THE HENNESSY
FUNDS, INC.
ANNUAL REPORT
JUNE 30, 1999
(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]
Hennessy Leveraged Dogs Fund Symbol: HDOGX
Hennessy Balanced Fund Symbol: HBFBX
THE HENNESSY FUNDS, INC.
August 1999
Dear Shareholder:
Approaching the beginning of a new millennium causes many people to reflect on
their lives and their goals, and here at Hennessy Funds, we are also reflecting
on our goals. We started our mutual funds to provide our shareholders a good
return on a conservative investment that would allow them to sleep at night, and
we feel we are right on track. The present financial atmosphere is overrun with
ideas of getting rich overnight, and while getting rich quick is always
alluring, it is also usually risky. The Hennessy Balanced and Leveraged Dogs
Funds continue their commitment to conservatively growing your assets. As we
have said since we began, it is not just what you make on the upside, it is what
you don't lose on the downside.
Our investment strategy (employing U.S. Treasury Bills and the "Dogs of the
Dow") is designed to limit the amount of volatility inherent in stock market
investing. Our Funds benefited from this strategy when the stock markets
declined during the calendar quarter ended September 30, 1998. When the markets
began their recovery in the quarter ended December 31, 1998, our Funds' holding
of U.S. Treasury Bills was a factor limiting appreciation. The "Dogs of the
Dow" did not outperform the Dow Jones Industrial Average or the Standard &
Poor's Index, but as you will see on the graph on the following page, our Funds'
continue to bring in commendable returns.
Thank you for continuing to put your trust and confidence in us. If you have
any questions, please do not hesitate to contact our offices at 1-800-966-4354.
Thank you again for making the Hennessy Funds part of your investment portfolio.
Best wishes,
/s/ Neil J. Hennessy
Neil J. Hennessy
President & Portfolio Manager
HENNESSY BALANCED FUND
HENNESSY DOW JONES MERRILL LYNCH STANDARD & POOR'S
BALANCED INDUSTRIAL ONE YEAR TREASURY 500 STOCK
DATE FUND AVERAGE BILL INDEX INDEX
- -------- -------- ---------- ----------------- -----------------
3/8/96*<F1> $10,000 $10,000 $10,000 $10,000
6/30/96 $10,180 $10,090 $10,134 $10,329
12/31/96 $11,025 $11,486 $10,452 $11,485
6/30/97 $11,982 $13,797 $10,760 $13,803
12/31/97 $12,460 $14,350 $11,070 $15,263
6/30/98 $13,036 $16,379 $11,380 $17,967
12/31/98 $13,385 $16,952 $11,719 $19,625
6/30/99 $14,290 $20,418 $11,963 $22,055
*<F1> inception date
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.
RATE OF RETURN(%)
FOR THE PERIOD ENDED JUNE 30, 1999
ONE YEAR ENDED SINCE INCEPTION
JUNE 30, 1999 3/8/96
-------------- ---------------
Hennessy Balanced Fund 9.61% 11.37%
Dow Jones Industrial Average 24.66% 24.03%
Merrill Lynch One Year Treasury Bill Index 5.12% 5.55%
Standard & Poor's 500 Stock Index 22.76% 26.95%
HENNESSY LEVERAGED DOGS FUND
HENNESSY DOW JONES MERRILL LYNCH STANDARD & POOR'S
LEVERAGED INDUSTRIAL ONE YEAR TREASURY 500 STOCK
DATE DOGS FUND AVERAGE BILL INDEX INDEX
- -------- --------- ---------- ----------------- -----------------
7/29/98*<F2> $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
3/31/99 $9,987 $11,094 $10,358 $11,497
6/30/99 $11,028 $12,485 $10,476 $12,307
*<F2> 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 JUNE 30, 1999
SINCE INCEPTION
7/29/98
---------------
Hennessy Leveraged Dogs Fund 11.18%
Dow Jones Industrial Average 27.17%
Merrill Lynch One Year Treasury Bill Index 5.17%
Standard & Poor's 500 Stock Index 25.21%
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1999
HENNESSY
HENNESSY LEVERAGED
BALANCED FUND DOGS FUND
------------- ---------
ASSETS:
Investments, at value (cost $21,607,848 and $24,035,653 $6,958,404
$6,608,417, respectively)
Receivable from Adviser -- 15,731
Income receivable 33,917 10,839
Organization costs, net of accumulated amortization 13,058 --
Other assets 14,633 7,885
----------- ----------
Total Assets 24,097,261 6,992,859
----------- ----------
LIABILITIES:
Payable to Adviser 16,750 --
Reverse repurchase agreement -- 1,538,500
Accrued expenses and other payables 39,339 31,939
----------- ----------
Total Liabilities 56,089 1,570,439
----------- ----------
NET ASSETS $24,041,172 $5,422,420
----------- ----------
----------- ----------
NET ASSETS CONSIST OF:
Capital stock $20,723,714 $5,074,190
Accumulated undistributed net investment income 1,046 151
Accumulated undistributed net realized gains
(losses) on investments 888,607 (1,908)
Unrealized net appreciation on investments 2,427,805 349,987
----------- ----------
Total Net Assets $24,041,172 $5,422,420
----------- ----------
----------- ----------
Shares outstanding (100,000,000 shares
authorized, $.0001 par value) 1,913,369 506,800
Net asset value per share $ 12.56 $ 10.70
----------- ----------
----------- ----------
See notes to the financial statements.
STATEMENT OF OPERATIONS
FISCAL YEAR ENDED JUNE 30, 1999
HENNESSY
HENNESSY LEVERAGED
BALANCED FUND DOGS FUND*<F3>
------------- --------------
INVESTMENT INCOME:
Dividend income $ 300,026 $ 41,304
Interest income 585,062 73,645
---------- --------
Total investment income 885,088 114,949
---------- --------
EXPENSES:
Investment advisory fees 138,497 14,902
Administration fees 30,011 16,500
Shareholder servicing and accounting costs 55,747 29,517
Distribution fees 57,707 6,209
Custody fees 7,459 3,363
Federal and state registration fees 23,143 20,418
Professional fees 23,835 7,802
Reports to shareholders 6,049 6,493
Amortization of organization costs 7,752 --
Directors' fees and expenses 2,841 2,000
Other 5,427 899
---------- --------
Total operating expenses before
interest expense 358,468 108,103
Interest expense -- 29,152
Less, expense reimbursement -- (108,103)
---------- --------
Net expenses 358,468 29,152
---------- --------
NET INVESTMENT INCOME 526,620 85,797
---------- --------
REALIZED AND UNREALIZED GAINS:
Net realized gains (losses) on investments 1,109,164 (1,908)
Change in unrealized appreciation on
investments 477,903 349,987
---------- --------
Net gain on investments 1,587,067 348,079
---------- --------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $2,113,687 $433,876
---------- --------
---------- --------
*<F3> For the period July 29, 1998 (commencement of operations) through June
30, 1999.
See notes to the financial statements.
STATEMENT OF CHANGES IN NET ASSETS
HENNESSY
LEVERAGED
HENNESSY BALANCED FUND DOGS FUND
---------------------------- --------------
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1999 JUNE 30,1998 JUNE 30, 1999*
<F4>
------------- ------------- --------------
OPERATIONS:
Net investment income $ 526,620 $ 521,543 $ 85,797
Net realized gains (losses)
on investments 1,109,164 834,648 (1,908)
Change in unrealized
appreciation on investments 477,903 374,793 349,987
----------- ----------- -----------
Net increase in net assets
resulting from operations 2,113,687 1,730,984 433,876
----------- ----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (528,138) (519,980) (85,646)
From net realized gains (915,182) (294,580) --
----------- ----------- -----------
(1,443,320) (814,560) (85,646)
----------- ----------- -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares subscribed 2,560,820 6,284,327 5,322,828
Shares issued to holders in
reinvestment of dividends 1,412,416 883,883 85,045
Cost of shares redeemed (4,098,397) (2,227,392) (333,683)
----------- ----------- -----------
Net increase (decrease) in net
assets resulting from
capital share transactions (125,161) 4,940,818 5,074,190
----------- ----------- -----------
TOTAL INCREASE IN NET ASSETS 545,206 5,857,242 5,422,420
NET ASSETS:
Beginning of period 23,495,966 17,638,724 0
----------- ----------- -----------
End of period (including
undistributed net investment
income of $1,046, $2,564 and
$151, respectively) $24,041,172 $23,495,966 $5,422,420
----------- ----------- -----------
----------- ----------- -----------
CHANGES IN SHARES OUTSTANDING:
Shares sold 209,769 520,307 530,459
Shares issued to holders as
reinvestment of dividends 118,867 73,694 8,348
Shares redeemed (337,156) (183,622) (32,007)
----------- ----------- -----------
Net increase (decrease) (8,520) 410,379 506,800
----------- ----------- -----------
----------- ----------- -----------
*<F4> For the period July 29, 1998 (commencement of operations) through June
30, 1999.
See notes to the financial statements.
FINANCIAL HIGHLIGHTS
<TABLE>
HENNESSY BALANCED FUND
-------------------------------------------------------------------------
MARCH 8, 1996(1)<F5>
YEAR ENDED YEAR ENDED YEAR ENDED THROUGH
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1996
------------- ------------- ------------- --------------------
<S> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period $12.23 $11.67 $10.18 $10.00
Income from investment operations:
Net investment income 0.28 0.29 0.23 0.06
Net realized and unrealized gains
on securities 0.83 0.73 1.55 0.12
------- ------- ------- -------
Total from investment operations 1.11 1.02 1.78 0.18
Less Distributions:
Dividends from net investment income (0.28) (0.29) (0.29) --
Dividends from realized capital gains (0.50) (0.17) -- --
------- ------- ------- -------
Total distributions (0.78) (0.46) (0.29) --
------- ------- ------- -------
Net asset value, end of period $12.56 $12.23 $11.67 $10.18
------- ------- ------- -------
------- ------- ------- -------
TOTAL RETURN 9.61% 8.80% 17.70% 1.80%(2)<F6>
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands, end of period $24,041 $23,496 $17,639 $6,866
Ratio of net expenses to average net assets:
Before expense reimbursement 1.55% 2.39% 2.48% 4.04%(3)<F7>
After expense reimbursement 1.55% 1.64% 1.90% 1.90%(3)<F7>
Ratio of net investment income to
average net assets:
Before expense reimbursement 2.28% 1.69% 1.84% 0.85%(3)<F7>
After expense reimbursement 2.28% 2.44% 2.41% 2.99%(3)<F7>
Portfolio turnover rate 28.92% 23.24% 20.01% --(4)<F8>
</TABLE>
(1)<F5> Commencement of operations.
(2)<F6> Not annualized.
(3)<F7> Annualized.
(4)<F8> 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.
See notes to the financial statements.
FINANCIAL HIGHLIGHTS
HENNESSY
LEVERAGED
DOGS FUND
--------------------
JULY 29, 1998(1)<F9>
THROUGH
JUNE 30, 1999
--------------------
PER SHARE DATA:
Net asset value, beginning of period $10.00
Income from investment operations:
Net investment income 0.31
Net realized and unrealized gains on securities 0.70
------
Total from investment operations 1.01
Less Distributions:
Dividends from net investment income (0.31)
Dividends from realized capital gains --
------
Total distributions (0.31)
------
Net asset value, end of period $10.70
------
------
TOTAL RETURN 10.28%(2)<F10>
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands, end of period $5,422
Ratio of net expenses to average net assets:
Before expense reimbursement 4.35%(3) (4)
<F11><F12>
After expense reimbursement --%(3) (4)
<F11><F12>
Ratio of interest expense to average net assets 1.17%
Ratio of net investment income to average net assets:
Before expense reimbursement (0.90%)(3)<F11>
After expense reimbursement 3.45%(3)<F11>
Portfolio turnover rate --%(5)<F13>
(1)<F9> Commencement of operations.
(2)<F10> Not annualized.
(3)<F11> Annualized.
(4)<F12> For the period ended June 30, 1999, the ratio of operating expenses to
average net assets excludes interest expense. The ratio before and
after expense reimbursement, including interest expense, would be
5.52% and 1.17%, respectively.
(5)<F13> For the period July 29, 1998 through June 30, 1999, there were no
sales of securities other than short-term securities which are not
factored into this calculation.
See notes to the financial statements.
HENNESSY BALANCED FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 1999
NUMBER
OF SHARES VALUE
--------- -----
COMMON STOCKS -- 50.9%
AUTOMOBILES & TRUCKS -- 4.7%
9,068 Delphi Automotive Systems Corporation $ 168,325
14,700 General Motors Corporation 970,200
-----------
1,138,525
-----------
BANK & BANK HOLDING COMPANY -- 5.5%
9,425 J.P. Morgan and Co. Incorporated 1,324,212
-----------
CAPITAL GOODS -- 4.5%
18,100 Caterpillar, Inc. 1,086,000
-----------
CHEMICALS -- 5.1%
17,100 E. I. du Pont de Nemours and Company 1,168,144
1,375 Union Carbide Corporation 67,031
-----------
1,235,175
-----------
CONSUMER DURABLES -- 3.5%
12,250 Eastman Kodak Company 829,937
-----------
ENERGY -- 9.0%
12,800 Chevron Corporation 1,218,400
12,325 Exxon Corporation 950,566
-----------
2,168,966
-----------
FOOD, BEVERAGE & TOBACCO -- 4.6%
27,450 Philip Morris Companies, Inc. 1,103,147
-----------
MANUFACTURING -- 5.1%
13,950 Minnesota Mining and Manufacturing Company 1,212,778
-----------
PAPER & FOREST PRODUCTS -- 2.8%
13,400 International Paper Company 676,700
-----------
RETAIL -- 0.7%
3,550 Sears, Roebuck and Co. 158,197
-----------
RUBBER & TIRES -- 3.7%
15,250 Goodyear Tire & Rubber Company 896,890
-----------
TELECOMMUNICATIONS -- 1.7%
7,276 AT&T Corporation 406,092
-----------
TOTAL COMMON STOCKS (Cost $9,795,232) 12,236,619
-----------
PRINCIPAL
AMOUNT VALUE
--------- -----
SHORT-TERM INVESTMENTS -- 49.1%
U.S. GOVERNMENT -- 44.7%
U.S. Treasury Bills:
$1,104,000 5.02%, 7/22/99 1,100,814
1,165,000 4.74%, 8/19/99 1,157,580
625,000 4.65%, 9/16/99 618,864
610,000 4.70%, 10/14/99 601,745
273,000 4.81%, 11/12/99 268,183
443,000 4.78%, 1/06/00 432,046
522,000 4.62%, 2/03/00 507,652
1,292,000 4.70%, 3/02/00 1,251,201
2,192,000 4.73%, 3/30/00 2,114,373
1,618,000 4.66%, 4/27/00 1,555,770
1,182,000 4.72%, 5/25/00 1,131,662
-----------
10,739,890
-----------
VARIABLE RATE DEMAND NOTES#<F14> -- 4.4%
696,460 General Mills, Inc., 4.83% 696,460
130,678 Sara Lee Corporation, 4.82% 130,678
104,167 Wisconsin Electric Power Co., 4.70% 104,167
127,839 American Family Financial Services, Inc., 4.70% 127,839
-----------
1,059,144
-----------
TOTAL SHORT-TERM INVESTMENTS (Cost $11,812,616) 11,799,034
-----------
TOTAL INVESTMENTS -- 100.0% (Cost $21,607,848) 24,035,653
-----------
Other Assets and Liabilities, Net -- (0.0%) 5,519
-----------
NET ASSETS -- 100.0% $24,041,172
-----------
-----------
#<F14> Variable rate demand notes are considered short-term obligations and
are payable on demand. Interest rates change periodically on specified
dates. The rates listed are as of June 30, 1999.
See notes to the financial statements.
HENNESSY LEVERAGED DOGS FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 1999
NUMBER
OF SHARES VALUE
--------- -----
COMMON STOCKS -- 75.1%
AUTOMOBILES & TRUCKS -- 6.3%
2,848 Delphi Automotive Systems Corporation $ 52,866
4,400 General Motors Corporation 290,400
-----------
343,266
-----------
BANK & BANK HOLDING COMPANIES -- 8.8%
3,400 J.P. Morgan and Co. Incorporated 477,700
-----------
CAPITAL GOODS -- 8.4%
7,575 Caterpillar, Inc. 454,500
-----------
CHEMICALS -- 8.1%
6,425 E. I. du Pont de Nemours and Company 438,908
-----------
CONSUMER DURABLES -- 6.6%
5,250 Eastman Kodak Company 355,687
-----------
ENERGY -- 15.4%
4,575 Chevron Corporation 435,483
5,175 Exxon Corporation 399,122
-----------
834,605
-----------
FOOD, BEVERAGE & TOBACCO -- 6.0%
8,075 Philip Morris Companies, Inc. 324,514
-----------
MANUFACTURING -- 7.6%
4,750 Minnesota Mining and Manufacturing Company 412,953
-----------
PAPER & FOREST PRODUCTS -- 0.8%
875 International Paper Company 44,187
-----------
RETAIL -- 0.3%
400 Sears, Roebuck and Co. 17,825
-----------
RUBBER & TIRES -- 6.8%
6,300 Goodyear Tire & Rubber Company 370,519
-----------
TOTAL COMMON STOCKS (Cost $3,724,677) 4,074,664
-----------
SHORT-TERM INVESTMENTS -- 53.2%
U.S. GOVERNMENT -- 48.0%
U.S. Treasury Bills:
2,600,000 4.22%, 7/01/99 *<F16> $ 2,600,000
-----------
VARIABLE RATE DEMAND NOTES#<F15> -- 5.2%
101,148 Wisconsin Corporation Central
Credit Union, 4.89% 101,148
85,628 Warner-Lambert Co., 4.70% 85,628
12,790 American Family Financial Services,
Inc., 4.70% 12,790
84,174 Wisconsin Electric Power Co., 4.70% 84,174
-----------
283,740
-----------
TOTAL SHORT-TERM INVESTMENTS (Cost $2,883,740) 2,883,740
-----------
TOTAL INVESTMENTS -- 128.3% (Cost $6,608,417) 6,958,404
-----------
Other Liabilities and Assets, Net -- (28.3%) (1,535,984)
-----------
NET ASSETS -- 100.0% $ 5,422,420
-----------
-----------
#<F15> Variable rate demand notes are considered short-term obligations and
are payable on demand. Interest rates change periodically on specified
dates. The rates listed are as of June 30, 1999.
*<F16> Collateral or partial collateral for securities sold subject to
repurchase.
See notes to the financial statements.
NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 1999
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 Balanced Fund (the "Balanced Fund") and The Hennessy Funds, Inc. --
Hennessy Leveraged Dogs Fund (the "Leveraged Dogs Fund"). Both funds are open-
end, non-diversified companies registered under the Investment Company Act of
1940, as amended. The investment objectives and organization costs of The
Hennessy Funds, Inc. are set forth below.
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 Balanced 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 Balanced 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 Balanced 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 Balanced Fund commenced investment operations.
The Leveraged Dogs 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 Leveraged
Dogs 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 Leveraged Dogs 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 Leveraged Dogs 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 Leveraged
Dogs 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 Funds in the preparation of their 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. Temporary differences are primarily the result of wash sales
treatment for tax reporting purposes. 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.
c). Income and Expenses -- Dividend income is recognized on the ex-dividend
date and interest income is recognized on an accrual basis. 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. During the year
ended June 30, 1999, The Balanced Fund paid capital gain dividends of $915,182
(taxable as long term capital gains).
e). Security Transactions -- 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.
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). REVERSE REPURCHASE AGREEMENTS
The Leveraged Dogs Fund has entered into reverse repurchase agreements with
Paine Webber, Inc., under which the Leveraged Dogs Fund sells securities and
agrees to repurchase them at a mutually agreed upon price. For the period ended
June 30, 1999, the average daily balance and average interest rate in effect for
reverse repurchase agreements was $647,404 and 4.73%, respectively. At June 30,
1999, the interest rate in effect for the outstanding reverse repurchase
agreement, scheduled to mature on July 1, 1999, is 4.75% and represented 22.00%
of the Leveraged Dogs Fund's total assets.
4). INVESTMENT TRANSACTIONS
During the periods ended June 30, 1999, purchases and sales of investment
securities (excluding short-term investments) were as follows:
HENNESSY HENNESSY
BALANCED LEVERAGED
FUND DOGS FUND
-------- ---------
Purchases $3,460,497 $3,724,681
Sales $3,229,084 $ --
The following balances for the Funds are as of June 30, 1999:
HENNESSY HENNESSY
BALANCED LEVERAGED
FUND DOGS FUND
-------- ---------
Cost for federal
income tax purposes $21,618,776 $6,608,417
Net tax unrealized
appreciation 2,416,877 349,987
Tax basis gross
unrealized
appreciation 2,529,787 456,336
Tax basis gross
unrealized
depreciation (112,910) (106,349)
The Leveraged Dogs Fund realized, on a tax basis, post-October losses
through June 30, 1999 of $1,908 which are not recognized for tax purposes until
the first day of the following fiscal year.
5). INVESTMENT ADVISORY AND OTHER AGREEMENTS
The Balanced Fund has entered into an investment advisory agreement with
The Hennessy Management Co., L.P. (the "Balanced Fund Adviser"). The Balanced
Fund Adviser is a California limited partnership organized on October 24, 1995,
for the purpose of becoming the Balanced Fund's investment adviser. The
Leveraged Dogs Fund has entered into an investment advisory agreement with The
Hennessy Management Co. 2, L.P. (the "Leveraged Dogs Fund Adviser"). The
Leveraged Dogs Adviser is a California limited partnership organized on February
2, 1998, for the purpose of becoming the Leveraged Dogs Fund's investment
adviser. The general partner of both Advisers is Edward J. Hennessy,
Incorporated ("Hennessy"). Hennessy is a registered broker-dealer and
investment adviser. Edward J. Hennessy received commissions of $6,815 and
$3,451 for transactions related to the purchase and sales of securities held by
the Balanced Fund and Leveraged Dogs Fund, respectively, for the period ending
June 30, 1999. 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 Agreements, the Balanced Fund Adviser and
Leveraged Dogs Fund Adviser are entitled to receive a fee, calculated daily and
payable monthly, at an annual rate not to exceed 0.60% of each Funds' average
daily net assets.
The Funds have 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 each Funds' 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 Leveraged Dogs Fund Adviser has voluntarily agreed to waive its
investment advisory fee, waive 12b-1 fees and reimburse the Leveraged Dogs Fund
for all operating expenses (excluding interest, taxes, brokerage costs and
extraordinary items) for the fiscal year ending June 30, 1999. The Leveraged
Dogs Fund 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 Funds. Firstar
Mutual Fund Services, LLC serves as transfer agent, dividend disbursing agent,
administrator and accounting services agent for the Funds.
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors
The Hennessy Funds, Inc.:
We have audited the accompanying statements of assets and liabilities of The
Hennessy Funds, Inc., (comprising, respectively, the Hennessy Balanced Fund and
Hennessy Leveraged Dogs Fund), collectively referred to as the "Funds",
including the schedules of investments, as of June 30, 1999, and the related
statements of operations for the period then ended, statements of changes in net
assets for each of the periods presented in the two-year period then ended, and
financial highlights for each of the periods presented in the four-year period
then ended. These financial statements and financial highlights are the
responsibility of the Funds' 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 are free of material
misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. 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
Hennessy Balanced Fund and Hennessy Leveraged Dogs Fund as of June 30, 1999,
the results of its operations for the period then ended, the changes in their
net assets for each of the periods presented in the two-year period then ended
and the financial highlights for each of the periods presented the four-year
period ended then ended, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Chicago, Illinois
July 20, 1999
INVESTMENT ADVISERS
The Hennessy Management Co., L.P.
The Courtyard Square
750 Grant Avenue, Suite 100
Novato, CA 94945
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 LLP
303 East Wacker Drive
Chicago, Illinois 60601
