment strategy is unlikely to be affected by the
requirement that it not concentrate its investments since currently no more than
three companies in the DJIA are engaged primarily in any one industry. Similarly
each Fund's investment strategy is unlikely to be materially affected by the
requirement that it meet the diversification requirements of the Internal
Revenue Code since each Fund will normally have 50% of its assets invested in
U.S. Treasury securities and the remainder of its assets divided among at least
ten stocks. However each Fund's diversification requirement may preclude it from
effecting a purchase otherwise dictated by its investment strategy. Finally
because of the requirements of the Act, each Fund will not invest more than 5%
of its total assets in the common stock of any issuer that derives more than 15%
of its revenues from securities-related activities. From time to time this
requirement may preclude a Fund from effecting a purchase otherwise dictated by
its investment strategy.
Money Market Instruments
Each of the Funds may invest in cash and money market instruments. The
Funds may do so when accumulating funds to make purchases of common stocks or
U.S. Treasury securities or to have assets available to pay expenses or satisfy
redemption requests. The money market instruments in which the Funds invest
include U.S. Treasury bills, commercial paper, commercial paper master notes,
repurchase agreements and shares of money market mutual funds.
The Funds may invest in commercial paper or commercial paper master
notes rated, at the time of purchase, A-1 or A-2 by Standard & Poor's
Corporation or Prime-1 or Prime-2 by Moody's Investors Service, Inc. Commercial
paper master notes are demand instruments without a fixed maturity bearing
interest at rates that are fixed to known lending rates and automatically
adjusted when such lending rates change.
The Funds may enter into repurchase agreements with banks that are
Federal Reserve Member banks and non-bank dealers of U.S. government securities
which, at the time of purchase, are on the Federal Reserve Bank of New York's
list of primary dealers with a capital base greater than $100 million. When
entering into repurchase agreements, a Fund will hold as collateral an amount of
cash or government securities at least equal to the market value of the
securities that are part of the repurchase agreement. A repurchase agreement
involves the risk that a seller may declare bankruptcy or default. In such event
a Fund may experience delays, increased costs and a possible loss.
The Funds may also invest in securities issued by other investment
companies that invest in high qualify, short-term debt securities (i.e., money
market funds). In addition to the advisory fees and other expenses the Funds
bear directly in connection with their own operations, as a shareholder of
another investment company, a Fund would bear its pro rata portion of the other
investment company's advisory fees and other expenses, and such fees and other
expenses will be borne indirectly by that Fund's shareholders.
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Borrowing
The Leveraged Dogs Fund intends to borrow for investment purposes.
Borrowing for investment is known as leveraging. Leveraging investments, by
purchasing securities with borrowed money, is a speculative technique which
increases investment risk, but also increases investment opportunity. Since
approximately half of the Leveraged Dogs Fund's assets will fluctuate in value,
whereas the interest obligations on borrowings may be fixed, the net asset value
per share of the Leveraged Dogs Fund when it leverages its investments will
increase more when the Leveraged Dogs Fund's portfolio assets increase in value
and decrease more when the Leveraged Dogs Fund's portfolio assets decrease in
value than would otherwise be the case. Moreover, interest costs on borrowings
may fluctuate with changing market rates of interest and may partially offset or
exceed the returns on the borrowed funds. Under adverse conditions, the
Leveraged Dogs Fund might have to sell portfolio securities to meet interest or
principal payments at a time investment considerations would not favor such
sales. The Leveraged Dogs Fund intends to use leverage whenever it is able to
borrow on terms considered by its investment adviser to be reasonable.
As required by the Act, the Leveraged Dogs Fund must maintain
continuous asset coverage (total assets, including assets acquired with borrowed
funds, less liabilities exclusive of borrowings) of 300% of all amounts
borrowed. If, at any time, the value of the Leveraged Dogs Fund's assets should
fail to meet this 300% coverage test, the Leveraged Dogs Fund, within three days
(not including Sundays and holidays), will reduce the amount of the Leveraged
Dogs Fund's borrowings to the extent necessary to meet this 300% coverage.
Maintenance of this percentage limitation may result in the sale of portfolio
securities at a time when investment considerations otherwise indicate that it
would be disadvantageous to do so.
Both Funds are authorized to borrow from banks as temporary measures
for extraordinary or emergency purposes in amounts not in excess of 10% of that
Fund's total assets. These borrowings are not subject to the foregoing 300%
asset coverage requirement.
The Leveraged Dogs Fund may enter into reverse repurchase agreements,
which are considered to be borrowings under the Act. Under a reverse repurchase
agreement, the Leveraged Dogs Fund sells portfolio securities and agrees to
repurchase them at an agreed-upon future date and price. At the time the
Leveraged Dogs Fund enters into a reverse repurchase agreement, it will place in
a segregated custodial account, U.S. government securities or other liquid
securities having a value equal to or greater than the repurchase price
(including accrued interest), and will subsequently monitor the account to
insure that such value is maintained. Reverse repurchase agreements involve the
risk that the market value of the securities sold by the Leveraged Dogs Fund may
decline below the price of the securities it is obligated to repurchase.
Portfolio Turnover
The Funds will generally hold securities for approximately one year
irrespective of investment performance. Securities may be sold after being held
less than one year to fund redemption requests. Consequently each Fund's annual
portfolio turnover rate may vary from
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year to year. Notwithstanding the foregoing, each Fund's portfolio turnover rate
will generally not exceed 100%. High portfolio turnover in any year will result
in the payment by a Fund of above-average transaction costs (such as brokerage
commissions or mark-ups or mark-downs) and could result in the payment by
shareholders of above-average amounts of taxes on realized investment gains.
Distributions to shareholders of such investment gains, to the extent they
consist of net short-term capital gains, will be considered ordinary income for
federal income tax purposes.
DIRECTORS AND OFFICERS OF THE CORPORATION
As a Maryland corporation, the business and affairs of the Corporation
are managed by its officers under the direction of its Board of Directors. The
name, age, address, principal occupation(s) during the past five years, and
other information with respect to each of the directors and officers of the
Corporation are as follows:
*Neil J. Hennessy -- Director, President and Treasurer. Mr. Hennessy,
43, has been President of Edward J. Hennessy, Incorporated ("EJH") since 1989.
His address is The Courtyard Square, 750 Grant Avenue, Suite 100, Novato, CA
94945.
*Brian A. Hennessy -- Director. Mr. Hennessy, 46, has been a
self-employed dentist for more than ten years. His address is 912 Grand Avenue,
San Rafael, CA 94901.
Robert T. Doyle -- Director. Mr. Doyle, 52, is currently the Sheriff of
Marin County, California and has been employed in the Marin County Sheriff's
Office in various capacities since 1969. His address is 87 Washington Street,
Novato, CA 94947.
*Rodger D. Offenbach -- Director. Mr. Offenbach, 48, has been the owner
of Rays Catering since 1974. His address is 919 Eastman Lane, Petaluma, CA
94952.
J. Dennis DeSousa -- Director. Mr. DeSousa, 63, is a retired vice
president of the California State Automobile Association. He currently is a
private investor. His address is 682 Wilson Street, Novato, CA 94947.
Teresa M. Nilsen -- Vice President and Secretary. Ms. Nilsen, 33, has
been corporate secretary and financial officer of EJH since 1989. Her address is
The Courtyard Square, 750 Grant Avenue, Suite 100, Novato, CA 94945.
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* Messrs. Neil Hennessy, Brian Hennessy and Offenbach are directors who
are interested persons of the Corporation (as defined in the Act). Messrs. Neil
Hennessy and Brian Hennessy are brothers. Ms. Nilsen, as an officer of the
Corporation, is an interested person of the Corporation.
The Corporation's standard method of compensating directors is to pay
each director who is not an interested person of the Corporation a fee of $600
($350 from the Balanced Fund and $250 from the Leveraged Dogs Fund) for each
meeting of the Board of
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Directors attended. The Corporation also may reimburse directors for travel
expenses incurred in order to attend meetings of the Board of Directors.
The table below sets forth the compensation paid by the Corporation to
each of the current directors of the Corporation during the fiscal year ended
June 30, 1999:
<TABLE>
COMPENSATION TABLE
<CAPTION>
Total
Compensation
Estimated Annual from Corporation
Pension or Retirement Benefits and Fund
Name of Aggregate Compensation Benefits Accrued As Upon Complex Paid to
Person from Corporation* Part of Fund Expenses Retirement Directors
------ ----------------- --------------------- ---------- ---------
<S> <C> <C> <C> <C>
Neil J. Hennessy $0 $0 $0 $0
Brian A. Hennessy 0 0 0 0
Robert T. Doyle $2,150 0 0 $2,150
Rodger D. Offenbach 0 0 0 0
J. Dennis DeSousa $2,150 0 0 $2,150
</TABLE>
OWNERSHIP OF MANAGEMENT AND PRINCIPAL SHAREHOLDERS
At July 31, 1999, the only persons owning of record, or known to the
Corporation to own beneficially, 5% or more of the outstanding shares of the
Balanced Fund are:
Name and Address of Shareholder Percentage Owned
Charles Schwab & Co.* 15.53%
101 Montgomery Street
San Francisco, CA 94104
Tile West Inc. Profit Sharing Plan 6.52%
10 Hamilton Drive
Novato, CA 94949-5603
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* All of the shares owned by Charles Schwab & Co. were owned of record
only.
Including shares of the Balanced Fund owned by its investment adviser,
all officers and directors of the Corporation own owned 0.88% of the outstanding
shares of the Balanced Fund.
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At July 31, 1999, the only person owning of record, or known to the
Corporation to own beneficially, 5% or more of the outstanding shares of the
Leveraged Dogs Fund is:
Name and Address of Shareholder Percentage Owned
Charles Schwab & Co.* 66.55%
101 Montgomery Street
San Francisco, CA 94104
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* All of the shares owned by Charles Schwab & Co. were owned of record
only.
Including shares of the Leveraged Dogs Fund owned by its investment
adviser, all officers and directors of the Corporation owned 4.89% of the
outstanding shares of the Leveraged Dogs Fund.
INVESTMENT ADVISERS, ADMINISTRATOR, CUSTODIAN,
TRANSFER AGENT AND ACCOUNTING SERVICES AGENT
The investment adviser to the Balanced Fund is The Hennessy Management
Co., L.P., The Courtyard Square, 750 Grant Avenue, Suite 100, Novato, California
94945 (the "Balanced Fund Adviser"). The investment adviser to the Leveraged
Dogs Fund is The Hennessy Management Co. 2, L.P., The Courtyard Square, 750
Grant Avenue, Suite 100, Novato, California 94945 (the "Leveraged Dogs Fund
Adviser"). Each of the Balanced Fund Adviser and the Leveraged Dogs Fund Adviser
is controlled by its general partner, EJH, which is in turn controlled by Neil
J. Hennessy. Mr. Offenbach and Mr. Hennessy are limited partners of each of the
Balanced Fund Adviser and the Leveraged Dogs Fund Adviser.
Pursuant to separate investment advisory agreements (the "Advisory
Agreements") entered into between the Balanced Fund and the Balanced Fund
Adviser and the Leveraged Dogs Fund and the Leveraged Dogs Fund Adviser,
respectively, the investment adviser supervises and manages the applicable
Fund's investment portfolio and, subject to such policies as the Corporation's
Board of Directors may determine, directs the purchase or sale of investment
securities in the day-to-day management of that Fund. Under each of the Advisory
Agreements, the investment adviser, at its own expense and without separate
reimbursement from the Fund (other than pursuant to the Fund's 12b-1 plan),
furnishes office space and all necessary office facilities, equipment and
executive personnel for managing that Fund; and bears all of that Fund's sales
and promotional expenses, other than expenses incurred in complying with the
laws regulating the issue or sale of securities. For the foregoing, each
investment adviser receives a monthly fee at the annual rate of 0.60% of the
daily net assets of the applicable Fund. During the fiscal year ended June 30,
1999 the Balanced Fund Adviser earned $138,497 of investment advisory fees from
the Balanced Fund and did not waive any of such fees. During the fiscal year
ended June 30,1998, the Balanced Fund Adviser earned $181,174 of investment
advisory fees from the Balanced Fund and waived $53,286 of such fees. During the
fiscal year ended June 30, 1997, the Balanced Fund Adviser earned
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$100,537 of investment advisory fees from the Balanced Fund and waived $68,330
of such fees. During the fiscal year ended June 30,1999 the Leveraged Dogs Fund
Adviser earned $14,902 of investment advisory fees from the Leveraged Dogs Fund
and waived all of such fees.
The Funds pay all of their expenses not assumed by the investment
advisers, including, but not limited to, the costs of preparing and printing the
registration statement required under the Securities Act of 1933 and the Act and
any amendments thereof, the expenses of registering their shares with the
Securities and Exchange Commission and in the various states, the printing and
distribution cost of prospectuses mailed to existing shareholders, the cost of
director and officer liability insurance, reports to shareholders, reports to
government authorities and proxy statements, interest charges, brokerage
commissions, and expenses incurred in connection with portfolio transactions.
The Funds will also pay the fees of the Corporation's directors who are not
officers, salaries of administrative and clerical personnel, association
membership dues, legal fees, auditing and accounting services, fees and expenses
of any custodian or trustees having custody of the Funds' assets, expenses of
calculating the net asset value and repurchasing and redeeming shares, and
charges and expenses of dividend disbursing agents, registrars, and share
transfer agents, including the cost of keeping all necessary shareholder records
and accounts and handling any problems relating thereto.
Each investment adviser has undertaken to reimburse the applicable Fund
to the extent that the aggregate annual operating expenses, including the
investment advisory fee and the administration fee but excluding interest,
taxes, brokerage commissions and other costs incurred in connection with the
purchase or sale of portfolio securities, and extraordinary items, exceed that
percentage of the average net assets of that Fund for such year, as determined
by valuations made as of the close of each business day of the year, which is
the most restrictive percentage provided by the state laws of the various states
in which the shares of that Fund are qualified for sale or, if the states in
which the shares of that Fund are qualified for sale impose no such
restrictions, 3%. As of the date of this Statement of Additional Information, no
such percentage limitation was applicable to either Fund. Each Fund monitors its
expense ratio on a monthly basis. If the accrued amount of the expenses of a
Fund exceeds the expense limitation, that Fund creates an account receivable
from its investment adviser for the amount of such excess. In such a situation
the monthly payment of the investment adviser's fee will be reduced by the
amount of such excess (and if the amount of such excess in any month is greater
than the monthly payment of the Adviser's fee, the investment adviser will pay
the applicable Fund the amount of such difference), subject to adjustment month
by month during the balance of that Fund's fiscal year if accrued expenses
thereafter fall below this limit. Notwithstanding the most restrictive
applicable expense limitation of state securities commissions described above,
during the fiscal years ended June 30, 1997 and 1998, the Balanced Fund Adviser
waived investment advisory fees, as described above, in amounts sufficient to
cause the Balanced Fund's expenses not to exceed 1.90% and 1.68%, respectively,
of the Balanced Fund's average daily net assets. Notwithstanding the most
restrictive applicable expense limitation of state securities commissions
described above, during the fiscal year ended June 30, 1999 the Leveraged Dogs
Fund Adviser waived investment advisory fees, as described above, and reimbursed
the Leveraged Dogs Fund
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$108,103 so as to cause the Leveraged Dogs Fund's expenses (excluding interest,
taxes, brokerage commissions and other costs incurred in connection with the
purchase and sale of securities, and extraordinary items) not to exceed 0.00% of
the Leveraged Dogs Fund's average daily net assets.
Each Advisory Agreement will remain in effect as long as its
continuance is specifically approved at least annually (i) by the Board of
Directors of the Corporation or by the vote of a majority (as defined in the
Act) of the outstanding shares of the applicable Fund, and (ii) by the vote of a
majority of the directors of the Corporation who are not parties to the Advisory
Agreement or interested persons of the applicable investment adviser, cast in
person at a meeting called for the purpose of voting on such approval. Each
Advisory Agreement provides that it may be terminated at any time, without the
payment of any penalty, by the Board of Directors of the Corporation or by vote
of the majority of the applicable Fund's shareholders on sixty (60) days'
written notice to the investment adviser, and by the investment adviser on the
same notice to the Corporation, and that it shall be automatically terminated if
it is assigned.
Each Advisory Agreement provides that the applicable investment adviser
shall not be liable to the Corporation or its shareholders for anything other
than willful misfeasance, bad faith, gross negligence or reckless disregard of
its obligations or duties. Each Advisory Agreement also provides that the
investment adviser and its officers, directors and employees may engage in other
businesses, devote time and attention to any other business whether of a similar
or dissimilar nature, and render services to others.
The administrator to the Corporation is Firstar Mutual Fund Services,
LLC, 615 East Michigan Street, Milwaukee, Wisconsin 53202 (the "Administrator").
Pursuant to an administration agreement entered into between the Corporation and
the Administrator relating to each Fund (the "Administration Agreements"), the
Administrator maintains the books, accounts and other documents required by the
Act, responds to shareholder inquiries, prepares each Fund's financial
statements and tax returns, prepares certain reports and filings with the
Securities and Exchange Commission and with state Blue Sky authorities,
furnishes statistical and research data, clerical, accounting and bookkeeping
services and stationery and office supplies, keeps and maintains our financial
and accounting records and generally assists in all aspects of each Fund's
operations. The Administrator, at its own expense and without reimbursement from
the Funds, furnishes office space and all necessary office facilities, equipment
and executive personnel for performing the services required to be performed by
it under the Administration Agreement. For the foregoing, the Administrator
receives from each Fund a fee, paid monthly, at an annual rate of .05% of the
first $100,000,000 of such Fund's average net assets, .04% of the next
$400,000,000 of such Fund's average net assets, and .03% of such Fund's net
assets in excess of $500,000,000. Notwithstanding the foregoing, the
Administrator's minimum annual fee from the Balanced Fund is $30,000 and from
the Leveraged Dogs Fund, $20,000. The Administration Agreement will remain in
effect until terminated by either party. The Administration Agreement may be
terminated at any time, without the payment of any penalty, by the Board of
Directors of the Corporation upon the giving of ninety (90) days' written notice
to the Administrator, or by the Administrator upon the giving of ninety (90)
days' written notice to the Corporation. During the fiscal years
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ended June 30, 1999, June 30, 1998 and June 30, 1997, the Balanced Fund incurred
fees in the amount of $30,011, $32,474 and $31,299, respectively, pursuant to
the Administration Agreement. During the fiscal year ended June 30, 1999, the
Leveraged Dogs Fund incurred fees of $16,500 pursuant to the Administration
Agreement.
Under the Administration Agreement, the Administrator is required to
exercise reasonable care and is not liable for any error of judgment or mistake
of law or for any loss suffered by the Corporation in connection with its
performance as administrator under the Administration Agreement, except a loss
resulting from willful misfeasance, bad faith or negligence on the part of the
Administrator in the performance of its duties under the Administration
Agreement.
Firstar Bank Milwaukee, N.A., an affiliate of Firstar Mutual Fund
Services, LLC, serves as custodian of the Corporation's assets pursuant to a
Custody Agreement. Under the Custody Agreement, Firstar Bank Milwaukee, N.A. has
agreed to (i) maintain a separate account in the name of each Fund, (ii) make
receipts and disbursements of money on behalf of each Fund, (iii) collect and
receive all income and other payments and distributions on account of each
Fund's portfolio investments, (iv) respond to correspondence from shareholders,
security brokers and others relating to its duties, and (v) make periodic
reports to each Fund concerning the Fund's operations. Firstar Bank Milwaukee,
N.A. does not exercise any supervisory function over the purchase and sale of
securities. Firstar Mutual Fund Services, LLC also serves as transfer agent and
dividend disbursing agent for each Fund under Shareholder Servicing Agent
Agreements. As transfer and dividend disbursing agent, Firstar Mutual Fund
Services, LLC has agreed to (i) issue and redeem shares of each Fund, (ii) make
dividend and other distributions to shareholders of each Fund, (iii) respond to
correspondence by Fund shareholders and others relating to its duties, (iv)
maintain shareholder accounts, and (v) make periodic reports to the Funds.
In addition the Corporation has entered into a Fund Accounting
Servicing Agreement with Firstar Mutual Fund Services, LLC pursuant to which
Firstar Mutual Fund Services, LLC has agreed to maintain the financial accounts
and records of each Fund and provide other accounting services to each Fund. For
its accounting services, Firstar Mutual Fund Services, LLC is entitled to
receive fees, payable monthly, based on the total annual rate of $22,000 for the
first $40 million in average net assets of each Fund, .01% on the next $200
million of average net assets, and .0005% on average net assets exceeding $240
million. Firstar Mutual Fund Services, LLC is also entitled to certain out of
pocket expenses, including pricing expenses. During the fiscal years ended June
30, 1999, June 30, 1998 and June 30, 1997, the Balanced Fund incurred fees of
$24,014, $25,095 and $24,192, respectively, pursuant to the Fund Accounting
Servicing Agreement. During the fiscal year ended June 30, 1998 the Leveraged
Dogs Fund incurred fees of $18,423 pursuant to the Fund Accounting Servicing
Agreement.
DETERMINATION OF NET ASSET VALUE
The net asset value of each Fund is determined as of the close of
regular trading (currently 4:00 p.m. Eastern time) on each day the New York
Stock Exchange is open
-11-
<PAGE>
for trading. The New York Stock Exchange is open for trading Monday through
Friday except New Year's Day, Martin Luther King, Jr. Day, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. Additionally, when any of the aforementioned holidays falls on a
Saturday, the New York Stock Exchange will not be open for trading on the
preceding Friday and when any such holiday falls on a Sunday, the New York Stock
Exchange will not be open for trading on the succeeding Monday, unless unusual
business conditions exist, such as the ending of a monthly or the yearly
accounting period. The New York Stock Exchange also may be closed on national
days of mourning.
Each Fund's net asset value per share is determined by dividing the
total value of its investments and other assets less any liabilities, by the
number of its outstanding shares. Each Fund's stock investments are valued at
the last quoted sales price on the day the valuation is made utilizing price
information taken from the New York Stock Exchange where the security is
primarily traded. Securities which are not traded on the valuation date are
valued at the most recent bid prices. Debt securities are valued at the latest
bid prices furnished by independent pricing services. Other assets are valued at
fair value as determined in good faith by the applicable Fund's investment
adviser in accordance with procedures approved by the Board of Directors of the
Corporation. Short-term instruments (those with remaining maturities of 60 days
or less) are valued at amortized cost, which approximates market value.
DISTRIBUTION OF SHARES
The Corporation has adopted a Service and Distribution Plan (the
"Plan") in anticipation that the Funds will benefit from the Plan through
increased sales of their shares, thereby reducing each Fund's expense ratio and
providing an asset size that allows its investment adviser greater flexibility
in management. The Plan authorizes payments by the Funds in connection with the
distribution of their shares at an annual rate, as determined from time to time
by the Corporation's Board of Directors, of up to 0.25% of each Fund's average
daily net assets. Payments made pursuant to the Plan may only be used to pay
distribution expenses actually incurred. Amounts paid under the Plan by the
Funds may be spent on any activities or expenses primarily intended to result in
the sale of shares of the Funds, including but not limited to, advertising,
compensation for sales and marketing activities of 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 Plan permits the Funds to employ a
distributor of their shares, in which event payments under the Plan will be made
to the distributor and may be spent by the distributor on any activities or
expenses primarily intended to result in the sale of our shares, including but
not limited to, compensation to, and expenses (including overhead and telephone
expenses) of, employees of the distributor who engage in or support distribution
of the Funds' shares, printing of prospectuses and reports for other than
existing shareholders, advertising and preparation and distribution of sales
literature. Allocation of overhead (rent, utilities, etc.) and salaries will be
based on the percentage of utilization, and time devoted to, distribution
activities.
-12-
<PAGE>
Initially all payments under the Plan will be made to the investment
advisers who directly bear all sales and promotional expenses of the Fund, other
than expenses incurred in complying with laws regulating the issuance or sale of
securities. (The Funds indirectly bear sales and promotional expenses to the
extent they make payments under the Plan.) During the fiscal year ended June
30,1999, the Balanced Fund incurred $57,707 of distribution fees under the Plan,
none of which was waived by the Balanced Fund Adviser. During the fiscal year
ended June 30, 1998, the Balanced Fund incurred $159,859 of distribution fees
under the Plan, of which $106,573 were waived by the Balanced Fund Adviser.
During the fiscal year ended June 30, 1997, the Balanced Fund incurred $89,322
of distribution fees under the Plan, of which $59,548 were waived by the
Balanced Fund Adviser. During the fiscal year ended June 30, 1999 the Leveraged
Dogs Fund incurred $6,209 of distribution fees under the Plan, all of which were
waived by the Leveraged Dogs Fund Adviser.
Each investment adviser has entered into an agreement with EJH pursuant
to which it will pay EJH for expenses actually incurred by EJH in distributing
that Fund's shares (the "EJH Agreement"). The EJH Agreement further provides
that the applicable investment adviser will pay EJH an amount equal to $225 per
hour, or such other rate as the applicable investment adviser and EJH may agree
from time to time, for services provided by Neil J. Hennessy in his capacity as
President of EJH related to the distribution of that Funds' shares. (Prior to
May 28, 1998, the Balanced Fund Adviser had an agreement with EJH pursuant to
which it paid EJH an amount equal to 1% of the net asset value of all shares of
the Balanced Fund sold other than through dividend reinvestments (the "Former
EJH Agreement"). The Former EJH Agreement required EJH to repay any such fees
with respect to shares redeemed within one month after the date of the original
purchase other than shares redeemed as a result of the death or disability of
the shareholder. During the fiscal years ended June 30, 1999, 1998 and 1997, the
Balanced Fund Adviser paid EJH $94,420, $69,836 and $101,527, respectively,
pursuant to the foregoing Agreements. During the fiscal year ended June 30,
1999, the Leveraged Dogs Fund Adviser paid EJH $152,407 pursuant to the EJH
Agreement. Neil J. Hennessy, the President and a director of the Corporation, is
a limited partner of each investment adviser as well as President and
controlling shareholder of EJH, the general partner to each investment adviser.
The Plan may be terminated by the Fund at any time by a vote of the
directors of the Corporation who are not interested persons of the Corporation
and who have no direct or indirect financial interest in the Plan or any
agreement related thereto (the "Rule 12b-1 Directors") or by a vote of a
majority of the outstanding shares of the Fund. Messrs. Doyle and DeSousa are
currently the Rule 12b-1 Directors. Any change in the Plan that would materially
increase the distribution expenses of the Fund provided for in the Plan requires
approval of the shareholders of the Fund and the Board of Directors, including
the Rule 12b-1 Directors. While the Plan is in effect, the selection and
nomination of directors who are not interested persons of the Corporation will
be committed to the discretion of the directors of the Corporation who are not
interested persons of the Corporation. The Board of Directors of the Corporation
must review the amount and purposes of expenditures pursuant to the Plan
quarterly as reported to it by a Distributor, if any, or officers of the
Corporation. The Plan will continue in effect for as long as its continuance is
specifically approved at least annually by the Board of Directors, including the
Rule 12b-1 Directors.
-13-
<PAGE>
AUTOMATIC INVESTMENT PLAN AND TELEPHONE PURCHASES
Each Fund offers an automatic investment option pursuant to which money
will be moved from a shareholder's bank account to the shareholder's Fund
account on the schedule (e.g., monthly, bimonthly (every other month), quarterly
or yearly) the shareholder selects. The minimum transaction amount is $100.
Each Fund offers a telephone purchase option pursuant to which money
will be moved from the shareholder's bank account to the shareholder's Fund
account upon request. Only bank accounts held at domestic financial institutions
that are Automated Clearing House (ACH) members can be used for telephone
transactions. To have Fund shares purchased at the net asset value determined as
of the close of regular trading on a given date, Firstar Mutual Fund Services,
LLC must receive both the purchase order and payment by Electronic Funds
Transfer through the ACH System before the close of regular trading on such
date. Most transfers are completed within 3 business days. The minimum amount
that can be transferred by telephone is $100.
REDEMPTION OF SHARES
A shareholder's right to redeem shares of the Funds will be suspended
and the shareholder's right to payment postponed for more than seven days for
any period during which the New York Stock Exchange is closed because of
financial conditions or any other extraordinary reason and may be suspended for
any period during which (a) trading on the New York Stock Exchange is restricted
pursuant to rules and regulations of the Securities and Exchange Commission, (b)
the Securities and Exchange Commission has by order permitted such suspension,
or (c) such emergency, as defined by rules and regulations of the Securities and
Exchange Commission, exists as a result of which it is not reasonably practical
for the Funds to dispose of its securities or fairly to determine the value of
its net assets.
SYSTEMATIC WITHDRAWAL PLAN
An investor who owns shares of either Fund worth at least $10,000 at
the current net asset value may, by completing an application which may be
obtained from that Fund or Firstar Mutual Fund Services, LLC, create a
Systematic Withdrawal Plan from which a fixed sum will be paid to the investor
at regular intervals. To establish the Systematic Withdrawal Plan, the investor
deposits Fund shares with the Corporation and appoints it as agent to effect
redemptions of Fund shares held in the account for the purpose of making monthly
or quarterly withdrawal payments of a fixed amount to the investor out of the
account. Fund shares deposited by the investor in the account need not be
endorsed or accompanied by a stock power if registered in the same name as the
account; otherwise, a properly executed endorsement or stock power, obtained
from any bank, broker-dealer or the Corporation is required. The investor's
signature should be guaranteed by a bank, a member firm of a national stock
exchange or other eligible guarantor.
The minimum amount of a withdrawal payment is $100. These payments will
be made from the proceeds of periodic redemptions of shares in the account at
net asset value.
-14-
<PAGE>
Redemptions will be made in accordance with the schedule (e.g., monthly,
bimonthly [every other month], quarterly or yearly, but in no event more
frequently than monthly) selected by the investor. If a scheduled redemption day
is a weekend day or a holiday, such redemption will be made on the next
preceding business day. Establishment of a Systematic Withdrawal Plan
constitutes an election by the investor to reinvest in additional Fund shares,
at net asset value, all income dividends and capital gains distributions payable
by the Fund on shares held in such account, and shares so acquired will be added
to such account. The investor may deposit additional Fund shares in his account
at any time.
Withdrawal payments cannot be considered as yield or income on the
investor's investment, since portions of each payment will normally consist of a
return of capital. Depending on the size or the frequency of the disbursements
requested, and the fluctuation in the value of the Fund's portfolio, redemptions
for the purpose of making such disbursements may reduce or even exhaust the
investor's account.
The investor may vary the amount or frequency of withdrawal payments,
temporarily discontinue them, or change the designated payee or payee's address,
by notifying Firstar Mutual Fund Services, LLC in writing thirty (30) days prior
to the next payment.
EXCHANGING SHARES
Investors may exchange shares of either Fund having a value of $1,000
or more for shares of the Firstar Money Market Fund at their net asset value and
at a later date exchange such shares and shares purchased with reinvested
dividends for shares of the Funds at net asset value. Investors who are
interested in exercising the exchange privilege should first contact the Funds
to obtain instructions and any necessary forms. The exchange privilege does not
in any way constitute an offering of, or recommendation on the part of the Funds
or their investment advisers of, an investment in Firstar Money Market Fund. Any
investor who considers making such an investment through the exchange privilege
should obtain and review the prospectus of the Firstar Money Market Fund before
exercising the exchange privilege.
Because of the time needed to transfer money between the Funds or a
Fund and the Firstar Money Market Fund, investors may not exchange into or out
of the same fund on the same or successive days. There must be at least one day
between exchange transactions. Investors may exchange shares only for shares
that have been registered in their state.
The exchange privilege will not be available if (i) the proceeds from a
redemption of shares are paid directly to the investor or at his or her
discretion to any persons other than the Funds or (ii) the proceeds from
redemption of the shares of the Firstar Money Market Fund are not immediately
reinvested in shares of the Funds through a subsequent exercise of the exchange
privilege. Because excessive trading can hurt a Fund's performance and
shareholders, each Fund reserves the right to temporarily or permanently
terminate the exchange privilege of any investor who makes excessive use of the
exchange privilege (more than five exchanges per calendar year). Exchanges may
be restricted or refused by a Fund if it receives or anticipates receiving
simultaneous orders affecting significant portions of the Fund's assets. In
particular, a pattern of exchanges with a "market timing" strategy may be
-15-
<PAGE>
disruptive to a Fund. The exchange privilege may be terminated by the Funds upon
at least 60 days prior notice to investors.
ALLOCATION OF PORTFOLIO BROKERAGE
Each Fund's securities trading and brokerage policies and procedures
are reviewed by and subject to the supervision of the Corporation's Board of
Directors. Decisions to buy and sell securities for the Balanced Fund are made
by the Balanced Fund Adviser and for the Leveraged Dogs Fund by the Leveraged
Dogs Fund Adviser in each case subject to review by the Corporation's Board of
Directors. In placing purchase and sale orders for portfolio securities for the
Funds, it is the policy of the investment advisers to seek the best execution of
orders at the most favorable price in light of the overall quality of brokerage
and research services provided, as described in this and the following
paragraphs. Many of these transactions involve payment of a brokerage commission
by a Fund. In some cases, transactions are with firms who act as principals of
their own accounts. In selecting brokers to effect portfolio transactions, the
determination of what is expected to result in best execution at the most
favorable price involves a number of largely judgmental considerations. Among
these are the investment adviser's evaluation of the broker's efficiency in
executing and clearing transactions, block trading capability (including the
broker's willingness to position securities) and the broker's reputation,
financial strength and stability. The most favorable price to a Fund means the
best net price without regard to the mix between purchase or sale price and
commission, if any. Securities not listed on exchanges may be purchased and sold
directly with principal market makers who retain the difference in their cost in
the security and its selling price (i.e. "markups" when the market maker sells a
security and "markdowns" when the market maker buys a security). In some
instances, the investment adviser may believe that better prices are available
from non-principal market makers who are paid commissions directly. Although the
Funds do not initially intend to market their shares through intermediary
broker-dealers, the Funds may place portfolio orders with broker-dealers who
recommend the purchase of Fund shares to clients (if the investment adviser
believes the commissions and transaction quality are comparable to that
available from other brokers) and may allocate portfolio brokerage on that
basis.
The investment adviser may allocate brokerage to EJH but only if the
investment adviser reasonably believes the commission and transaction quality
are comparable to that available from other qualified brokers. Under the Act,
EJH is prohibited from dealing with a Fund as a principal in the purchase and
sale of securities. EJH, when acting as a broker for a Fund in any of its
portfolio transactions executed on a securities exchange of which EJH is a
member, will act in accordance with the requirements of Section 11(a) of the
Securities Exchange Act of 1934 and the rules of such exchanges.
In allocating brokerage business for the Funds, the investment advisers
also take into consideration the research, analytical, statistical and other
information and services provided by the broker, such as general economic
reports and information, reports or analyses of particular companies or industry
groups, market timing and technical information, and the availability of the
brokerage firm's analysts for consultation. While the investment advisers
believe these services have substantial value, they are considered supplemental
to their own
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<PAGE>
efforts in the performance of their duties under the Advisory Agreements. Other
clients of the investment advisers may indirectly benefit from the availability
of these services to the investment advisers, and the Funds may indirectly
benefit from services available to the investment adviser as a result of
transactions for other clients. The Advisory Agreements provide that the
investment advisers may cause a Fund to pay a broker which provides brokerage
and research services to the investment adviser a commission for effecting a
securities transaction in excess of the amount another broker would have charged
for effecting the transaction, if the investment adviser determines in good
faith that such amount of commission is reasonable in relation to the value of
brokerage and research services provided by the executing broker viewed in terms
of either the particular transaction or the investment adviser's overall
responsibilities with respect to the Fund and the other accounts as to which he
exercises investment discretion.
All of the brokerage commissions paid by the Balanced Fund during the
fiscal years ended June 30, 1999, June 30, 1998 and June 30, 1997 were paid to
EJH. Commissions totaled $6,815 on transactions involving securities having a
total market value of $6,685,463 during the fiscal year ended June 30, 1999,
commissions totaled $5,009 on transactions involving securities having a total
market value of $5,234,098 during the fiscal year ended June 30, 1998, and
commissions totaled $5,573 on transactions involving securities having a total
market value of $6,110,181 during the fiscal year ended June 30, 1997. All of
the brokerage commissions paid by the Leveraged Dogs Fund during the fiscal year
ended June 30, 1999 were paid to EJH. Commissions totaled $3,451 on transactions
involving securities having a total market value of $3,724,679 during the fiscal
year ended June 30, 1999.
TAXES
Each Fund will endeavor to qualify annually for and elect tax treatment
applicable to a regulated investment company under Subchapter M of the Internal
Revenue Code. Each Fund has so qualified in each of its fiscal years. If a Fund
fails to qualify as a regulated investment company under Subchapter M in any
fiscal year, it will be treated as a corporation for federal income tax
purposes. As such, the Fund would be required to pay income taxes on its net
investment income and net realized capital gains, if any, at the rates generally
applicable to corporations. Shareholders of a Fund that did not qualify as a
regulated investment company under Subchapter M would not be liable for income
tax on the Fund's net investment income or net realized capital gains in their
individual capacities. Distributions to shareholders, whether from the Fund's
net investment income or net realized capital gains, would be treated as taxable
dividends to the extent of accumulated earnings and profits of the Fund.
Each Fund intends to distribute substantially all of its net investment
income and net capital gains each fiscal year. Dividends from the Fund's net
investment income, and distributions of the Fund's net long-term realized
capital gains, are taxable to investors, whether received in cash or in
additional shares of the Fund. The 70% dividends-received deduction for
corporations will apply only to dividends from the Fund's net investment income,
subject to proportionate reductions if the aggregate dividends received by the
Fund
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<PAGE>
from domestic corporations in any year are less than 100% of the distributions
of net investment company taxable income made by the Fund.
Redemption of shares will generally result in a capital gain or loss
for income tax purposes. The tax treatment of any such capital gain or loss
generally will be dependent upon the investor's holding period for the shares.
However, if a loss is realized on shares held for six months or less, and the
investor received a distribution of long-term capital gains during that period,
then such loss is treated as a long-term capital loss to the extent of the
capital gain distribution received.
Each Fund may be required to withhold Federal income tax at a rate of
31% ("backup withholding") from dividend payments and redemption proceeds if a
shareholder fails to furnish such Fund with his social security number or other
tax identification number and certify under penalty of perjury that such number
is correct and that he is not subject to backup withholding due to the
underreporting of income. The certification form is included as part of the new
account application and should be completed when the account is opened.
This section is not intended to be a complete discussion of present or
proposed federal income tax laws and the effect of such laws on an investor.
Investors are urged to consult with their respective tax advisers for a complete
review of the tax ramifications of an investment in the Funds.
SHAREHOLDER MEETINGS
The Maryland General Corporation Law permits registered investment
companies, such as the Corporation, to operate without an annual meeting of
shareholders under specified circumstances if an annual meeting is not required
by the Act. The Corporation has adopted the appropriate provisions in its Bylaws
and may, at its discretion, not hold an annual meeting in any year in which the
election of directors is not required to be acted on by shareholders under the
Act.
The Corporation's Bylaws also contain procedures for the removal of
directors by its shareholders. At any meeting of shareholders, duly called and
at which a quorum is present, the shareholders may, by the affirmative vote of
the holders of a majority of the votes entitled to be cast thereon, remove any
director or directors from office and may elect a successor or successors to
fill any resulting vacancies for the unexpired terms of removed directors.
Upon the written request of the holders of shares entitled to not less
than ten percent (10%) of all the votes entitled to be cast at such meeting, the
Secretary of the Corporation shall promptly call a special meeting of
shareholders for the purpose of voting upon the question of removal of any
director. Whenever ten or more shareholders of record who have been such for at
least six months preceding the date of application, and who hold in the
aggregate either shares having a net asset value of at least $25,000 or at least
one percent (1%) of the total outstanding shares, whichever is less, shall apply
to the Corporation's Secretary in writing, stating that they wish to communicate
with other shareholders with a view to obtaining signatures to a request for a
meeting as described above and accompanied by
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<PAGE>
a form of communication and request which they wish to transmit, the Secretary
shall within five business days after such application either: (1) afford to
such applicants access to a list of the names and addresses of all shareholders
as recorded on the books of the Corporation; or (2) inform such applicants as to
the approximate number of shareholders of record and the approximate cost of
mailing to them the proposed communication and form of request.
If the Secretary elects to follow the course specified in clause (2) of
the last sentence of the preceding paragraph, the Secretary, upon the written
request of such applicants, accompanied by a tender of the material to be mailed
and of the reasonable expenses of mailing, shall, with reasonable promptness,
mail such material to all shareholders of record at their addresses as recorded
on the books unless within five business days after such tender the Secretary
shall mail to such applicants and file with the Securities and Exchange
Commission, together with a copy of the material to be mailed, a written
statement signed by at least a majority of the Board of Directors to the effect
that in their opinion either such material contains untrue statements of fact or
omits to state facts necessary to make the statements contained therein not
misleading, or would be in violation of applicable law, and specifying the basis
of such opinion.
After opportunity for hearing upon the objections specified in the
written statement so filed, the Securities and Exchange Commission may, and if
demanded by the Board of Directors or by such applicants shall, enter an order
either sustaining one or more of such objections or refusing to sustain any of
them. If the Securities and Exchange Commission shall enter an order refusing to
sustain any of such objections, or if, after the entry of an order sustaining
one or more of such objections, the Securities and Exchange Commission shall
find, after notice and opportunity for hearing, that all objections so sustained
have been met, and shall enter an order so declaring, the Secretary shall mail
copies of such material to all shareholders with reasonable promptness after the
entry of such order and the renewal of such tender.
PERFORMANCE INFORMATION
Each of the Funds may provide from time to time in advertisements,
reports to shareholders and other communications with shareholders their average
annual total returns. An average total return refers to the rate of return
which, if applied to an initial investment at the beginning of a stated period
and compounded over the period, would result in the redeemable value of the
investment at the end of the stated period assuming reinvestment of all
dividends and distributions and reflecting the effect of all recurring fees.
With respect to "average" total return figures for periods longer than one year,
a Fund's annual total return for any one year in the period might have been
greater or less than the average for the entire period. The Funds may use
"aggregate" total return figures for various periods, representing the
cumulative change in value of an investment in a Fund for a specific period
(again reflecting changes in our share price and assuming reinvestment of
dividends and distributions).
Average annual total return measures both the net investment income
generated by, and the effect of any realized or unrealized appreciation or
depreciation of, the underlying
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<PAGE>
investments in a Fund's investment portfolio. Each Fund's average annual total
return figures are computed in accordance with the standardized method
prescribed by the Securities and Exchange Commission by determining the average
annual compounded rates of return over the periods indicated, that would equate
the initial amount invested to the ending redeemable value, according to the
following formula:
n
P(1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the
period of a hypothetical $1,000 payment made
at the beginning of such period
Total return is the cumulative rate of investment growth which assumes
that income dividends and capital gains are reinvested. It is determined by
assuming a hypothetical investment at the net asset value at the beginning of
the period, adding in the reinvestment of all income dividends and capital
gains, calculating the ending value of the investment at the net asset value as
of the end of the specified time period, subtracting the amount of the original
investment, and dividing this amount by the amount of the original investment.
This calculated amount is then expressed as a percentage by multiplying by 100.
The Balanced Fund's average annual total returns for the one-year
period ended June 30, 1999 and for the period from the Fund's commencement of
operations (March 8, 1996) through June 30, 1999 were 9.61% and 11.37%,
respectively. The Leveraged Dogs Fund's total return from the Fund's
commencement of operations (July 29, 1998) through June 30, 1999 (its period of
operations) was 10.28%.
The information below illustrates the total return for each of the
Funds compared to that of the DJIA and the Merrill Lynch One Year U.S. Treasury
Bill Index.
<TABLE>
COMPARISON OF TOTAL RETURN(1)
<CAPTION>
Year Ended June 30, DJIA Total Return Balanced Fund Leveraged Dogs Fund Merrill Lynch One Year U.S.
Total Return Total Return Treasury Bill Index
<S> <C> <C> <C> <C>
1997 38.59% 17.70% N/A 6.22%
1998 18.71% 8.80% N/A 5.80%
1999 24.66% 9.61% N/A(2) 5.12%
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- -------------------
(1) Total return for the DJIA represents the sum of the following components:
(a) the percentage change in value of each common stock from the first trading
day on the New York Stock Exchange in a given year to the last trading day in
that year; and (b) the total dividends received in that year on each common
stock divided by the market value of the common stock as of the first trading
day in that year (without any dividend reinvestment). Total return for the DJIA
does not take into consideration any brokerage commissions, expenses or taxes,
and does not include reinvestment of dividends. Total return for the Merrill
Lynch One Year U.S. Treasury Bill Index is the change in the level of the index
during the measuring period.
(2) The Leveraged Dogs Fund commenced operations on July 29, 1998.
</TABLE>
The charts below assume an initial investment of $10,000 on March 8,
1996 in the Balanced Fund and July 29, 1998 in the Leveraged Dogs Fund.
<TABLE>
<CAPTION>
Merrill Lynch One Year
Hennessy Balanced Dow Jones Industrial U.S. Treasury
Date Fund Average Bill Index
<S> <C> <C> <C>
3/31/96 $10,000 $10,000 $10,000
6/30/96 10,181 10,089 10,155
6/30/97 11,982 13,983 10,783
6/30/98 13,036 16,637 11,385
6/30/99 14,290 20,418 11,963
<CAPTION>
Hennessy ` Merrill Lynch One Year
Leveraged Dow Jones Industrial U.S. Treasury
Date Dogs Fund Average Bill Index
<S> <C> <C> <C>
6/30/99 $11,028 $12,485 $10,476
</TABLE>
The foregoing performance results are based on historical earnings and
should not be considered as representative of the performance of the Funds in
the future. Such performance results also reflect waivers and/or reimbursements
made by the Balanced Fund Adviser and the Leveraged Dogs Fund Adviser described
in "Investment Advisers, Administrator, Custodian, Transfer Agent and Accounting
Services Agent." An investment in the Funds will fluctuate in value and at
redemption their value may be more or less than the initial investment.
Each of the Funds may also compare their performance to other mutual
funds with similar investment objectives and to the industry as a whole as
reported by Lipper Analytical Services, Inc., Morningstar OnDisc, Money, Forbes,
Business Week and Barron's magazines and The Wall Street Journal, (Lipper
Analytical Services, Inc. and Morningstar OnDisc are independent ranking
services that rank mutual funds based upon total return
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<PAGE>
performance.) The Funds may also compare their performance to the DJIA, NASDAQ,
Composite Index,, NASDAQ Industrials Index, Value Line Composite Index, the
Standard & Poor's 500 Stock Index, the Merrill Lynch One Year U.S. Treasury Bill
Index and the Consumer Price Index.
INDEPENDENT AUDITORS
KPMG LLP, 303 East Wacker Drive, Chicago, Illinois 60601 has served as
the independent accountants for the Funds since each Fund's inception. As such
KPMG LLP performs an audit of each Fund's financial statements including
consideration of each Fund's internal control structure.
CAPITAL STRUCTURE
The Corporation's authorized capital consists of 500,000,000 shares of
Common Stock. Our Board of Directors has the power to designate one or more
classes ("series") of shares of common stock and to classify or reclassify any
unissued shares with respect to such series. Currently the Corporation is
offering two series of shares, the Balanced Fund and the Leveraged Dogs Fund.
One hundred million shares of Common Stock have been allocated to each of the
Balanced Fund and the Leveraged Dogs Fund. Shareholders are entitled: (i) to one
vote per full share of Common Stock; (ii) to such distributions as may be
legally declared by the Corporation's Board of Directors; and (iii) upon
liquidation, to share in the assets available for distribution. There are no
conversion or sinking fund provisions applicable to the shares of either Fund,
and shareholders have no preemptive rights and may not cumulate their votes in
the election of directors. Consequently the holders of more than 50% of the
Corporation's shares voting for the election of directors can elect the entire
Board of Directors, and in such event, the holders of the remaining shares
voting for the election of directors will not be able to elect any person or
persons to the Board of Directors. As a general matter, shares are voted in the
aggregate and not by series, except where voting by series would be required by
Maryland law or the Act (e.g., approval of an investment advisory agreement).
The shares of each Fund are redeemable and are transferable. All shares
issued and sold by the Corporation will be fully paid and nonassessable.
Fractional shares of each Fund entitle the holder to the same rights as whole
shares of the Fund.
The shares of each Fund have the same preferences, limitations and
rights, except that all consideration received from the sale of shares of each
Fund, together with all income, earnings, profits and proceeds thereof, belong
to that Fund and are charged with the liabilities in respect of that Fund and of
that Fund's share of the general liabilities of the Corporation in the
proportion that the total net assets of the Fund bears to the total net assets
of both Funds. The net asset value per share of each Fund is based on the assets
belonging to that Fund less the liabilities charged to that Fund, and dividends
are paid on shares of each Fund only out of lawfully available assets belonging
to that Fund. In the event of liquidation or dissolution of the Corporation, the
shareholders of each Fund will be entitled, out of the assets of the Corporation
available for distribution, to the assets belonging to such Fund.
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DESCRIPTION OF SECURITIES RATINGS
Each of the Funds may invest in commercial paper and commercial paper
master notes rated A-1 or A-2 by Standard & Poor's Corporation ("Standard &
Poor's") or Prime-1 or Prime-2 by Moody's Investors Service, Inc. ("Moody's").
Standard & Poor's Commercial Paper Ratings. A Standard & Poor's
commercial paper rating is a current assessment of the likelihood of timely
payment of debt considered short-term in the relevant market. Ratings are graded
into several categories, ranging from A-1 for the highest quality obligations to
D for the lowest. These categories are as follows:
A-1. the highest category indicates that the degree of safety regarding
timely payment is strong. Those issuers determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2. Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issuers designated "A-1".
A-3. Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying a higher designation.
Moody's Short-Term Debt Ratings. Moody's short-term debt ratings are
opinions of the ability of issuers to repay punctually senior debt obligations
which have an original maturity not exceeding one year. Obligations relying upon
support mechanisms such as letters-of-credit and bonds of indemnity are excluded
unless explicitly rated.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated issuers:
Prime-1. Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
o Leading market positions in well-established industries.
o High rates of return on funds employed.
o Conservative capitalization structure with moderate reliance
on debt and ample asset protection.
o Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
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o Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Prime-2. Issuers rated Prime-2 (or supporting institutions) have a
strong ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Prime-3. Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
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