HENNESSY BALANCED
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: HBFBX
February 1999
Dear Shareholder:
As we approach the Balanced Fund's 3rd anniversary (we began operations March 8,
1996), we are proud to see our portfolio strategy is working. From July to
December 1998 our fund gained 2.68% versus the Dow Jones Industrial Average gain
of 3.49%.
During 1998, 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 remain value-oriented investors investing in good
companies, not just good stocks. You may ask, "What's the difference?". We
feel that while Yahoo and Amazon may be good stocks, their corporate viability
has yet to be determined. Our holdings, on the other hand, represent
established companies who provide indispensable products. We are currently
invested in companies who build the roads we drive on, put gas in our cars, and
garner assets in order to lend us money to buy our homes. We want to maintain
our strategy of investing in blue chip companies with a high yield. We have
seen that since 1996 our pursuit of an investment philosophy, which relies on
purchasing out of favor stocks (the "Dogs of the Dow") with a mix of T-Bills,
provides a good return without the volatility of the overall market.
Thank you for making the Hennessy Balanced 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 Standard &
Hennessy Dow Jones One Year Poor's
Balanced Industrial Treasury 500
date Fund Average Bill Index Stock Index
3/8/96*<F1> $10,000 $10,000 $10,000 $10,000
6/30/96 $10,180 $10,111 $10,134 $10,356
12/31/96 $11,025 $11,667 $10,453 $11,566
6/30/97 $11,982 $14,014 $10,761 $13,950
12/31/97 $12,459 $14,576 $11,075 $15,425
6/30/98 $13,036 $16,637 $11,385 $18,157
12/31/98 $13,385 $17,181 $11,726 $19,782
*<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.
AVERAGE ANNUAL RATE OF RETURN(%)
FOR PERIODS ENDED DECEMBER 31, 1998
SINCE INCEPTION
1 YEAR 3/8/96
------ --------------
Hennessy Balanced Fund 7.43% 10.90%
Dow Jones Industrial Average 18.13% 21.17%
Merrill Lynch One Year Treasury Bill Index 5.89% 5.81%
Standard & Poor's 500 Stock Index 28.58% 27.38%
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
(UNAUDITED)
ASSETS:
Investments, at value (cost $20,800,315) $22,807,784
Income receivable 33,619
Organization costs, net of accumulated amortization 16,902
Other assets 8,534
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Total Assets 22,866,839
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LIABILITIES:
Accrued expenses and other payables 36,684
Due to Adviser 16,332
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Total Liabilities 53,016
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NET ASSETS $22,813,823
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-----------
NET ASSETS CONSIST OF:
Capital stock $20,786,110
Accumulated distributions in excess of
net investment income (7,085)
Accumulated undistributed net realized gains on investments 27,329
Unrealized net appreciation on investments 2,007,469
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Total Net Assets $22,813,823
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-----------
Shares outstanding (100,000,000 shares
authorized, $.0001 par value) 1,919,136
Net asset value per share $ 11.89
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-----------
See notes to the financial statements.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1998
(UNAUDITED)
INVESTMENT INCOME:
Dividend income $ 148,712
Interest income 309,363
-----------
Total investment income 458,075
-----------
EXPENSES:
Investment advisory fees 69,077
Administration fees 15,640
Shareholder servicing and accounting costs 29,676
Distribution fees 28,782
Custody fees 4,232
Federal and state registration fees 12,205
Professional fees 13,307
Reports to shareholders 3,128
Amortization of organization costs 3,908
Directors' fees and expenses 1,393
Other 3,264
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Total expenses 184,612
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NET INVESTMENT INCOME 273,463
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REALIZED AND UNREALIZED GAINS:
Net realized gains on investments 247,886
Change in unrealized appreciation on investments 57,566
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Net gain on investments 305,452
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NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 578,915
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See notes to the financial statements.
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1998 JUNE 30, 1998
----------------- --------------
(UNAUDITED)
OPERATIONS:
Net investment income $ 273,463 $ 521,543
Net realized gains on investments 247,886 834,648
Change in unrealized appreciation
on investments 57,566 374,793
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Net increase in net assets
resulting from operations 578,915 1,730,984
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DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (283,111) (519,980)
From net realized gains (915,182) (294,580)
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(1,198,293) (814,560)
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CAPITAL SHARE TRANSACTIONS:
Proceeds from shares subscribed 1,195,169 6,284,327
Shares issued to holders in
reinvestment of dividends 1,170,210 883,883
Cost of shares redeemed (2,428,144) (2,227,392)
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Net increase (decrease) in net
assets resulting from
capital share transactions (62,765) 4,940,818
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TOTAL INCREASE (DECREASE) IN NET ASSETS (682,143) 5,857,242
NET ASSETS:
Beginning of period 23,495,966 17,638,724
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End of period (including
overdistribution of net
investment income of $7,085,
and undistributed net
investment income of $2,564,
respectively) $22,813,823 $23,495,966
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CHANGES IN SHARES OUTSTANDING:
Shares sold 98,186 520,307
Shares issued to holders as
reinvestment of dividends 99,086 73,694
Shares redeemed (200,025) (183,622)
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Net increase (decrease) (2,753) 410,379
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See notes to the financial statements.
FINANCIAL HIGHLIGHTS
<TABLE> MARCH 8, 1996(1)<F2>
SIX MONTHS ENDED YEAR ENDED YEAR ENDED THROUGH
DECEMBER 31, 1998 JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1996
---------------- ------------ ------------ --------------
(UNAUDITED)
<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 0.15 0.29 0.23 0.06
Net realized and unrealized
gains on securities 0.17 0.73 1.55 0.12
------ ------ ------ ------
Total from investment operations 0.32 1.02 1.78 0.18
Less Distributions:
Dividends from net investment income (0.16) (0.29) (0.29) --
Dividends from realized capital gains (0.50) (0.17) -- --
------ ------ ------ ------
Total distributions (0.66) (0.46) (0.29) --
------ ------ ------ ------
Net asset value, end of period $11.89 $12.23 $11.67 $10.18
------ ------ ------ ------
------ ------ ------ ------
TOTAL RETURN 2.68%(2)<F3> 8.80% 17.70% 1.80%(2)<F3>
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands, end of period $22,814 $23,496 $17,639 $ 6,866
Ratio of net expenses to average net assets:
Before expense reimbursement 1.60%(3)<F4> 2.39% 2.48% 4.04%(3)<F4>
After expense reimbursement 1.60%(3)<F4> 1.64% 1.90% 1.90%(3)<F4>
Ratio of net investment income
(loss) to average net assets:
Before expense reimbursement 2.37%(3)<F4> 1.69% 1.84% 0.85%(3)<F4>
After expense reimbursement 2.37%(3)<F4> 2.44% 2.41% 2.99%(3)<F4>
Portfolio turnover rate 9.90%(2)<F3> 23.24% 20.01% --(4)<F5>
(1)<F2> Commencement of operations.
(2)<F3> Not annualized.
(3)<F4> Annualized.
(4)<F5> For the period March 8, 1996 through June 30, 1996, there were no sales of securities other than short-term securities
which are not factored into this calculation.
</TABLE>
See notes to the financial statements.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1998
(UNAUDITED)
NUMBER
OF SHARES VALUE
- --------- -----
COMMON STOCKS -- 49.1%
AUTOMOBILES & TRUCKS -- 5.1%
16,400 General Motors Corporation $1,173,625
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BANK & BANK HOLDING COMPANIES -- 4.2%
9,150 J.P. Morgan and Co. Incorporated 961,322
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CAPITAL GOODS -- 2.7%
13,550 Caterpillar, Inc. 623,300
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CHEMICALS -- 3.1%
10,800 E. I. du Pont de Nemours and Company 573,075
3,275 Union Carbide Corporation 139,188
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712,263
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CONSUMER DURABLES -- 3.9%
12,425 Eastman Kodak Company 894,600
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ENERGY -- 9.9%
13,375 Chevron Corporation 1,109,289
15,550 Exxon Corporation 1,137,094
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2,246,383
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FOOD, BEVERAGE & TOBACCO -- 6.2%
26,375 Philip Morris Companies, Inc. 1,411,062
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MANUFACTURING -- 4.0%
12,800 Minnesota Mining and Manufacturing Company 910,400
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PAPER & FOREST PRODUCTS -- 4.2%
21,225 International Paper Company 951,145
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RUBBER & TIRES -- 0.6%
2,775 Goodyear Tire & Rubber Company 139,964
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TELECOMMUNICATIONS -- 5.2%
15,625 AT&T Corporation 1,175,781
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TOTAL COMMON STOCKS (Cost $9,211,015) 11,199,845
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PRINCIPAL
AMOUNT
- ---------
SHORT-TERM INVESTMENTS -- 50.9%
U. S. GOVERNMENT -- 47.5%
U.S. Treasury Bills:
$658,000 4.92%, 2/04/99 654,986
1,235,000 4.22%, 3/04/99 1,226,155
2,152,000 4.26%, 4/01/99 2,129,378
1,524,000 4.32%, 4/29/99 1,502,725
1,103,000 4.35%, 5/27/99 1,083,810
591,000 4.33%, 6/24/99 578,789
1,104,000 4.40%, 7/22/99 1,077,088
1,165,000 4.37%, 8/19/99 1,132,898
625,000 4.35%, 9/16/99 605,786
610,000 4.35%, 10/14/99 589,189
273,000 4.39%, 11/12/99 262,661
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10,843,465
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VARIABLE RATE DEMAND NOTES -- 3.4%
355,408 American Family, 5.17% 355,408
208,255 General Mills, Inc., 5.23% 208,255
66,848 Pitney Bowes, Inc., 5.23% 66,848
69,399 Sara Lee Corporation, 5.23% 69,399
64,564 Warner-Lambert Co., 5.18% 64,564
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764,474
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TOTAL SHORT-TERM INVESTMENTS (Cost $11,589,300) 11,607,939
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TOTAL INVESTMENTS -- 100.0% (Cost $20,800,315) 22,807,784
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Other Assets, less Liabilities -- 0.0% 6,039
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NET ASSETS -- 100.0% $22,813,823
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See notes to the financial statements.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998 (UNAUDITED)
1). ORGANIZATION
The Hennessy Funds, Inc. -- Hennessy Balanced Fund (the "Fund") was
organized as a Maryland corporation on January 11, 1996. The Fund is an open-
end, non-diversified company registered under the Investment Company Act of
1940, as amended. The objectives of the Hennessy Balanced Fund are capital
appreciation and current income. The investment strategy involves investing
approximately one half of the portfolio's assets in one-year Treasury Bills and
the other half in the top ten dividend yielding stocks of the Dow Jones
Industrial Average. Bi-monthly, the Fund will determine the ten highest
yielding common stocks in the Dow Jones Industrial Average. All purchases of
common stocks following such determination, until the next determination, will
be of the ten highest yielding common stocks so determined. The Fund intends to
hold any common stock purchased for approximately one year, including common
stocks that are no longer one of the ten highest yielding common stocks in the
Dow Jones Industrial Average.
Between the date of organization and the commencement of investment
operations on March 8, 1996, the Fund had no operations other than incurring
organizational expenses. These costs aggregated $38,758 and are being amortized
over the period of benefit, but not to exceed sixty months from the date the
Fund commenced investment operations.
2). SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements. These policies are in
conformity with generally accepted accounting principles.
a). Investment Valuation -- Securities which are traded on a national or
recognized stock exchange are valued at the last sale price on the securities
exchange on which such securities are primarily traded. Exchange-traded
securities for which there were no transactions that day and debt securities are
valued at the most recent bid prices. Instruments with a remaining maturity of
60 days or less are valued on an amortized cost basis.
b). Federal Income Taxes -- Provision for federal income taxes or excise taxes
has not been made since the Fund has elected to be taxed as a "regulated
investment company" and intends to distribute substantially all taxable income
to its shareowners and otherwise comply with the provisions of the Internal
Revenue Code applicable to regulated investment companies. Net investment
income and realized gains and losses for federal income tax purposes may differ
from that reported on the financial statements because of temporary book and tax
basis differences. Distributions from net realized gains for book purposes may
include short-term capital gains which are included as ordinary income to
shareholders for tax purposes. Temporary differences are primarily the result
of wash sales treatment for tax reporting purposes.
c). Income and Expenses -- The Fund is charged for those expenses that are
directly attributable to the portfolio, such as advisory, administration and
certain shareowner service fees.
d). Distributions to Shareowners -- Dividends from net investment income are
declared and paid on a calendar quarter basis. Distributions of net realized
capital gains, if any, will be declared at least annually.
e). Security Transactions and Income -- Investment and shareowner transactions
are recorded on the trade date. The Fund determines the gain or loss realized
from the investment transactions by comparing the original cost of the security
lot sold with the net sale proceeds. Dividend income is recognized on the ex-
dividend date and interest income is recognized on an accrual basis.
f). Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported change in net assets during the
reporting period. Actual results could differ from from those estimates.
3). INVESTMENT TRANSACTIONS
The aggregate purchases and sales, excluding short-term investments, for the
Fund, for the six months ended December 31, 1998, were $1,572,992 and
$1,064,545, respectively.
At December 31, 1998, gross unrealized appreciation and depreciation on
investments for federal income tax purposes was as follows:
Appreciation $2,138,587
(Depreciation) (140,757)
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Net unrealized appreciation
on investments $1,997,830
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-----------
At December 31, 1998, the cost of investments for federal income tax purposes
was $20,809,954.
4). INVESTMENT ADVISORY AND OTHER AGREEMENTS
The Hennessy Funds, Inc. -- Hennessy Balanced Fund has entered into an
investment advisory agreement with The Hennessy Management Co., L.P. (the
"Adviser"). The Adviser is a California limited partnership organized on
October 24, 1995, for the purpose of becoming the Fund's investment adviser.
The general partner of the Adviser is Edward J. Hennessy, Incorporated
("Hennessy"). Hennessy is a registered broker-dealer and investment adviser.
Edward J. Hennessy received commissions of $2,675 for transactions related to
the purchase and sales of securities held by the Fund for the six months 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.
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., 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 53201-071
(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
