THE HENNESSY
FUNDS, INC.
ANNUAL REPORT
JUNE 30, 2000
(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]
Webpage: http://www.hennessy-funds.com
Hennessy Leveraged Dogs Fund Symbol: HDOGX
Hennessy Balanced Fund Symbol: HBFBX
THE HENNESSY FUNDS, INC.
August 2000
Dear Shareholder:
The news is full of items pitting the "new economy" versus "old economy." The
"new economy" is identified with the high tech and Internet industries while the
"old economy" is identified with oil, retail, paper, autos and other old-line
industries. But even as the "new economy" makes headlines, in our day-to-day
lives we are supporting the "old economy" companies. For example, every
employee (even a "new economy" employee) still needs office supplies - (MMM),
and that same employee needs to print reports on copy paper - (International
Paper), he needs to drive his car and take his "razor" scooter out of his trunk
(General Motors & Goodyear Tire), and he needs gas to fill his tank - (Exxon-
Mobil). It is clearly evident that without the "old economy" there would be no
"new economy."
Over the past year our investment strategy of investing in stocks with high
dividend yields resulted in our funds' performance trailing the major stock
market indices. Our funds were plagued with fears of the end of the tobacco
industry to the end of the traditional telephone industry, while the financial
markets watched the dot-com mania rule the roost. Our Balanced Fund fell 10.4%,
and our Leveraged Fund fell 17.5%, while the Dow Jones Industrial Average fell
only 3.31%. As we know, from time to time the "Dogs of the Dow" can under
perform the broad market indices, but they have historically been a good long-
term investment strategy. It is easy to get caught up in the short-term hype of
the market and forget that investing is like running a marathon; slow and steady
wins the race.
This calendar year a different scenario is developing. Wall Street is again
recognizing the merit of value investing, and many of the companies we hold are
turning around. For example, since it's low of this year (March 29, 2000)
Philip Morris has gained over 60%. As always, we feel that our funds create
good long-term strategies to benefit our investors in all kinds of markets.
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.
Visit us at www.hennessy-funds.com to see what's new.
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
BALANCED INDUSTRIAL ONE YEAR STANDARD & POOR'S
DATE FUND AVERAGE TREASURY BILL INDEX 500 STOCK INDEX
3/8/96*<F1> $10,000 $10,000 $10,000 $10,000
6/30/96 $10,180 $10,406 $10,155 $10,658
12/31/96 $11,025 $12,006 $10,474 $11,903
6/30/97 $11,982 $14,422 $10,783 $14,356
12/31/97 $12,460 $15,000 $11,097 $15,874
6/30/98 $13,037 $17,121 $11,408 $18,686
12/31/98 $13,386 $17,719 $11,751 $20,411
6/30/99 $14,290 $21,343 $11,995 $22,939
12/31/99 $13,592 $22,539 $12,225 $24,706
6/30/00 $12,803 $20,636 $12,609 $24,601
*<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 THE PERIOD ENDED JUNE 30, 2000
ONE YEAR ENDED SINCE INCEPTION
JUNE 30, 2000 3/8/96
-------------- ---------------
Hennessy Balanced Fund -10.40% 5.89%
Dow Jones Industrial Average -3.31% 18.27%
Merrill Lynch One Year Treasury Bill Index 5.12% 5.52%
Standard & Poor's 500 Stock Index 7.25% 23.18%
HENNESSY LEVERAGED DOGS FUND
HENNESSY DOW JONES MERRILL LYNCH
LEVERAGED INDUSTRIAL ONE YEAR STANDARD & POOR'S
DATE DOGS FUND AVERAGE TREASURY BILL INDEX 500 STOCK INDEX
7/29/98*<F2> $10,000 $10,000 $10,000 $10,000
9/30/98 $10,091 $8,834 $10,164 $9,067
12/31/98 $10,016 $10,388 $10,253 $10,998
3/31/99 $9,987 $11,119 $10,357 $11,546
6/30/99 $11,028 $12,512 $10,466 $12,360
9/30/99 $10,510 $11,839 $10,597 $11,588
12/31/99 $10,196 $13,214 $10,667 $13,312
3/31/00 $9,634 $12,599 $10,803 $13,617
6/30/00 $9,098 $12,098 $11,002 $13,256
*<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.
AVERAGE ANNUAL RATE OF RETURN(%)
FOR THE PERIOD ENDED JUNE 30, 2000
ONE YEAR ENDED SINCE INCEPTION
JUNE 30, 2000 7/29/98
-------------- ---------------
Hennessy Leveraged Dogs Fund -17.50% -4.79%
Dow Jones Industrial Average -3.31% 10.39%
Merrill Lynch One Year Treasury Bill Index 5.12% 5.08%
Standard & Poor's 500 Stock Index 7.25% 15.76%
STATEMENTS OF ASSETS AND LIABILITIES
JUNE 30, 2000
<TABLE>
HENNESSY
HENNESSY LEVERAGED
BALANCED FUND DOGS FUND
------------- ---------
<S> <C> <C>
ASSETS:
Investments, at value (cost $16,944,194 and $4,969,986 respectively) $16,078,885 $4,587,186
Receivable from Adviser -- 5,478
Receivable for investment securities sold -- 197,280
Income receivable 37,415 13,471
Receivable for fund shares sold -- 25,000
Organization costs, net of accumulated amortization 5,284 --
Other assets 11,318 15,035
----------- -----------
Total assets 16,132,902 4,843,450
----------- -----------
LIABILITIES:
Payable to Adviser 11,690 --
Payable to Custodian -- 153,904
Reverse repurchase agreement -- 1,277,288
Accrued expenses and other payables 41,404 27,279
----------- -----------
Total Liabilities 53,094 1,458,471
----------- -----------
NET ASSETS $16,079,808 $3,384,979
----------- -----------
----------- -----------
NET ASSETS CONSIST OF:
Capital stock $16,927,733 $4,111,148
Accumulated undistributed net investment income 1,040 118
Accumulated undistributed net realized gains (losses) on investments 16,344 (343,487)
Unrealized net (depreciation) on investments (865,309) (382,800)
----------- -----------
Total Net Assets $16,079,808 $3,384,979
----------- -----------
----------- -----------
Shares authorized ($.0001 par value) 100,000,000 100,000,000
Shares issued and outstanding 1,550,693 392,514
Net asset value, offering price and redemption price per share $ 10.37 $ 8.62
----------- -----------
----------- -----------
</TABLE>
See notes to the financial statements.
STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30, 2000
<TABLE>
HENNESSY
HENNESSY LEVERAGED
BALANCED FUND DOGS FUND
------------- ---------
<S> <C> <C>
INVESTMENT INCOME:
Dividend income $ 306,973 $ 110,214
Interest income 534,792 142,202
----------- -----------
Total investment income 841,765 252,416
----------- -----------
EXPENSES:
Investment advisory fees 127,758 30,384
Administration fees 29,789 24,427
Shareholder servicing 28,464 13,507
Fund accounting fees 25,760 24,259
Distribution fees 53,232 12,660
Custody fees 7,781 3,965
Federal and state registration fees 13,720 10,520
Audit fees 13,417 6,840
Legal fees 18,493 5,819
Reports to shareholders 7,472 1,535
Amortization of organization costs 7,774 --
Directors' fees and expenses 2,785 1,993
Other 4,079 3,596
----------- -----------
Total operating expenses before interest expense 340,524 139,505
Interest expense -- 84,686
Less, expense reimbursement -- (78,737)
----------- -----------
Net expenses 340,524 145,454
----------- -----------
NET INVESTMENT INCOME 501,241 106,962
----------- -----------
REALIZED AND UNREALIZED GAINS (LOSSES):
Net realized gains (losses) on investments 436,091 (341,579)
Change in unrealized appreciation or depreciation on investments (3,293,114) (732,787)
----------- -----------
Net loss on investments (2,857,023) (1,074,366)
----------- -----------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS $(2,355,782) $ (967,404)
----------- -----------
----------- -----------
</TABLE>
See notes to the financial statements.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
HENNESSY BALANCED FUND HENNESSY LEVERAGED DOGS FUND
------------------------------- ------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999*<F3>
------------- ------------- ------------- ------------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income $ 501,241 $ 526,620 $ 106,962 $ 85,797
Net realized gains (losses) on investments 436,091 1,109,164 (341,579) (1,908)
Change in unrealized appreciation or
depreciation on investments (3,293,114) 477,903 (732,787) 349,987
----------- ----------- ---------- ----------
Net increase (decrease) in net assets
resulting from operations (2,355,782) 2,113,687 (967,404) 433,876
----------- ----------- ---------- ----------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (501,285) (528,138) (106,995) (85,646)
From net realized gains (1,308,316) (915,182) -- --
----------- ----------- ---------- ----------
(1,809,601) (1,443,320) (106,995) (85,646)
----------- ----------- ---------- ----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares subscribed 2,595,617 2,560,820 1,300,866 5,322,828
Shares issued to holders in
reinvestment of dividends 1,779,547 1,412,416 105,301 85,045
Cost of shares redeemed (8,171,145) (4,098,397) (2,369,209) (333,683)
----------- ----------- ---------- ----------
Net increase (decrease) in net assets
resulting from capital share transactions (3,795,981) (125,161) (963,042) 5,074,190
----------- ----------- ---------- ----------
TOTAL INCREASE (DECREASE)
IN NET ASSETS (7,961,364) 545,206 (2,037,441) 5,422,420
NET ASSETS:
Beginning of period 24,041,172 23,495,966 5,422,420 0
----------- ----------- ---------- ----------
End of period (including undistributed
net investment income of $1,040, $1,046,
$118 and $151, respectively) $16,079,808 $24,041,172 $3,384,979 $5,422,420
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
CHANGES IN SHARES OUTSTANDING:
Shares sold 213,863 209,769 129,044 530,459
Shares issued to holders as
reinvestment of dividends 158,111 118,867 11,123 8,348
Shares redeemed (734,650) (337,156) (254,453) (32,007)
----------- ----------- ---------- ----------
Net increase (decrease) (362,676) (8,520) (114,286) 506,800
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
</TABLE>
*<F3> 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)<F4>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1996
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period $12.56 $12.23 $11.67 $10.18 $10.00
Income from investment operations:
Net investment income 0.28 0.28 0.29 0.23 0.06
Net realized and unrealized gains
(losses) on securities (1.53) 0.83 0.73 1.55 0.12
------ ------ ------ ------ ------
Total from investment operations (1.25) 1.11 1.02 1.78 0.18
Less Distributions:
Dividends from net investment income (0.28) (0.28) (0.29) (0.29) --
Dividends from realized capital gains (0.66) (0.50) (0.17) -- --
------ ------ ------ ------ ------
Total distributions (0.94) (0.78) (0.46) (0.29) --
------ ------ ------ ------ ------
Net asset value, end of period $10.37 $12.56 $12.23 $11.67 $10.18
------ ------ ------ ------ ------
------ ------ ------ ------ ------
TOTAL RETURN (10.40%) 9.61% 8.80% 17.70% 1.80%(2)<F5>
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands,
end of period $16,080 $24,041 $23,496 $17,639 $6,866
Ratio of net expenses
to average net assets:
Before expense reimbursement 1.61% 1.55% 2.39% 2.48% 4.04%(3)<F6>
After expense reimbursement 1.61% 1.55% 1.64% 1.90% 1.90%(3)<F6>
Ratio of net investment income
to average net assets:
Before expense reimbursement 2.36% 2.28% 1.69% 1.84% 0.85%(3)<F6>
After expense reimbursement 2.36% 2.28% 2.44% 2.41% 2.99%(3)<F6>
Portfolio turnover rate 31.16% 28.92% 23.24% 20.01% --(4)<F7>
</TABLE>
(1)<F4> Commencement of operations.
(2)<F5> Not annualized.
(3)<F6> Annualized.
(4)<F7> 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
<TABLE>
HENNESSY LEVERAGED DOGS FUND
------------------------------------------
JULY 29, 1998(1)<F8>
YEAR ENDED THROUGH
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
<S> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period $10.70 $10.00
Income from investment operations:
Net investment income 0.22 0.31
Net realized and unrealized gains (losses) on securities (2.08) 0.70
------ ------
Total from investment operations (1.86) 1.01
Less Distributions:
Dividends from net investment income (0.22) (0.31)
Dividends from realized capital gains -- --
------ ------
Total distributions (0.22) (0.31)
------ ------
Net asset value, end of period $ 8.62 $10.70
------ ------
------ ------
TOTAL RETURN (17.50%) 10.28%(2)<F9>
SUPPLEMENTAL DATA AND RATIOS:
Net assets, in thousands, end of period $3,385 $5,422
Ratio of net operating expenses to average net assets:
Before expense reimbursement 2.76%(6)<F13> 4.35%(3)<F10>(4)<F11>
After expense reimbursement 1.20%(6)<F13> --%(3)<F10>(4)<F11>
Ratio of interest expense to average net assets 1.68% 1.17%
Ratio of net investment income to average net assets:
Before expense reimbursement 0.56% (0.90%)(3)<F10>
After expense reimbursement 2.12% 3.45%(3)<F10>
Portfolio turnover rate 33.58% --%(5)<F12>
</TABLE>
(1)<F8> Commencement of operations.
(2)<F9> Not annualized.
(3)<F10> Annualized.
(4)<F11> 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)<F12> 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.
(6)<F13> For the period ended June 30, 2000 the ratio of operating expenses to
average net assets excludes interest expense. The ratio before and
after expense reimbursement, including interest expense, would be
4.44% and 2.88%, respectively.
See notes to the financial statements.
HENNESSY BALANCED FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 2000
NUMBER
OF SHARES VALUE
--------- -----
COMMON STOCKS -- 47.6%
AUTOMOBILES & TRUCKS -- 4.9%
13,575 General Motors Corporation $ 788,199
-----------
BANK & BANK HOLDING COMPANY -- 5.2%
7,650 J.P. Morgan and Co. Incorporated 842,456
-----------
CAPITAL GOODS -- 4.3%
20,425 Caterpillar, Inc. 691,897
-----------
CHEMICALS -- 3.5%
12,850 E. I. du Pont de Nemours and Company 562,188
-----------
CONSUMER DURABLES -- 5.5%
14,800 Eastman Kodak Company 880,600
-----------
CONSUMER PRODUCTS -- 0.8%
2,075 Procter & Gamble Company 118,794
-----------
ENERGY -- 4.8%
2,410 Chevron Corporation 204,398
7,175 Exxon Mobil Corporation 563,238
-----------
767,636
-----------
FOOD, BEVERAGE & TOBACCO -- 5.6%
34,150 Philip Morris Companies, Inc. 907,109
-----------
MANUFACTURING -- 5.4%
10,500 Minnesota Mining and Manufacturing Company 866,250
-----------
PAPER & FOREST PRODUCTS -- 2.3%
12,375 International Paper Company 368,930
-----------
RETAIL -- 1.1%
5,275 Sears, Roebuck and Co. 172,097
-----------
RUBBER & TIRES -- 0.5%
4,585 Goodyear Tire & Rubber Company 91,700
-----------
TELECOMMUNICATIONS -- 3.7%
7,000 AT&T Corp. 221,375
8,750 SBC Communications, Inc. 378,438
-----------
599,813
-----------
TOTAL COMMON STOCKS (Cost $8,524,640) 7,657,669
-----------
PRINCIPAL
AMOUNT
---------
SHORT-TERM INVESTMENTS -- 52.4%
U.S. GOVERNMENT -- 49.3%
U.S. Treasury Bills:
$ 628,000 4.84%, 7/20/00 626,419
301,000 5.59%, 8/03/00 299,480
1,468,000 4.92%, 8/17/00 1,458,692
1,075,000 5.60%, 9/14//00 1,062,641
354,000 5.72%, 10/12/00 348,289
315,000 5.72%, 10/12/00 309,918
276,000 5.87%, 11/09/00 270,185
2,513,000 5.58%, 3/01/01 2,419,632
1,189,000 5.78%, 5/31/01 1,126,059
-----------
7,921,315
-----------
VARIABLE RATE DEMAND NOTES#<F14> -- 3.1%
225,783 American Family Financial Services, Inc., 6.31% 225,783
38,946 General Mills, Inc., 6.28% 38,946
112,616 Firstar Corporation, 6.42% 112,616
62,805 Wisconsin Corporation Central Credit Union, 6.34% 62,805
59,751 Wisconsin Electric Power Co., 6.31% 59,751
-----------
499,901
-----------
TOTAL SHORT-TERM INVESTMENTS (Cost $8,419,554) 8,421,216
-----------
TOTAL INVESTMENTS -- 100.0% (Cost $16,944,194) 16,078,885
-----------
Other Assets and Liabilities, Net -- (0.0%) 923
-----------
NET ASSETS -- 100.0% $16,079,808
-----------
-----------
#<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, 2000.
See notes to the financial statements.
HENNESSY LEVERAGED DOGS FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 2000
NUMBER
OF SHARES VALUE
--------- -----
COMMON STOCKS -- 72.0%
AUTOMOBILES & TRUCKS -- 6.1%
3,550 General Motors Corporation $ 206,122
-----------
BANK & BANK HOLDING COMPANY -- 7.4%
2,275 J.P. Morgan and Co. Incorporated 250,534
-----------
CAPITAL GOODS -- 6.6%
6,575 Caterpillar, Inc. 222,728
-----------
CHEMICALS -- 6.2%
4,800 E. I. du Pont de Nemours and Company 210,000
-----------
CONSUMER DURABLES -- 7.9%
4,475 Eastman Kodak Company 266,263
-----------
ENERGY -- 6.7%
2,885 Exxon Mobil Corporation 226,472
-----------
FOOD, BEVERAGE & TOBACCO -- 10.2%
12,950 Philip Morris Companies, Inc. 343,984
-----------
MANUFACTURING -- 7.4%
3,050 Minnesota Mining and Manufacturing Company 251,625
-----------
PAPER & FOREST PRODUCTS -- 5.2%
5,900 International Paper Company 175,894
-----------
TELECOMMUNICATIONS -- 8.3%
825 AT&T Corp. 26,091
5,925 SBC Communications, Inc. 256,256
-----------
282,347
-----------
TOTAL COMMON STOCKS (Cost $2,818,769) 2,435,969
-----------
PRINCIPAL
AMOUNT
---------
SHORT-TERM INVESTMENTS -- 63.5%
U.S. GOVERNMENT -- 63.5%
U.S. Treasury Bill:
$2,160,000 5.71%, 7/27/00 *<F15> 2,151,217
-----------
TOTAL SHORT-TERM INVESTMENTS (Cost $2,151,217) 2,151,217
-----------
TOTAL INVESTMENTS -- 135.5% (Cost $4,969,986) 4,587,186
-----------
Other Liabilities and Assets, Net -- (35.5%) (1,202,207)
-----------
NET ASSETS -- 100.0% $ 3,384,979
-----------
-----------
*<F15> Collateral or partial collateral for securities sold subject to
repurchase.
See notes to the financial statements.
NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2000
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.
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, 2000, the Balanced Fund paid capital gain dividends of $1,308,316
(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, 2000, the average daily balance and average interest rate in effect for
reverse repurchase agreements was $1,482,395 and 5.66%, respectively. At June
30, 2000, the interest rate in effect for the outstanding reverse repurchase
agreement, scheduled to mature on July 27, 2000, is 6.50% and represented 26.05%
of the Leveraged Dogs Fund's total assets.
4). INVESTMENT TRANSACTIONS
During the periods ended June 30, 2000, purchases and sales of investment
securities (excluding short-term investments) were as follows:
HENNESSY HENNESSY
BALANCED LEVERAGED
FUND DOGS FUND
-------- ---------
Purchases $3,183,320 $1,196,291
Sales $4,893,619 $1,760,620
The following balances for the Funds are as of June 30, 2000:
HENNESSY HENNESSY
BALANCED LEVERAGED
FUND DOGS FUND
-------- ---------
Cost for federal
income tax purposes $17,001,536 $4,969,986
Net tax unrealized
depreciation (922,651) (382,800)
Tax basis gross
unrealized
appreciation 421,742 76,164
Tax basis gross
unrealized
depreciation (1,344,393) (458,964)
The Leveraged Dogs Fund realized on a tax basis, post-October losses
through June 30, 2000 of $343,487 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 investment adviser and
during the year ending June 30, 2000 was a registered broker-dealer. Edward J.
Hennessy received commissions of $9,949 and $3,684 for transactions related to
the purchase and sales of securities held by the Balanced Fund and Leveraged
Dogs Fund, respectively, for the year ending June 30, 2000. 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 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.
For the fiscal year ending June 30, 2000, the investment adviser to the
Leveraged Dogs Fund reimbursed the Leveraged Dogs Fund to the extent necessary
to insure that "Other Expenses" less "Interest Expense" did not exceed 0.35% and
"Total Annual Fund Operating Expenses" less "Interest Expense" did not exceed
1.20%.
Firstar Bank, 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
the Hennessy Leveraged Dogs Fund), collectively referred to as the "Funds",
including the schedules of investments, as of June 30, 2000, and the related
statements of operations for the year then ended, statements of changes in net
assets for the each of the years in the two-year period then ended, and
financial highlights for each of the periods presented. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. 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 and
broker. 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 the Hennessy Leveraged Dogs Fund as of June 30, 2000,
the results of their operations for the year then ended, the changes in their
net assets for each of the years in the two-year period then ended and the
financial highlights for each of the periods presented, in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Chicago, Illinois
July 26, 2000
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, 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
