THE HENNESSY
MUTUAL FUNDS, INC.
ANNUAL REPORT
SEPTEMBER 30, 2000
(HENNESSY MUTUAL FUNDS LOGO)
THE HENNESSY MUTUAL FUNDS, INC.
The Courtyard Square
750 Grant Avenue, Suite 100
Novato, California 94945
1 (415) 899-1555
1 (800) 966-4354
www.hennessy-funds.com
Hennessy Cornerstone Growth
Fund Symbol: HFCGX
Hennessy Cornerstone Value
Fund Symbol: HFCVX
THE HENNESSY MUTUAL FUNDS, INC.
October 2000
Dear Shareholder:
I wanted to take this time to thank you for choosing to invest in the Hennessy
Cornerstone Funds. I am pleased to be your portfolio manager because I am a
firm believer of strategy indexing investing. Since becoming portfolio manager,
I have consistently followed the index strategies that Jim O'Shaughnessy
developed. We hired Frank Ingarra (formerly the Head Trader for the funds at
O'Shaughnessy) to make sure that the stocks selected and traded are correct for
the strategy. At the same time, we have taken some steps to better tax-manage
the funds while remaining true to the Cornerstone strategies. For example, we
have implemented tax-lot accounting to replace the existing first-in first-out
method. We are also utilizing a line of credit in order to trade the funds in a
more effective manner.
As you will see in this annual report, the two Cornerstone strategies continued
to perform well for the fiscal year ended September 30, 2000. The Hennessy
Cornerstone Growth Fund produced a net gain of 57.61%. I attribute this to a
fall of overpriced large cap tech stocks and the broad based rally of small to
medium cap stocks as investors' adjusted their technology heavy portfolios. The
strategy stayed in line with its historical model by outperforming the indexes
in the same time period.
For the fiscal year ended September 30, 2000, the Hennessy Cornerstone Value
Fund was profitable at 1.30% but trailed the markets as income-producing
equities remained out of favor with investors. Since the second half of its
fiscal year and into its new fiscal year, the Cornerstone Value Fund is
experiencing a turnaround and continues to look promising for the year ahead.
Looking forward I know you will find that at Hennessy Funds our shareholders
always come first. Our philosophy is that each shareholder is important.
That's why at Hennessy Funds, we do not use a voice mail system. When you call
us during our business hours, you will always hear a friendly and courteous
voice, and you will always have your question answered by a knowledgeable
person. Your time and money are very valuable. When you need assistance, you
deserve excellent service.
Thank you for continuing to put your trust and confidence in us. Please provide
us with your e-mail address at [email protected] so that we can send
----------------------------
you current updates on the goings-on of our funds.
Our goal is to provide you with the best possible service, so please call or
contact us with any questions or comments at 1-800-966-4354 or e-mail us at the
funds information address listed above. Our door is always open.
Thank you again for making the Hennessy Funds part of your investment portfolio.
Best wishes,
/s/Neil J. Hennessy
Neil J. Hennessy
President & Portfolio Manager
Please visit us at www.hennessy-funds.com to see what's new.
----------------------
HENNESSY CORNERSTONE GROWTH FUND
COMPARISON OF THE CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE
HENNESSY CORNERSTONE GROWTH FUND VERSUS THE S&P 500 COMPOSITE STOCK
PRICE INDEX, THE LIPPER SMALL CAP GROWTH INDEX AND THE RUSSELL 2000 INDEX
HENNESSY S&P 500 LIPPER SMALL RUSSELL
CORNERSTONE COMPOSITE STOCK CAP GROWTH 2000
DATE GROWTH FUND PRICE INDEX INDEX INDEX
---- ----------- ----------- ----- -----
11/1/96*<F1> 10,000 10,000 10,000 10,000
12/31/96 10,073 10,560 10,287 10,678
3/31/97 9,753 10,842 9,061 10,127
6/30/97 11,864 12,729 10,708 11,764
9/30/97 15,305 13,684 12,504 13,510
12/31/97 13,229 14,080 11,442 13,051
3/31/98 15,000 16,041 12,734 14,397
6/30/98 15,498 16,570 12,268 13,739
9/30/98 11,077 14,921 9,342 10,957
12/31/98 13,716 18,119 11,552 12,744
3/31/99 12,674 19,023 11,176 12,053
6/30/99 14,723 20,366 12,769 13,928
9/30/99 14,306 19,093 13,000 13,047
12/31/99 18,890 21,934 18,619 15,453
3/31/00 20,892 22,436 21,953 16,547
6/30/00 20,892 21,840 20,779 15,921
9/30/00 22,547 22,051 20,450 16,098
*<F1> inception date
Past performance is not predictive of future performance.
The S&P 500 is a broad market-weighted average of U.S. blue-chip companies. The
Lipper Small Cap Growth Index is comprised of mutual funds that invest at least
75% of equity assets in companies with market capitalizations of less than 250%
of the dollar-weighted market capitalization of the S&P Small-Cap 600 index and
have an above average price-to-earnings ratio, price-to-book ratio and three
year earnings growth. The Russell 2000 tracks the 2000 smallest stocks in the
Russell 3000. The indices are unmanaged and include reinvested dividends.
HENNESSY CORNERSTONE GROWTH FUND
AVERAGE ANNUAL TOTAL RETURN
PERIOD ENDED SEPTEMBER 30, 2000
SINCE INCEPTION
ONE YEAR 11/1/96
-------- ---------------
Hennessy Cornerstone Growth Fund 57.61% 23.06%
HENNESSY CORNERSTONE VALUE FUND
COMPARISON OF THE CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE HENNESSY
CORNERSTONE VALUE FUND VERSUS THE S&P 500 COMPOSITE STOCK PRICE INDEX AND THE
LIPPER MULTI-CAP VALUE INDEX
HENNESSY CORNERSTONE S&P 500 COMPOSITE LIPPER MULTI-CAP
DATE VALUE FUND STOCK PRICE INDEX VALUE INDEX
---- ---------- ----------------- -----------
11/1/96*<F2> 10,000 10,000 10,000
12/31/96 10,028 10,560 10,629
3/31/97 9,818 10,842 10,809
6/30/97 10,729 12,729 12,264
9/30/97 11,521 13,684 13,490
12/31/97 11,562 14,080 13,490
3/31/98 12,934 16,041 15,031
6/30/98 12,253 16,570 14,765
9/30/98 11,023 14,921 12,520
12/31/98 12,324 18,119 14,370
3/31/99 12,519 19,023 14,474
6/30/99 14,244 20,366 16,184
9/30/99 12,910 19,093 14,444
12/31/99 13,065 21,934 15,224
3/31/00 12,086 22,436 15,259
6/30/00 12,188 21,840 15,106
9/30/00 13,078 22,051 15,976
*<F2> inception date
Past performance is not predictive of future performance.
The S&P is a broad market-weighted average of U.S. blue-chip companies. The
Lipper Multi-Cap Value Index is comprised of mutual funds that invest in a
variety of market capitalization ranges, without concentrating 75% or more of
net assets in any one capitalization range over an extended period of time and
have a below average price-to-earning ratio, price-to-book ratio and three year
growth figure. The indices are unmanaged and include reinvested dividends.
HENNESSY CORNERSTONE VALUE FUND
AVERAGE ANNUAL TOTAL RETURN
PERIOD ENDED SEPTEMBER 30, 2000
SINCE INCEPTION
ONE YEAR 11/1/96
-------- ---------------
Hennessy Cornerstone Value Fund 1.30% 7.09%
STATEMENTS OF ASSETS AND LIABILITIES
SEPTEMBER 30, 2000
<TABLE>
HENNESSY HENNESSY
CORNERSTONE CORNERSTONE
GROWTH FUND VALUE FUND
----------- -----------
<S> <C> <C>
ASSETS:
Investments, at value (cost $149,013,541 and $17,872,069 respectively) $183,696,485 $17,477,564
Cash 60,350 --
Income receivable 24,126 91,273
Receivable for fund shares sold 42,038 5,500
Organization costs, net of accumulated amortization 5,467 5,467
Other assets 32,974 24,937
------------ -----------
Total Assets 183,861,440 17,604,741
------------ -----------
LIABILITIES:
Payable to Adviser 225,814 24,494
Payable for fund shares redeemed 913,818 43,580
Accrued expenses and other payables 194,750 55,249
------------ -----------
Total Liabilities 1,334,382 123,323
------------ -----------
NET ASSETS $182,527,058 $17,481,418
------------ -----------
------------ -----------
NET ASSETS CONSIST OF:
Capital stock $115,438,130 $21,896,024
Accumulated undistributed net investment income -- 183,507
Accumulated undistributed net realized gains (losses) on investments 32,405,984 (4,203,608)
Unrealized net appreciation (depreciation) on investments 34,682,944 (394,505)
------------ -----------
Total Net Assets $182,527,058 $17,481,418
------------ -----------
------------ -----------
Shares authorized ($.0001 par value) 25,000,000,000 25,000,000,000
Shares issued and outstanding 9,370,892 1,698,529
Net asset value, offering price and redemption price per share $ 19.48 $ 10.29
------------ -----------
------------ -----------
</TABLE>
See notes to the financial statements.
STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 2000
<TABLE>
HENNESSY HENNESSY
CORNERSTONE CORNERSTONE
GROWTH FUND VALUE FUND
----------- -----------
<S> <C> <C>
INVESTMENT INCOME:
Dividend income $ 307,683 $ 826,227*<F3>
Interest income 55,036 1,640
Other income 84,179 33,611
----------- -----------
Total investment income 446,898 861,478
----------- -----------
EXPENSES:
Investment advisory fees 1,217,901 152,222
Administration fees 161,093 21,988
Fund accounting fees 42,896 27,941
Custody fees 54,199 17,629
Federal and state registration fees 44,417 25,407
Audit fees 39,204 8,392
Legal fees 99,966 36,614
Reports to shareholders 41,178 6,112
Amortization of organization costs 5,051 5,051
Directors' fees and expenses 6,588 7,729
Transfer Agent Fees 200,839 65,819
Other 17,491 3,705
----------- -----------
Total expenses 1,930,823 378,609
----------- -----------
NET INVESTMENT INCOME (LOSS) (1,483,925) 482,869
----------- -----------
REALIZED AND UNREALIZED GAINS (LOSSES):
Net realized gains (losses) on investments 44,709,165 (2,215,138)
Change in unrealized appreciation or depreciation on investments 25,514,702 2,013,424
----------- -----------
Net gain (loss) on investments 70,223,867 (201,714)
----------- -----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $68,739,942 $ 281,155
----------- -----------
----------- -----------
</TABLE>
*<F3> Net of Foreign Taxes Withheld of $15,181
See notes to the financial statements.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
HENNESSY CORNERSTONE HENNESSY CORNERSTONE
GROWTH FUND VALUE FUND
----------------------------- -----------------------------
YEAR ENDED SEPTEMBER 30, YEAR ENDED SEPTEMBER 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) $ (1,483,925) $ (886,032) $ 482,869 $ 716,483
Net realized gain (loss) from security transactions 44,709,165 (1,597,353) (2,215,138) 2,269,047
Change in unrealized appreciation or
depreciation on investments 25,514,702 25,593,050 2,013,424 553,549
------------ ------------ ------------ ------------
Net increase (decrease) in net assets
resulting from operations 68,739,942 23,109,665 281,155 3,539,079
------------ ------------ ------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income -- -- (864,771) (511,737)
From net realized gains from security transactions -- -- (2,378,765) (1,009,259)
------------ ------------ ------------ ------------
-- -- (3,243,536) (1,520,996)
------------ ------------ ------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 45,456,732 82,058,831 6,372,054 23,974,199
Shares issued in exchange for shares of
Aggressive Growth Fund 12,990,988 -- -- --
Shares issued in exchange for shares of
Dogs of the Market Fund -- -- 6,406,260 --
Shares issued to holders in
reinvestment of dividends -- -- 3,100,393 1,412,633
Cost of shares redeemed (65,432,829) (64,774,920) (21,739,958) (23,026,258)
------------ ------------ ------------ ------------
Net increase (decrease) in net assets derived
from capital share transactions (6,985,109) 17,283,911 (5,861,251) 2,360,574
------------ ------------ ------------ ------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS 61,754,833 40,393,576 (8,823,632) 4,378,657
NET ASSETS:
Beginning of year 120,772,225 80,378,649 26,305,050 21,926,393
------------ ------------ ------------ ------------
End of year (including undistributed net
investment income of $0, $0, $183,507
and $565,497, respectively) $182,527,058 $120,772,225 $17,481,418 $26,305,050
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
CHANGES IN SHARES OUTSTANDING:
Shares sold 2,771,896 7,152,440 634,002 1,924,794
Shares issued in exchange for shares of
Aggressive Growth Fund 734,784 -- -- --
Shares issued in exchange for shares of
Dogs of the Market Fund -- -- 690,330 --
Shares issued to holders as
reinvestment of dividends -- -- 304,557 124,352
Shares redeemed (3,909,539) (5,777,646) (2,140,912) (1,861,996)
------------ ------------ ------------ ------------
Net increase (decrease) in shares outstanding (402,859) 1,374,794 (512,023) 187,150
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See notes to the financial statements.
FINANCIAL HIGHLIGHTS
<TABLE>
HENNESSY CORNERSTONE GROWTH FUND
-------------------------------------------------------------------
NOVEMBER 1,
1996(1)<F4>
THROUGH
YEAR ENDED SEPTEMBER 30, SEPTEMBER 30,
2000 1999 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period $12.36 $ 9.57 $15.30 $10.00
------ ------ ------ ------
Income from investment operations:
Net investment loss (0.16) (0.09) (0.07) (0.02)
Net realized and unrealized gains
(losses) on investments 7.28 2.88 (3.88) 5.32
------ ------ ------ ------
Total from investment operations 7.12 2.79 (3.95) 5.30
Less Distributions:
From net investment income -- -- -- --
From net realized gains -- -- (1.78) --
------ ------ ------ ------
Total distributions -- -- (1.78) --
------ ------ ------ ------
Net asset value, end of period $19.48 $12.36 $ 9.57 $15.30
------ ------ ------ ------
------ ------ ------ ------
TOTAL RETURN 57.61% 29.15% (27.63%) 53.05%(2)<F5>
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period (millions) $182.5 $120.8 $80.4 $91.3
Ratio of net expenses to average net assets:
Before expense reimbursement 1.18% 1.15% 1.16% 1.63%(3)<F6>
After expense reimbursement 1.18% 1.15% 1.16% 1.56%(3)<F6>
Ratio of net investment (loss)
to average net assets:
Before expense reimbursement (0.90%) (0.84%) (0.86%) (1.19%)(3)<F6>
After expense reimbursement (0.90%) (0.84%) (0.86%) (1.12%)(3)<F6>
Portfolio turnover rate 95.28% 125.19% 119.98% 15.52%
</TABLE>
(1)<F4> Commencement of operations.
(2)<F5> Not annualized.
(3)<F6> Annualized.
See notes to the financial statements.
FINANCIAL HIGHLIGHTS
<TABLE>
HENNESSY CORNERSTONE VALUE FUND
-------------------------------------------------------------------
NOVEMBER 1,
1996(1)<F7>
THROUGH
YEAR ENDED SEPTEMBER 30, SEPTEMBER 30,
2000 1999 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period $11.90 $10.84 $11.50 $10.00
------ ------ ------ ------
Income from investment operations:
Net investment income 0.32 0.33 0.21 0.15
Net realized and unrealized gains
(losses) on investments (0.18) 1.49 (0.70) 1.37
------ ------ ------ ------
Total from investment operations 0.14 1.82 (0.49) 1.52
Less Distributions:
From net investment income (0.47) (0.26) (0.17) (0.02)
From net realized gains (1.28) (0.50) -- --
------ ------ ------ ------
Total distributions (1.75) (0.76) (0.17) (0.02)
------ ------ ------ ------
Net asset value, end of period $10.29 $11.90 $10.84 $11.50
------ ------ ------ ------
------ ------ ------ ------
TOTAL RETURN 1.30% 17.12% (4.32)% 15.21%(2)<F8>
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period (millions) $17.5 $26.3 $21.9 $13.5(2)<F8>
Ratio of net expenses to average net assets:
Before expense reimbursement 1.85% 1.38% 1.45% 2.66%(3)<F9>
After expense reimbursement 1.85% 1.38% 1.45% 1.85%(3)<F9>
Ratio of net investment (loss)
to average net assets:
Before expense reimbursement 2.36% 2.58% 2.12% 1.93%(3)<F9>
After expense reimbursement 2.36% 2.58% 2.12% 2.73%(3)<F9>
Portfolio turnover rate 86.13% 122.79% 51.56% 2.01%
</TABLE>
(1)<F7> Commencement of operations.
(2)<F8> Not annualized.
(3)<F9> Annualized.
See notes to the financial statements.
HENNESSY CORNERSTONE GROWTH FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2000
NUMBER
OF SHARES VALUE
--------- -----
COMMON STOCKS -- 100.34%
AMUSEMENT AND RECREATION SERVICES -- 5.43%
200,590 Argosy Gaming Company $ 3,635,694
118,080 Harrah's Entertainment, Inc.*<F11> 3,247,200
139,140 Pinnacle Entertainment, Inc.*<F11> 3,026,295
------------
9,909,189
------------
APPAREL AND ACCESSORY STORES -- 6.09%
471,180 Charming Shoppes, Inc.*<F11> 2,458,971
134,240 Hot Topic, Inc.*<F11> +<F10> 4,027,200
69,990 The Talbots, Inc.+<F10> 4,636,837
------------
11,123,008
------------
BUSINESS SERVICES -- 10.49%
233,360 4Front Technologies, Inc.*<F11> +<F10> 4,244,235
145,240 Hall, Kinion & Associates, Inc.*<F11> 4,130,262
256,120 Indus International, Inc.*<F11> 1,248,585
278 Opus360 Corporation, Rts.*<F11> 0
179,050 Sensormatic Electronics Corporation*<F11> +<F10> 2,685,750
445,950 SITEL Corporation*<F11> 1,309,978
241,340 Take-Two Interactive Software, Inc.*<F11> +<F10> 3,031,834
69,880 True North Communications, Inc. 2,498,210
------------
19,148,854
------------
CHEMICALS AND ALLIED PRODUCTS -- 1.18%
117,000 Church & Dwight Co., Inc. 2,149,875
------------
COMMUNICATIONS -- 0.85%
102,810 Audiovox Corporation*<F11> +<F10> 1,548,576
------------
ELECTRONIC AND OTHER ELECTRICAL EQUIPMENT AND
COMPONENTS, EXCEPT COMPUTER EQUIPMENT -- 7.46%
93,760 Amphenol Corporation*<F11> 5,338,460
93,010 Imation Corp.*<F11> 1,732,311
117,570 Park Electrochemical Corp. 6,539,831
------------
13,610,602
------------
ENGINEERING, ACCOUNTING, RESEARCH, MANAGEMENT
AND RELATED SERVICES -- 6.42%
102,160 Quest Diagnostics Incorporated*<F11> 11,722,860
------------
FABRICATED METAL PRODUCTS, EXCEPT MACHINERY AND
TRANSPORTATION EQUIPMENT -- 4.77%
123,370 The Shaw Group, Inc.*<F11> +<F10> 8,697,585
------------
FOOD AND KINDRED PRODUCTS -- 1.41%
153,700 Hormel Foods Corporation+<F10> 2,564,869
------------
GENERAL MERCHANDISE STORES -- 2.79%
85,530 BJ's Wholesale Club, Inc.*<F11> 2,918,711
85,020 Target Corporation 2,178,637
------------
5,097,348
------------
HOME FURNITURE, FURNISHINGS AND EQUIPMENT STORES -- 5.46%
69,290 Circuit City Stores-Circuit City Group 1,593,670
87,920 Tweeter Home Entertainment Group, Inc.*<F11> +<F10> 3,192,595
126,090 Ultimate Electronics, Inc.*<F11> +<F10> 5,185,451
------------
9,971,716
------------
HOTELS, ROOMING HOUSES, CAMPS AND OTHER LODGING PLACES -- 8.24%
287,085 Aztar Corporation*<F11> 4,413,932
236,690 Isle of Capri Casinos, Inc.*<F11> 3,668,695
155,100 Mandalay Resort Group*<F11> 3,974,438
208,715 Station Casinos, Inc.*<F11> 2,974,189
------------
15,031,254
------------
INDUSTRIAL AND COMMERCIAL MACHINERY
AND COMPUTER EQUIPMENT -- 9.79%
79,440 CDW Computer Centers, Inc.*<F11> +<F10> 5,481,360
134,580 InFocus Corporation*<F11> 7,132,740
57,780 Safeguard Scientifics, Inc.*<F11> +<F10> 1,151,989
76,950 ScanSource, Inc.*<F11> 4,107,206
------------
17,873,295
------------
LEATHER AND LEATHER PRODUCTS -- 2.65%
118,120 The Timberland Company*<F11> 4,842,920
------------
MEASURING, ANALYZING AND CONTROLLING INSTRUMENTS;
PHOTOGRAPHIC, MEDICAL AND OPTICAL GOODS; WATCHES
AND CLOCKS -- 3.85%
274,420 Concord Camera Corp.*<F11> 7,032,013
------------
MISCELLANEOUS RETAIL -- 11.90%
152,300 Coldwater Creek, Inc.*<F11> +<F10> 4,112,100
68,470 Costco Wholesale Corporation*<F11> +<F10> 2,392,171
109,580 Michaels Stores, Inc.*<F11> +<F10> 4,383,200
135,715 PC Connection, Inc.*<F11> +<F10> 7,735,755
127,000 Whitehall Jewellers, Inc.*<F11> 1,008,062
64,540 Zale Corporation*<F11> 2,093,516
------------
21,724,804
------------
MOTOR FREIGHT TRANSPORTATION AND WAREHOUSING -- 2.19%
260,170 Arkansas Best Corporation*<F11> 4,000,114
------------
PRIMARY METAL INDUSTRIES -- 2.10%
75,200 Alcoa Inc. 1,903,500
86,110 Mueller Industries, Inc.*<F11> 1,932,093
------------
3,835,593
------------
PRINTING, PUBLISHING AND ALLIED INDUSTRIES -- 0.37%
109,070 Workflow Management, Inc.*<F11> +<F10> 668,054
------------
RUBBER AND MISCELLANEOUS PRODUCTS -- 0.83%
96,790 Spartech Corporation 1,506,294
------------
SECURITY AND COMMODITY BROKERS,
DEALERS, EXCHANGES AND SERVICES -- 2.98%
36,860 Lehman Brothers Holdings, Inc. 5,446,065
------------
TEXTILE MILL PRODUCTS -- 0.69%
171,020 Polymer Group, Inc. 1,261,272
------------
WHOLESALE TRADE - DURABLE GOODS -- 2.40%
83,210 ACT Manufacturing, Inc.*<F11> +<F10> 4,389,328
------------
TOTAL COMMON STOCKS (Cost $148,472,544) 183,155,488
------------
PRINCIPAL
AMOUNT
---------
VARIABLE RATE DEMAND NOTES#<F12> -- 0.30%
$540,997 Firstar Bank, 6.37% 540,997
------------
TOTAL VARIABLE RATE DEMAND NOTES (Cost $540,997) 540,997
------------
TOTAL INVESTMENTS -- 100.64% (Cost $149,013,541) 183,696,485
------------
Other Liabilities and Assets, Net -- (0.64%) (1,169,427)
------------
NET ASSETS -- 100.0% $182,527,058
------------
------------
+<F10> Securities in whole or in part on loan.
*<F11> Non-income producing security
#<F12> Variable rate demand notes are considered short-term obligations and
are payable on demand. Interest rates change periodically on
specified dates. The rates listed are as of September 30, 2000.
See notes to the financial statements.
HENNESSY CORNERSTONE VALUE FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2000
NUMBER
OF SHARES VALUE
--------- -----
COMMON STOCKS -- 98.94%
COMMUNICATIONS -- 2.40%
11,500 Telefonica de Argentina S.A. - ADR+<F13> $ 419,031
-----------
DIVERSIFIED OPERATIONS -- 1.25%
21,200 Desc S.A. de C.V. - ADR+<F13> 218,625
-----------
ELECTRONIC AND OTHER ELECTRICAL EQUIPMENT AND
COMPONENTS, EXCEPT COMPUTER EQUIPMENT -- 2.18%
13,400 Raytheon Company 381,063
-----------
ENGINEERING, ACCOUNTING, RESEARCH, MANAGEMENT
AND RELATED SERVICES -- 1.63%
28,900 The ServiceMaster Company 285,387
-----------
FABRICATED METAL PRODUCTS, EXCEPT MACHINERY AND
TRANSPORTATION EQUIPMENT -- 4.85%
8,820 Cooper Industries, Inc. 310,905
16,300 Lockheed Martin Corporation 537,248
-----------
848,153
-----------
FOOD AND KINDRED PRODUCTS -- 14.99%
15,700 ConAgra Foods, Inc. 314,981
11,100 Diageo plc - ADR 391,969
9,910 General Mills, Inc.+<F13> 351,805
8,900 H.J. Heinz Company 329,856
11,500 Kellogg Company 278,156
33,450 Nabisco Group Holdings Corp. 953,325
-----------
2,620,092
-----------
FOOD STORES -- 1.23%
14,900 Winn-Dixie Stores, Inc. 214,188
-----------
GENERAL MERCHANDISE STORES -- 3.37%
17,790 J.C. Penney Company, Inc. 210,144
11,700 Sears, Roebuck & Co.+<F13> 379,314
-----------
589,458
-----------
HOLDING COMPANIES -- 1.35%
24,200 Tomkins plc - ADR+<F13> 235,950
-----------
INSURANCE CARRIERS -- 6.29%
20,000 Conseco, Inc.+<F13> 152,500
8,900 Lincoln National Corporation 428,312
10,520 The St. Paul Companies, Inc. 518,768
-----------
1,099,580
-----------
MEASURING, ANALYZING, AND CONTROLLING INSTRUMENTS;
PHOTOGRAPHIC MEDICAL AND OPTICAL GOODS; WATCHES
AND CLOCKS -- 1.35%
15,700 Xerox Corporation 236,481
-----------
NATIONAL COMMERCIAL BANKS -- 23.98%
11,120 Bank One Corporation 429,510
7,060 Bank of America Corporation 369,768
7,600 Comerica Incorporated 444,125
10,780 First Union Corporation 346,981
10,219 FleetBoston Financial Corporation 398,541
16,410 Huntington Bancshares, Incorporated 241,022
16,090 KeyCorp 407,278
7,970 PNC Financial Services Group 518,050
11,570 Summit Bancorp. 399,165
14,900 U.S. Bancorp 338,975
9,020 Union Planters Corporation 298,224
-----------
4,191,639
-----------
OIL AND GAS EXTRACTION -- 4.21%
5,700 Kerr-McGee Corporation 377,625
16,400 Occidental Petroleum Corporation 357,725
-----------
735,350
-----------
PETROLEUM REFINING AND RELATED INDUSTRIES -- 6.50%
14,300 Conoco, Inc. 385,206
6,540 Texaco, Inc.+<F13> 343,350
14,400 USX-Marathon Group 408,600
-----------
1,137,156
-----------
RAILROAD TRANSPORTATION -- 2.86%
11,300 CSX Corporation 246,481
17,300 Norfolk Southern Corporation 253,013
-----------
499,494
-----------
RUBBER AND MISCELLANEOUS PLASTICS PRODUCTS -- 1.31%
12,700 The Goodyear Tire & Rubber Company+<F13> 228,600
-----------
SAVINGS INSTITUTIONS - FEDERALLY CHARTERED -- 3.12%
13,700 Washington Mutual, Inc.+<F13> 545,431
-----------
STATE COMMERCIAL BANKS -- 3.70%
4,700 National Australia Bank Limited+<F13> 326,063
14,100 Regions Financial Corporation 319,894
-----------
645,957
-----------
TOBACCO PRODUCTS -- 5.19%
34,700 British American Tobacco p.l.c. - ADR+<F13> 453,269
15,440 Philip Morris Companies Inc. 454,515
-----------
907,784
-----------
TRANSPORTATION & LEISURE -- 1.34%
5,500 British Airways PLC - ADR+<F13> 235,125
-----------
TRANSPORTATION EQUIPMENT -- 5.76%
13,700 Corus Group plc - ADR+<F13> 106,175
11,860 Dana Corporation 254,990
4,600 DaimlerChrysler AG+<F13> 204,194
6,670 Ford Motor Company 168,834
14,330 Genuine Parts Company 273,166
-----------
1,007,359
-----------
WHOLESALE TRADE - DURABLE -- 0.08%
904 Visteon Corporation 13,673
-----------
TOTAL COMMON STOCKS (Cost $17,690,081) 17,295,576
-----------
PRINCIPAL
AMOUNT
---------
VARIABLE RATE DEMAND NOTES#<F14> -- 1.04%
$159,472 Firstar Bank, 6.37% 159,472
22,516 Wisconsin Corporation Central Credit Union, 6.29% 22,516
-----------
TOTAL VARIABLE RATE DEMAND NOTES (Cost $181,988) 181,988
-----------
TOTAL INVESTMENTS -- 99.98% (Cost $17,872,069) 17,477,564
-----------
Other Assets and Liabilities, Net -- 0.02% 3,854
-----------
NET ASSETS -- 100.0% $17,481,418
-----------
-----------
+<F13> Securities in whole or in part on loan.
#<F14> Variable rate demand notes are considered short-term obligations and are
payable on demand. Interest rates change periodically on specified
dates. The rates listed are as of September 30, 2000.
ADR - American Depository Receipts
See notes to the financial statements.
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
1). ORGANIZATION
The Hennessy Cornerstone Growth Fund, formerly O'Shaughnessy Cornerstone
Growth Fund, and Hennessy Cornerstone Value Fund, formerly O'Shaughnessy
Cornerstone Value Fund (the "Funds") are each a series of shares of The Hennessy
Mutual Funds, Inc., which is registered under the Investment Company Act of 1940
as a diversified, open-end management investment company. The Funds began
operations on November 1, 1996.
2). SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Funds. These policies are in conformity with generally accepted
accounting principles.
a). Security Valuation -- The Funds' investments are carried at market value.
Securities listed on an exchange or quoted on a National Market System are
valued at the last sale price. Other securities are valued at the mean between
the last bid and asked prices. Securities for which market quotations are not
readily available, if any, are valued following procedures approved by the Board
of Directors. Short-term investments are valued at amortized cost, which
approximates market value.
b). Federal Income Taxes -- It is each Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Therefore, no federal income tax provision is required.
c). Security Transactions, Dividends and Distributions -- Security transactions
are accounted for on the trade date. Dividend income and distributions to
shareholders are recorded on the ex-dividend date. Realized gains and losses on
securities sold are determined under the identified cost basis.
d). Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
increases and decreases in net assets during the reporting period. Actual
results could differ from those estimates.
3). INVESTMENT MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
As a result of the proxy vote (see note 8), Edward J. Hennessy, Inc.
(the"Manager") was named the investment manager as of June 30, 2000, replacing
O'Shaughnessy Capital Management, Inc. The Manager provides the Funds with
investment management services under a Management Agreement. The Manager
furnishes all investment advice, office space, facilities, and provides most of
the personnel needed by the Funds. As compensation for its services, the
Manager is entitled to a monthly fee from each Fund at the annual rate of 0.74%
based upon the average daily net assets of the Funds.
As of September 1, 2000, Firstar Mutual Fund Services, LLC (the
"Administrator") acts as the Funds' Administrator under an Administration
Agreement. The Administrator prepares various federal and state regulatory
filings, reports and returns for the Funds; prepares reports and materials to be
supplied to the directors; monitors the activities of the Funds' custodian,
transfer agent and accountants; coordinates the preparation and payment of the
Funds' expenses and reviews the Funds' expense accruals. Fees paid to Firstar
Mutual Fund Services, LLC for the year ended September 30, 2000 were $12,648 and
$2,500 for Cornerstone Growth and Cornerstone Value Funds, respectively.
Effective September 1, 2000 Quasar Distributors, LLC (the "Distributor")
acts as the Funds' principal underwriter in a continuous public offering of the
Funds' shares. The Distributor is an affiliate of the Administrator.
Prior to September 1, 2000, the Fund's Administrator and Distributor were
Investment Company Administration, LLC and First Fund Distributors, Inc.,
respectively.
Administration fees paid to Investment Company Administration, LLC were
$148,445 and $19,488 for Cornerstone Growth and Cornerstone Value Funds,
respectively, for the year ended September 30, 2000.
Certain officers of the Funds were also officers and/or directors of
Investment Company Administration, LLC and First Fund Distributors, Inc.
4). PURCHASES AND SALES OF SECURITIES
For the year ended September 30, 2000, the cost of purchases and the
proceeds from sales of securities, excluding short-term securities, for the
Cornerstone Growth Fund were $154,020,974 and $174,293,407, respectively.
For the year ended September 30, 2000, the cost of purchases and the
proceeds from sales of securities, excluding short-term securities, for the
Cornerstone Value Fund were $17,824,883 and $32,195,456, respectively.
5). SECURITIES LENDING
At September 30, 2000, the Cornerstone Growth Fund and Cornerstone Value
Fund, respectively, loaned securities valued at $41,865,988 and $3,710,255 to
certain brokers, dealers and other financial institutions, with the Fund's
custodian acting as lending agent. For collateral, the Funds received
$44,369,500 and $3,896,370, respectively, in the form of commercial paper and
other short term investments. This represents an amount equal to 102% of the
market value of the loaned securities, marked-to-market daily. The risks to the
Funds, of lending their securities, are that the borrower may not provide
additional collateral when required or return the securities when due.
6). INCOME TAXES
At September 30, 2000, the cost of securities for income tax purposes in
the Cornerstone Growth Fund was approximately $149,315,294. Unrealized
appreciation and depreciation of securities were as follows:
Gross unrealized appreciation $58,171,903
Gross unrealized depreciation (23,790,712)
-----------
Net unrealized appreciation $34,381,191
-----------
-----------
At September 30, 2000, the cost of securities for income tax purposes in
the Cornerstone Value Fund was approximately $18,482,632. Unrealized
appreciation and depreciation of securities were as follows:
Gross unrealized appreciation $ 2,054,681
Gross unrealized depreciation (3,059,749)
-----------
Net unrealized depreciation $(1,005,068)
-----------
-----------
Net realized capital gains/losses differ for financial statement and tax
purposes primarily due to differing tax treatment of wash sales.
At September 30, 2000, Cornerstone Value Fund had tax basis capital losses
of $1,141,777, including$142,288 which arose on the merger of Dogs of the Market
Fund discussed in Note 7, which may be carried over to offset future capital
gains. Such losses expire September 30, 2007 through September 30, 2008.
At September 30, 2000, Cornerstone Value Fund has deferred capital losses
occurring subsequent to October 31, 1999 of $2,451,268. For tax purposes, such
losses will be reflected in the year ending September 30, 2001.
For the year ended October 31, 2000, Cornerstone Growth Fund utilized
capital loss carryforwards of $8,247,030.
7). FUND MERGER
On March 24, 2000, the shareholders of the O'Shaughnessy Funds approved a
plan of reorganization whereby on that date, the O'Shaughnessy Cornerstone
Growth Fund acquired all the net assets of the O'Shaughnessy Aggressive Growth
Fund and the O'Shaughnessy Cornerstone Value Fund acquired all the net assets of
the O'Shaughnessy Dogs of the Market Fund. These acquisitions were accomplished
by the tax-free exchange of shares on the acquisition date, pursuant to a plan
of reorganization approved by the O'Shaughnessy Funds' shareholders. The net
assets, net unrealized appreciation (depreciation), and shares outstanding of
the O'Shaughnessy Aggressive Growth and O'Shaughnessy Dogs of the Market
immediately prior to the acquisition were as follows:
AGGRESSIVE DOGS OF THE
GROWTH MARKET
MARKET FUND
---------- -----------
Net Assets $12,990,988 $ 6,406,260
Net Unrealized
Appreciation
(Depreciation)
on Investments $ 1,343,399 $(1,506,741)
Shares Outstanding 934,533 771,631
The net assets of the following Funds, the accounting survivors of the
reorganizations, immediately after the acquisitions were as follows:
Cornerstone Growth Fund $184,456,834
Cornerstone Value Fund $ 22,323,163
8). SUBSEQUENT EVENT
Effective October 31, 2000, Cornerstone Growth Fund and Cornerstone Value
Fund opened $2,000,000 and $500,000 lines of credit, respectively, intended to
provide short-term financing, if necessary, subject to certain restrictions, in
connection with shareholder redemptions.
9). PROXY VOTING RESULTS (UNAUDITED)
HENNESSY CORNERSTONE GROWTH FUND
A special meeting of the Fund's shareholders was held on June 30, 2000.
The results of the votes taken among shareholders on proposals before them are
reported below. Each vote reported represents one share of shares outstanding
held on the record date for the meeting.
PROPOSAL 1
To approve the new investment management agreement between O'Shaughnessy
Funds, Inc. on behalf of the Fund, and Edward J. Hennessy, Inc.
# OF % OF
VOTES CAST VOTES CAST
---------- ----------
Affirmative 6,075,818 90.33%
Against 498,838 7.41%
Abstain 152,134 2.26%
--------- -------
Total 6,726,790 100.00%
PROPOSAL 2
To elect as Directors.
# OF % OF
VOTES CAST VOTES CAST
---------- ----------
J. DENNIS DESOUSA
Affirmative 6,331,310 94.12%
Withheld 395,480 5.88%
--------- -------
Total 6,726,790 100.00%
ROBERT T. DOYLE
Affirmative 6,323,282 94.00%
Withheld 403,508 6.00%
--------- -------
Total 6,726,790 100.00%
NEIL J. HENNESSY
Affirmative 6,363,912 94.61%
Withheld 362,878 5.39%
--------- -------
Total 6,726,790 100.00%
HARRY F. THOMAS
Affirmative 6,370,354 94.70%
Withheld 356,436 5.30%
--------- -------
Total 6,726,790 100.00%
PROPOSAL 3
To ratify the selection of PricewaterhouseCoopers LLP as the independent
accountants of the O'Shaughnessy Funds, Inc. for the fiscal year ending
September 30, 2000.
# OF % OF
VOTES CAST VOTES CAST
---------- ----------
Affirmative 6,496,581 96.58%
Against 106,789 1.59%
Abstain 123,420 1.83%
--------- -------
Total 6,726,790 100.00%
HENNESSY CORNERSTONE VALUE FUND
A special meeting of the Fund's shareholders was held on June 30, 2000.
The results of the votes taken among shareholders on proposals before them are
reported below. Each vote reported represents one share of shares outstanding
held on the record date for the meeting.
PROPOSAL 1
To approve the new investment management agreement between O'Shaughnessy
Funds, Inc. on behalf of the Fund, and Edward J. Hennessy, Inc.
# OF % OF
VOTES CAST VOTES CAST
---------- ----------
Affirmative 1,499,844 90.79%
Against 114,741 6.95%
Abstain 37,318 2.26%
--------- -------
Total 1,651,903 100.00%
PROPOSAL 2
To elect as Directors.
# OF % OF
VOTES CAST VOTES CAST
---------- ----------
J. DENNIS DESOUSA
Affirmative 1,514,632 91.69%
Withheld 137,271 8.31%
--------- -------
Total 1,651,903 100.00%
ROBERT T. DOYLE
Affirmative 1,512,472 91.56%
Withheld 139,431 8.44%
--------- -------
Total 1,651,903 100.00%
NEIL J. HENNESSY
Affirmative 1,518,536 91.93%
Withheld 133,367 8.07%
--------- -------
Total 1,651,903 100.00%
HARRY F. THOMAS
Affirmative 1,521,147 92.08%
Withheld 130,756 7.92%
--------- -------
Total 1,651,903 100.00%
PROPOSAL 3
To ratify the selection of PricewaterhouseCoopers LLP as the independent
accountants of the O'Shaughnessy Funds, Inc. for the fiscal year ending
September 30, 2000.
# OF % OF
VOTES CAST VOTES CAST
---------- ----------
Affirmative 1,564,949 94.74%
Against 42,501 2.57%
Abstain 44,453 2.69%
--------- -------
Total 1,651,903 100.00%
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Hennessy Cornerstone Growth Fund and
Hennessy Cornerstone Value Fund
In our opinion, the accompanying statements of assets and liabilities, including
the schedules of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Hennessy Cornerstone Growth Fund
and Hennessy Cornerstone Value Fund (constituting Hennessy Mutual Funds, Inc.,
hereafter referred to as the "Fund") at September 30, 2000, the results of each
of their operations for the year then ended, and the changes in each of their
net assets and the financial highlights for each of the two years in the period
then ended, in conformity with accounting principles generally accepted in the
United States of America. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits, which included confirmation of securities at September
30, 2000 by correspondence with the custodian, provide a reasonable basis for
our opinion. The financial highlights for periods prior to October 1, 1998 were
audited by other independent accountants whose report dated October 23, 1998
expressed an unqualified opinion on those financial statements.
PricewaterhouseCoopers LLP
November 13, 2000
INVESTMENT ADVISER
Edward J. Hennessy, Inc.
The Courtyard Square
750 Grant Avenue, Suite 100
Novato, CA 94945
ADMINISTRATOR, TRANSFER AGENT,
DIVIDEND PAYING AGENT & SHAREHOLDER SERVICING AGENT
Firstar Mutual Fund Services, LLC
P.O. Box 701
Milwaukee, WI 53201-0701
(800) 261-6950
CUSTODIAN
Firstar Bank, N.A.
P.O. Box 701
Milwaukee, WI 53201-0701
(800) 261-6950
DIRECTORS
Neil J. Hennessy
Robert T. Doyle
J. Dennis DeSousa
Harry F. Thomas
COUNSEL
Foley & Lardner
777 East Wisconsin Avenue
Milwaukee, WI 53202-5367
INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036
