HENNESSY LEVERAGED
DOGS FUND
SEMIANNUAL REPORT
DECEMBER 31, 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: HDOGX
February 1999
Dear Shareholder:
The Leveraged Dogs Fund received effective registration with the Securities and
Exchange Commission on June 30, 1998; however, we did not begin fund operations
until the fall of 1998. From July 29 to December 31 of 1998 the Leveraged Dogs
returned 0.16% versus the Dow Jones Industrial Average return of 3.65%. The
Leveraged Dogs Fund had $1.3 million in assets as of December 31, 1998 and
currently has $4.2 million in assets (as of February 23, 1999).
As most investors and investment professionals know, the majority of Big Board
stocks suffered a losing year, which means that a handful of dangerously
overpriced stocks led the indexes and averages to record levels. We feel our
strategy of buying out of favor companies (the "Dogs of the Dow") and leveraging
our T-Bill holdings to purchase a higher percentage of those companies, will
perform as anticipated in the future as more investors and less speculators
focus their attention on VALUE COMPANIES.
Thank you for making the Hennessy Leveraged Dogs Fund part of your investment
portfolio. We appreciate your continued business.
Best wishes,
/s/ Neil J. Hennessy
Neil J. Hennessy
President & Portfolio Manager
Merrill Lynch
Hennessy Dow Jones One Year Standard &
Leveraged Industrial Treasury Poor's 500
date Dogs Fund Average Bill Index Stock Index
7/29/98*<F1> $10,000 $10,000 $10,000 $10,000
9/30/98 $10,091 $8,815 $10,164 $9,029
12/31/98 $10,016 $10,365 $10,254 $10,951
*<F1> inception date
This chart assumes an initial investment of $10,000, made on 7/29/98
(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.
RATE OF RETURN(%)
FOR THE PERIOD ENDED DECEMBER 31, 1998
- -------------------------------------------------------------------------------
SINCE INCEPTION
7/29/98
---------------
Hennessy Leveraged Dogs Fund 0.16%
Dow Jones Industrial Average 3.65%
Merrill Lynch One Year Treasury Bill Index 2.54%
Standard & Poor's 500 Stock Index 9.51%
- -------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
(UNAUDITED)
ASSETS:
Investments, at value (cost $1,282,349) $1,264,316
Income receivable 2,422
Receivable for Fund shares sold 45,000
Due from Adviser 25,321
-----------
Total Assets 1,337,059
-----------
LIABILITIES:
Accrued expenses and other payables 25,321
-----------
Total Liabilities 25,321
-----------
NET ASSETS $1,311,738
-----------
-----------
NET ASSETS CONSIST OF:
Capital stock $1,329,558
Accumulated undistributed net investment income 213
Unrealized net (depreciation) on investments (18,033)
-----------
Total Net Assets $1,311,738
-----------
-----------
Shares outstanding (100,000,000 shares
authorized, $.0001 par value) 133,043
Net asset value per share $ 9.86
-----------
-----------
See notes to the financial statements.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1998
(UNAUDITED)
INVESTMENT INCOME:
Dividend income $ 921
Interest income 13,104
----------
Total investment income 14,025
----------
EXPENSES:
Investment advisory fees 1,810
Administration fees 7,500
Shareholder servicing and accounting costs 13,442
Distribution fees 754
Custody fees 1,257
Federal and state registration fees 8,775
Professional fees 3,355
Reports to shareholders 1,250
Directors' fees and expenses 500
----------
Total expenses before waiver 38,643
Less: Waiver of expenses by Adviser 38,643
----------
Net expenses --
----------
NET INVESTMENT INCOME 14,025
----------
REALIZED AND UNREALIZED GAINS (LOSSES):
Net realized gains on investments --
Change in unrealized (depreciation) on investments (18,033)
----------
Net (loss) on investments (18,033)
----------
NET (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ (4,008)
----------
----------
See notes to the financial statements.
STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED
DECEMBER 31, 1998
-----------------
(UNAUDITED)
OPERATIONS:
Net investment income $ 14,025
Net realized gains on investments --
Change in unrealized depreciation on investments (18,033)
-----------
Net (decrease) in net assets resulting from operations (4,008)
-----------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (13,812)
From net realized gains --
-----------
(13,812)
-----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares subscribed 1,323,353
Shares issued to holders in reinvestment of dividends 13,803
Cost of shares redeemed (7,598)
-----------
Net increase in net assets resulting
from capital share transactions 1,329,558
-----------
TOTAL INCREASE IN NET ASSETS 1,311,738
NET ASSETS:
Beginning of period --
-----------
End of period (including undistributed
net investment income of $213) $1,311,738
-----------
-----------
CHANGES IN SHARES OUTSTANDING:
Shares sold 132,395
Shares issued to holders as reinvestment of dividends 1,403
Shares redeemed (755)
-----------
Net increase 133,043
-----------
-----------
See notes to the financial statements.
FINANCIAL HIGHLIGHTS
JULY 29, 1998(1)<F2>
THROUGH
DECEMBER 31, 1998
-----------------
PER SHARE DATA:
Net asset value, beginning of period $10.00
Income from investment operations:
Net investment income 0.16
Net realized and unrealized (loss) on securities (0.14)
------
Total from investment operations 0.02
Less Distributions:
Dividends from net investment income (0.16)
Dividends from realized capital gains --
------
Total distributions (0.16)
------
Net asset value, end of period $ 9.86
------
------
TOTAL RETURN 0.16%(2)<F3>
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands, end of period $ 1,312
Ratio of net expenses to average net assets:
Before expense reimbursement 12.81%(3)<F4>
After expense reimbursement --(3)<F4>
Ratio of net investment income (loss) to average net assets:
Before expense reimbursement (8.16)%(3)<F4>
After expense reimbursement 4.65%(3)<F4>
Portfolio turnover rate --(4)<F5>
(1)<F2> Commencement of operations.
(2)<F3> Not annualized.
(3)<F4> Annualized.
(4)<F5> For the period July 29, 1998 through December 31, 1998, there were no
sales of securities other than short-term securities which are not
factored into this calculation.
See notes to the financial statements.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1998
(UNAUDITED)
NUMBER
OF SHARES VALUE
- --------- -----
COMMON STOCKS -- 29.3%
AUTOMOBILES & TRUCKS -- 3.0%
550 General Motors Corporation $ 39,359
-----------
BANK & BANK HOLDING COMPANIES -- 3.0%
375 J.P. Morgan and Co. Incorporated 39,398
-----------
CAPITAL GOODS -- 2.9%
825 Caterpillar, Inc. 37,950
-----------
CHEMICALS -- 2.6%
650 E. I. du Pont de Nemours and Company 34,491
-----------
CONSUMER DURABLES -- 2.9%
525 Eastman Kodak Company 37,800
-----------
ENERGY -- 6.4%
500 Chevron Corporation 41,469
575 Exxon Corporation 42,047
-----------
83,516
-----------
FOOD, BEVERAGE & TOBACCO -- 2.9%
725 Philip Morris Companies, Inc. 38,788
-----------
MANUFACTURING -- 2.6%
475 Minnesota Mining and Manufacturing Company 33,784
-----------
PAPER & FOREST PRODUCTS -- 3.0%
875 International Paper Company 39,211
-----------
TOTAL COMMON STOCKS (Cost $401,935) 384,297
-----------
PRINCIPAL
AMOUNT
- ---------
SHORT-TERM INVESTMENTS -- 67.1%
U. S. GOVERNMENT -- 30.6%
U.S. Treasury Bills:
$417,000 4.39%, 11/12/99 401,207
-----------
VARIABLE RATE DEMAND NOTES -- 36.5%
100,900 American Family, 5.17% 100,900
120,817 General Mills, Inc., 5.23% 120,817
102,469 Pitney Bowes, Inc., 5.23% 102,469
154,626 Warner-Lambert Co., 5.18% 154,626
-----------
478,812
-----------
TOTAL SHORT-TERM INVESTMENTS (Cost $880,414) 880,019
-----------
TOTAL INVESTMENTS -- 96.4% (Cost $1,282,349) 1,264,316
-----------
Other Assets, less Liabilities -- 3.6% 47,422
-----------
NET ASSETS -- 100.0% $ 1,311,738
-----------
-----------
See notes to the financial statements.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998 (UNAUDITED)
1). ORGANIZATION
The Hennessy Funds, Inc., organized as a Maryland corporation on January 11,
1996, consists of two separate portfolios. The Hennessy Funds, Inc. -- Hennessy
Leveraged Dogs Fund (the "Fund") is an open-end, non-diversified company
registered under the Investment Company Act of 1940, as amended. The Fund's
investment objective is to achieve total return that in the long run will exceed
that of the Dow Jones Industrial Average (the "DJIA"). The investment strategy
involves borrowing money for investment purposes, and investing approximately
one half of the portfolio's assets, including proceeds from borrowing, in one-
year Treasury Bills and the other half in the top ten dividend yielding stocks
of the DJIA. Bi-monthly, the Fund will determine the ten highest yielding
common stocks in the DJIA. 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 DJIA.
Between the date of organization and the commencement of investment
operations on July 29, 1998, the Fund had no operations other than incurring
organizational expenses. These costs aggregated $31,954 and were absorbed by
Hennessy Management Co. 2, L.P. (the "Adviser"). The Fund will not be required
to reimburse the Adviser for the organizational expenses.
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 period ended December 31, 1998, were $401,935 and $0,
respectively.
At December 31, 1998, gross unrealized appreciation and depreciation on
investments for federal income tax purposes was as follows:
Appreciation $ 1,923
(Depreciation) (19,956)
---------
Net unrealized depreciation
on investments $ (18,033)
---------
---------
At December 31, 1998, the cost of investments for federal income tax purposes
was $1,282,349.
4). INVESTMENT ADVISORY AND OTHER AGREEMENTS
The Hennessy Funds, Inc. -- Hennessy Leveraged Dogs Fund has entered into an
investment advisory agreement with The Hennessy Management Co. 2, L.P. (the
"Adviser"). The Adviser is a California limited partnership organized on
February 2, 1998, 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 $368 for transactions related to the
purchase and sales of securities held by the Fund for the period ending December
31, 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 0.60% 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 0.25% 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,
waive 12b-1 fees and reimburse the Fund for all operating expenses (excluding
interest, taxes, brokerage costs and extraordinary items) for the fiscal year
ending June 30, 1999. The Adviser will not seek reimbursement for any waived
fees or operating expenses for the fiscal year ending June 30, 1999.
Firstar Bank Milwaukee, N.A. serves as custodian for the Fund. Firstar
Mutual Fund Services, LLC serves as transfer agent, dividend disbursing agent,
administrator and accounting services agent for the Fund.
INVESTMENT ADVISER
The Hennessy Management Co. 2, L.P.
The Courtyard Square
750 Grant Avenue, Suite 100
Novato, CA 94945
ADMINISTRATOR, TRANSFER AGENT,
DIVIDEND PAYING AGENT & SHAREHOLDER SERVICING AGENT
Firstar Mutual Fund Services, LLC
P.O. Box 701
Milwaukee, WI 53201-0701
(800) 261-6950
CUSTODIAN
Firstar Bank Milwaukee, N.A.
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
