Securities Act Registration No. 333-00227
Investment Company Act Reg. No. 811-7493
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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 6 |X|
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
Amendment No. 7 |X|
(Check appropriate box or boxes.)
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THE HENNESSY FUNDS, INC.
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(Exact Name of Registrant as Specified in Charter)
The Courtyard Square
750 Grant Avenue
Suite 100
Novato, CA 94945
---------------------------------------- ---------
(Address of Principal Executive Offices) (Zip Code)
(800) 966-4354
----------------------------------------------------
(Registrant's Telephone Number, including Area Code)
Neil J. Hennessy Copy to:
The Hennessy Management Co., L.P.
The Courtyard Square Richard L. Teigen
750 Grant Avenue Foley & Lardner
Suite 100 777 East Wisconsin Avenue
Novato, CA 94945 Milwaukee, Wisconsin 53202
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(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: As soon as practicable after the
Registration Statement becomes effective.
It is proposed that this filing become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
|X| on October 20, 2000 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
THE HENNESSY
FUNDS, INC.
PROSPECTUS
OCTOBER 20, 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]
Hennessy Leveraged Dogs Fund Symbol: HDOGX
Hennessy Balanced Fund Symbol: HBFBX
HENNESSY FUNDS
PROSPECTUS
OCTOBER 20, 2000
BALANCED FUND LEVERAGED DOGS FUND
Hennessy Funds were the first mutual funds to implement the "Dogs of the Dow"
investment strategy.
Please read this Prospectus and keep it for future reference. It contains
important information, including information on how the Hennessy Funds invest
and the services they offer to shareholders.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
Questions Every Investor Should Ask
Before Investing in the Hennessy Funds 1
Fees and Expenses 3
Investment Objectives and Strategies 4
Management of the Funds 6
The Funds' Share Price 7
Purchasing Shares 8
Redeeming Shares 10
Exchanging Shares 12
Dividends, Distributions and Taxes 13
Financial Highlights 14
The Hennessy Funds, Inc.
The Courtyard Square
750 Grant Avenue
Suite 100
Novato, California 94945
(800) 966-4354 (Fund Information)
(800) 261-6950 (Account Information)
QUESTIONS EVERY INVESTOR SHOULD ASK BEFORE
INVESTING IN THE HENNESSY FUNDS
1. WHAT ARE THE HENNESSY FUNDS' GOALS?
HENNESSY BALANCED FUND
The Balanced Fund seeks capital appreciation and current income.
HENNESSY LEVERAGED DOGS FUND
The Leveraged Dogs Fund seeks a combination of capital appreciation and
current income (or "total return") that in the long run exceeds that of the Dow
Jones Industrial Average ("DJIA")*<F1>
2. WHAT ARE THE HENNESSY FUNDS' PRINCIPAL INVESTMENT STRATEGIES?
Each of our Fund's investment strategies is derived from the so-called "Dogs
of the Dow" investment strategy. The "Dogs of the Dow" investment strategy
involves annually:
o investing in the ten highest yielding stocks in the DJIA in
approximately equal dollar amounts
o rebalancing the portfolio at the end of one year to the then current 10
highest yielding stocks in the DJIA in approximately equal dollar
amounts
o rebalancing the portfolio in a similar manner at the end of the next
year and so on.
Investing professionals often consider stocks with a relatively high
dividend yield to be out of favor - hence the term "Dog."
Our Balanced Fund invests approximately one-half of its investment portfolio
in the "Dogs of the Dow" stocks and one-half in U.S. Treasury securities with a
remaining maturity of approximately one year. By utilizing this investment
strategy, we attempt to achieve total return that in the long run will be
substantially similar to that of the DJIA but with half the risk and volatility.
Our Leveraged Dogs Fund also invests approximately one-half of its
investment portfolio in the "Dogs of the Dow" stocks and one-half in U.S.
Treasury securities with a remaining maturity of approximately one year. Unlike
the Balanced Fund, the Leveraged Dogs Fund borrows money and invests the
proceeds approximately one-half in "Dogs of the Dow" stocks and one-half in U.S.
Treasury securities with a remaining maturity of one year. By borrowing money
and investing the proceeds (or "leveraging"), the Leveraged Dogs Fund increases
the percentage of its investment return that is based on the returns of the
"Dogs of the Dow" stocks it holds (up to 75%) and decreases the percentage of
its investment return based on the U.S. Treasury securities it holds (to not
less than 25%).
Historically mutual funds have not used the "Dogs of the Dow" investment
strategy because if they did they would not satisfy the tax diversification
requirements applicable to "regulated investment companies" under the Internal
Revenue Code. By investing approximately one-half of their total assets in U.S.
Treasury securities, our Funds are able to satisfy these tax diversification
requirements. The Leveraged Dogs Fund, by utilizing leverage, should be able to
achieve a total return more similar to that resulting from the "Dogs of the Dow"
investment strategy than if it did not.
3. WHAT ARE THE PRINCIPAL RISKS OF INVESTING IN THE HENNESSY FUNDS?
Although approximately one-half of each Fund's portfolio is invested in U.S.
Treasury securities with a remaining maturity of one year, investors in the
Hennessy Funds may lose money. There are risks associated with any investment,
including the types of securities in which the Funds invest. These risks
include:
*<F1> The Dow Jones Industrial Average is the property of Dow Jones & Company,
Inc. Dow Jones & Company, Inc. is not affiliated with the Hennessy
Funds or their investment advisers. Dow Jones & Company, Inc. has not
participated in any way in the creation of the Hennessy Funds or in the
selection of stocks included in the Hennessy Funds and has not approved
any information included in this Prospectus.
o MARKET RISK: The prices of the securities in which the Hennessy Funds
invest (e.g. AT&T Corp., Exxon Mobil Corporation and General Motors
Corporation etc.) may decline for a number of reasons including, a
financial performance that does not meet investor expectations, a shift
of investor assets to stocks in different sectors, or a general stock
market decline.
o NON-DIVERSIFICATION RISK: Each Fund is a non-diversified investment
company. As such it likely will invest in fewer securities than
diversified investment companies and its performance may be more
volatile because each security in which it invests will have greater
impact on its investment performance.
o LEVERAGE RISK: The Leveraged Dogs Fund may leverage its investments.
Purchasing securities with borrowed money, or leverage, is an investment
technique which increases investment risk because if the securities
purchased with borrowed money decline in value, the Leveraged Dogs
Fund's losses would be greater than if they had not used leverage.
Also, the Leveraged Dogs Fund will incur interest costs when it borrows
money, which costs may exceed the investment returns it earns on the
securities purchased with borrowed money.
BECAUSE OF THESE RISKS THE HENNESSY FUNDS ARE A SUITABLE INVESTMENT ONLY FOR
THOSE INVESTORS WHO HAVE LONG-TERM INVESTMENT GOALS AND WHO WANT AN INVESTMENT
RESTRICTED TO HIGH QUALITY DIVIDEND PAYING COMMON STOCKS, U.S. TREASURY
SECURITIES AND MONEY MARKET INSTRUMENTS.
4. HOW HAVE THE HENNESSY FUNDS PERFORMED?
The bar charts and tables that follow provide some indication of the risks
of investing in the Hennessy Balanced Fund and the Hennessy Leveraged Dogs Fund
by showing changes in each Fund's performance from year to year and how each
Fund's average annual returns over various periods compare to the performance of
the Standard & Poor's Composite Index of 500 Stocks, the DJIA and the Merrill
Lynch One Year Treasury Bill Index. Please remember that each Fund's past
performance is not necessarily an indication of its future performance. It may
perform better or worse in the future.
HENNESSY BALANCED FUND
(TOTAL RETURN PER CALENDAR YEAR)
1997 13.01%
1998 7.43%
1999 1.55%
Note: During the three year period shown on the bar chart, the Fund's highest
total return for a quarter was 6.48% (quarter ended June 30, 1999) and
the lowest total return for a quarter was -2.85% (quarter ended
September 30, 1999).
The Fund's 2000 year to date total return is -2.49% (January 1, 2000
through the quarter ended September 30, 2000).
SINCE THE INCEPTION
AVERAGE ANNUAL TOTAL RETURNS DATE OF THE FUND
(FOR THE PERIODS ENDING DECEMBER 31, 1999) PAST YEAR (MARCH 8, 1996)
----------------------------------------- --------- ---------------
Hennessy Balanced Fund 1.55% 8.37%
S&P 500*<F2> 21.04% 26.72%
DJIA 27.20% 23.71%
Merrill Lynch One Year
U.S. Treasury Bill Index**<F3> 4.03% 5.40%
*<F2> The S&P 500 is the Standard & Poor's Composite Index of 500 Stocks, a
widely recognized unmanaged index of common stock prices.
**<F3> The Merrill Lynch One Year U.S. Treasury Bill Index is comprised of a
single issue purchased at the beginning of a month and held for the
full month. At the end of the month that issue is sold and rolled into
a newly selected issue.
HENNESSY LEVERAGED DOGS FUND
(TOTAL RETURN PER CALENDAR YEAR)
1999 1.80%
Note: During the one year period shown on the bar chart, the Fund's highest
total return for a quarter was 10.42% (quarter ended June 30, 1999) and
the lowest total return for a quarter was -4.70% (quarter ended
September 30, 1999).
The Fund's 2000 year to date total return is -5.10% (January 1, 2000
through the quarter ended September 30, 2000).
SINCE THE INCEPTION
AVERAGE ANNUAL TOTAL RETURNS DATE OF THE FUND
(FOR THE PERIODS ENDING DECEMBER 31, 1999) PAST YEAR (JULY 29, 1998)
----------------------------------------- --------- ---------------
Hennessy Leveraged Dogs Fund 1.80% 1.37%
S&P 500 21.04% 22.24%
DJIA 27.20% 21.61%
Merrill Lynch One Year U.S. Treasury Bill Index 4.03% 4.63%
FEES AND EXPENSES
The table below describes the fees and expenses that you may pay if you buy
and hold shares of the Hennessy Funds.
SHAREHOLDER FEES (fees paid directly from your investment)
<TABLE>
HENNESSY BALANCED FUND HENNESSY LEVERAGED DOGS FUND
----------------------- -----------------------------
<S> <C> <C>
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of offering price) No Sales Charge No Sales Charge
Maximum Deferred Sales Charge (Load) No Deferred Sales Charge No Deferred Sales Charge
Maximum Sales Charge (Load) Imposed on
Reinvested Dividends And Distributions No Sales Charge No Sales Charge
Redemption Fee None(1)<F4> None(1)<F4>
Exchange Fee None(2)<F5> None(2)<F5>
</TABLE>
(1)<F4> Our transfer agent charges a fee of $12.00 for each wire redemption.
(2)<F5> Our transfer agent charges a fee of $5.00 for each telephone exchange.
<TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)
<S> <C> <C>
Management Fees 0.60% 0.60%
Distribution and/or Service (12b-1) Fees 0.25% 0.25%
Other Expenses
Interest Expense 0.00% 1.68%
All remaining Other Expenses 0.76% 1.91%*<F6>
Total Other Expenses 0.76% 3.59%*<F6>
Total Annual Fund Operating Expenses 1.61% 4.44%*<F6>
</TABLE>
*<F6> 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%.
EXAMPLE
This Example is intended to help you compare the cost of investing in the
Hennessy Funds with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in a Fund for the time periods
indicated and then redeem all of your shares at the end of these periods. The
Example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions, your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
Hennessy Balanced Fund $164 $508 $876 $1,911
Hennessy Leveraged Dogs Fund $445 $1,343 $2,251 $4,566
INVESTMENT OBJECTIVES AND STRATEGIES
INVESTMENT OBJECTIVES
The Balanced Fund seeks capital appreciation and current income. The
Leveraged Dogs Fund seeks a combination of capital appreciation and current
income (or "total return") that in the long run exceeds that of the DJIA. In
order to provide a degree of flexibility, each Fund may change its investment
objective without obtaining shareholder approval. Please remember that an
investment objective is not a guarantee.
THE PRINCIPAL INVESTMENT STRATEGY
Twice monthly, our Funds' investment advisers will determine the ten highest
yielding common stocks in the DJIA. They do this by annualizing the last
quarterly or semi-annual ordinary dividend declared on each common stock
included in the DJIA and dividing the result by the market value of the common
stock on the last business day preceding the date of determination. All
purchases of common stocks following such determination until the next
determination will be of the ten highest yielding common stocks so determined in
approximately equal dollar amounts. Unless our Funds need to sell common stocks
to fund redemption requests, they will hold for approximately one year any
common stocks purchased including common stocks that are no longer one of the
ten highest yielding common stocks in the DJIA, common stocks that are no longer
in the DJIA and common stocks received in reorganizations of companies in the
DJIA.
When our Funds purchase common stock, they will also purchase an approximately
equal amount of U.S. Treasury securities having a remaining maturity of
approximately one year. (U.S. Treasury securities are backed by the full faith
and credit of the U.S. Treasury. U.S. Treasury securities differ only in their
interest rates, maturities and dates of issuance. Treasury bills have
maturities of one year or less. Treasury notes have maturities of one to ten
years and Treasury bonds generally have maturities of greater than ten years at
the date of issuance.) Consequently approximately half of our Funds' portfolios
will at all times consist of U.S. Treasury securities. Because approximately
half of our Funds' portfolios will consist of short-term U.S. Treasury
securities, they may not perform as well in the long term as a portfolio of
common stocks, but will have lower volatility.
Our Funds rebalance their stock investments after they have been held for one
year. They sell any stock which is no longer one of the ten highest yielding
common stocks and replace it with stocks which are. Additionally they may sell
a portion of the stocks which remain in the portfolio such that after they
complete the rebalancing, the rebalanced portion of our Funds' portfolios will
consist of approximately 50% U.S. Treasury securities and approximately 50% of
the ten highest yielding common stocks in the DJIA in approximately equal dollar
amounts. Our Funds anticipate rebalancing twice monthly with respect to the
portfolio securities purchased one year earlier. Rebalancing our common stock
investments more frequently would increase transaction costs. Our Funds'
investment strategy does not involve high portfolio turnover.
In an effort to minimize transaction costs our Funds may accumulate funds and
make purchases in larger blocks to avoid odd lot transactions. However, neither
of our Funds take temporary defensive positions. Our Funds invest funds they
accumulate in money market instruments (such as U.S. Treasury Bills, commercial
paper, commercial paper master notes or repurchase agreements) or money market
mutual funds.
When funding redemption requests, our Funds will first utilize any accumulated
funds described above. If it is necessary for a Fund to sell portfolio
securities to meet redemption requests, it will endeavor to obtain approximately
one-half of the necessary proceeds from the sale of U.S. Treasury securities and
the remainder from the sale of common stocks in proportion to their respective
percentages of its total portfolio of common stocks. Again a Fund may vary the
percentage of each issue of common stock sold to avoid odd lot transactions
thereby reducing total transaction costs.
THE LEVERAGED DOGS FUND VARIATION ON THE PRINCIPAL INVESTMENT STRATEGY
The Leveraged Dogs Fund follows the same investment strategy as the Balanced
Fund. However, it also will borrow up to approximately the maximum permitted by
the Investment Company Act of 1940, and invest the proceeds approximately one-
half in "Dogs of the Dow" stocks and one-half in U.S. Treasury securities. The
Investment Company Act of 1940 permits mutual funds to borrow up to one-half of
their net assets. The Leveraged Dogs Fund typically will borrow money by
entering into reverse repurchase agreements secured by its portfolio of U.S.
Treasury securities.
HYPOTHETICAL PAST PERFORMANCE
The chart below illustrates the total return for each of the last twenty-five
years of the DJIA, the "Dogs of the Dow" and for a hypothetical portfolio
consisting 50% of one-year Treasury bills and 50% of the ten highest yielding
common stocks in the DJIA as of the beginning of each year (the "Model
Portfolio"). The Model Portfolio was developed in a manner very similar to our
Balanced Fund's investment strategy, but does not reflect the effects of cash
flows in and out of the portfolio, the deduction of commissions and other
expenses, and the reinvestment of dividends. The performance of the Model
Portfolio would have been lower if the fees and expenses borne by the Balanced
Fund had been deducted.
COMPARISON OF TOTAL RETURN(1)<F7>
<TABLE>
"DOGS OF THE MODEL "DOGS OF THE MODEL
DJIA TOTAL DOW" TOTAL PORTFOLIO DJIA TOTAL DOW" TOTAL PORTFOLIO
YEAR RETURN RETURN TOTAL RETURN YEAR RETURN RETURN TOTAL RETURN
---- ------ ------ ------------ ---- ------ ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1975 44.40% 55.90% 31.28% 1988 15.95% 22.90% 14.99%
1976 22.72% 34.80% 20.24% 1989 31.71% 26.50% 17.75%
1977 -12.71% 0.90% 2.75% 1990 -0.57% -7.60% 0.10%
1978 2.69% -0.10% 3.21% 1991 23.93% 39.30% 23.05%
1979 10.52% 12.40% 11.03% 1992 7.34% 7.90% 5.71%
1980 21.41% 27.20% 19.52% 1993 16.72% 27.30% 15.44%
1981 -3.40% 5.00% 9.39% 1994 4.95% 4.10% 3.85%
1982 25.79% 23.60% 19.43% 1995 36.48% 36.70% 20.45%
1983 25.68% 38.70% 23.66% 1996 28.57% 27.90% 16.54%
1984 1.06% 7.60% 8.82% 1997 24.78% 21.90% 13.01%(2)<F8>
1985 32.78% 29.50% 19.34% 1998 17.75% 10.60% 7.43%(2)<F8>
1986 26.91% 32.10% 19.84% 1999 26.90% 3.60% 1.55%(2)<F8>
1987 6.02% 6.10% 6.01%
Average 17.54% 19.79% 13.38%
</TABLE>
(1)<F7> Total return represents the sum of the following components: (a) the
percentage change in value of each common stock from the first trading
day on the New York Stock Exchange in a given year to the last trading
day in that year; (b) the total dividends received in that year on
each common stock dividend by the market value of the common stock as
of the first trading day in that year (without any dividend
reinvestment); and (c) the yield on one-year U.S. Treasury bills as of
the close of the first trading day in that year. Total return does
not take into consideration any commissions, expenses or taxes, and
does not include reinvestment of dividends.
(2)<F8> Returns for 1997, 1998 and 1999 are actual returns for the Balanced
Fund, net of fees and expenses.
The returns shown above are not guarantees of future performance and should
not be used as a predictor of returns to be expected in connection with an
investment in the Balanced Fund. As indicated above, the Model Portfolio has
both outperformed and underperformed the DJIA in the last twenty-five years.
The performance information shown above was compiled by the Balanced Fund's
investment adviser from statistical services, reports, or other sources that it
believed to be reliable. This information has not been verified by any third
party and is unaudited.
While the foregoing information is relevant to an investor's decision to
invest in the Balanced Fund, investors should be aware that the Balanced Fund's
performance will not be identical to that of the Model Portfolio for a number of
reasons including the fact that it (a) will reinvest dividends; (b) have
expenses; (c) purchase and sell investments continuously; and (d) may not be
able to be fully invested or invest in the exact proportions of the Model
Portfolio at all times.
The foregoing information is also relevant to an investor's decision to invest
in the Leveraged Dogs Fund. For example, if the Leveraged Dogs Fund has $10
million in net assets, it is permitted under the Investment Company Act of 1940
to borrow $5 million. The Leveraged Dogs Fund intends initially to borrow by
entering into reverse repurchase agreements secured by its portfolio of U.S.
Treasury securities. After giving effect to the borrowing and investment of the
borrowed proceeds, the Leveraged Dogs Fund would have a portfolio consisting
approximately of $7.5 million in the 10 highest yielding stocks of the DJIA in
approximately equal dollar amounts and approximately $7.5 million in U.S.
Treasury securities. Approximately $5 million of the Fund's U.S. Treasury
securities would serve as collateral for its reverse repurchase agreement
obligations. If the interest earned on the Leveraged Dogs Fund's U.S. Treasury
securities were equal to the interest paid on its reverse repurchase agreements,
the Fund's investment return, before expenses, would be derived approximately
75% from its investments in the 10 highest yielding stocks in the DJIA and
approximately 25% from its investments in U.S. Treasury securities. The
Leveraged Dogs Fund, of course, recognizes that the interest it earns on its
U.S. Treasury securities will be less than the interest it pays when it borrows
by entering into reverse repurchase agreements. The Leveraged Dogs Fund refers
to the difference between the interest rate on the U.S. Treasury securities and
the interest rate on the reverse repurchase agreements to be its "cost of
funds." The Leveraged Dogs Fund's investment strategy will be successful only if
its investments in the stocks of the 10 highest yielding stocks of the DJIA
purchased with borrowed funds appreciate more than its cost of funds. The
Leveraged Dogs Fund cannot assure investors that this will happen. In fact, the
Leveraged Dogs Fund's investments in the 10 highest yielding stocks in the DJIA
may decline in value.
MANAGEMENT OF THE FUNDS
THE HENNESSY MANAGEMENT CO., L.P. MANAGES THE INVESTMENTS OF THE BALANCED FUND
The Hennessy Management Co., L.P. (the "Balanced Fund Adviser") is the
investment adviser to the Balanced Fund. The Balanced Fund Adviser's address
is:
The Courtyard Square
750 Grant Avenue
Suite 100
Novato, California 94945
As investment adviser, the Balanced Fund Adviser manages the investment
portfolio of the Balanced Fund. The Balanced Fund Adviser makes the decisions
as to which securities to buy and which securities to sell. During the last
fiscal year, the Balanced Fund paid the Balanced Fund Adviser an annual
investment advisory fee equal to 0.60% of the Balanced Fund's average net
assets.
Neil J. Hennessy is primarily responsible for the day-to-day management of the
portfolio of the Balanced Fund and has been so since its inception. He is the
Balanced Fund's portfolio manager. Mr. Hennessy is the President, controlling
shareholder and a director of Edward J. Hennessy, Incorporated, a registered
investment adviser, since its organization in 1989. Edward J. Hennessy,
Incorporated is the general partner of the Balanced Fund Adviser.
THE HENNESSY MANAGEMENT CO. 2, L.P. MANAGES THE INVESTMENTS OF THE LEVERAGED
DOGS FUND
The Hennessy Management Co. 2, L.P. (the "Leveraged Dogs Fund Adviser") is the
investment adviser to the Leveraged Dogs Fund. The Leveraged Dogs Fund Adviser's
address is:
The Courtyard Square
750 Grant Avenue
Suite 100
Novato, California 94945
As investment adviser, the Leveraged Dogs Fund Adviser manages the investment
portfolio of the Leveraged Dogs Fund. The Leveraged Dogs Fund Adviser makes the
decisions as to which securities to buy and which securities to sell. During
the last fiscal year, the Leveraged Dogs Fund paid the Leveraged Dogs Fund
Adviser an annual investment advisory fee equal to 0.60% of the Leveraged Dogs
Fund's average net assets, all of which was waived by the Leveraged Dogs Fund
Adviser.
Neil J. Hennessy is primarily responsible for the day-to-day management of the
portfolio of the Leveraged Dogs Fund. Edward J. Hennessy, Incorporated is also
the general partner of the Leveraged Dogs Fund Adviser.
DISTRIBUTION FEES
Each of the Hennessy Funds has adopted a distribution plan pursuant to Rule
12b-1 under the Investment Company Act. This Plan allows each of our Funds to
use up to 0.25% of its average daily net assets to pay sales, distribution and
other fees for the sale of its shares and for services provided to investors.
Because these fees are paid out of a Fund's assets, over time these fees will
increase the cost of your investment and may cost you more than paying other
types of sales charges.
THE FUNDS' SHARE PRICE
The price at which investors purchase shares of each Fund and at which
shareholders redeem shares of each Fund is called its net asset value. Each
Fund calculates its net asset value as of the close of regular trading on the
New York Stock Exchange (normally 4:00 p.m. Eastern Time) on each day the New
York Stock Exchange is open for trading. The New York Stock Exchange is closed
on national holidays and weekends. Each Fund calculates its net asset value
based on the market prices of the securities (other than money market
instruments) it holds. Each Fund values most money market instruments it holds
at their amortized cost. Each Fund will process purchase orders that it
receives and accepts and redemption orders that it receives prior to the close
of regular trading on a day that the New York Stock Exchange is open at the net
asset value determined later that day. It will process purchase orders that it
receives and accepts and redemption orders that it receives after the close of
regular trading at the net asset value determined at the close of regular
trading on the next day the New York Stock Exchange is open. If an investor
sends a purchase order or redemption request to the Funds' corporate address,
instead of to its transfer agent, the Funds will forward it, as promptly as
practicable, to the transfer agent and the effective date of the purchase order
or redemption request will be delayed until the purchase order or redemption
request is received by the transfer agent.
PURCHASING SHARES
HOW TO PURCHASE SHARES FROM THE FUNDS
1. Read this Prospectus carefully.
2. Determine how much you want to invest keeping in mind the following
minimums:
a. New accounts
o All accounts $1,000
b. Existing accounts
o Dividend reinvestment No Minimum
o All other investments $ 100
3. Complete the New Account Application accompanying this Prospectus, carefully
following the instructions. For additional investments, complete the
remittance form attached to your individual account statements. (The Funds
have additional New Account Applications and remittance forms if you need
them.) If you have any questions, please call 1-800-261-6950.
4. Make your check payable to the full name of the Hennessy Fund you intend to
purchase. All checks must be drawn on U.S. banks. The Funds will not
accept cash or third party checks. FIRSTAR MUTUAL FUND SERVICES, LLC, THE
FUNDS' TRANSFER AGENT, WILL CHARGE A $25 FEE AGAINST A SHAREHOLDER'S ACCOUNT
FOR ANY PAYMENT CHECK RETURNED FOR INSUFFICIENT FUNDS. THE SHAREHOLDER WILL
ALSO BE RESPONSIBLE FOR ANY LOSSES SUFFERED BY A FUND AS A RESULT.
5. Send the application and check to:
BY FIRST CLASS MAIL
The Hennessy Funds, Inc.
c/o Firstar Mutual Fund Services, LLC
P.O. Box 701
Milwaukee, WI 53201-0701
BY OVERNIGHT DELIVERY SERVICE
OR EXPRESS MAIL
The Hennessy Funds, Inc.
c/o Firstar Mutual Fund Services, LLC
3rd Floor
615 East Michigan Street
Milwaukee, WI 53202-5207
PLEASE DO NOT SEND LETTERS BY OVERNIGHT DELIVERY SERVICE OR EXPRESS MAIL TO THE
POST OFFICE BOX ADDRESS.
If you wish to open an account by wire, please call 1-800-261-6950 prior to
wiring funds in order to obtain a confirmation number and to ensure prompt and
accurate handling of funds. YOU SHOULD WIRE FUNDS TO:
Firstar Bank, N.A.
777 East Wisconsin Avenue
Milwaukee, WI 53202
ABA #042000013
CREDIT:
Firstar Mutual Fund Services, LLC
Account #112-952-137
FURTHER CREDIT:
(name of Fund to be purchased)
(shareholder registration)
(shareholder account number, if known)
You should then send a properly signed New Account Application marked
"FOLLOW-UP" to either of the addresses listed above. PLEASE REMEMBER THAT
FIRSTAR BANK, N.A. MUST RECEIVE YOUR WIRED FUNDS PRIOR TO THE CLOSE OF REGULAR
TRADING ON THE NEW YORK STOCK EXCHANGE FOR YOU TO RECEIVE SAME DAY PRICING. THE
FUNDS AND FIRSTAR BANK, N.A. ARE NOT RESPONSIBLE FOR THE CONSEQUENCES OF DELAYS
RESULTING FROM THE BANKING OR FEDERAL RESERVE WIRE SYSTEM, OR FROM INCOMPLETE
WIRING INSTRUCTIONS.
PURCHASING SHARES FROM BROKER-DEALERS, FINANCIAL INSTITUTIONS AND OTHERS
Some broker-dealers may sell shares of the Hennessy Funds. These broker-
dealers may charge investors a fee either at the time of purchase or redemption.
The fee, if charged, is retained by the broker-dealer and not remitted to the
Funds or their investment advisers. Some broker-dealers may purchase and redeem
shares on a three day settlement basis.
The Funds may enter into agreements with broker-dealers, financial
institutions or other service providers ("Servicing Agents") that may include
the Funds as investment alternatives in the programs they offer or administer.
Servicing agents may:
o Become shareholders of record of the Funds. This means all requests to
purchase additional shares and all redemption requests must be sent
through the Servicing Agent. This also means that purchases made
through Servicing Agents are not subject to the Funds' minimum purchase
requirements.
o Use procedures and impose restrictions that may be in addition to, or
different from, those applicable to investors purchasing shares directly
from the Funds.
o Charge fees to their customers for the services they provide them.
Also, the Funds and/or their investment advisers may pay fees to
Servicing Agents to compensate them for the services they provide their
customers.
o Be allowed to purchase shares by telephone with payment to follow the
next day. If the telephone purchase is made prior to the close of
regular trading on the New York Stock Exchange, it will receive same day
pricing.
o Be authorized to accept purchase orders on behalf of the Funds. This
means that a Fund will process the purchase order at the net asset value
which is determined following the Servicing Agent's acceptance of the
customer's order.
If you decide to purchase shares through Servicing Agents, please carefully
review the program materials provided to you by the Servicing Agent. When you
purchase shares of the Funds through a Servicing Agent, it is the responsibility
of the Servicing Agent to place your order with the Funds on a timely basis. If
the Servicing Agent does not, or if it does not pay the purchase price to the
Funds within the period specified in its agreement with the Funds, it may be
held liable for any resulting fees or losses.
OTHER INFORMATION ABOUT PURCHASING SHARES OF THE FUNDS
The Funds may reject any purchase order for any reason. The Funds will not
accept initial purchase orders made by telephone unless they are from a
Servicing Agent which has an agreement with the Fund.
The Funds will not issue certificates evidencing shares purchased. Instead,
the Funds will send investors a written confirmation for all purchases of
shares.
The Funds offer an automatic investment plan allowing shareholders to make
purchases on a regular and convenient basis. The Funds also offer a telephone
purchase option permitting shareholders to make additional purchases by
telephone. The Funds also offer the following retirement plans:
o Traditional IRA
o Roth IRA
o SEP-IRA
o Education IRA
Investors can obtain further information about the automatic investment plan,
the telephone purchase plan and the IRAs by calling the Funds at 1-800-261-6950.
The Hennessy Funds recommend that investors consult with a competent financial
and tax advisor regarding the IRAs before investing through them.
REDEEMING SHARES
Investors may redeem shares by mail, by telephone or through Servicing Agents.
HOW TO REDEEM (SELL) SHARES BY MAIL
1. Prepare a letter of instruction containing:
o the name of the Fund(s)
o account number(s)
o the amount of money or number of shares being redeemed
o the name(s) on the account
o daytime phone number
o additional information that the Funds may require for redemptions by
corporations, executors, administrators, trustees, guardians, or others
who hold shares in a fiduciary or representative capacity. Please
contact the Funds' transfer agent, Firstar Mutual Fund Services, LLC, in
advance, at 1-800-261-6950 if you have any questions.
2. Sign the letter of instruction exactly as the shares are registered. Joint
ownership accounts must be signed by all owners.
3. Have the signatures guaranteed by a commercial bank or trust company in the
United States, a member firm of the New York Stock Exchange or other
eligible guarantor institution in the following situations:
o The redemption request includes a change of address
o The redemption proceeds are to be sent to a person other than the person
in whose name the shares are registered
o The redemption proceeds are to be sent to an address other than the
address of record
A NOTARIZED SIGNATURE IS NOT AN ACCEPTABLE SUBSTITUTE FOR A SIGNATURE
GUARANTEE.
4. Send the letter of instruction to:
BY FIRST CLASS MAIL
The Hennessy Funds, Inc.
c/o Firstar Mutual Fund Services, LLC
Shareholder Services Center
P. O. Box 701
Milwaukee, WI 53201-0701
BY OVERNIGHT DELIVERY SERVICE
OR EXPRESS MAIL
The Hennessy Funds, Inc.
c/o Firstar Mutual Fund Services, LLC
3rd Floor
615 East Michigan Street
Milwaukee, WI 53202-5207
PLEASE DO NOT SEND LETTERS OF INSTRUCTION BY OVERNIGHT DELIVERY SERVICE OR
EXPRESS MAIL TO THE POST OFFICE BOX ADDRESS.
HOW TO REDEEM (SELL) SHARES BY TELEPHONE
1. Instruct Firstar Mutual Fund Services, LLC that you want the option of
redeeming shares by telephone. This can be done by completing the New
Account Application. If you have already opened an account, you may write
to Firstar Mutual Fund Services, LLC requesting this option. When you do
so, please sign the request exactly as your account is registered and have
the signatures guaranteed. Shares held in retirement plans cannot be
redeemed by telephone.
2. Assemble the same information that you would include in the letter of
instruction for a written redemption request.
3. Call Firstar Mutual Fund Services, LLC at 1-800-261-6950. PLEASE DO NOT
CALL THE FUNDS OR THE ADVISER.
4. Telephone redemptions must be in amounts of $1,000 or more.
HOW TO REDEEM (SELL) SHARES THROUGH SERVICING AGENTS
If your shares are held by a Servicing Agent, you must redeem your shares
through the Servicing Agent. Contact the Servicing Agent for instructions on
how to do so.
REDEMPTION PRICE
The redemption price per share you receive for redemption requests is the next
determined net asset value after:
o Firstar Mutual Fund Services, LLC receives your written request in
proper form with all required information.
o Firstar Mutual Fund Services, LLC receives your authorized telephone
request with all required information.
o A Servicing Agent that has been authorized to accept redemption requests
on behalf of the Funds receives your request in accordance with its
procedures.
PAYMENT OF REDEMPTION PROCEEDS
o For those shareholders who redeem shares by mail, Firstar Mutual Fund
Services, LLC will mail a check in the amount of the redemption proceeds
no later than the seventh day after it receives the redemption request
in proper form with all required information.
o For those shareholders who redeem by telephone, Firstar Mutual Fund
Services, LLC will either mail a check in the amount of the redemption
proceeds no later than the seventh day after it receives the redemption
request, or transfer the redemption proceeds to your designated bank
account if you have elected to receive redemption proceeds by either
Electronic Funds Transfer or wire. An Electronic Funds Transfer
generally takes up to 3 business days to reach the shareholder's account
whereas Firstar Mutual Fund Services, LLC generally wires redemption
proceeds on the business day following the calculation of the redemption
price. However, the Funds may direct Firstar Mutual Fund Services, LLC
to pay the proceeds of a telephone redemption on a date no later than
the seventh day after the redemption request.
o For those shareholders who redeem shares through Servicing Agents, the
Servicing Agent will transmit the redemption proceeds in accordance with
its redemption procedures.
OTHER REDEMPTION CONSIDERATIONS
When redeeming shares of the Funds, shareholders should consider the
following:
o The redemption may result in a taxable gain.
o Shareholders who redeem shares held in an IRA must indicate on their
redemption request whether or not to withhold federal income taxes. If
not, these redemptions will be subject to federal income tax
withholding.
o The Funds may delay the payment of redemption proceeds for up to seven
days in all cases.
o If you purchased shares by check, the Funds may delay the payment of
redemption proceeds until they are reasonably satisfied the check has
cleared (which may take up to 15 days from the date of purchase).
o Firstar Mutual Fund Services, LLC will send the proceeds of telephone
redemptions to an address or account other than that shown on its
records only if the shareholder has sent in a written request with
signatures guaranteed.
o The Funds reserve the right to refuse a telephone redemption request if
they believe it is advisable to do so. The Funds and Firstar Mutual
Fund Services, LLC may modify or terminate their procedures for
telephone redemptions at any time. Neither the Funds nor Firstar Mutual
Fund Services, LLC will be liable for following instructions for
telephone redemption transactions that they reasonably believe to be
genuine, provided they use reasonable procedures to confirm the
genuineness of the telephone instructions. They may be liable for
unauthorized transactions if they fail to follow such procedures. These
procedures include requiring some form of personal identification prior
to acting upon the telephone instructions and recording all telephone
calls. During periods of substantial economic or market change, you may
find telephone redemptions difficult to implement. If a shareholder
cannot contact Firstar Mutual Fund Services, LLC by telephone, he or she
should make a redemption request in writing in the manner described
earlier.
o Firstar Mutual Fund Services, LLC currently charges a fee of $12 when
transferring redemption proceeds to your designated bank account by wire
but does not charge a fee when transferring redemption proceeds by
Electronic Funds Transfer.
o If your account balance falls below $1,000 because you redeem shares,
you will be given 60 days to make additional investments so that your
account balance is $1,000 or more. If you do not, the Funds may close
your account and mail the redemption proceeds to you.
o The Funds may pay redemption requests "in kind." This means that the
Funds may pay redemption requests entirely or partially with securities
rather than with cash.
EXCHANGING SHARES
Shares of either Hennessy Fund may be exchanged for shares of the other
Hennessy Fund or Firstar Money Market Fund at their relative net asset values.
(An affiliate of Firstar Mutual Fund Services, LLC advises Firstar Money Market
Fund. Please call 1-800-261-6950 for a prospectus describing Firstar Money
Market Fund.) You may have a taxable gain or loss as a result of an exchange
because the Internal Revenue Code treats an exchange as a sale of shares.
HOW TO EXCHANGE SHARES
1. Read this Prospectus carefully and, if applicable, the prospectus for the
Firstar Money Market Fund.
2. Determine the number of shares you want to exchange keeping in mind that
exchanges are subject to a $1,000 minimum.
3. Call Firstar Mutual Fund Services, LLC at 1-800-261-6950. You may also make
an exchange by writing to The Hennessy Funds, Inc. c/o Firstar Mutual Fund
Services, LLC, 3rd Floor, P. O. Box 701, Milwaukee, Wisconsin 53201-0701.
Firstar Mutual Fund Services, LLC charges a fee of $5.00 for each telephone
exchange. There is no charge for a written exchange.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Each of the Hennessy Funds distributes substantially all of its net investment
income quarterly and substantially all of its capital gains annually. You have
three distribution options:
o AUTOMATIC REINVESTMENT OPTION - Both dividend and capital gains
distributions will be reinvested in additional Fund shares.
o CASH DIVIDEND OPTION - Your dividends will be paid in cash and your
capital gains distributions will be reinvested in additional Fund
shares.
o ALL CASH OPTION - Both dividend and capital gains distributions will be
paid in cash.
You may make this election on the New Account Application. You may change your
election by writing to Firstar Mutual Fund Services, LLC or by calling 1-800-
261-6950.
Each Fund's distributions, whether received in cash or additional shares of
the Fund, may be subject to federal and state income tax. These distributions
may be taxed as ordinary income and capital gains (which may be taxed at
different rates depending on the length of time the Fund holds the assets
generating the capital gains).
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand a Fund's
financial performance for the period of its operations. Certain information
reflects financial results for a single Fund share. The total returns in the
tables represent the rate that an investor would have earned on an investment in
a Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by KPMG LLP, whose report, along with the Funds'
financial statements, are included in the Annual Report which is available upon
request.
HENNESSY BALANCED FUND
<TABLE>
FOR THE YEARS ENDED JUNE 30, 3/8/96(1)<F9>
------------------------------------------------- THROUGH
2000 1999 1998 1997 6/30/96
---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C>
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) --
Distributions from realized 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 INVESTMENT RETURN (10.40)% 9.61% 8.80% 17.70% 1.80%(2)<F10>
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period (000s) $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)<F11>
After expense reimbursement 1.61% 1.55% 1.64% 1.90% 1.90%(3)<F11>
Ratio of net investment income
to average net assets:
Before expense reimbursement 2.36% 2.28% 1.69% 1.84% 0.85%(3)<F11>
After expense reimbursement 2.36% 2.28% 2.44% 2.41% 2.99%(3)<F11>
Portfolio turnover rate 31.16% 28.92% 23.24% 20.01% --%(4)<F12>
</TABLE>
(1)<F9> Commencement of operations.
(2)<F10> Not annualized.
(3)<F11> Annualized.
(4)<F12> 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.
HENNESSY LEVERAGED DOGS FUND
<TABLE>
7/29/98(1)<F13>
YEAR ENDED THROUGH
JUNE 30, 2000 6/30/99
------------- -------
<S> <C> <C>
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)
Distributions from realized gains -- --
------ ------
Total distributions (0.22) (0.31)
------ ------
Net asset value, end of period $ 8.62 $10.70
------ ------
------ ------
TOTAL INVESTMENT RETURN (17.50)% 10.28%(2)<F14>
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period (000s) $3,385 $5,422
Ratio of net operating expenses to average net assets:
Before expense reimbursement 2.76%(6)<F18> 4.35%(3)<F15>(4)<F16>
After expense reimbursement 1.20%(6)<F18> --%(3)<F15>(4)<F16>
Ratio of interest expense to average net assets 1.68% 1.17%
Ratio of net investment income (loss) to average net assets:
Before expense reimbursement 0.56% (0.90)%(3)<F15>
After expense reimbursement 2.12% 3.45%(3)<F15>
Portfolio turnover rate 33.58% --%(5)<F17>
</TABLE>
(1)<F13> Commencement of operations.
(2)<F14> Not annualized.
(3)<F15> Annualized.
(4)<F16> For the period ended June 30, 1999, the ratio of operating expenses to
average net assets excludes interest expense. The ratios, before and
after expense reimbursement, including interest expense would be 5.52%
and 1.17%, respectively.
(5)<F17> 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)<F18> 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.
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
DISTRIBUTOR
Quasar Distributors, LLC
615 East Michigan Street
Milwaukee, WI 53202
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
To learn more about the Hennessy Funds you may want to read the Hennessy
Funds' Statement of Additional Information (or "SAI") which contains additional
information about the Funds. The Hennessy Funds have incorporated by reference
the SAI into the Prospectus. This means that you should consider the contents
of the SAI to be part of the Prospectus.
You also may learn more about the Hennessy Funds' investments by reading the
Hennessy Funds' annual and semi-annual reports to shareholders. The annual
report includes a discussion of the market conditions and investment strategies
that significantly affected the performance of the Funds during their last
fiscal year.
The SAI and the annual and semi-annual reports are all available to
shareholders and prospective investors without charge, simply by calling 1-800-
261-6950.
Prospective investors and shareholders who have questions about the Hennessy
Funds may also call the above number or write to the following address:
The Hennessy Funds, Inc.
The Courtyard Square
750 Grant Avenue
Suite 100
Novato, CA 94945
The general public can review and copy information about the Hennessy Funds
(including the SAI) at the Securities and Exchange Commission's Public Reference
Room in Washington, D.C. (Please call 1-202-942-8090 for information on the
operations of the Public Reference Room.) Reports and other information about
the Hennessy Funds are also available on the EDGAR Database at the Securities
and Exchange Commission's Internet site at http://www.sec.gov and copies of this
information may be obtained, upon payment of a duplicating fee, by electronic
request at the following E-mail address: [email protected], or by
writing to:
Public Reference Section
Securities and Exchange Commission
Washington, D.C. 20549-6009
Please refer to the Hennessy Funds' Investment Company Act File No. 811-7493,
when seeking information about the Hennessy Funds from the Securities and
Exchange Commission.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION October 20, 2000
FOR THE
HENNESSY BALANCED FUND
HENNESSY LEVERAGED DOGS FUND
THE HENNESSY FUNDS, INC.
The Courtyard Square
750 Grant Avenue
Suite 100
Novato, California 94945
This Statement of Additional Information is not a prospectus and
should be read in conjunction with the Prospectus for The Hennessy Funds, Inc.,
dated October 20, 2000. Requests for copies of the Prospectus for the Fund
should be made by writing to The Hennessy Funds, Inc., The Courtyard Square, 750
Grant Avenue, Suite 100, Novato, California 94945, Attention: Corporate
Secretary, or by calling 1-800-966-4354.
The following financial statements are incorporated by reference to
the Annual Report, dated June 30, 2000 of The Hennessy Funds, Inc. (File No.
811-7493) as filed with the Securities and Exchange Commission on September 5,
2000:
o Statements of Assets and Liabilities
o Statements of Operations
o Statements of Changes in Net Assets
o Financial Highlights
o Schedules of Investments
o Notes to the Financial Statements
o Independent Auditors' Report
<PAGE>
The Hennessy Funds, Inc.
TABLE OF CONTENTS
-----------------
Page No.
--------
GENERAL INFORMATION AND HISTORY................................................1
INVESTMENT RESTRICTIONS........................................................1
INVESTMENT CONSIDERATIONS......................................................3
DIRECTORS AND OFFICERS OF THE CORPORATION......................................6
OWNERSHIP OF MANAGEMENT AND PRINCIPAL SHAREHOLDERS.............................8
INVESTMENT ADVISERS, ADMINISTRATOR, CUSTODIAN, TRANSFER AGENT
AND ACCOUNTING SERVICES AGENT.............................................8
DETERMINATION OF NET ASSET VALUE..............................................12
DISTRIBUTION OF SHARES........................................................12
AUTOMATIC INVESTMENT PLAN AND TELEPHONE PURCHASES.............................14
REDEMPTION OF SHARES..........................................................14
SYSTEMATIC WITHDRAWAL PLAN....................................................15
EXCHANGING SHARES.............................................................15
ALLOCATION OF PORTFOLIO BROKERAGE.............................................16
TAXES.........................................................................18
SHAREHOLDER MEETINGS..........................................................19
PERFORMANCE INFORMATION.......................................................20
INDEPENDENT AUDITORS..........................................................22
CAPITAL STRUCTURE.............................................................22
DESCRIPTION OF SECURITIES RATINGS.............................................23
No person has been authorized to give any information or to make any
representations other than those contained in this Statement of Additional
Information and the Prospectus dated October 20, 2000 and, if given or made,
such information or representations may not be relied upon as having been
authorized by The Hennessy Funds, Inc.
This Statement of Additional Information does not constitute an offer to sell
securities.
(i)
<PAGE>
GENERAL INFORMATION AND HISTORY
The Hennessy Funds, Inc., a Maryland corporation incorporated on
January 11, 1996 (the "Corporation"), is an open-end management investment
company consisting of two non-diversified portfolios, Hennessy Balanced Fund
(the "Balanced Fund") and Hennessy Leveraged Dogs Fund (the "Leveraged Dogs
Fund") (collectively, the "Funds"). The Corporation is registered under the
Investment Company Act of 1940 (the "Act").
INVESTMENT RESTRICTIONS
Each of the Funds has adopted the following investment restrictions
which are matters of fundamental policy and cannot be changed without approval
of the holders of the lesser of: (i) 67% of that Fund's shares present or
represented at a shareholder's meeting at which the holders of more than 50% of
such shares are present or represented; or (ii) more than 50% of the outstanding
shares of that Fund.
1. Neither Fund will purchase securities of any issuer if the purchase
would cause more than 5% of the value of that Fund's total assets to be
invested in securities of such issuer (except securities of the U.S.
government or any agency or instrumentality thereof), or purchase more than
10% of the outstanding voting securities of any one issuer, except that up
to 50% of each Fund's total assets may be invested without regard to these
limitations.
2. Neither Fund will sell securities short.
3. Neither Fund will purchase securities on margin (except for such
short term credits as are necessary for the clearance of transactions) or
write put or call options.
4. The Balanced Fund may not borrow money or issue senior securities
except for temporary bank borrowings (not exceeding 10% of the Balanced
Fund's total assets) or for emergency or extraordinary purposes. The
Balanced Fund will not borrow money for the purpose of investing in
securities and the Balanced Fund will not purchase any portfolio securities
so long as any borrowed amounts remain outstanding. The Leveraged Dogs Fund
may borrow money or issue senior securities to the extent permitted by the
Act.
5. Neither Fund will pledge or hypothecate its assets, except to
secure permitted borrowings.
6. Neither Fund will act as an underwriter or distributor of
securities other than of its shares (except to the extent that a Fund may
be deemed to be an underwriter within the meaning of the Securities Act of
1933, as amended, in the disposition of restricted securities).
7. Neither Fund will make loans, including loans of securities, except
it may acquire debt securities from the issuer or others which are publicly
-1-
<PAGE>
distributed or are of a type normally acquired by institutional investors
and enter into repurchase agreements.
8. Neither Fund will invest 25% or more of its total assets at the
time of purchase in securities of issuers whose principal business
activities are in the same industry.
9. Neither Fund will make investments for the purpose of exercising
control or management of any company.
10. Neither Fund will purchase or sell real estate or real estate
mortgage loans and neither will make any investments in real estate limited
partnerships.
11. Neither Fund will purchase or sell commodities or commodity
contracts.
12. Neither Fund will purchase or sell any interest in any oil, gas or
other mineral exploration or development program, including any oil, gas or
mineral leases.
Each of the Funds has adopted certain other investment restrictions
which are not fundamental policies and which may be changed by the Corporation's
Board of Directors without shareholder approval. These additional restrictions
are as follows:
1. Neither Fund will acquire or retain any security issued by a
company, an officer or director of which is an officer or director of the
Corporation or an officer, director or other affiliated person of a Fund's
investment adviser.
2. Neither Fund will invest in securities of any issuer which has a
record of less than three (3) years of continuous operation, including the
operation of any predecessor business of a company which came into
existence as a result of a merger, consolidation, reorganization or
purchase of substantially all of the assets of such predecessor business.
3. Neither Fund will purchase illiquid securities.
4. Neither Fund will purchase the securities of other investment
companies except: (a) as part of a plan of merger, consolidation or
reorganization approved by the shareholders of that Fund; or (b) securities
of registered open-end investment companies that invest exclusively in high
quality, short-term debt securities. No purchases described in (b) will be
made if as a result of such purchases (i) that Fund and its affiliated
persons would hold more than 3% of any class of securities, including
voting securities, of any registered investment company; (ii) more than 5%
of that Fund's net assets would be invested in shares of any one registered
investment company; and (iii) more than 10% of that Fund's net assets would
be invested in shares of registered investment companies.
-2-
<PAGE>
The aforementioned percentage restrictions on investment or
utilization of assets refer to the percentage at the time an investment is made.
If these restrictions are adhered to at the time an investment is made, and such
percentage subsequently changes as a result of changing market values or some
similar event, no violation of a Fund's investment restrictions will be deemed
to have occurred. Any changes in the Fund's investment restrictions made by the
Board of Directors will be communicated to shareholders prior to their
implementation.
INVESTMENT CONSIDERATIONS
The Fund's prospectus describes its principal investment strategies
and risks. This section expands upon that discussion and also describes
non-principal investment strategies and risks.
The Dow Jones Industrial Average
The Dow Jones Industrial Average ("DJIA") consists of the following 30
common stocks:
AlliedSignal Inc. The Home Depot, Inc.
Aluminum Co. of America (ALCOA) Intel Corp.
American Express Co. International Business Machines Corp.(IBM)
AT&T Corp. International Paper Co.
The Boeing Co. Johnson & Johnson
Caterpillar Inc. McDonald's Corp.
Citigroup Inc. Merck & Co., Inc.
The Coca-Cola Company Microsoft Corp.
The Walt Disney Company Minnesota Mining & Manufacturing Co.(3M)
E.I du Pont De Nemours & Co., Inc. J.P. Morgan & Co., Inc.
Eastman Kodak Co. Philip Morris Cos.
Exxon Mobil Corporation Procter & Gamble Co.
General Electric Co. SBC Communications Inc.
General Motors Corporation United Technologies Corp.
Hewlett-Packard Co. Wal-Mart Stores, Inc.
The DJIA is the property of Dow Jones & Company, Inc. Dow Jones & Company, Inc.
is not affiliated with either Fund, either Fund's investment adviser, or Edward
J. Hennessy, Inc., the general partner to each Fund's investment adviser. Dow
Jones & Company, Inc. has not participated in any way in the creation of the
Funds or in the selection of stocks included in the Funds and has not approved
any information included herein related thereto.
-3-
<PAGE>
The first DJIA, consisting of 12 stocks, was published in The Wall
Street Journal in 1896. The list grew to 20 stocks in 1916 and to 30 stocks on
October 1, 1928. Dow Jones & Company, Inc. from time to time changes the stocks
comprising the DJIA, although such changes are infrequent.
Each Fund's investment strategy is unlikely to be affected by the
requirement that it not concentrate its investments since currently no more than
three companies in the DJIA are engaged primarily in any one industry. Similarly
each Fund's investment strategy is unlikely to be materially affected by the
requirement that it meet the diversification requirements of the Internal
Revenue Code since each Fund will normally have 50% of its assets invested in
U.S. Treasury securities and the remainder of its assets divided among at least
ten stocks. However each Fund's diversification requirement may preclude it from
effecting a purchase otherwise dictated by its investment strategy. Finally
because of the requirements of the Act, each Fund will not invest more than 5%
of its total assets in the common stock of any issuer that derives more than 15%
of its revenues from securities-related activities. From time to time this
requirement may preclude a Fund from effecting a purchase otherwise dictated by
its investment strategy.
Money Market Instruments
Each of the Funds may invest in cash and money market instruments. The
Funds may do so when accumulating funds to make purchases of common stocks or
U.S. Treasury securities or to have assets available to pay expenses or satisfy
redemption requests. The money market instruments in which the Funds invest
include U.S. Treasury bills, commercial paper, commercial paper master notes,
repurchase agreements and shares of money market mutual funds.
The Funds may invest in commercial paper or commercial paper master
notes rated, at the time of purchase, A-1 or A-2 by Standard & Poor's
Corporation or Prime-1 or Prime-2 by Moody's Investors Service, Inc. Commercial
paper master notes are demand instruments without a fixed maturity bearing
interest at rates that are fixed to known lending rates and automatically
adjusted when such lending rates change.
The Funds may enter into repurchase agreements with banks that are
Federal Reserve Member banks and non-bank dealers of U.S. government securities
which, at the time of purchase, are on the Federal Reserve Bank of New York's
list of primary dealers with a capital base greater than $100 million. When
entering into repurchase agreements, a Fund will hold as collateral an amount of
cash or government securities at least equal to the market value of the
securities that are part of the repurchase agreement. A repurchase agreement
involves the risk that a seller may declare bankruptcy or default. In such event
a Fund may experience delays, increased costs and a possible loss.
The Funds may also invest in securities issued by other investment
companies that invest in high qualify, short-term debt securities (i.e., money
market funds). In addition to the advisory fees and other expenses the Funds
bear directly in connection with their own
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<PAGE>
operations, as a shareholder of another investment company, a Fund would bear
its pro rata portion of the other investment company's advisory fees and other
expenses, and such fees and other expenses will be borne indirectly by that
Fund's shareholders.
Borrowing
The Leveraged Dogs Fund intends to borrow for investment purposes.
Borrowing for investment is known as leveraging. Leveraging investments, by
purchasing securities with borrowed money, is a speculative technique which
increases investment risk, but also increases investment opportunity. Since
approximately half of the Leveraged Dogs Fund's assets will fluctuate in value,
whereas the interest obligations on borrowings may be fixed, the net asset value
per share of the Leveraged Dogs Fund when it leverages its investments will
increase more when the Leveraged Dogs Fund's portfolio assets increase in value
and decrease more when the Leveraged Dogs Fund's portfolio assets decrease in
value than would otherwise be the case. Moreover, interest costs on borrowings
may fluctuate with changing market rates of interest and may partially offset or
exceed the returns on the borrowed funds. Under adverse conditions, the
Leveraged Dogs Fund might have to sell portfolio securities to meet interest or
principal payments at a time investment considerations would not favor such
sales. The Leveraged Dogs Fund intends to use leverage whenever it is able to
borrow on terms considered by its investment adviser to be reasonable.
As required by the Act, the Leveraged Dogs Fund must maintain
continuous asset coverage (total assets, including assets acquired with borrowed
funds, less liabilities exclusive of borrowings) of 300% of all amounts
borrowed. If, at any time, the value of the Leveraged Dogs Fund's assets should
fail to meet this 300% coverage test, the Leveraged Dogs Fund, within three days
(not including Sundays and holidays), will reduce the amount of the Leveraged
Dogs Fund's borrowings to the extent necessary to meet this 300% coverage.
Maintenance of this percentage limitation may result in the sale of portfolio
securities at a time when investment considerations otherwise indicate that it
would be disadvantageous to do so.
Both Funds are authorized to borrow from banks as temporary measures
for extraordinary or emergency purposes in amounts not in excess of 10% of that
Fund's total assets. These borrowings are not subject to the foregoing 300%
asset coverage requirement.
The Leveraged Dogs Fund may enter into reverse repurchase agreements,
which are considered to be borrowings under the Act. Under a reverse repurchase
agreement, the Leveraged Dogs Fund sells portfolio securities and agrees to
repurchase them at an agreed-upon future date and price. When the Leveraged Dogs
Fund enters into a reverse repurchase agreement, it will maintain cash or liquid
securities having a value equal to or greater than the repurchase price
(including accrued interest). Reverse repurchase agreements involve the risk
that the market value of the securities sold by the Leveraged Dogs Fund may
decline below the price of the securities it is obligated to repurchase.
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<PAGE>
Portfolio Turnover
The Funds will generally hold securities for approximately one year
irrespective of investment performance. Securities may be sold after being held
less than one year to fund redemption requests. Consequently each Fund's annual
portfolio turnover rate may vary from year to year. Notwithstanding the
foregoing, each Fund's portfolio turnover rate will generally not exceed 100%.
High portfolio turnover in any year will result in the payment by a Fund of
above-average transaction costs (such as brokerage commissions or mark-ups or
mark-downs) and could result in the payment by shareholders of above-average
amounts of taxes on realized investment gains. Distributions to shareholders of
such investment gains, to the extent they consist of net short-term capital
gains, will be considered ordinary income for federal income tax purposes.
DIRECTORS AND OFFICERS OF THE CORPORATION
As a Maryland corporation, the business and affairs of the Corporation
are managed by its officers under the direction of its Board of Directors. The
name, age, address, principal occupation(s) during the past five years, and
other information with respect to each of the directors and officers of the
Corporation are as follows:
*Neil J. Hennessy -- Director, President and Treasurer. Mr. Hennessy,
44, has been President of Edward J. Hennessy, Incorporated ("EJH") since 1989.
His address is The Courtyard Square, 750 Grant Avenue, Suite 100, Novato, CA
94945.
*Brian A. Hennessy -- Director. Mr. Hennessy, 47, has been a
self-employed dentist for more than ten years. His address is 912 Grand Avenue,
San Rafael, CA 94901.
Robert T. Doyle -- Director. Mr. Doyle, 53, is currently the Sheriff
of Marin County, California and has been employed in the Marin County Sheriff's
Office in various capacities since 1969. His address is 87 Washington Street,
Novato, CA 94947.
*Rodger D. Offenbach -- Director. Mr. Offenbach, 49, has been the
owner of Rays Catering since 1974. His address is 919 Eastman Lane, Petaluma, CA
94952.
J. Dennis DeSousa -- Director. Mr. DeSousa, 64, is a retired vice
president of the California State Automobile Association. He currently is a
private investor. His address is 682 Wilson Street, Novato, CA 94947.
Teresa M. Nilsen -- Vice President and Secretary. Ms. Nilsen, 34, is
currently Executive Vice President and Secretary of EJH. She has been corporate
secretary and a financial officer of EJH since 1989. Her address is The
Courtyard Square, 750 Grant Avenue, Suite 100, Novato, CA 94945.
Daniel Steadman - Executive Vice President. Mr. Steadman, 44, has been
Executive Vice President of EJH since 2000. He was a vice president of
Westamerica Bank from 1995-2000. His address is The Courtyard Square, 750 Grant
Avenue, Suite 100, Novato, CA 94945.
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<PAGE>
Jeffrey Colella - Vice President. Mr. Colella, 30, is currently Vice
President-Sales of EJH and has been employed by EJH in various capacities since
1996. His address is The Courtyard Square, 750 Grant Avenue, Suite 100, Novato,
CA 94945.
Ana Miner - Vice President. Ms. Miner, 42, has been Vice
President-Operations of EJH since 1998. From 1990 to 1998 she was employed as an
institutional sales assistant by Merrill Lynch Capital Markets. Her address is
The Courtyard Square, 750 Grant Avenue, Suite 100, Novato, CA 94945.
--------------------
* Messrs. Neil Hennessy, Brian Hennessy and Offenbach are directors who are
interested persons of the Corporation (as defined in the Act). Messrs. Neil
Hennessy and Brian Hennessy are brothers. All of the officers of the Corporation
are interested persons of the Corporation.
The Corporation's standard method of compensating directors is to pay
each director who is not an interested person of the Corporation a fee of $600
($350 from the Balanced Fund and $250 from the Leveraged Dogs Fund) for each
meeting of the Board of Directors attended. The Corporation also may reimburse
directors for travel expenses incurred in order to attend meetings of the Board
of Directors.
The table below sets forth the compensation paid by the Corporation to
each of the current directors of the Corporation during the fiscal year ended
June 30, 2000:
<TABLE>
COMPENSATION TABLE
<CAPTION>
Total
Compensation
Estimated from Corporation
Pension or Retirement Annual and Fund
Name of Aggregate Compensation Benefits Accrued As Benefits Upon Complex* Paid to
Person from Corporation* Part of Fund Expenses Retirement Directors
------ ----------------- --------------------- ---------
<S> <C> <C> <C> <C>
Neil J. Hennessy $0 $0 $0 $0
Brian A. Hennessy 0 0 0 0
Robert T. Doyle $2,400 0 0 $2,400
Rodger D. Offenbach 0 0 0 0
J. Dennis DeSousa $2,400 0 0 $2,400
---------------------------
*The Balanced Fund, the Leveraged Dogs Fund and two series of Hennessy Mutual Funds, Inc., Hennessy Cornerstone Growth Fund
and Hennessy Cornerstone Value Fund, are the only funds in the Fund Complex.
</TABLE>
The Funds and their investment advisers have adopted a code of ethics
pursuant to Rule 17j-1 under the Act. This code of ethics permits personnel
subject thereto to invest in securities, including securities that may be
purchased or held by the Funds; provided that, with respect to purchases or
sales of common stock of issuers in the Dow Jones Industrial Average,
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<PAGE>
the number of shares purchased or sold of any one issuer on any day does not
exceed 5,000 shares.
OWNERSHIP OF MANAGEMENT AND PRINCIPAL SHAREHOLDERS
At September 30, 2000, the only person owning of record, or known to
the Corporation to own beneficially, 5% or more of the outstanding shares of the
Balanced Fund was:
Name and Address of Shareholder Percentage Owned
------------------------------- ----------------
Tile West Inc. Profit Sharing Plan 9.23%
10 Hamilton Drive
Novato, CA 94949-5603
Including shares of the Balanced Fund owned by its investment adviser,
all officers and directors of the Corporation owned 3.17% of the outstanding
shares of the Balanced Fund.
At September 30, 2000, there were no persons owning of record, or
known to the Corporation to own beneficially, 5% or more of the outstanding
shares of the Leveraged Dogs Fund.
Including shares of the Leveraged Dogs Fund owned by its investment
adviser, all officers and directors of the Corporation owned 3.88% of the
outstanding shares of the Leveraged Dogs Fund.
INVESTMENT ADVISERS, ADMINISTRATOR, CUSTODIAN,
TRANSFER AGENT AND ACCOUNTING SERVICES AGENT
The investment adviser to the Balanced Fund is The Hennessy Management
Co., L.P., The Courtyard Square, 750 Grant Avenue, Suite 100, Novato, California
94945 (the "Balanced Fund Adviser"). The investment adviser to the Leveraged
Dogs Fund is The Hennessy Management Co. 2, L.P., The Courtyard Square, 750
Grant Avenue, Suite 100, Novato, California 94945 (the "Leveraged Dogs Fund
Adviser"). Each of the Balanced Fund Adviser and the Leveraged Dogs Fund Adviser
is controlled by its general partner, EJH, which is in turn controlled by Neil
J. Hennessy. Mr. Offenbach and Mr. Hennessy are limited partners of each of the
Balanced Fund Adviser and the Leveraged Dogs Fund Adviser.
Pursuant to separate investment advisory agreements (the "Advisory
Agreements") entered into between the Balanced Fund and the Balanced Fund
Adviser and the Leveraged Dogs Fund and the Leveraged Dogs Fund Adviser,
respectively, the investment adviser supervises and manages the applicable
Fund's investment portfolio and, subject to such policies as the Corporation's
Board of Directors may determine, directs the purchase or sale of investment
securities in the day-to-day management of that Fund. Under each of the Advisory
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<PAGE>
Agreements, the investment adviser, at its own expense and without separate
reimbursement from the Fund (other than pursuant to the Fund's 12b-1 plan),
furnishes office space and all necessary office facilities, equipment and
executive personnel for managing that Fund; and bears all of that Fund's sales
and promotional expenses, other than expenses incurred in complying with the
laws regulating the issue or sale of securities. For the foregoing, each
investment adviser receives a monthly fee at the annual rate of 0.60% of the
daily net assets of the applicable Fund. During the fiscal years ended June 30,
2000 and June 30, 1999 the Balanced Fund Adviser earned $127,758 and $138,497,
respectively, of investment advisory fees from the Balanced Fund and did not
waive any of such fees. During the fiscal year ended June 30,1998, the Balanced
Fund Adviser earned $181,174 of investment advisory fees from the Balanced Fund
and waived $53,286 of such fees. During the fiscal years ended June 30, 2000 and
June 30, 1999 the Leveraged Dogs Fund Adviser earned $30,384 and $14,902,
respectively, of investment advisory fees from the Leveraged Dogs Fund and
waived all of such fees.
The Funds pay all of their expenses not assumed by the investment
advisers, including, but not limited to, the costs of preparing and printing the
registration statement required under the Securities Act of 1933 and the Act and
any amendments thereof, the expenses of registering their shares with the
Securities and Exchange Commission and in the various states, the printing and
distribution cost of prospectuses mailed to existing shareholders, the cost of
director and officer liability insurance, reports to shareholders, reports to
government authorities and proxy statements, interest charges, brokerage
commissions, and expenses incurred in connection with portfolio transactions.
The Funds will also pay the fees of the Corporation's directors who are not
officers, salaries of administrative and clerical personnel, association
membership dues, legal fees, auditing and accounting services, fees and expenses
of any custodian or trustees having custody of the Funds' assets, expenses of
calculating the net asset value and repurchasing and redeeming shares, and
charges and expenses of dividend disbursing agents, registrars, and share
transfer agents, including the cost of keeping all necessary shareholder records
and accounts and handling any problems relating thereto.
Each investment adviser has undertaken to reimburse the applicable
Fund to the extent that the aggregate annual operating expenses, including the
investment advisory fee and the administration fee but excluding interest,
taxes, brokerage commissions and other costs incurred in connection with the
purchase or sale of portfolio securities, and extraordinary items, exceed that
percentage of the average net assets of that Fund for such year, as determined
by valuations made as of the close of each business day of the year, which is
the most restrictive percentage provided by the state laws of the various states
in which the shares of that Fund are qualified for sale or, if the states in
which the shares of that Fund are qualified for sale impose no such
restrictions, 3%. As of the date of this Statement of Additional Information, no
such percentage limitation was applicable to either Fund. Each Fund monitors its
expense ratio on a monthly basis. If the accrued amount of the expenses of a
Fund exceeds the expense limitation, that Fund creates an account receivable
from its investment adviser for the amount of such excess. In such a situation
the monthly payment of the investment adviser's fee will be reduced by the
amount of such excess (and if the amount of such excess in any month is greater
than the monthly payment of the Adviser's fee, the
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<PAGE>
investment adviser will pay the applicable Fund the amount of such difference),
subject to adjustment month by month during the balance of that Fund's fiscal
year if accrued expenses thereafter fall below this limit. Notwithstanding the
most restrictive applicable expense limitation of state securities commissions
described above, during the fiscal year ended June 30, 1998, the Balanced Fund
Adviser waived investment advisory fees, as described above, in amounts
sufficient to cause the Balanced Fund's expenses not to exceed 1.68% of the
Balanced Fund's average daily net assets. Notwithstanding the most restrictive
applicable expense limitation of state securities commissions described above,
during the fiscal years ended June 30, 1999 and June 30, 2000, the Leveraged
Dogs Fund Adviser waived investment advisory fees, as described above, and
reimbursed the Leveraged Dogs Fund $108,103 and $78,737, respectively, so as to
cause the Leveraged Dogs Fund's expenses (excluding interest, taxes, brokerage
commissions and other costs incurred in connection with the purchase and sale of
securities, and extraordinary items) not to exceed 0.00% and 1.20%,
respectively, of the Leveraged Dogs Fund's average daily net assets.
Each Advisory Agreement will remain in effect as long as its
continuance is specifically approved at least annually (i) by the Board of
Directors of the Corporation or by the vote of a majority (as defined in the
Act) of the outstanding shares of the applicable Fund, and (ii) by the vote of a
majority of the directors of the Corporation who are not parties to the Advisory
Agreement or interested persons of the applicable investment adviser, cast in
person at a meeting called for the purpose of voting on such approval. Each
Advisory Agreement provides that it may be terminated at any time, without the
payment of any penalty, by the Board of Directors of the Corporation or by vote
of the majority of the applicable Fund's shareholders on sixty (60) days'
written notice to the investment adviser, and by the investment adviser on the
same notice to the Corporation, and that it shall be automatically terminated if
it is assigned.
Each Advisory Agreement provides that the applicable investment
adviser shall not be liable to the Corporation or its shareholders for anything
other than willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations or duties. Each Advisory Agreement also provides
that the investment adviser and its officers, directors and employees may engage
in other businesses, devote time and attention to any other business whether of
a similar or dissimilar nature, and render services to others.
The administrator to the Corporation is Firstar Mutual Fund Services,
LLC, 615 East Michigan Street, Milwaukee, Wisconsin 53202 (the "Administrator").
Pursuant to an administration agreement entered into between the Corporation and
the Administrator relating to each Fund (the "Administration Agreements"), the
Administrator maintains the books, accounts and other documents required by the
Act, responds to shareholder inquiries, prepares each Fund's financial
statements and tax returns, prepares certain reports and filings with the
Securities and Exchange Commission and with state Blue Sky authorities,
furnishes statistical and research data, clerical, accounting and bookkeeping
services and stationery and office supplies, keeps and maintains our financial
and accounting records and generally assists in all aspects of each Fund's
operations. The Administrator, at its own expense and without reimbursement from
the Funds, furnishes office space and all necessary office facilities, equipment
and executive personnel for performing the services required to be performed by
it
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<PAGE>
under the Administration Agreement. For the foregoing, the Administrator
receives from each Fund a fee, paid monthly, at an annual rate of .08% of the
first $200,000,000 of such Fund's average net assets, .07% of the next
$500,000,000 of such Fund's average net assets, and .05% of such Fund's net
assets in excess of $700,000,000. Notwithstanding the foregoing, the
Administrator's minimum annual fee from the Balanced Fund is $30,000 and from
the Leveraged Dogs Fund, $25,000. The Administration Agreement will remain in
effect until terminated by either party. The Administration Agreement may be
terminated at any time, without the payment of any penalty, by the Board of
Directors of the Corporation upon the giving of ninety (90) days' written notice
to the Administrator, or by the Administrator upon the giving of ninety (90)
days' written notice to the Corporation. During the fiscal years ended June 30,
2000, June 30, 1999 and June 30, 1998, the Balanced Fund incurred fees in the
amount of $29,789, $30,011 and $32,474, respectively, pursuant to the
Administration Agreement. During the fiscal years ended June 30, 2000 and June
30, 1999, the Leveraged Dogs Fund incurred fees of $24,427 and $16,500,
respectively, pursuant to the Administration Agreement.
Under the Administration Agreement, the Administrator is required to
exercise reasonable care and is not liable for any error of judgment or mistake
of law or for any loss suffered by the Corporation in connection with its
performance as administrator under the Administration Agreement, except a loss
resulting from willful misfeasance, bad faith or negligence on the part of the
Administrator in the performance of its duties under the Administration
Agreement.
Firstar Bank, N.A., an affiliate of Firstar Mutual Fund Services, LLC,
serves as custodian of the Corporation's assets pursuant to a Custody Agreement.
Under the Custody Agreement, Firstar Bank, N.A. has agreed to (i) maintain a
separate account in the name of each Fund, (ii) make receipts and disbursements
of money on behalf of each Fund, (iii) collect and receive all income and other
payments and distributions on account of each Fund's portfolio investments, (iv)
respond to correspondence from shareholders, security brokers and others
relating to its duties, and (v) make periodic reports to each Fund concerning
the Fund's operations. Firstar Bank, N.A. does not exercise any supervisory
function over the purchase and sale of securities. Firstar Mutual Fund Services,
LLC also serves as transfer agent and dividend disbursing agent for each Fund
under Shareholder Servicing Agent Agreements. As transfer and dividend
disbursing agent, Firstar Mutual Fund Services, LLC has agreed to (i) issue and
redeem shares of each Fund, (ii) make dividend and other distributions to
shareholders of each Fund, (iii) respond to correspondence by Fund shareholders
and others relating to its duties, (iv) maintain shareholder accounts, and (v)
make periodic reports to the Funds.
In addition the Corporation has entered into a Fund Accounting
Servicing Agreement with Firstar Mutual Fund Services, LLC pursuant to which
Firstar Mutual Fund Services, LLC has agreed to maintain the financial accounts
and records of each Fund and provide other accounting services to each Fund. For
its accounting services, Firstar Mutual Fund Services, LLC is entitled to
receive fees, payable monthly, based on the total annual rate of $26,000 for the
first $100 million in average net assets of each Fund, .01125% on the next $200
million of average net assets, and .000625% on average net assets exceeding $300
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<PAGE>
million. Firstar Mutual Fund Services, LLC is also entitled to certain out of
pocket expenses, including pricing expenses. During the fiscal years ended June
30, 2000, June 30, 1999 and June 30, 1998, the Balanced Fund incurred fees of
$25,760, $24,014 and $25,095, respectively, pursuant to the Fund Accounting
Servicing Agreement. During the fiscal years ended June 30, 2000 and June 30,
1999 the Leveraged Dogs Fund incurred fees of $24,259 and $18,423, respectively,
pursuant to the Fund Accounting Servicing Agreement.
DETERMINATION OF NET ASSET VALUE
The net asset value of each Fund is determined as of the close of
regular trading (currently 4:00 p.m. Eastern time) on each day the New York
Stock Exchange is open for trading. The New York Stock Exchange is open for
trading Monday through Friday except New Year's Day, Martin Luther King, Jr.
Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Additionally, when any of the aforementioned
holidays falls on a Saturday, the New York Stock Exchange will not be open for
trading on the preceding Friday and when any such holiday falls on a Sunday, the
New York Stock Exchange will not be open for trading on the succeeding Monday,
unless unusual business conditions exist, such as the ending of a monthly or the
yearly accounting period. The New York Stock Exchange also may be closed on
national days of mourning.
Each Fund's net asset value per share is determined by dividing the
total value of its investments and other assets less any liabilities, by the
number of its outstanding shares. Each Fund's stock investments are valued at
the last quoted sales price on the day the valuation is made utilizing price
information taken from the New York Stock Exchange where the security is
primarily traded. Securities which are not traded on the valuation date are
valued at the most recent bid prices. Debt securities are valued at the latest
bid prices furnished by independent pricing services. Other assets are valued at
fair value as determined in good faith by the applicable Fund's investment
adviser in accordance with procedures approved by the Board of Directors of the
Corporation. Short-term instruments (those with remaining maturities of 60 days
or less) are valued at amortized cost, which approximates market value.
DISTRIBUTION OF SHARES
The Corporation has adopted a Service and Distribution Plan (the
"Plan") in anticipation that the Funds will benefit from the Plan through
increased sales of their shares, thereby reducing each Fund's expense ratio and
providing an asset size that allows its investment adviser greater flexibility
in management. The Plan authorizes payments by the Funds in connection with the
distribution of their shares at an annual rate, as determined from time to time
by the Corporation's Board of Directors, of up to 0.25% of each Fund's average
daily net assets. Payments made pursuant to the Plan may only be used to pay
distribution expenses actually incurred. Amounts paid under the Plan by the
Funds may be spent on any activities or expenses primarily intended to result in
the sale of shares of the Funds, including but not limited to, advertising,
compensation for sales and marketing activities of financial institutions and
others such as dealers and distributors, shareholder account servicing, the
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<PAGE>
printing and mailing of prospectuses to other than current shareholders and the
printing and mailing of sales literature. The Plan permits the Funds to employ a
distributor of their shares, in which event payments under the Plan may be made
to the distributor and may be spent by the distributor on any activities or
expenses primarily intended to result in the sale of our shares, including but
not limited to, compensation to, and expenses (including overhead and telephone
expenses) of, employees of the distributor who engage in or support distribution
of the Funds' shares, printing of prospectuses and reports for other than
existing shareholders, advertising and preparation and distribution of sales
literature. Allocation of overhead (rent, utilities, etc.) and salaries will be
based on the percentage of utilization, and time devoted to, distribution
activities.
Prior to July 1, 2000 payments under the Plan were made to the
investment advisers who bear all sales and promotional expenses of the Fund
(other than expenses incurred in complying with laws regulating the issuance or
sale of securities) that are not borne by the Funds under the Plan. During the
fiscal year ended June 30, 2000, the Balanced Fund incurred $53,232 of
distribution fees under the Plan, none of which were waived by the Balanced Fund
Adviser. During the fiscal year ended June 30,1999, the Balanced Fund incurred
$57,707 of distribution fees under the Plan, none of which was waived by the
Balanced Fund Adviser. During the fiscal year ended June 30, 1998, the Balanced
Fund incurred $159,859 of distribution fees under the Plan, of which $106,573
were waived by the Balanced Fund Adviser. During the fiscal year ended June 30,
2000 the Leveraged Dogs Fund incurred $12,660 of distribution fees under the
Plan, all of which were waived by the Leveraged Dogs Fund Adviser. During the
fiscal year ended June 30, 1999 the Leveraged Dogs Fund incurred $6,209 of
distribution fees under the Plan, all of which were waived by the Leveraged Dogs
Fund Adviser.
Each investment adviser has entered into an agreement with EJH
pursuant to which it would pay EJH for expenses actually incurred by EJH in
distributing that Fund's shares (the "EJH Agreement"). Each of the EJH
Agreements terminated as of July 27, 2000. The EJH Agreement further provided
that the applicable investment adviser will pay EJH an amount equal to $225 per
hour, or such other rate as the applicable investment adviser and EJH may agree
from time to time, for services provided by Neil J. Hennessy in his capacity as
President of EJH related to the distribution of that Funds' shares. (Prior to
May 28, 1998, the Balanced Fund Adviser had an agreement with EJH pursuant to
which it paid EJH an amount equal to 1% of the net asset value of all shares of
the Balanced Fund sold other than through dividend reinvestments (the "Former
EJH Agreement"). The Former EJH Agreement required EJH to repay any such fees
with respect to shares redeemed within one month after the date of the original
purchase other than shares redeemed as a result of the death or disability of
the shareholder. During the fiscal years ended June 30, 2000, 1999 and 1998, the
Balanced Fund Adviser paid EJH $84,681, $94,420 and $69,836, respectively,
pursuant to the foregoing Agreements. During the fiscal years ended June 30,
2000 and June 30, 1999, the Leveraged Dogs Fund Adviser paid EJH $44,276 and
$152,407, respectively, pursuant to the EJH Agreement. Neil J. Hennessy, the
President and a director of the Corporation, is a limited partner of each
investment adviser as well as President and controlling shareholder of EJH, the
general partner to each investment adviser.
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<PAGE>
Effective September 1, 2000 the Funds retained Quasar Distributors,
LLC, 615 East Michigan Street, Milwaukee, Wisconsin 53202, as the distributor
for the Funds. Quasar Distributors, LLC is an affiliate of Firstar Mutual Fund
Services, LLC. Quasar Distributors, LLC provides distribution-related services
to each Fund in connection with the continuous offering of the Funds' shares.
The Distributor may distribute the shares of the Funds through other
broker-dealers with which it enters into sales or similar agreements.
The Plan may be terminated by the Fund at any time by a vote of the
directors of the Corporation who are not interested persons of the Corporation
and who have no direct or indirect financial interest in the Plan or any
agreement related thereto (the "Rule 12b-1 Directors") or by a vote of a
majority of the outstanding shares of the Fund. Messrs. Doyle and DeSousa are
currently the Rule 12b-1 Directors. Any change in the Plan that would materially
increase the distribution expenses of the Fund provided for in the Plan requires
approval of the shareholders of the Fund and the Board of Directors, including
the Rule 12b-1 Directors. While the Plan is in effect, the selection and
nomination of directors who are not interested persons of the Corporation will
be committed to the discretion of the directors of the Corporation who are not
interested persons of the Corporation. The Board of Directors of the Corporation
must review the amount and purposes of expenditures pursuant to the Plan
quarterly as reported to it by a Distributor, if any, or officers of the
Corporation. The Plan will continue in effect for as long as its continuance is
specifically approved at least annually by the Board of Directors, including the
Rule 12b-1 Directors.
AUTOMATIC INVESTMENT PLAN AND TELEPHONE PURCHASES
Each Fund offers an automatic investment option pursuant to which
money will be moved from a shareholder's bank account to the shareholder's Fund
account on the schedule (e.g., monthly, bimonthly [every other month], quarterly
or yearly) the shareholder selects. The minimum transaction amount is $100.
Each Fund offers a telephone purchase option pursuant to which money
will be moved from the shareholder's bank account to the shareholder's Fund
account upon request. Only bank accounts held at domestic financial institutions
that are Automated Clearing House (ACH) members can be used for telephone
transactions. To have Fund shares purchased at the net asset value determined as
of the close of regular trading on a given date, Firstar Mutual Fund Services,
LLC must receive both the purchase order and payment by Electronic Funds
Transfer through the ACH System before the close of regular trading on such
date. Most transfers are completed within 3 business days. The minimum amount
that can be transferred by telephone is $100.
REDEMPTION OF SHARES
A shareholder's right to redeem shares of the Funds will be suspended
and the shareholder's right to payment postponed for more than seven days for
any period during which the New York Stock Exchange is closed because of
financial conditions or any other extraordinary reason and may be suspended for
any period during which (a) trading on the New York Stock Exchange is restricted
pursuant to rules and regulations of the Securities and
-14-
<PAGE>
Exchange Commission, (b) the Securities and Exchange Commission has by order
permitted such suspension, or (c) such emergency, as defined by rules and
regulations of the Securities and Exchange Commission, exists as a result of
which it is not reasonably practical for the Funds to dispose of its securities
or fairly to determine the value of its net assets.
SYSTEMATIC WITHDRAWAL PLAN
An investor who owns shares of either Fund worth at least $10,000 at
the current net asset value may, by completing an application which may be
obtained from that Fund or Firstar Mutual Fund Services, LLC, create a
Systematic Withdrawal Plan from which a fixed sum will be paid to the investor
at regular intervals. To establish the Systematic Withdrawal Plan, the investor
deposits Fund shares with the Corporation and appoints it as agent to effect
redemptions of Fund shares held in the account for the purpose of making monthly
or quarterly withdrawal payments of a fixed amount to the investor out of the
account. Fund shares deposited by the investor in the account need not be
endorsed or accompanied by a stock power if registered in the same name as the
account; otherwise, a properly executed endorsement or stock power, obtained
from any bank, broker-dealer or the Corporation is required. The investor's
signature should be guaranteed by a bank, a member firm of a national stock
exchange or other eligible guarantor.
The minimum amount of a withdrawal payment is $100. These payments
will be made from the proceeds of periodic redemptions of shares in the account
at net asset value. Redemptions will be made in accordance with the schedule
(e.g., monthly, bimonthly [every other month], quarterly or yearly, but in no
event more frequently than monthly) selected by the investor. If a scheduled
redemption day is a weekend day or a holiday, such redemption will be made on
the next preceding business day. Establishment of a Systematic Withdrawal Plan
constitutes an election by the investor to reinvest in additional Fund shares,
at net asset value, all income dividends and capital gains distributions payable
by the Fund on shares held in such account, and shares so acquired will be added
to such account. The investor may deposit additional Fund shares in his account
at any time.
Withdrawal payments cannot be considered as yield or income on the
investor's investment, since portions of each payment will normally consist of a
return of capital. Depending on the size or the frequency of the disbursements
requested, and the fluctuation in the value of the Fund's portfolio, redemptions
for the purpose of making such disbursements may reduce or even exhaust the
investor's account.
The investor may vary the amount or frequency of withdrawal payments,
temporarily discontinue them, or change the designated payee or payee's address,
by notifying Firstar Mutual Fund Services, LLC in writing thirty (30) days prior
to the next payment.
EXCHANGING SHARES
Investors may exchange shares of either Fund having a value of $1,000
or more for shares of the Firstar Money Market Fund at their net asset value and
at a later date exchange such shares and shares purchased with reinvested
dividends for shares of the Funds
-15-
<PAGE>
at net asset value. Investors who are interested in exercising the exchange
privilege should first contact the Funds to obtain instructions and any
necessary forms. The exchange privilege does not in any way constitute an
offering of, or recommendation on the part of the Funds or their investment
advisers of, an investment in Firstar Money Market Fund. Any investor who
considers making such an investment through the exchange privilege should obtain
and review the prospectus of the Firstar Money Market Fund before exercising the
exchange privilege.
Because of the time needed to transfer money between the Funds or a
Fund and the Firstar Money Market Fund, investors may not exchange into or out
of the same fund on the same or successive days. There must be at least one day
between exchange transactions. Investors may exchange shares only for shares
that have been registered in their state.
The exchange privilege will not be available if (i) the proceeds from
a redemption of shares are paid directly to the investor or at his or her
discretion to any persons other than the Funds or (ii) the proceeds from
redemption of the shares of the Firstar Money Market Fund are not immediately
reinvested in shares of the Funds through a subsequent exercise of the exchange
privilege. Because excessive trading can hurt a Fund's performance and
shareholders, each Fund reserves the right to temporarily or permanently
terminate the exchange privilege of any investor who makes excessive use of the
exchange privilege (more than five exchanges per calendar year). Exchanges may
be restricted or refused by a Fund if it receives or anticipates receiving
simultaneous orders affecting significant portions of the Fund's assets. In
particular, a pattern of exchanges with a "market timing" strategy may be
disruptive to a Fund. The exchange privilege may be terminated by the Funds upon
at least 60 days prior notice to investors.
ALLOCATION OF PORTFOLIO BROKERAGE
Each Fund's securities trading and brokerage policies and procedures
are reviewed by and subject to the supervision of the Corporation's Board of
Directors. Decisions to buy and sell securities for the Balanced Fund are made
by the Balanced Fund Adviser and for the Leveraged Dogs Fund by the Leveraged
Dogs Fund Adviser in each case subject to review by the Corporation's Board of
Directors. In placing purchase and sale orders for portfolio securities for the
Funds, it is the policy of the investment advisers to seek the best execution of
orders at the most favorable price in light of the overall quality of brokerage
and research services provided, as described in this and the following
paragraphs. Many of these transactions involve payment of a brokerage commission
by a Fund. In some cases, transactions are with firms who act as principals of
their own accounts. In selecting brokers to effect portfolio transactions, the
determination of what is expected to result in best execution at the most
favorable price involves a number of largely judgmental considerations. Among
these are the investment adviser's evaluation of the broker's efficiency in
executing and clearing transactions, block trading capability (including the
broker's willingness to position securities) and the broker's reputation,
financial strength and stability. The most favorable price to a Fund means the
best net price without regard to the mix between purchase or sale price and
commission, if any. Securities not listed on exchanges may be purchased and sold
directly with principal market makers who retain the difference in their cost in
the security and its selling price (i.e. "markups" when the market maker sells a
security and "markdowns"
-16-
<PAGE>
when the market maker buys a security). In some instances, the investment
adviser may believe that better prices are available from non-principal market
makers who are paid commissions directly. The Funds may place portfolio orders
with broker-dealers who recommend the purchase of Fund shares to clients (if the
investment adviser believes the commissions and transaction quality are
comparable to that available from other brokers) and may allocate portfolio
brokerage on that basis.
Prior to July 28, 2000, the investment adviser was permitted to
allocate brokerage to EJH but only if the investment adviser reasonably believed
the commission and transaction quality was comparable to that available from
other qualified brokers. Under the Act, EJH is prohibited from dealing with a
Fund as a principal in the purchase and sale of securities. EJH, when acting as
a broker for a Fund in any of its portfolio transactions executed on a
securities exchange of which EJH is a member, was required to act in accordance
with the requirements of Section 11(a) of the Securities Exchange Act of 1934
and the rules of such exchanges.
In allocating brokerage business for the Funds, the investment
advisers also take into consideration the research, analytical, statistical and
other information and services provided by the broker, such as general economic
reports and information, reports or analyses of particular companies or industry
groups, market timing and technical information, and the availability of the
brokerage firm's analysts for consultation. While the investment advisers
believe these services have substantial value, they are considered supplemental
to their own efforts in the performance of their duties under the Advisory
Agreements. Other clients of the investment advisers may indirectly benefit from
the availability of these services to the investment advisers, and the Funds may
indirectly benefit from services available to the investment adviser as a result
of transactions for other clients. The Advisory Agreements provide that the
investment advisers may cause a Fund to pay a broker which provides brokerage
and research services to the investment adviser a commission for effecting a
securities transaction in excess of the amount another broker would have charged
for effecting the transaction, if the investment adviser determines in good
faith that such amount of commission is reasonable in relation to the value of
brokerage and research services provided by the executing broker viewed in terms
of either the particular transaction or the investment adviser's overall
responsibilities with respect to the Fund and the other accounts as to which he
exercises investment discretion.
All of the brokerage commissions paid by the Balanced Fund during the
fiscal years ended June 30, 2000, June 30, 1999 and June 30, 1998 were paid to
EJH. Commissions totaled $9,949 on transactions involving securities having a
total market value of $8,060,890 during the fiscal year ended June 30, 2000,
commissions totaled $6,815 on transactions involving securities having a total
market value of $6,685,463 during the fiscal year ended June 30, 1999, and
commissions totaled $5,009 on transactions involving securities having a total
market value of $5,234,098 during the fiscal year ended June 30, 1998. All of
the brokerage commissions paid by the Leveraged Dogs Fund during the fiscal
years ended June 30, 2000 and June 30, 1999 were paid to EJH. Commissions
totaled $3,684 on transactions involving securities having a total market value
of $2,876,157 during the fiscal year ended
-17-
<PAGE>
June 30, 2000 and commissions totaled $3,451 on transactions involving
securities having a total market value of $3,724,679 during the fiscal year
ended June 30, 1999.
TAXES
Each Fund will endeavor to qualify annually for and elect tax
treatment applicable to a regulated investment company under Subchapter M of the
Internal Revenue Code. Each Fund has so qualified in each of its fiscal years.
If a Fund fails to qualify as a regulated investment company under Subchapter M
in any fiscal year, it will be treated as a corporation for federal income tax
purposes. As such, the Fund would be required to pay income taxes on its net
investment income and net realized capital gains, if any, at the rates generally
applicable to corporations. Shareholders of a Fund that did not qualify as a
regulated investment company under Subchapter M would not be liable for income
tax on the Fund's net investment income or net realized capital gains in their
individual capacities. Distributions to shareholders, whether from the Fund's
net investment income or net realized capital gains, would be treated as taxable
dividends to the extent of accumulated earnings and profits of the Fund.
Each Fund intends to distribute substantially all of its net
investment income and net capital gains each fiscal year. Dividends from the
Fund's net investment income, and distributions of the Fund's net long-term
realized capital gains, are taxable to investors, whether received in cash or in
additional shares of the Fund. The 70% dividends-received deduction for
corporations will apply only to dividends from the Fund's net investment income,
subject to proportionate reductions if the aggregate dividends received by the
Fund from domestic corporations in any year are less than 100% of the
distributions of net investment company taxable income made by the Fund.
Redemption of shares will generally result in a capital gain or loss
for income tax purposes. The tax treatment of any such capital gain or loss
generally will be dependent upon the investor's holding period for the shares.
However, if a loss is realized on shares held for six months or less, and the
investor received a distribution of long-term capital gains during that period,
then such loss is treated as a long-term capital loss to the extent of the
capital gain distribution received.
Each Fund may be required to withhold Federal income tax at a rate of
31% ("backup withholding") from dividend payments and redemption proceeds if a
shareholder fails to furnish such Fund with his social security number or other
tax identification number and certify under penalty of perjury that such number
is correct and that he is not subject to backup withholding due to the
underreporting of income. The certification form is included as part of the new
account application and should be completed when the account is opened.
This section is not intended to be a complete discussion of present or
proposed federal income tax laws and the effect of such laws on an investor.
Investors are urged to consult with their respective tax advisers for a complete
review of the tax ramifications of an investment in the Funds.
-18-
<PAGE>
SHAREHOLDER MEETINGS
The Maryland General Corporation Law permits registered investment
companies, such as the Corporation, to operate without an annual meeting of
shareholders under specified circumstances if an annual meeting is not required
by the Act. The Corporation has adopted the appropriate provisions in its Bylaws
and may, at its discretion, not hold an annual meeting in any year in which the
election of directors is not required to be acted on by shareholders under the
Act.
The Corporation's Bylaws also contain procedures for the removal of
directors by its shareholders. At any meeting of shareholders, duly called and
at which a quorum is present, the shareholders may, by the affirmative vote of
the holders of a majority of the votes entitled to be cast thereon, remove any
director or directors from office and may elect a successor or successors to
fill any resulting vacancies for the unexpired terms of removed directors.
Upon the written request of the holders of shares entitled to not less
than ten percent (10%) of all the votes entitled to be cast at such meeting, the
Secretary of the Corporation shall promptly call a special meeting of
shareholders for the purpose of voting upon the question of removal of any
director. Whenever ten or more shareholders of record who have been such for at
least six months preceding the date of application, and who hold in the
aggregate either shares having a net asset value of at least $25,000 or at least
one percent (1%) of the total outstanding shares, whichever is less, shall apply
to the Corporation's Secretary in writing, stating that they wish to communicate
with other shareholders with a view to obtaining signatures to a request for a
meeting as described above and accompanied by a form of communication and
request which they wish to transmit, the Secretary shall within five business
days after such application either: (1) afford to such applicants access to a
list of the names and addresses of all shareholders as recorded on the books of
the Corporation; or (2) inform such applicants as to the approximate number of
shareholders of record and the approximate cost of mailing to them the proposed
communication and form of request.
If the Secretary elects to follow the course specified in clause (2)
of the last sentence of the preceding paragraph, the Secretary, upon the written
request of such applicants, accompanied by a tender of the material to be mailed
and of the reasonable expenses of mailing, shall, with reasonable promptness,
mail such material to all shareholders of record at their addresses as recorded
on the books unless within five business days after such tender the Secretary
shall mail to such applicants and file with the Securities and Exchange
Commission, together with a copy of the material to be mailed, a written
statement signed by at least a majority of the Board of Directors to the effect
that in their opinion either such material contains untrue statements of fact or
omits to state facts necessary to make the statements contained therein not
misleading, or would be in violation of applicable law, and specifying the basis
of such opinion.
After opportunity for hearing upon the objections specified in the
written statement so filed, the Securities and Exchange Commission may, and if
demanded by the Board of Directors or by such applicants shall, enter an order
either sustaining one or more of
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<PAGE>
such objections or refusing to sustain any of them. If the Securities and
Exchange Commission shall enter an order refusing to sustain any of such
objections, or if, after the entry of an order sustaining one or more of such
objections, the Securities and Exchange Commission shall find, after notice and
opportunity for hearing, that all objections so sustained have been met, and
shall enter an order so declaring, the Secretary shall mail copies of such
material to all shareholders with reasonable promptness after the entry of such
order and the renewal of such tender.
PERFORMANCE INFORMATION
Each of the Funds may provide from time to time in advertisements,
reports to shareholders and other communications with shareholders their average
annual total returns. An average total return refers to the rate of return
which, if applied to an initial investment at the beginning of a stated period
and compounded over the period, would result in the redeemable value of the
investment at the end of the stated period assuming reinvestment of all
dividends and distributions and reflecting the effect of all recurring fees.
With respect to "average" total return figures for periods longer than one year,
a Fund's annual total return for any one year in the period might have been
greater or less than the average for the entire period. The Funds may use
"aggregate" total return figures for various periods, representing the
cumulative change in value of an investment in a Fund for a specific period
(again reflecting changes in our share price and assuming reinvestment of
dividends and distributions).
Average annual total return measures both the net investment income
generated by, and the effect of any realized or unrealized appreciation or
depreciation of, the underlying investments in a Fund's investment portfolio.
Each Fund's average annual total return figures are computed in accordance with
the standardized method prescribed by the Securities and Exchange Commission by
determining the average annual compounded rates of return over the periods
indicated, that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of
the period of a hypothetical $1,000
payment made at the beginning of such
period
Total return is the cumulative rate of investment growth which assumes
that income dividends and capital gains are reinvested. It is determined by
assuming a hypothetical
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<PAGE>
investment at the net asset value at the beginning of the period, adding in the
reinvestment of all income dividends and capital gains, calculating the ending
value of the investment at the net asset value as of the end of the specified
time period, subtracting the amount of the original investment, and dividing
this amount by the amount of the original investment. This calculated amount is
then expressed as a percentage by multiplying by 100.
The Balanced Fund's average annual total returns for the one-year
period ended June 30, 2000 and for the period from the Fund's commencement of
operations (March 8, 1996) through June 30, 2000 were -10.40% and 5.89%,
respectively. The Leveraged Dogs Fund's average annual total returns for the
one-year period ended June 30, 2000 and for the period from the Fund's
commencement of operations (July 29, 1998) through June 30, 2000 were -17.50%
and -4.79%, respectively.
The information below illustrates the total return for each of the
Funds compared to that of the DJIA and the Merrill Lynch One Year U.S. Treasury
Bill Index.
<TABLE>
COMPARISON OF TOTAL RETURN(1)
<CAPTION>
Year Ended DJIA Total Balanced Fund Leveraged Dogs Fund Merrill Lynch One Year
June 30, Return Total Return Total Return U.S. Treasury Bill Index
-------- ------ ------------ ------------ ------------------------
<S> <C> <C> <C> <C>
1997 38.59% 17.70% N/A(2) 6.22%
1998 18.71% 8.80% N/A(2) 5.80%
1999 24.66% 9.61% N/A(2) 5.12%
2000 -3.31% -10.40% -17.50% 5.12%
-------------------
(1) Total return for the DJIA represents the sum of the following components: (a) the
percentage change in value of each common stock from the first trading day on the New York
Stock Exchange in a given year to the last trading day in that year; and (b) the total
dividends received in that year on each common stock divided by the market value of the
common stock as of the first trading day in that year (without any dividend reinvestment).
Total return for the DJIA does not take into consideration any brokerage commissions,
expenses or taxes, and does not include reinvestment of dividends. Total return for the
Merrill Lynch One Year U.S. Treasury Bill Index is the change in the level of the index
during the measuring period.
(2) The Leveraged Dogs Fund commenced operations on July 29, 1998.
</TABLE>
The charts below assume an initial investment of $10,000 on March 8,
1996 in the Balanced Fund and July 29, 1998 in the Leveraged Dogs Fund.
Merrill Lynch One
Hennessy Dow Jones Year U.S.
Date Balanced Fund Industrial Average Treasury Bill Index
---- ------------- ------------------ -------------------
3/31/96 $10,000 $10,000 $10,000
6/30/96 10,181 10,089 10,155
6/30/97 11,982 13,983 10,783
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6/30/98 13,036 16,637 11,385
6/30/99 14,290 20,418 11,963
6/30/00 12,803 20,636 12,609
Hennessy Merrill Lynch One
Leveraged Dogs Dow Jones Year U.S.
Date Fund Industrial Average Treasury Bill Index
---- ---- ------------------ -------------------
6/30/99 $11,028 $12,485 $10,476
6/30/00 9,098 12,098 11,002
The foregoing performance results are based on historical earnings and
should not be considered as representative of the performance of the Funds in
the future. Such performance results also reflect waivers and/or reimbursements
made by the Balanced Fund Adviser and the Leveraged Dogs Fund Adviser described
in "Investment Advisers, Administrator, Custodian, Transfer Agent and Accounting
Services Agent." An investment in the Funds will fluctuate in value and at
redemption their value may be more or less than the initial investment.
Each of the Funds may also compare its performance to other mutual
funds with similar investment objectives and to the industry as a whole as
reported by Lipper Analytical Services, Inc., Morningstar OnDisc, Money, Forbes,
Business Week and Barron's magazines and The Wall Street Journal, (Lipper
Analytical Services, Inc. and Morningstar OnDisc are independent ranking
services that rank mutual funds based upon total return performance.) The Funds
may also compare their performance to the DJIA, NASDAQ, Composite Index,, NASDAQ
Industrials Index, Value Line Composite Index, the Standard & Poor's 500 Stock
Index, the Merrill Lynch One Year U.S. Treasury Bill Index and the Consumer
Price Index.
INDEPENDENT AUDITORS
KPMG LLP, 303 East Wacker Drive, Chicago, Illinois 60601 has served as
the independent accountants for the Funds since each Fund's inception. As such
KPMG LLP performs an audit of each Fund's financial statements including
consideration of each Fund's internal control structure.
CAPITAL STRUCTURE
The Corporation's authorized capital consists of 500,000,000 shares of
Common Stock. Our Board of Directors has the power to designate one or more
classes ("series") of shares of common stock and to classify or reclassify any
unissued shares with respect to such series. Currently the Corporation is
offering two series of shares, the Balanced Fund and the Leveraged Dogs Fund.
One hundred million shares of Common Stock have been allocated to each of the
Balanced Fund and the Leveraged Dogs Fund. Shareholders are entitled: (i) to one
vote per full share of Common Stock; (ii) to such distributions as may be
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legally declared by the Corporation's Board of Directors; and (iii) upon
liquidation, to share in the assets available for distribution. There are no
conversion or sinking fund provisions applicable to the shares of either Fund,
and shareholders have no preemptive rights and may not cumulate their votes in
the election of directors. Consequently the holders of more than 50% of the
Corporation's shares voting for the election of directors can elect the entire
Board of Directors, and in such event, the holders of the remaining shares
voting for the election of directors will not be able to elect any person or
persons to the Board of Directors. As a general matter, shares are voted in the
aggregate and not by series, except where voting by series would be required by
Maryland law or the Act (e.g., approval of an investment advisory agreement).
The shares of each Fund are redeemable and are transferable. All
shares issued and sold by the Corporation will be fully paid and nonassessable.
Fractional shares of each Fund entitle the holder to the same rights as whole
shares of the Fund.
The shares of each Fund have the same preferences, limitations and
rights, except that all consideration received from the sale of shares of each
Fund, together with all income, earnings, profits and proceeds thereof, belong
to that Fund and are charged with the liabilities in respect of that Fund and of
that Fund's share of the general liabilities of the Corporation in the
proportion that the total net assets of the Fund bears to the total net assets
of both Funds. The net asset value per share of each Fund is based on the assets
belonging to that Fund less the liabilities charged to that Fund, and dividends
are paid on shares of each Fund only out of lawfully available assets belonging
to that Fund. In the event of liquidation or dissolution of the Corporation, the
shareholders of each Fund will be entitled, out of the assets of the Corporation
available for distribution, to the assets belonging to such Fund.
DESCRIPTION OF SECURITIES RATINGS
Each of the Funds may invest in commercial paper and commercial paper
master notes rated A-1 or A-2 by Standard & Poor's Corporation ("Standard &
Poor's") or Prime-1 or Prime-2 by Moody's Investors Service, Inc. ("Moody's").
Standard & Poor's Commercial Paper Ratings. A Standard & Poor's
commercial paper rating is a current assessment of the likelihood of timely
payment of debt considered short-term in the relevant market. Ratings are graded
into several categories, ranging from A-1 for the highest quality obligations to
D for the lowest. These categories are as follows:
A-1. the highest category indicates that the degree of safety
regarding timely payment is strong. Those issuers determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation.
A-2. Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issuers designated "A-1".
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<PAGE>
A-3. Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying a higher designation.
Moody's Short-Term Debt Ratings. Moody's short-term debt ratings are
opinions of the ability of issuers to repay punctually senior debt obligations
which have an original maturity not exceeding one year. Obligations relying upon
support mechanisms such as letters-of-credit and bonds of indemnity are excluded
unless explicitly rated.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated issuers:
Prime-1. Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
o Leading market positions in well-established industries.
o High rates of return on funds employed.
o Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
o Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
o Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Prime-2. Issuers rated Prime-2 (or supporting institutions) have a
strong ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Prime-3. Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
-24-
<PAGE>
PART C
OTHER INFORMATION
Item 23. Exhibits
--------
(a) Registrant's Articles of Incorporation as supplemented(4).
(b) Registrant's Bylaws(1).
(c) None
(d)(1) Investment Advisory Agreement with The Hennessy Management
Co., L.P. relating to the Hennessy Balanced Fund(3).
(d)(2) Investment Advisory Agreement with The Hennessy Management
Co., 2, L.P. relating to the Hennessy Leveraged Dogs Fund(2).
(e) None
(f) None
(g) Custodian Agreement with Firstar Trust Company (predecessor
to Firstar Bank, N.A.)(1).
(h)(i) Fund Administration Servicing Agreement with Firstar Mutual
Fund Services, LLC.
(h)(ii) Transfer Agent Agreement with Firstar Trust Company
(predecessor to Firstar Mutual Fund Services, LLC)(1).
(h)(iii) Fund Accounting Servicing Agreement with Firstar Trust
Company (predecessor to Firstar Mutual Fund Services, LLC)(1).
(i) Opinion of Foley & Lardner, counsel for Registrant.
(j) Consent of KPMG LLP
(k) None
(l) Subscription Agreement(1).
(m)(i) Service and Distribution Plan(3).
(m)(ii) Distribution Agreements with Quasar Distributors, LLC
(n) None
S-1
<PAGE>
(p) Code of Ethics of The Hennessy Funds, Inc., Hennessy Mutual
Funds, Inc., The Hennessy Management Co., L.P., The Hennessy
Management Co. 2, L.P. and Edward J. Hennessy, Incorporated.
---------------
(1) Previously filed as an exhibit to the Registration Statement and
incorporated by reference thereto. The Registration Statement was filed on
January 16, 1996 and its accession number is 0000897069-96-000006.
(2) Previously filed as an exhibit to Amendment No. 4 to the Registration
Statement and incorporated by reference thereto. Amendment No. 4 to the
Registration Statement was filed on April 16, 1998 and its accession number
is 0000897069-98-000230.
(3) Previously filed as an exhibit to Amendment No. 5 to the Registration
Statement and incorporated by reference thereto. Amendment No. 5 to the
Registration Statement was filed on October 30, 1998 and its accession
number is 0000897069-98-000523.
(4) Previously filed as an exhibit to Amendment No. 6 to the Registration
Statement and incorporated by reference thereto. Amendment No. 6 to the
Registration Statement was filed on August 30, 1999 and its accession
number is 0000897069-99-000448.
Item 24. Persons Controlled by or under Common Control with Registrant
-------------------------------------------------------------
Registrant neither controls any person nor is under common control
with any other person.
Item 25. Indemnification
---------------
Pursuant to the authority of the Maryland General Corporation Law,
particularly Section 2-418 thereof, Registrant's Board of Directors has adopted
the following bylaw which is in full force and effect and has not been modified
or cancelled:
Article VII
GENERAL PROVISIONS
Section 7. Indemnification.
--------- ---------------
B. The Corporation shall indemnify all of its corporate representatives
against expenses, including attorneys fees, judgments, fines and amounts paid in
settlement actually and reasonably incurred by them in connection with the
defense of any action, suit or proceeding, or threat or claim of such action,
suit or proceeding, whether civil, criminal, administrative, or legislative, no
matter by whom brought, or in any appeal in which they or any of them are made
parties or a party by reason of being or having been a corporate representative,
if the corporate representative acted in good faith and in a manner reasonably
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believed to be in or not opposed to the best interests of the corporation and
with respect to any criminal proceeding, if he had no reasonable cause to
believe his conduct was unlawful provided that the corporation shall not
indemnify corporate representatives in relation to matters as to which any such
corporate representative shall be adjudged in such action, suit or proceeding to
be liable for gross negligence, willful misfeasance, bad faith, reckless
disregard of the duties and obligations involved in the conduct of his office,
or when indemnification is otherwise not permitted by the Maryland General
Corporation Law.
C. In the absence of an adjudication which expressly absolves the corporate
representative, or in the event of a settlement, each corporate representative
shall be indemnified hereunder only if there has been a reasonable determination
based on a review of the facts that indemnification of the corporate
representative is proper because he has met the applicable standard of conduct
set forth in paragraph A. Such determination shall be made: (i) by the board of
directors, by a majority vote of a quorum which consists of directors who were
not parties to the action, suit or proceeding, or if such a quorum cannot be
obtained, then by a majority vote of a committee of the board consisting solely
of two or more directors, not, at the time, parties to the action, suit or
proceeding and who were duly designated to act in the matter by the full board
in which the designated directors who are parties to the action, suit or
proceeding may participate; or (ii) by special legal counsel selected by the
board of directors or a committee of the board by vote as set forth in (i) of
this paragraph, or, if the requisite quorum of the full board cannot be obtained
therefor and the committee cannot be established, by a majority vote of the full
board in which directors who are parties to the action, suit or proceeding may
participate.
D. The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall create a rebuttable presumption that the person was guilty of willful
misfeasance, bad faith, gross negligence or reckless disregard to the duties and
obligations involved in the conduct of his or her office, and, with respect to
any criminal action or proceeding, had reasonable cause to believe that his or
her conduct was unlawful.
E. Expenses, including attorneys' fees, incurred in the preparation of
and/or presentation of the defense of a civil or criminal action, suit or
proceeding may be paid by the corporation in advance of the final disposition of
such action, suit or proceeding as authorized in the manner provided in Section
2-418(F) of the Maryland General Corporation Law upon receipt of: (i) an
undertaking by or on behalf of the corporate representative to repay such amount
unless it shall ultimately be determined that he or she is entitled to be
indemnified by the corporation as authorized in this bylaw; and (ii) a written
affirmation by the corporate representative of the corporate representative's
good faith belief that the standard of conduct necessary for indemnification by
the corporation has been met.
F. The indemnification provided by this bylaw shall not be deemed exclusive
of any other rights to which those indemnified may be entitled under these
bylaws, any agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his or her official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee or agent and shall
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inure to the benefit of the heirs, executors and administrators of such a person
subject to the limitations imposed from time to time by the Investment Company
Act of 1940, as amended.
G. This corporation shall have power to purchase and maintain insurance on
behalf of any corporate representative against any liability asserted against
him or her and incurred by him or her in such capacity or arising out of his or
her status as such, whether or not the corporation would have the power to
indemnify him or her against such liability under this bylaw provided that no
insurance may be purchased or maintained to protect any corporate representative
against liability for gross negligence, willful misfeasance, bad faith or
reckless disregard of the duties and obligations involved in the conduct of his
or her office.
H. "Corporate Representative" means an individual who is or was a director,
officer, agent or employee of the corporation or who serves or served another
corporation, partnership, joint venture, trust or other enterprise in one of
these capacities at the request of the corporation and who, by reason of his or
her position, is, was, or is threatened to be made, a party to a proceeding
described herein.
Insofar as indemnification for and with respect to liabilities arising
under the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of Registrant pursuant to the foregoing provisions or
otherwise, Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by Registrant
of expenses incurred or paid by a director, officer or controlling person or
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question of whether such indemnification is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Item 26. Business and Other Connections of Investment Adviser
----------------------------------------------------
Incorporated by reference to pages 6 through 11 of the Statement of
Additional Information pursuant to Rule 411 under the Securities Act of 1933.
Item 27. Principal Underwriters
----------------------
Not Applicable.
Item 28. Location of Accounts and Records
--------------------------------
The accounts, books and other documents required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act of 1940 and
the rules promulgated thereunder are in the physical possession of Registrant
and Registrant's Administrator as follows: the documents required to be
maintained by paragraphs (5), (6), (7), (10) and (11) of Rule 31a-1(b) will be
maintained by the Registrant at The Courtyard Square, 750 Grant Avenue, Suite
100, Novato, California 94945; and all other records will be
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maintained by the Registrant's Administrator, Firstar Mutual Fund Services, LLC,
615 East Michigan Street, Milwaukee, Wisconsin.
Item 29. Management Services
-------------------
All management-related service contracts entered into by Registrant
are discussed in Parts A and B of this Registration Statement.
Item 30. Undertakings
------------
Registrant undertakes to provide its Annual Report to Shareholders
upon request without charge to each person to whom a prospectus is delivered.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Amended Registration Statement under
Rule 485(b) under the Securities Act and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Novato and State of California on the 4th day of
October, 2000.
THE HENNESSY FUNDS, INC.
(Registrant)
By: /s/ Neil J. Hennessy
-------------------------------
Neil J. Hennessy, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date(s) indicated.
Name Title Date
---- ----- ----
/s/ Neil J. Hennessy President and Treasurer October 4, 2000
------------------------------ (Principal Executive,
Neil J. Hennessy Financial and Accounting
Officer) and a Director
/s/ Brian A. Hennessy Director October 5, 2000
------------------------------
Brian A. Hennessy
/s/ Robert T. Doyle Director October 9, 2000
------------------------------
Robert T. Doyle
/s/ Rodger D. Offenbach Director October 11, 2000
------------------------------
Rodger D. Offenbach
/s/ J. Dennis DeSousa Director October 13, 2000
------------------------------
J. Dennis DeSousa
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EXHIBIT INDEX
Exhibit No. Exhibit
----------- -------
(a) Registrant's Articles of Incorporation, as supplemented*
(b) Registrant's Bylaws*
(c) None
(d)(1) Investment Advisory Agreement with The Hennessy
Management Co., L.P. relating to Hennessy Balanced Fund*
(d)(2) Investment Advisory Agreement with the Hennessy
Management Co. 2, L.P. relating to the Hennessy Leveraged
Dogs Fund*
(e) None
(f) None
(g) Custodian Agreement with Firstar Trust Company
(predecessor to Firstar Bank, N.A.)*
(h)(i) Fund Administration Servicing Agreement with Firstar Mutual
Fund Services, LLC
(h)(ii) Transfer Agent Agreement with Firstar Trust Company
(predecessor to Firstar Mutual Fund Services, LLC)*
(h)(iii) Fund Accounting Servicing Agreement with Firstar Trust
Company (predecessor to Firstar Mutual Fund Services,
LLC)*
(i) Opinion of Foley & Lardner, counsel for Registrant
(j) Consent of KPMG LLP
(k) None
(l) Subscription Agreement*
(m)(i) Service and Distribution Plan*
(m)(ii) Distribution Agreements with Quasar Distributors, LLC
(n) None
(p) Code of Ethics of The Hennessy Funds, Inc., Hennessy
Mutual Funds, Inc., The Hennessy Management Co., L.P.,
The Hennessy Management Co. 2, L.P. and Edward J.
Hennessy, Incorporated
----------------------------------
* Incorporated by Reference.
