UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
-
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 2004
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _____ to _____
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Commission File Number 001-49872
HENNESSY ADVISORS, INC.
(Exact name of small business issuer as specified in its charter)
California 68-0176227
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
750 Grant Avenue, Suite 100
Novato, California 94945
(Address of principal (Zip Code)
executive office)
(415) 899-1555
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act:
None.
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
Form 10-KSB. [X]
Total revenues for Fiscal Year 2004 were $9,545,189.
The aggregate market value of the Common Stock of the registrant held by
non-affiliates (as affiliates are defined in Rule 12b-2 of the Exchange Act) was
$22,779,745, based on the most recent common equity selling price of $26.30 per
share, within the last 60 days (December 3, 2004).
1
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
As of December 10, 2004 there were 1,635,142 shares of common stock issued and
outstanding.
----------------------------------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE:
There are no documents incorporated by reference.
Transitional Small Business Disclosure Format (Check one):
Yes _ No X
2
HENNESSY ADVISORS, INC.
FORM 10-KSB
For the Fiscal Year Ended September 30, 2004
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Table of Contents:
PART I
ITEM 1. DESCRIPTION OF BUSINESS............................................ 4
GENERAL.................................................................. 4
SUMMARY OF INVESTMENT PRODUCTS AND STRATEGIES............................ 5
EMPLOYEES................................................................ 8
ITEM 2. DESCRIPTION OF PROPERTY............................................ 8
ITEM 3. LEGAL PROCEEDINGS.................................................. 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................ 9
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES........................... 9
MARKET INFORMATION....................................................... 9
HOLDERS.................................................................. 9
DIVIDENDS................................................................ 9
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS............................... 10
RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2004
AND SEPTEMBER 30, 2003.................................................. 11
Liquidity and Capital Resources........................................ 12
Critical Accounting Policies........................................... 13
Forward Looking Statements and Risk Factors............................ 13
ITEM 7. FINANCIAL STATEMENTS............................................... 17
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE..................................................... 30
ITEM 8A. CONTROLS AND PROCEDURES........................................... 31
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a)OF THE EXCHANGE ACT......................... 31
DIRECTORS AND OFFICERS................................................... 31
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.................. 31
BUSINESS EXPERIENCE OF OFFICERS AND DIRECTORS............................ 31
AUDIT COMMITTEE FINANCIAL EXPERT......................................... 33
CODE OF ETHICS........................................................... 33
ITEM 10. EXECUTIVE COMPENSATION............................................ 33
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS........................................... 35
PERSONS BENEFICIALLY OWNING MORE THAN 5% OF OUTSTANDING COMMON STOCK..... 36
DIRECTORS OF THE CORPORATION............................................. 36
OFFICERS OF THE CORPORATION.............................................. 36
DIRECTORS AND OFFICERS OF THE CORPORATION AS A GROUP..................... 36
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS....... 36
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................... 37
ITEM 13. EXHIBITS............................................ ............. 38
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES............................ 68
SIGNATURES................................................................. 69
3
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
The Company
Hennessy Advisors,Inc.("Hennessy Advisors" or the "Company")provides
investment advisory services to our own family of no-load open-ended mutual
funds as well as high net worth investors, primarily located in the United
States. We generally manage assets on a discretionary basis (i.e., there is no
need to seek the client's approval for securities transactions). We invest
through a set of quantitative criteria rather than qualitative judgments. Under
investment management agreements with the mutual funds described below, fund
assets are invested in the stock of public companies and in U.S. Treasury
securities, in accordance with a specific strategy designed to meet the
investment objective of each fund. Our investment management agreements with
high net worth individuals generally give us discretion to invest their funds by
applying the same quantitative criteria described below for the fund portfolios,
modified in each instance by specific investment criteria supplied by the
client. As of September 30, 2004, we managed $1.261 billion in total assets, of
which $1.222 billion or 97% were managed on behalf of the mutual funds. Fees
generated through management of our mutual fund assets comprise 99% of our total
revenues.
Company History
Hennessy Advisors was founded in 1989 as a California corporation under
the name Edward J. Hennessy Incorporated. We served mainly individual investors
as an NASD broker-dealer. In 1996 we became an investment adviser to no load
mutual funds, which we founded as The Hennessy Funds, Inc., building assets
under management through the Hennessy Balanced Fund. In 1998 we launched the
Hennessy Total Return Fund. Since their inception, a portion of these funds have
been managed utilizing the "Dogs of the Dow" investment strategy, periodically
purchasing the 10 highest yielding Dow Jones stocks in approximately equal
dollar amounts and holding those stocks for one year.
In June of 2000, we acquired the management contracts to two additional
mutual funds from Netfolio, Inc. (formerly O'Shaugnessy Capital Management) and
obtained the right to use the names and investment strategies of the Hennessy
Cornerstone Growth Fund and Hennessy Cornerstone Value Fund. These two no-load
open-end mutual funds had approximately $197 million in assets under management
at the time of the acquisition. Each of these funds is a series of Hennessy
Mutual Funds, Inc. and maintains a 50-stock portfolio selected using
formula-based strategies licensed by from Netfolio, Inc.
In September of 2003, we acquired the assets of the SYM Select Growth
Fund and simultaneously launched our fifth no-load mutual fund, the Hennessy
Focus 30 Fund. This fund is an additional series of the Hennessy Mutual Funds,
Inc. The SYM Select Growth Fund had approximately $35 million under management
when the assets were acquired and merged into the Hennessy Focus 30 Fund.
In March of this year, we acquired the assets of five mutual funds from
Lindner Asset Management. This trasaction involved merging the assets of the
Lindner Funds into four of our existing mutual funds. The Lindner Funds had
approximately $301 million under management at the time of this acquisition.
We derive the majority of our revenue from providing investment
advisory services to our family of mutual funds. The management contracts for
Hennessy Funds, Inc. and Hennessy Mutual Funds, Inc. are renewable annually. All
contracts in force as of September 30, 2004, were renewed by the board of
directors of both companies, at their meeting on February 10, 2004. The
agreements may be renewed annually, as long as continuance is specifically
approved in accordance with the requirements of the Investment Company Act of
1940. Each management agreement will terminate in the event of its assignment,
4
or it may be terminated by Hennessy Mutual Funds (either by the board of
directors or by vote of a majority of the outstanding voting securities of that
Fund) or by Hennessy Advisors upon 60 days' prior written notice.
Hennessy Advisors bears the expense of fulfillment and providing office
space for the all of the Funds. The administrator maintains the books and
records and provides clerical and bookkeeping services. Hennessy Advisors, as
deemed necessary and without contractual obligation, may voluntarily waive its
management fee or subsidize other Fund expenses.
Our fund shares are primarily sold through mutual fund supermarkets.
Currently, our principal supermarkets are Schwab One Source, Fidelity, TD
Waterhouse and Pershing.
SUMMARY OF INVESTMENT PRODUCTS AND STRATEGIES
Hennessy Balanced Fund (HBFBX)
This Fund seeks capital appreciation and current income. Approximately
half of its portfolio is invested in U.S. Treasury bills, having a maturity of
approximately one year, and the other half of the portfolio is invested in the
ten highest yielding common stocks in the Dow Jones Industrial Average, known as
the "Dogs of the Dow" stocks.
Hennessy Total Return Fund (HDOGX)
This Fund seeks a combination of capital appreciation and current
income that in the long run exceeds that of the Dow Jones Industrial Average.
The Fund's strategy is similar to that of the Hennessy Balanced Fund except that
up to 75% of its return is based on the performance of the ten stocks with the
highest dividend yield in the Dow Jones Industrial Average, known as the "Dogs
of the Dow" stocks. The other 25% is based on the return of U.S. Treasury bills
maturing in a year or less.
Hennessy Cornerstone Value Fund (HFCVX)
This Fund seeks total return, consisting of capital appreciation and
current income. This Fund consists of a 50 stock portfolio of market leading
stocks (those with the highest sales, gross cash, shares outstanding and market
values) with the highest dividend yields. The goal of this strategy is to
produce a slightly higher rate of return versus the overall market, while taking
virtually the same level of risk.
Hennessy Cornerstone Growth Fund (HFCGX)
This Fund seeks long-term growth of capital. The Fund consists of 50
stocks with higher annual earnings than in the previous year, low price-to-sales
ratios and strong relative price performance. The goal of this strategy is to
produce a higher rate of return versus the overall market, while moderating
increased risk through diversification.
Hennessy Focus 30 Fund (HFTFX)
The Focus 30 Fund seeks long-term capital growth through investments in
common stock of domestic mid-cap growth companies. The portfolio consists of 30
stocks with market capitalizations between $1.0 billion and $10.0 billion.
Additional selection criteria include higher annual earnings than in the
previous year, a price to sales ratio of less than 1.5 and a stock price of
$5.00 or more. The 30 stocks with the best relative strength over the last
three, six and twelve month periods are selected for the portfolio.
5
Business Strategy
We intend to increase our assets under management and profitability
through implementation of the following key strategies:
o Attract investors by marketing our investment style of disciplined
and quantitative analysis.
o Expand our distribution network to additional mutual fund supermarkets.
o Expand our current base of registered investment advisors (RIA's) that
utilize no-load funds for their clients.
o Secure participation in the platforms of national full service firms
that permit their registered representatives to utilize no-load funds
for their clients in a wrap fee account.
o Pursue acquisitions. During the fiscal year ended September 30, 2004,
we acquired the assets of Lindner Asset Management in the amount of
$301 million and merged those assets into four of our existing mutual
funds.
o Introduce new funds in the future. We have filed and received approval
to open Hennessy Cornerstone Growth Fund Series II.
Description of our Business
Our revenues are largely based on the level of assets under management
in our mutual funds. Growth in revenues generally depends on good investment
performance which increases assets under management by:
o increasing the value of existing assets under management
o contributing to higher investment and lower redemption rates
o attracting additional investors
Growing our assets under management is also dependent on accessing
various distribution channels, which is based on several factors, including
performance and service. Fluctuations in financial markets also have a
substantial effect on assets under management and the results of our operations.
Advisory fees from the mutual funds are computed daily based on their respective
assets under management. Shareholders of our mutual funds are allowed to
exchange shares among the funds as economic conditions, market conditions and
investor needs change. Shareholders must pay a 1.5% exchange fee if they have
not owned the fund shares for 90 days when they make an exchange. A redemption
fee of 1.5% is charged to shareholders who withdraw funds before 90 days as
well.
Our marketing efforts for the mutual funds are currently focused on
increasing the distribution and sales of our existing funds. We believe that our
marketing efforts for the mutual funds will continue to generate additional
revenues from investment advisory fees. Initially, we distributed our mutual
funds by using a variety of direct response marketing techniques, including
trade shows and articles published in business periodicals. Beginning in late
1996, our mutual funds were offered through no transaction fee programs (NTF
programs). A no transaction fee program means that the mutual fund customer does
not pay a transaction fee. Rather, fees are paid by the mutual fund itself, its
investment advisor or its distributor. NTF programs have become an increasingly
important source of asset growth. Of the $1.222 billion of assets under
6
management in the mutual funds as of September 30, 2004, approximately 64% were
generated from NTF programs.
We provide investment advisory and management services pursuant to an
investment management agreement with each mutual fund. The management agreement
may continue in effect from year to year only if specifically approved at least
annually by the mutual funds' Board of Directors. While the specific terms of
the investment management agreements vary to some degree, the basic terms of the
agreements are similar. The investment management agreements generally provide
that we are responsible for overall investment and management services, subject
to the oversight of each mutual fund's Board of Directors (comprised of 75%
independent directors) and in accordance with each mutual fund's fundamental
investment objectives and policies.
Currently, Hennessy Advisors participates in two "soft dollar"
arrangements in which we receive research reports and real time electronic
research in order to assist us in trading and managing our mutual funds. Soft
dollar arrangements involve paying brokerage commissions for securities trades
on behalf of a client where the commissions may be higher than those obtained
elsewhere, in exchange for research or other services that also benefit other
clients. The value of the research we receive under our soft dollar arrangements
is approximately $70,000 per annum.
Competition
The finanical services industry, in particular the mutual fund
industry, is highly competitive. There are more than 8,200 open-end investment
companies of every size and of every type. We directly compete with investment
advisors and securities firms of all sizes, from small boutique firms to large
financial service complexes. Competition is influenced by various factors,
including product offering, level of service and price. All aspects of our
advisory business are competitive, including competition for assets to manage.
The investment advisory industry is characterized by relatively low cost of
entry and by the formation of new investment advisory entities which may compete
directly with us. While large national firms, often with more personnel, have
greater marketing, financial, technical, research, and other capabilities, we
have learned that we can hold our own with these entities by "branding" our
investment style through public relations and outstanding customer service. Many
of the larger firms offer a broader range of financial services than we do and
compete not only with us and among themselves, but also with commercial banks,
insurance companies and others for retail and institutional clients. The
investment funds we manage are similarly subject to competition from nationally
and regionally distributed funds offering equivalent financial products with
returns equal to or greater than those we offer.
A large number of investment products including closed-end companies
and mutual funds, are sold to the public by investment management firms,
broker/dealers, insurance companies and banks in competition with the investment
products we offer. Many of our competitors apply substantial resources to
advertising and marketing their investment products. The competition for new
investors is intense, but we feel that by increasing our funds' distribution
channels and continuing to brand our investment style, we can capture portions
of the investment business available. We expect that there will be increasing
pressures among investment advisors to obtain and hold market share.
Regulation
Virtually all aspects of our business are subject to federal and state
laws and regulations. These laws and regulations are primarily intended to
protect investment advisory clients and shareholders of registered investment
companies. Agencies that regulate investment advisers have broad administrative
powers, including the power to limit, restrict or prohibit an adviser from
carrying on its business in the event that it fails to comply with applicable
laws and regulations. In such event, the possible sanctions that may be imposed
include the suspension of individual employees, limitations on engaging in
certain lines of business for specified periods of time, revocation of
7
investment adviser and other registrations, censures, and fines. We believe that
we are in compliance with all material laws and regulations.
Our business is subject to regulation and examination at both the
federal and state level by the SEC and other regulatory bodies. We are
registered with the SEC under the Investment Advisers Act, and the mutual funds
are registered with the SEC under the Investment Company Act. Discussion of the
financial impact of full compliance with new SEC regulations is included in Item
6, "Management's Discussion and Analysis, Risk Factors".
The Investment Advisers Act imposes numerous obligations on registered
investment advisers including fiduciary duties, record keeping requirements,
operational requirements, marketing requirements and disclosure obligations. The
SEC is authorized to institute proceedings and impose sanctions for violations
of the Investment Advisers Act, ranging from censure to termination of an
investment adviser's registration. Our failure to comply with the SEC
requirements could have a material adverse effect on us. We believe we are in
compliance with the requirements of the SEC.
We derive most of our revenues from investment advisory services. Under
the Investment Advisers Act, our investment management agreements terminate
automatically if assigned without the client's consent. Under the Investment
Company Act, management agreements with registered investment companies, such as
the mutual funds, terminate automatically upon assignment. The term "assignment"
is broadly defined and includes direct assignments as well as assignments that
may be deemed to occur, under certain circumstances, upon the transfer, directly
or indirectly, of a controlling interest in Hennessy Advisors. As of September
30, 2004, there have been no assignment transactions.
EMPLOYEES
As of September 30, 2004, there were ten employees at Hennessy
Advisors, Inc. (all full-time).
Neil J. Hennessy is the Chairman of the Board, President, Chief
Executive Officer and Portfolio Manager. Teresa M. Nilsen is an Executive Vice
President, Chief Financial Officer, Secretary and a Director. Daniel B. Steadman
is an Executive Vice President in charge of expansion and a Director. Frank
Ingarra is responsible for stock trading and is the Assistant Portfolio Manager
of our mutual funds. Other employees include Tania Kelley, Marketing Director;
Harry Thomas, Chief Compliance Officer; Brian Peery, Wholesaler/Salesman; Ralph
Hayward, Controller; Ana Miner, Operations Specialist; and, Jill Lear, Human
Resources and Marketing Associate.
In August, 2004 we hired Harry Thomas as our Chief Compliance Officer.
Rule 204(6) of the Investment Advisers Act of 1940 is the Securities and
Exchange Commission regulation that required every SEC Registered Investment
Adviser to hire a Chief Compliance Officer by October 5, 2004. In order to
comply with that regulation and in order to enhance our commitment to
compliance, we hired Mr. Thomas to perform the duties of our Chief Compliance
Officer. Mr. Thomas gained extensive financial industry experience with Wells
Fargo and Bank of America, and from his former positions as Director and Audit
Committee Chairman for the Hennessy Funds/Hennessy Mutual Funds Board of
Directors.
ITEM 2. DESCRIPTION OF PROPERTY.
Business offices are located in leased facilities at 750 Grant Avenue,
in Novato, California. There are three suites (#100,#150 and #275) covered under
a single lease. The lease expires October 1, 2005 and there are five 2-year
extensions available, which if exercised, would provide existing facilities
through October, 2015.
8
ITEM 3. LEGAL PROCEEDINGS.
There are no existing, pending or threatened legal proceedings
involving Hennessy Advisors, Inc., the mutual funds they manage or against any
of our officers or directors as a result of their involvement with the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during
the quarter ended September 30, 2004.
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
The common stock of Hennessy Advisors, Inc. is traded over the counter
and is quoted by the Over The Counter Bulletin Board (OTCBB) under the trading
symbol HNNA. Our common stock began trading on the OTCBB effective July 15,
2002.
The high and low sales prices for our common stock on the OTCBB during
the quarter ended September 30, 2004 were $25.50 and $23.50, respectively, as
reported by Reuters. Quarterly high and low sales prices for each quarter since
trading began in July, 2002, were as follows:
Quarter Ended: High Low
----------------------------------------- ------------ -------------
- September 30, 2004 $25.50 $23.50
- June 30, 2004 $26.00 $22.00
- March 31, 2004 $28.00 $18.75
- December 31, 2003 $21.00 $13.00
- September 30, 2003 $15.00 $12.00
- June 30, 2003 $13.00 $11.00
- March 31, 2003 $11.00 $11.00
- December 31, 2002 $11.00 $10.30
- September 30, 2002 $10.00 $10.00
(issue price, no sales)
HOLDERS
As of September 30, 2004, the approximate number of holders of record
of Common Stock of the Company was 493.
DIVIDENDS
We have not declared any dividends on our common stock and do not
anticipate paying dividends in the foreseeable future. We plan to retain future
earnings for use in our business. Any decisions as to future payment of
dividends will depend on earnings and financial position and such other factors
as the Board of Directors deems relevant. In addition, our loan agreement with
US Bank, dated March 15, 2004, limits our ability to pay dividends.
9
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
1. Overview
Hennessy Advisors, Inc. ("Hennessy Advisors"), a California
corporation, is a publicly traded investment management firm. The Company's
principal business activity is managing and marketing mutual funds. Hennessy
Advisors is the investment manager of the Hennessy Funds, a family of five
no-load mutual funds. Each of the Hennessy Funds employs a unique mutual fund
money management approach combining time-tested stock selection formulas.
Neil J. Hennessy, Chairman, President and CEO of Hennessy Advisors also
serves as the Portfolio Manager, President and Director of the Hennessy Funds.
In the past, Mr. Hennessy served as an expert witness and mediator in securities
cases, however he has significantly limited those activities. Hennessy Advisors,
under the direction of Neil Hennessy, provides advisory services to the Hennessy
Funds, including investment research, supervision of investments, conducting
investment programs, including evaluation, sale and reinvestment of assets, the
placement of orders for purchase and sale of securities, solicitation of brokers
to execute transactions and the preparation and distribution of reports and
statistical information.
Hennessy Funds pay fees to Hennessy Advisors for these services, which
are charged as a percentage of the average daily net value of the assets under
management in the funds. Fees paid to Hennessy Advisors are based on the value
of the funds managed and fluctuate with changes in the total value of the assets
under management. Hennessy Advisors' total assets under management were $1.261
billion as of September 30, 2004, of which $1.222 billion were mutual fund
assets. Hennessy Advisors also provides shareholder servicing for the Hennessy
Funds, which consists primarily of providing a call center to respond to
shareholder inquiries, including specific mutual fund account information.
Hennessy Advisors' principal business activities are affected by many
factors, including redemptions by mutual fund shareholders, general economic and
financial conditions, movement of interest rates and competitive conditions.
Although we seek to maintain cost controls, a significant portion of our
expenses are fixed and do not vary greatly. As a result, substantial
fluctuations can occur in our revenue and net income from period to period.
Hennessy Advisors distributes its funds through third-party
broker/dealers and independent financial institutions such as Charles Schwab,
Inc., Fidelity, TD Waterhouse and Pershing. These distribution platforms are
considered an integral part of Hennessy Advisors' sales/distribution strategy.
Hennessy Advisors participates in "no transaction fee" ("NTF") programs with
these companies, which allow customers to purchase the Hennessy Funds through
third party distribution channels without paying a transaction fee. The use of
"NTF" programs and expansion of these programs have been, and continue to be, an
important part of our business growth strategy. Hennessy Advisors compensates
these third party distributors under a pre-determined contractual agreement.
The principal assets on our balance sheet represent the capitalized
costs of investment management contracts with all five mutual funds. As of
September 30, 2004, the management contracts asset had a net balance of
$14,142,520, including the capitalized Lindner transaction, which began on
February 27, 2004 and completed on March 11, 2004 with a total cost of
$8,464,931.
The principal liability on our balance sheet is the long-term debt
incurred for the acquisition of the Lindner Funds contract. On March 11, 2004,
Hennessy Advisors, Inc. secured financing from US Bank National Association to
acquire the management contracts for certain Lindner funds. The agreement
requires fifty-nine (59) monthly payments in the amount of $94,060 plus interest
at the bank's prime rate as it may change from time to time (5.0% effective
November 10, 2004). The final installment of the then outstanding principal and
interest is due March 10, 2009.
10
RESULTS OF OPERATIONS
The following table reflects items in the Statements of Income as
dollar amounts and as percentages of total revenue for the years ended September
30, 2004 and 2003:
Years Ended September 30,
-----------------------------------------------------------------
2004 2003
-----------------------------------------------------------------
Percent Percent
of Total of Total
Amounts Revenue Amounts Revenue
-----------------------------------------------------------------
Revenue:
Investment advisory fees $ 8,500,245 89.1% $ 4,192,176 87.6%
Shareholder service fees 1,014,467 10.6 547,297 11.4
Expert witness fees - - 7,150 0.1
Other 30,477 0.3 40,905 0.9
-----------------------------------------------------------------
Total revenue 9,545,189 100.0 4,787,528 100.0
-----------------------------------------------------------------
Operating expenses:
Compensation and benefits 2,016,895 21.1 1,330,645 27.8
General and administrative 871,804 9.1 641,718 13.4
Mutual fund distribution 1,849,977 19.4 1,010,802 21.1
Amortization and depreciation 33,274 0.4 21,161 0.4
-----------------------------------------------------------------
Total operating expenses 4,771,950 50.0 3,004,326 62.7
-----------------------------------------------------------------
Operating income 4,773,239 50.0 1,783,202 37.3
-----------------------------------------------------------------
Interest expense 177,433 1.9 - -
-----------------------------------------------------------------
Income before income tax expense 4,595,806 48.1 1,783,202 37.3
-----------------------------------------------------------------
Income tax expense 1,830,800 19.1 721,214 15.1
-----------------------------------------------------------------
Net income $ 2,765,006 29.0% $ 1,061,988 22.2%
=================================================================
Total revenue increased $4,757,661 (+99.4%) in the year ended September
30, 2004, from $4,787,528 last year, due to fees earned from increased mutual
fund assets under management, primarily resulting from acquisition of assets
from Lindner Asset Management, Inc., and higher market valuations. Total assets
in the mutual funds we manage increased $386.9 million to $1.222 billion as of
September 30, 2004, compared to $835.1 million as of September 30, 2003
(+46.3%). Cash inflows (including the Lindner acquisition of $301.0 million),
were $601.0 million, redemptions were $335.3 million and market valuations
increased $121.2 million. The revenue we earn from the funds we manage increased
$4,308,069 (+102.8%) in the year ended September 30, 2004, while shareholder
service fees increased $467,170 (+85.4%).
There were no expert witness fees earned in the year ended September
30, 2004, a decrease of $7,150 from the year ended September 30, 2003. Mr.
Hennessy is working in a limited capacity as a securities litigation mediator,
devoting the majority of his time to managing Hennessy Advisors, Inc.
Total operating expenses increased $1,767,624 (+58.8%) in the year
ended September 30, 2004, from $3,004,326 last year. The increase resulted from
higher compensation expense, increases in several components of general and
administrative expense and mutual fund distribution costs. As a percentage of
total revenue, total operating expenses decreased to 50.0% in the year ended
September 30, 2004, compared to 62.7% in the prior comparable period.
11
Compensation and benefits increased $686,250 (+51.6%) in the year ended
September 30, 2004, from $1,330,645 in the prior comparable period. The increase
resulted from the addition of a marketing director and chief compliance officer,
and salary increases and performance incentives for officers and staff. As a
percentage of total revenue, compensation and benefits decreased to 21.1% for
the year ended September 30, 2004, compared to 27.8% in the prior comparable
period.
General and administrative expense increased $230,086 (+35.9%), in the
year ended September 30, 2004, from $641,718 in the year ended September 30,
2003, due to increases in business promotion activities, marketing programs,
participation in industry conferences, insurance costs and office rent. As a
percentage of total revenue, general and administrative expense decreased to
9.1% in the year ended September 30, 2004, from 13.4% in the prior comparable
period.
Mutual fund distribution expenses increased $839,175 (+83.0%) in the
year ended September 30, 2004, from $1,010,802 in the year ended September 30,
2003. As a percentage of total revenue, distribution expenses decreased to 19.4%
for the year ended September 30, 2004, compared to 21.1% in the prior comparable
period. The value of mutual fund assets to which distribution expenses relate
increased approximately 12% from September 30, 2003 to September 30, 2004,
however, total assets under management increased 46%, indicating that the
proportion of assets held by NTF providers has declined in relation to assets
held at other financial institutions. This change in proportion has lowered the
percentage of NTF expenses in relation to total revenues.
Amortization and depreciation expense increased $12,113 in the year
ended September 30, 2004, from $21,161 for the year ended September 30, 2003,
resulting from amortization of loan acquisition costs and additional purchases
of furniture and equipment.
Interest expense of $177,433 was generated from the $7.9 million US
Bank loan used to acquire assets from Lindner Asset Management, Inc. Interest
accrues at the prime rate in effect as it may change from time to time (5.0%
effective November 10, 2004).
For the year ended September 30, 2004, the provision for income taxes
increased $1,109,586 resulting from an increase in pre-tax income of $2,812,604.
Net income increased $1,703,018 to $2,765,006 in the year ended
September 30, 2004, compared to $1,061,988 in the prior comparable period, as a
result of the factors discussed above.
Liquidity and Capital Resources
As of September 30, 2004, Hennessy Advisors, Inc. had cash and cash
equivalents of $4,568,323.
With the exception of property and equipment and management contracts
acquired, which amount to a combined $14,230,612 as of September 30, 2004, the
remaining assets are very liquid, consisting primarily of cash and receivables
derived from mutual fund asset management activities. Total assets as of
September 30, 2004 were $19,913,879, compared to $9,148,863 at September 30,
2003, an increase of $10,765,016 or 117.7%.
Capital requirements for Hennessy Advisors, Inc. are continually
reviewed to ensure that sufficient funding is available to support business
growth strategies. The management of Hennessy Advisors, Inc. anticipates that
cash and other liquid assets on hand as of September 30, 2004 will be sufficient
to meet short-term capital requirements. To the extent that liquid resources and
cash provided by operations are not adequate to meet long-term capital
requirements, management plans to raise additional capital through debt and/or
equity markets. There can be no assurance that Hennessy Advisors, Inc. will be
able to borrow funds or raise additional equity.
In September 2003, Hennessy Advisors, Inc., acquired the mutual fund
assets of the SYM Select Growth Fund (SYM) which was a Mid-cap growth fund with
$34.7 million in assets under management. On September 18, 2003, the acquisition
transaction was completed and assets of the SYM Select Growth Fund were merged
12
into the Hennessy Focus 30 Fund. The acquisition was funded through cash from
Hennessy Advisors, Inc. in the amount of $629,413 and an interest free note from
SYM Financial Corporation, in the amount of $527,912. The note was paid in full
in September 2004.
On March 11, 2004, Hennessy Advisors, Inc. secured financing from US Bank
National Association to acquire the management contracts for certain Lindner
funds. The agreement requires fifty-nine (59) monthly payments in the amount of
$94,060 plus interest at the bank's prime rate as it may change from time to
time (5.0% effective November 10, 2004). The final installment of the then
outstanding principal and interest is due March 10, 2009
Critical Accounting Policies
In June of 2001 the Financial Accounting Standards Board issued FASB
Statement No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142
addresses financial accounting and reporting for acquired goodwill and other
intangible assets and supercedes APB No, 17, Intangible Assets. Under FASB
Statement No. 142, goodwill and intangible assets that have indefinite useful
lives will not be amortized but rather will be tested at least annually for
impairment. The Company considers the management contracts acquired to be
intangible assets with an indefinite life. The Company fully implemented the
provisions of FASB Statement No. 142 on October 1, 2002 at which time it ceased
amortization on these intangible assets. Impairment analysis is conducted
quarterly and coincides with our financial reporting on Forms 10-QSB and 10-KSB.
Based on our detailed assessment of current fair market value, the value of the
management contracts acquired has not been impaired. If future valuations in the
marketplace decline significantly, the valuation of management contracts
acquired may become impaired and net earnings would be negatively impacted by
the resulting impairment adjustment.
Forward Looking Statements
Certain statements in this report are forward-looking within the
meaning of federal securities laws. Although management believes that the
expectations reflected in the forward-looking statements are reasonable, future
levels of activity, performance or achievements cannot be guaranteed. Factors
that may affect the Company's actual results include those described below under
"Risk Factors." There is no regulation requiring an update of any of the
forward-looking statements after the date of this report to conform these
statements to actual results or to changes in our expectations.
Risk Factors
-Our revenues will decline if the value of the securities held by the mutual
funds we manage declines.
We derive our revenues primarily from advisory fees paid by the mutual
funds we manage. These advisory fees are based on a percentage of the value of
the assets of the funds. For the year ended September 30, 2004, 99% of our
revenues were advisory and shareholder service fees. The securities markets in
general have experienced significant volatility in recent years. Volatility in
the securities markets in general, and the equity markets in particular, could
reduce our assets under management and consequently, reduce our revenues. In
addition to declines in the equity markets, failure of these markets to sustain
prior levels of growth, or continued short-term volatility in these markets
could result in investors withdrawing from the mutual funds we manage or
decreasing their rate of investment, either of which would be likely to
adversely affect us.
-Our management fees are based on the value of our assets under management,
which are subject to significant fluctuations.
Global economic conditions, interest rate fluctuations, inflation rate
increases and other factors that are difficult to predict affect the mix, market
values, and levels of our assets under management. The Hennessy Balanced Fund
and Hennessy Total Return Fund invest approximately 50% of their portfolios in
13
U.S. Treasury securities with one year maturities. Fluctuations in interest
rates affect the value of such fixed-income assets under management. In turn,
this affects our management fees. Similarly, all five of our funds are affected
by changes in the equity marketplace, which may significantly affect the level
of our assets under management. The factors above often have inverse effects on
equity assets and fixed-income assets, making it difficult for us to predict the
net effect of any particular set of conditions on our business and to decide
effective strategies to counteract those conditions.
-Poor investment performance by our mutual funds could decrease sales of our
funds.
Success in the investment management and mutual fund business is
dependent on investment performance as well as distribution and client
servicing. Good performance generally stimulates sales of our investment
products and tends to keep withdrawals and redemptions low, generating higher
management fees (which are based on the amount of assets under management).
Conversely, relatively poor performance tends to result in decreased sales,
increased withdrawals and redemptions, with corresponding decreases in our
revenues. Many analysts of the mutual fund industry believe that investment
performance is the most important factor for the growth of no-load mutual funds.
Failure of our investment products to perform well could, therefore, have a
material adverse effect . For any period in which revenues decline, our profits
and profit margins may decline by a greater proportion because certain expenses
remain relatively fixed.
-Our failure to comply with regulatory requirements may harm our financial
condition.
Our investment management activities are subject to client guidelines,
and our mutual fund business involves compliance with numerous investment, asset
valuation, distribution, and tax requirements. Failure to adhere to these
guidelines or satisfy these requirements could result in losses, which a client
could recover from us. We have installed procedures and utilize the services of
experienced administrators, accountants and lawyers to assist in satisfying
these requirements. However, there can be no assurance that such precautions
will protect us from potential liabilities.
Our business is subject to extensive regulation in the United States,
particularly by the Securities and Exchange Commission. Our failure to comply
with applicable laws or regulations could result in fines, suspensions of
personnel or other sanctions, including revocation of our registration as an
investment adviser. Changes in laws or regulations or in governmental policies
could have a material adverse effect on us. See "Business -- Regulation."
-The expense of full compliance with new securities regulations will reduce
earnings.
In order to comply with regulations we may have additional expenses
beyond our control and those expenses will have a substantial impact on earnings
per share. On October 5, 2004 Rule 206(4)-7 of the Investment Advisors Act of
1940 required the Company to hire a Chief Compliance Officer (CCO).
Simultaneously, Rule 38-(a) of the Investment Company Act of 1940 (pertaining to
mutual fund companies) also required Hennessy Funds to hire a Chief Compliance
Officer. This new CCO is responsible for providing reasonable assurance that
both the Company and Hennessy Funds comply with all securities laws. The board
of directors of the mutual fund companies are responsible for the appointment
and/or the removal of the CCO. The mutual fund directors also set the
compensation for the CCO. This specific regulation serves as an example of our
inability to control every aspect of compliance expenditures. In addition to the
hiring of a CCO, the new compliance procedures and policies that must be adopted
with Sarbanes-Oxley legislation will also increase our expenses. There will be
increases in audit, legal, internal technology, and other expenses associated
with the systematization of Sabanes-Oxley regulations and the resulting impact
on financial reporting.
-Our investment management agreements can be terminated on short notice.
Substantially all of our revenues are derived from investment
management agreements. Investment management agreements with our mutual funds
are terminable without penalty on 60 days' notice and must be approved at least
annually by the disinterested members of each mutual fund's board of directors
or trustees. If any of our investment management agreements are terminated or
not renewed, our revenues could materially decline.
14
-We face intense competition from larger companies.
The investment management business is intensely competitive, with low
barriers to entry, and is undergoing substantial consolidation. Many
organizations in this industry are attempting to market to and service the same
clients as we do, not only with mutual fund products and services, but also with
a wide range of other financial products and services. Many of our competitors
have greater distribution capabilities, offer more product lines and services,
and may also have a substantially greater amount of assets under management and
financial resources. These competitors would tend to have a substantial
advantage over us during periods when our investment performance is not strong
enough to counter these competitors' greater marketing resources.
-Market pressure to lower our advisory fees would reduce our profit margin.
There has been a trend toward lower fees in some segments of the
investment management industry. In order for us to maintain our fee structure in
a competitive environment, we must be able to provide our mutual fund
shareholders with investment returns and service that will encourage them to pay
our fees. There can be no assurance that we will be able to maintain our current
fee structure. Fee reductions on existing or future business could have an
adverse impact on our results of operations.
-We may be required to forego all or a portion of our fees under our investment
management agreements with the mutual funds.
Market conditions may require that we waive our investment advisory
fees from the mutual funds we manage to the extent that the mutual fund's
operating expenses, including our fees (but excluding interest, taxes, brokerage
commissions and extraordinary expenses such as litigation), exceed competitive
expense limitations. We monitor ratios of expenses to average assets under
management and waive advisory fees if we believe that our ratios might lead fund
investors to redeem their shares in our mutual funds in order to seek lower
expense ratios with other fund managers.
-We depend upon Neil J. Hennessy to manage our business. The loss of Mr.
Hennessy may adversely affect our business and financial condition.
Our success is largely dependent on the skills, experience and
performance of key personnel, particularly Neil J. Hennessy, our chairman, chief
executive officer and president, who is the driving force in our company's
success. Mr. Hennessy is primarily responsible for the day-to-day management of
the portfolio of each of our mutual funds and for developing and executing each
fund's investment programs. The loss of Mr. Hennessy could have an adverse
effect on our business, financial condition and results of operations.
-Changes in the distribution channels on which we depend could reduce our
revenues and slow our growth.
We derive a significant portion of our sales through investment
advisors who utilize no transaction fee programs (mutual fund supermarkets). A
no transaction fee program means that the mutual fund customer does not pay a
transaction fee. Rather, fees are paid by the mutual fund itself or its
investment advisor or distributor. Increasing competition in these distribution
channels has caused our distribution costs to rise and could cause further
increases in the future. Higher distribution costs lower our earnings. Moreover,
our failure to maintain strong business relationships with these advisors would
impair our ability to distribute and sell our products, which would have a
negative effect on our level of assets under management, related revenues and
overall financial condition.
-Our officers and directors own enough of our shares to significantly influence
our company, which will limit the ability of other shareholders to influence
corporate matters.
Our officers and directors own 52.9% of our outstanding common stock.
As a result, these stockholders will be able to significantly influence the
outcome of any matter requiring a stockholder vote and, as a result, our
management and affairs. Matters that typically require stockholder approval
include the following:
15
o election of directors.
o merger or consolidation with another company.
o sale of all or substantially all of our assets.
-Acquisitions, which are part of Hennessy's business strategy, involve inherent
risks that could result in adverse effects on Hennessy's operating results and
financial condition and dilute the holdings of current stockholders.
As part of Hennessy's business strategy, Hennessy intends to consider
acquisitions of similar or complementary businesses. If Hennessy misjudges the
value, strengths, weaknesses, liabilities or potential profitability of
acquisition candidates, or is unsuccessful in integrating the operations of the
acquired businesses, Hennessy may not achieve the expected return on investment
in the acquired businesses, which could have a material adverse effect on
Hennessy's operating results and financial condition. Any future acquisitions
would be accompanied by the risks commonly associated with acquisitions.
These risks include, among others:
o Inability to secure enough shareholder votes to gain approval of
a proposed acquisition.
o Potential exposure to unknown liabilities of acquired companies
and to acquisition costs and expenses.
o The difficulty and expense of integrating the operations and
personnel of the acquired companies.
o The potential disruption to the business of the combined company
and potential diversion of management's time and attention.
o The possible loss of key employees and clients as a result of
the changes in management.
o Dilution to stockholders if the acquisition were made with the
Company's common stock.
o The possible loss of mutual fund assets resulting in the
impairment of management contract valuations.
In addition, the products and technologies of acquired companies may not be
effectively assimilated into Hennessy's business, and product offerings of
combined companies may not have a positive effect on combined revenues or
earnings. Combined companies may also incur significant expense to complete
acquisitions and to support the acquired products and businesses. Furthermore,
any such acquisitions may be funded through cash, debt, equity or through some
combination of these resources, which could have the effect of diluting or
otherwise adversely affecting the holdings or the rights of stockholders.
Finally, Hennessy may not be successful in identifying attractive acquisition
candidates or completing acquisitions on favorable terms.
16
ITEM 7. FINANCIAL STATEMENTS
Index to Financial Statements:
Report of Independent Registered Public Accounting Firm............... 18
Balance Sheets as of September 30, 2004 and 2003...................... 19
Statements of Income for the years ended September 30, 2004 and
September 30, 2003.................................................... 20
Statements of Changes in Stockholders' Equity for the years ended
September 30, 2004 and 2003........................................... 21
Statements of Cash Flows for the years ended September 30, 2004 and
2003.................................................................. 22
Notes to Financial Statements......................................... 23
17
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Hennessy Advisors, Inc.:
We have audited the accompanying balance sheet of Hennessy Advisors,
Inc. (the "Company") as of September 30, 2004 and 2003, and the related
statements of income, changes in stockholders' equity, and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the auditing standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the Company's financial position as of
September 30, 2004 and 2003, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
Pisenti & Brinker LLP
Petaluma, California
November 4, 2004
18
Hennessy Advisors, Inc.
Balance Sheets
September 30, 2004 and September 30, 2003
2004 2003
---- ----
Assets
Current assets:
Cash and cash equivalents $ 4,568,323 $ 2,802,117
Investments in marketable securities, at fair value 4,582 4,372
Investment fee income receivable 831,371 562,743
Prepaid expenses 65,004 36,192
Other current assets 24,413 -
--------------- ----------------
Total current assets $ 5,493,693 $ 3,405,424
--------------- ----------------
Property and equipment, net of accumulated depreciation
of $100,200 and $73,590 $ 88,092 $ 46,212
Management contracts, net of accumulated amortization
of $628,627 14,142,520 5,637,943
Deferred income tax assets 126,900 51,000
Other assets 62,674 8,284
--------------- ----------------
Total assets $ 19,913,879 $ 9,148,863
=============== ================
Liabilities and Stockholders' Equity
Current liabilities:
Accrued liabilities and accounts payable $ 1,416,505 $ 633,333
Income taxes payable 772 -
Note payable - 527,912
Current portion of long-term debt 1,128,721 -
--------------- ----------------
Total current liabilities $ 2,545,998 $ 1,161,245
--------------- ----------------
Long-term debt $ 6,207,967 $ -
Deferred income tax liabilities 452,200 151,000
--------------- ----------------
Total liabilities $ 9,206,165 $ 1,312,245
--------------- ----------------
Stockholders' equity:
Adjustable rate preferred stock, $25 stated value, 5,000,000 shares
authorized: zero shares issued and outstanding $ - $ -
Common stock, no par value, 15,000,000 shares authorized:
1,635,142 shares issued and outstanding at September 30, 2004
and 1,626,142 at September 30, 2003 6,881,205 6,788,205
Additional paid-in capital 37,098 24,008
Retained earnings 3,789,411 1,024,405
--------------- ----------------
Total stockholders' equity $ 10,707,714 $ 7,836,618
--------------- ----------------
Total liabilities and stockholders' equity $ 19,913,879 $ 9,148,863
=============== ================
See accompanying notes to financial statements
19
Hennessy Advisors, Inc.
Statements of Income
Years Ended September 30, 2004 and 2003
2004 2003
---- ----
Revenue
Investment advisory fees $ 8,500,245 $ 4,192,176
Shareholder service fees 1,014,467 547,297
Expert witness fees - 7,150
Other 30,477 40,905
--------------- --------------
Total revenue 9,545,189 4,787,528
Operating expenses
Compensation and benefits 2,016,895 1,330,645
General and administrative 871,804 641,718
Mutual fund distribution 1,849,977 1,010,802
Amortization and depreciation 33,274 21,161
--------------- --------------
Total operating expenses 4,771,950 3,004,326
--------------- --------------
Operating income 4,773,239 1,783,202
Interest expense 177,433 -
--------------- --------------
Income before income tax expense 4,595,806 1,783,202
Income tax expense 1,830,800 721,214
--------------- --------------
Net income $ 2,765,006 $ 1,061,988
=============== ==============
Basic earnings per share $ 1.70 $ 0.65
=============== ==============
.
Diluted earnings per share $ 1.63 $ 0.65
=============== ==============
See accompanying notes to financial statements
20
Hennessy Advisors, Inc.
Statements of Changes in Stockholders' Equity
Years Ended September 30, 2004 and 2003
Retained
Additional Earnings Total
Common Common Paid-in (Accumulated Stockholders'
Shares Stock Capital Deficit) Equity
------ ----- ------- -------- ------
Balances as of September 30, 2002 1,626,142 $ 6,788,205 $ 24,008 $ (37,583) $ 6,774,630
Net income for the year
ended September 30, 2003 - - - 1,061,988 1,061,988
---------------------------------------------------------------------------------
Balances as of September 30, 2003 1,626,142 $ 6,788,205 $ 24,008 $ 1,024,405 $ 7,836,618
Net income for the year
ended September 30, 2004 - - - 2,765,006 2,765,006
Employee stock options exercised 9,000 93,000 - - 93,000
Tax benefit of employee stock sales - - 13,090 13,090
---------------------------------------------------------------------------------
Balances as of September 30, 2004 1,635,142 $ 6,881,205 $ 37,098 $ 3,789,411 $ 10,707,714
=================================================================================
See accompanying notes to financial statements
21
Hennessy Advisors, Inc.
Statements of Cash Flows
Years Ended September 30, 2004 and 2003
2004 2003
------------- --------------
Cash flows from operating activities:
Net income $ 2,765,006 $ 1,061,988
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 33,274 21,161
Deferred income taxes 225,300 119,695
Tax benefit from exercise of employee stock options 13,090 -
Unrealized gains on marketable securities (130) (467)
(Increase) decrease in operating assets:
Investment fee income receivable (268,628) (332,724)
Expert witness fees receivable - 21,745
Prepaid expenses (28,812) (14,421)
Other current assets (24,413) 7,400
Increase (decrease) in operating liabilities:
Accrued liabilities and accounts payable 783,171 508,117
Income taxes payable 772 (33,168)
------------- --------------
Net cash provided by operating activities 3,498,630 1,359,326
------------- --------------
Cash flows used in investing activities:
Purchases of property and equipment (68,491) (25,050)
Purchases of investments (80) (75)
Payments related to acquisition of management contracts (8,504,577) (629,143)
------------- --------------
Net cash used in investing activities (8,573,148) (654,268)
------------- --------------
Cash flows provided by financing activities:
Proceeds from long-term debt 7,861,544 -
Principal payments on note payable (527,912) -
Principal payments on long-term debt (564,360) -
Payment of loan acquisition costs (21,548) -
Proceeds from exercise of employee stock options 93,000 -
------------- --------------
Net cash provided by financing activities 6,840,724 -
------------- --------------
Net increase in cash and cash equivalents 1,766,206 705,058
Cash and cash equivalents at the beginning of the period 2,802,117 2,097,059
------------- --------------
Cash and cash equivalents at the end of the period $ 4,568,323 $ 2,802,117
============= ==============
Supplemental disclosures of cash flow information:
Cash paid for:
Income taxes $ 1,583,924 $ 642,4014
============= ==============
Interest $ 157,629 $ -
============= ==============
Non-cash investing and financing transactions:
Management contract acquired with note payable to
SYM Financial Corporation $ - $ 527,912
============= ==============
Loan acquisition costs withheld from long-term debt proceeds $ 39,505 $ -
============= ==============
See accompanying notes to financial statements
22
Notes to Financial Statements - Fiscal Year Ended September 30, 2004
(1) Summary of the Organization and Significant Accounting Policies
(a) Organization
Hennessy Advisors, Inc. (the "Company") was founded on
February 1, 1989, as a California corporation under the name
Edward J. Hennessy, Incorporated. In 1990, the Company became a
registered investment advisor and on April 15, 2001, the Company
changed its name to Hennessy Advisors, Inc.
The operating activities of the Company consist
primarily of providing investment management services to five
open-end mutual funds (the Hennessy Funds). The Company serves
as the investment advisor to the Hennessy Balanced Fund, the
Hennessy Total Return Fund, the Hennessy Cornerstone Value Fund,
the Hennessy Cornerstone Growth Fund and the Hennessy Focus 30
Fund.
(b) Cash and Cash Equivalents
Cash and cash equivalents include all cash balances and
highly liquid investments which are readily convertible into
cash.
(c) Investments in Marketable Securities
The Company holds investments in publicly traded mutual
funds which are accounted for as trading securities under FASB
Statement No. 115, "Accounting for Certain Investments in Debt
and Equity Securities". Accordingly, any unrealized gains and
losses on the investments are recognized currently in
operations.
Dividend income is recorded on the ex-dividend date.
Purchases and sales of marketable securities are recorded on a
trade date basis, and realized gains and losses recognized on
sale are determined on a specific identification/average cost
basis.
(d) Management Contracts Acquired
The Company was appointed as investment advisor to the
Hennessy Cornerstone Growth Fund and Hennessy Cornerstone Value
Fund concurrent with its acquisition of patented automated
investment strategies from Netfolio, Inc.
The initial management contracts acquired were
capitalized at $4,190,840. In February of 2002, the Company
recorded $918,675 as the incremental value of management
contracts acquired in connection with its mergers with Hennessy
Management Co. L.P. and Hennessy Management Co. 2 L.P. In
accordance with FASB Statement No. 142, intangible assets with
an indefinite life acquired after June 30, 2001 are not subject
to amortization. Accordingly, the Company has not recorded any
amortization for the value of the contracts acquired in
connection with the mergers of the partnerships.
On September 18, 2003, the Company was appointed
investment advisor to the Hennessy Focus 30 Fund, concurrent
with the acquisition of all the assets of the SYM Select Growth
Fund, which were immediately merged into the Hennessy Focus 30
Fund.
On March 11, 2004, Hennessy Advisors, Inc. completed the
acquisition of the management contract for the majority of the
mutual fund assets managed by Lindner Asset Management, Inc.
("Lindner"), based in Deerfield, Illinois. In conjunction with
the Asset Purchase Agreement, the assets of five of Lindner's
mutual funds were merged into four of the five Hennessy Funds.
The purchase price was equal to 2.625% of those assets valued by
the Lindner Funds custodian at closing. The transaction was
funded through a credit facility provided by US Bank, St. Louis,
Missouri. The loan agreement requires fifty-nine (59) monthly
payments in the amount of $94,060 plus interest at the bank's
23
prime rate which may change from time to time (5.0% effective
November 10, 2004). The final installment of the then
outstanding principal and interest is due March 10, 2009.
The Company periodically reviews the carrying value of
management contracts acquired to determine if any impairment has
occurred. Based on a detailed assessment of current fair value
and anticipated future cash flows, it is the opinion of the
Company's management that there has been no impairment.
Under FASB Statement No. 142, goodwill and intangible
assets that have indefinite useful lives are not amortized but
tested at least annually for impairment. The Company considers
our mutual fund management contracts to be intangible assets
with an indefinite useful life.
(e) Property and Equipment
Property and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using the
straight-line method over the estimated useful lives of the
assets, generally three to twelve years.
(f) Fair Value of Financial Instruments
FASB Statement No. 107 requires disclosures regarding
the fair value of all financial instruments for financial
statement purposes. The estimates presented in these statements
are based on information available to management as of September
30, 2004. Accordingly, the fair value presented in financial
statements for the year then ended may not be indicative of
amounts that could be realized on disposition of the financial
instruments. The fair value of receivables, accounts payable and
notes payable has been estimated at carrying value due to the
short maturity of these instruments. The fair value of
management contracts acquired is estimated at the cost of
acquisition. The fair value of marketable securities and money
market accounts is based on closing net asset values as reported
by securities exchanges registered with the Securities and
Exchange Commission.
(g) Expert Witness Fees
The Company receives fees for services provided by the
Company's President and staff in mediating, reviewing and
consulting on various cases within the securities industry. Such
fees are recognized when earned.
(h) Income Taxes
Income taxes are accounted for under the asset and
liability method, in accordance with the provisions of FASB
Statement No. 109 "Accounting For Income Taxes".
Under this method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in
which those differences are expected to be recovered or settled.
Deferred tax assets and liabilities are adjusted for the effects
of changes in tax laws and rates on the date of enactment.
A valuation allowance is then established to reduce that
deferred tax asset to the level at which it is "more likely than
not" that the tax benefits will be realized. Realization of tax
benefits of deductible temporary differences and operating
losses or credit carryforwards depends on having sufficient
taxable income of an appropriate character within the carry-
forward periods. Sources of taxable income that may allow for
the realization of tax benefits include income that will result
from future operations.
24
The Company's effective tax rate of 39.8% differs from
the federal statutory rate of 34% primarily due to the effects
of state income taxes.
(i) Earnings Per Share
Basic earnings per share is determined by dividing net
earnings by the weighted average number of shares of common
stock outstanding, while diluted earnings per share is
determined by dividing the weighted average number of shares of
common stock outstanding adjusted for the dilutive effect of
common stock equivalents.
(j) Authorized Common and Preferred Shares
Authorized common and preferred shares are 15 million
and 5 million shares, respectively.
(k) Use of Estimates
The preparation of financial statements in conformity
with accounting principles generally accepted in the United
States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
(2) Investment Advisory Agreements
Pursuant to investment management agreements (the
"Agreements"), the Company provides investment advisory services
to the five Hennessy Funds. The Agreements are renewable
annually based upon approval by a majority of the Funds'
disinterested directors. Additionally, each agreement may be
terminated prior to its expiration upon 60 days notice by either
the Company or the Fund.
As provided in the Agreements with the five Hennessy
Funds, the Company receives investment advisory fees monthly
based on a percentage of the respective Fund's average daily net
assets. The Agreements also contain expense limitation
provisions whereby the Company has agreed to reimburse certain
Funds annually, under certain conditions, an amount equal to all
or a portion of its investment advisory fees.
(3) Property and Equipment
Property and equipment were comprised of the following as of
September 30, 2004 and 2003:
2004 2003
---------------------- --------------------
Leasehold improvements $ 80,625 $ 43,294
Furniture and fixtures 19,622 9,664
Equipment 69,908 56,054
Software 18,137 10,790
---------------------- --------------------
188,292 119,802
Less: accumulated depreciation (100,200) (73,590)
---------------------- --------------------
$ 88,092 $ 46,212
====================== ====================
25
(4) Note Payable
In September of 2003, the Company entered into a borrowing
agreement with SYM Financial Corporation ("SYM") in order to finance
its acquisition of the assets in the SYM Select Growth Fund. Under
terms of the agreement, the Company borrowed $527,912, interest free,
with the balance due and payable on September 18, 2004. The note was
paid in full in September 2004.
(5) Long-term Debt
On March 11, 2004, Hennessy Advisors, Inc. secured financing
from US Bank National Association to acquire the management contracts
for certain Lindner funds. The loan agreement requires fifty-nine (59)
monthly payments in the amount of $94,060 plus interest at the bank's
prime rate as it may change from time to time (5.0% effective November
10, 2004), and is secured by the Company's assets. The final
installment of the then outstanding principal and interest is due March
10, 2009. The note maturity schedule is as follows:
Year ending September 30:
2005 $1,128,721
2006 $1,128,720
2007 $1,128,720
2008 $1,128,720
2009 $2,821,807
In connection with securing the financing, Hennessy Advisors,
Inc. incurred loan costs in the amount of $61,052. These costs are
included in other assets and are being amortized on a straight-line
basis over 60 months. Future amortization expense over the next five
years is as follows:
Year ending September 30:
2005 $12,211
2006 $12,211
2007 $12,211
2008 $12,211
2009 $ 5,547
26
(6) Income Taxes
The provision for income taxes is comprised of the following for
the years ended September 30, 2004 and 2003:
2004 2003
------------------- -------------------
Current:
Federal $1,263,400 $474,919
State 342,100 126,600
------------------- -------------------
1,605,500 601,519
------------------- -------------------
Deferred:
Federal 159,600 85,895
State 65,700 33,800
------------------- -------------------
225,300 119,695
------------------- -------------------
$1,830,800 $721,214
=================== ===================
The principal reasons for the differences from the federal
statutory rate of 34% are as follows:
2004 2003
------------------- -------------------
Tax provision at statutory rate $1,562,574 $606,289
State taxes, net of federal benefit 269,148 105,864
Permanent differences (5,792) 2,625
Other 4,870 6,436
------------------- -------------------
Income tax provision $1,830,800 $721,214
=================== ===================
The tax effects of temporary differences that give rise to
significant portions of deferred tax assets and liabilities as of
September 30, 2004 and 2003 are presented below:
2004 2003
------------------- -------------------
Deferred tax assets:
Accrued compensation $ 11,500 $ 8,000
State taxes 115,400 43,000
------------------- -------------------
Total deferred tax assets 126,900 51,000
Deferred tax liabilities:
Property and equipment (900) 0
Management contracts (451,300) (151,000)
------------------- -------------------
Total deferred tax liabilities (452,200) (151,000)
------------------- -------------------
Net deferred tax liabilities $(325,300) $(100,000)
=================== ===================
The components giving rise to the net deferred tax liabilities
described above have been included in the accompanying balance sheets as
of September 30, 2004 and 2003, as follows:
27
2004 2003
----------------- ----------------
Current assets $ 127,800 $ 51,600
Noncurrent assets 34,100 11,400
Current liabilities (900) (600)
Noncurrent liabilities (486,300) (162,400)
----------------- ----------------
Net deferred tax liabilities $ (325,300) $(100,000)
================= ================
(7) Earnings Per Share
The weighted average common shares outstanding used in the
calculation of basic earnings per share and weighted average common
shares outstanding adjusted for common stock equivalents used in the
computation of diluted earnings per share were as follows for the years
ended September 30, 2004 and 2003, respectively:
2004 2003
-------------------- --------------------
Weighted average common stock outstanding 1,629,069 1,626,142
Common stock equivalents:
Stock options 71,490 9,549
-------------------- --------------------
1,700,559 1,635,691
==================== ====================
(8) Reclassification of Prior Period's Statements
Certain items previously reported have been reclassified
to conform with the current period's presentation.
(9) Commitments
The Company leases office space under a single non-cancelable
operating lease that covers three suites at 750 Grant Ave. in Novato,
California. The initial lease expires September 30, 2005 with five
consecutive two-year options available thereafter. Total rent expense
for the year ended September 30, 2004 was $93,900. The minimum future
rental commitment under this lease as of September 30, 2004, is $93,900
for the fiscal year ending September 30, 2005.
(10) Stock-Based Compensation
On May 2, 2001, the Company established an incentive plan (the
Plan) providing for the issuance of options, stock appreciation rights,
restricted stock, performance awards, and stock loans for the purpose of
attracting and retaining executive officers and key employees. The
maximum number of shares which may be issued under the Plan is 25% of
the outstanding common stock of the Company, subject to adjustment by
the compensation committee of the Board of Directors. The 25% limitation
shall not invalidate any awards made prior to a decrease in the number
of outstanding shares, even though such awards have resulted or may
result in shares constituting more than 25% of the outstanding shares
being available for issuance under the Plan. Shares available under the
Plan which are not awarded in one particular year may be awarded in
subsequent years. The compensation committee of the Board of Directors
has the authority to determine the awards granted under the Plan,
including among other things, the individuals who receive the awards,
the times when they receive them, vesting schedules, performance goals,
whether an option is an incentive or nonqualified option and the number
of shares to be subject to each award. However, no participant may
receive options or stock appreciation rights under the Plan for an
aggregate of more than 50,000 shares in any calendar year. The exercise
price and term of each option or stock appreciation right will be fixed
by the compensation committee except that the exercise price for each
28
stock option which is intended to qualify as an incentive stock option
must be at least equal to the fair market value of the stock on the date
of grant and the term of the option cannot exceed 10 years. In the case
of an incentive stock option granted to a 10% shareholder, the exercise
price must be at least 110% of the fair market value on the date of
grant and cannot exceed five years. Incentive stock options may be
granted only within ten years from the date of adoption of the Plan. The
aggregate fair market value (determined at the time the option is
granted) of shares with respect to which incentive stock options may be
granted to any one individual, which stock options are exercisable for
the first time during any calendar year, may not exceed $100,000. An
optionee may, with the consent of the compensation committee, elect to
pay for the shares to be received upon exercise of their options in cash
or shares of common stock or any combination thereof.
As the exercise price of all options granted under the Plan were
equal to the market price of the underlying common stock on the grant
date, no stock-based employee compensation cost was recognized in net
income. During the current fiscal year ended September 30, 2004, 18,000
options were granted. During the fiscal year ended September 30, 2003,
72,500 options were granted. The following tables illustrate the effect
on net income and earnings per share if the Company had applied the fair
value recognition provisions of FASB Statement No. 123, "Accounting for
Stock-Based Compensation", as amended, to options granted under the
stock option plan. Because the estimated value is determined as of the
date of grant, the actual value ultimately realized by the employee may
be significantly different.
As required under FASB Statement No. 123 and FASB Statement No.
148, "Accounting for Stock-based Compensation - Transition and
Disclosure", the proforma effects of stock-based compensation on net
income and earnings per common share have been estimated at the date of
grant using the Black-Scholes option pricing model.
The value of options granted in the fiscal year ended
September 30, 2004 was determined at the date of grant by using an
options pricing model with an assumed risk-free interest rate of 2.84%,
an expected life of 5 years, zero dividends and a volatility factor of
34.68%:
Basic Diluted
Net Income EPS EPS
--------------------- ------------ -------------
For the year ended September 30, 2004
--------------------------------------------------------------
Net income $2,765,006 $1.70 $1.63
Fair value of stock options - net of tax 56,160 0.03 0.03
--------------------- ------------ -------------
Proforma net income $2,708,846 $1.67 $1.60
===================== ============ =============
The value of options granted in the fiscal year ended September 30, 2003
was determined at the date of grant by using an options pricing model with an
assumed risk-free interest rate of 3.24%, an expected life of 5 years, zero
dividends and a volatility factor of 0.0001%:
Basic Diluted
Net Income EPS EPS
--------------------- ------------ -------------
For the year ended September 30, 2003
--------------------------------------------------------------
Net income $1,061,988 $0.65 $0.65
Fair value of stock options - net of tax 77,431 0.05 0.05
--------------------- ------------ -------------
Proforma net income $ 984,557 $0.60 $0.60
===================== ============ =============
The Company continues to account for its stock option plan under the
intrinsic value recognition and measurement principles of APB Opinion No. 25 and
related interpretations.
The Company has reserved up to 408,786 options for shares of the
Company's common stock, in accordance with terms of the Plan, wherein a maximum
of 25% of the outstanding common stock may be issued as stock options. An
aggregate of 179,500 options have been granted to certain employees, executive
29
officers, and directors of the Company as of September 30, 2004. These options
were fully vested at the date of grant, and have a weighted average exercise
price of $11.41 per share. During the fiscal year ended September 30, 2004,
employees exercised a total of 9,000 options, leaving 170,500 options fully
vested and exercisable at year-end.
A summary of the status of stock options granted as of the fiscal years
ended September 30, 2004 and 2003, is presented in the following table:
2004 Weighted Avg. 2003 Weighted Avg.
Number Of Exercise Number Of Exercise
Options Price Options Price
Outstanding at beginning of the year 161,500 $10.90 89,000 $10.00
-------------- -------------
Granted 18,000 $16.04 72,500 $12.00
Exercised (9,000) $10.33 - -
Forfeited - - - -
Expired - - - -
-------------- -------------
Outstanding at year-end 170,500 $11.41 161,500 $10.90
============== =============
Exercisable at year-end 170,500 $11.41 161,500 $10.90
Weighted average fair value of options $5.20 $10.22
(11) Concentration of Credit Risk
The Company maintains its cash accounts with two commercial
banks which, at times, may exceed federally insured limits. The amount
on deposit at September 30, 2004, exceeded the insurance limits of the
Federal Deposit Insurance Corporation by approximately $352,000. In
addition, total cash and cash equivalents include $4,074,381 held in the
First American Prime Obligations Fund which is not federally insured.
The Company believes it is not exposed to any significant credit risk on
cash and cash equivalents.
(12) Subsequent Events
On October 31, 2004, 17,000 stock options were granted to
employees of the corporation at an exercise price of $24.00. On November
3, 2004, 60,000 options were granted to members of the board of
directors, at a price of $24.00. All options were granted at an exercise
price equal to the market price of the underlying stock on the grant
date.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements between Hennessy Advisors,
Inc. (the Company)and its auditors, Pisenti & Brinker LLP.
30
ITEM 8A. CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company's management,
including the Company's principal executive officer and principal financial
officer, the Company conducted an evaluation of its disclosure controls and
procedures, as such term is defined under Rule 13a-15(e) promulgated under the
Securities Exchange Act of 1934, as amended, as of the end of the period covered
by this report. Based on such evaluation, the Company's principal executive
officer and principal financial officer have concluded that the Company's
disclosure controls and procedures are effective. There have been no significant
changes (including corrective actions with regard to significant deficiencies or
material weaknesses) in internal controls or in other factors that could
significantly affect these controls subsequent to the date of the evaluation
referenced above.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
DIRECTORS AND OFFICERS
Directors and Executive Officers as of September 30, 2004 are as follows:
Name Age Position
---- --- --------
Neil J. Hennessy 48 President, Chief Executive Officer and Chairman
Teresa M. Nilsen 38 Executive Vice President, CFO, Secretary and
Director
Daniel B. Steadman 48 Executive Vice President and Director
Henry Hansel 56 Director
Brian A. Hennessy 51 Director
Rodger Offenbach 53 Director
Daniel G. Libarle 63 Director
Thomas L. Seavey 57 Director
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under Section 16(a) of the Securities Exchange Act, each officer,
director or 10% shareholder of the Company must file a Form 4 reporting the
acquisition or disposition of Company stock within two business days after the
date of the acquisition unless certain exceptions apply. Generally, transactions
not reported on Form 4 must be reported on Form 5 within 45 days after the end
of the Company's fiscal year. To the Company's knowledge, based solely on a
review of the copies of the reports furnished to it and written representations
that no other reports were required, during the Company's 2004 fiscal year, the
Company's officers, directors and 10% shareholders complied with all applicable
Section 16(a) filing requirements.
BUSINESS EXPERIENCE OF OFFICERS AND DIRECTORS
Neil J. Hennessy (age 48) has served as a director, president and chief
executive officer of Hennessy since 1989, as president and investment manager of
The Hennessy Funds, Inc. since 1996 and as a director and president of Hennessy
Mutual Funds, Inc. since 2000. He is the portfolio manager of our five no-load
mutual funds. Mr. Hennessy started his financial career almost 25 years ago as a
broker at Paine Webber. He subsequently moved to Hambrecht & Quist and later
returned to Paine Webber. Mr. Hennessy has served as an expert witness /
mediator to the securities industry since 1989, and has heard / evaluated
approximately 500 cases to date, in which he has prepared, reviewed, consulted
31
and evaluated securities sensitive issues. From 1987 to 1990, Neil served as a
nominated member of the National Association of Securities Dealers, Inc.,
District Business Conduct Committee (DBCC), and in March of 1993, he accepted
the nomination to this committee again. From January 1993 to January 1995, Mr.
Hennessy served his elected term as chairman of the DBCC. Mr. Hennessy is the
brother of Dr. Brian A. Hennessy.
Teresa M. Nilsen (age 38) has served as a director, executive vice
president, chief financial officer and secretary of Hennessy since 1989, as
executive vice president and secretary of The Hennessy Funds, Inc. since 1996
and as executive vice president and secretary of Hennessy Mutual Funds, Inc.
since 2000. Ms. Nilsen has worked in the securities industry for over 15 years.
Ms. Nilsen graduated with a Bachelor's Degree in Economics from the University
of California, Davis, in 1987.
Daniel B. Steadman (age 48) has served as a director and executive vice
president of Hennessy since 2000, as executive vice president of The Hennessy
Funds, Inc. since 2000 and as executive vice president of Hennessy Mutual Funds,
Inc. since 2000. Mr. Steadman has been in the financial services industry for
over 29 years, serving as vice president of WestAmerica Bank from 1995 through
2000, vice president and an organizing officer of Novato National Bank from 1984
through 1995, assistant vice president and manager of Bank of Marin from 1980
through 1984, and banking services officer of Wells Fargo Bank from 1974 through
1980.
Henry Hansel (age 56) has served as a director of Hennessy since 2001.
Mr. Hansel attended the University of Santa Clara where he graduated in 1970
with a B.S. in Economics. He is president (since 1982) of The Hansel Dealer
Group, which includes seven automobile dealerships. Mr. Hansel is a founding
director of the Bank of Petaluma.
Brian A. Hennessy (age 51) has served as a director of Hennessy since
1989, and as a director of The Hennessy Funds, Inc. from 1996 to 2001. Dr.
Hennessy has been a self-employed dentist for more than 20 years. Dr. Hennessy
is the brother of our chairman, Neil J. Hennessy. Dr. Hennessy attended the
University of San Francisco where he earned a B.S. in Biology in 1975. Dr.
Hennessy received his D.D.S. from the University of the Pacific in
1980.
Rodger Offenbach (age 53) has served as a director of Hennessy since
2001 and as a director of The Hennessy Funds, Inc. from 1996 to 2001. Mr.
Offenbach attended California State University, Sonoma where he received a B.S.
in Business Administration in 1972. Mr. Offenbach has been the owner of Ray's
Catering and Marin-Sonoma Picnics since 1973.
Daniel G. Libarle (age 63) has been a director of Hennessy since 2001.
Mr. Libarle attended the University of Oregon and San Jose State University,
where he graduated in 1963 with a B.A. in Economics. Mr. Libarle is the owner
and president of Lace House Linen, Inc. and is a founding director and chairman
of the board of directors for Bank of Petaluma. Mr. Libarle is currently a
director of Greater Bay Bancorp and serves on the bank's audit committee.
Thomas L. Seavey (age 57) has served as a director of Hennessy since
2001. Mr. Seavey graduated from Western Michigan University with a B.A. in
English and History in 1969. For the majority of Mr. Seavey's business career,
he has been involved in the sales and marketing of athletic and leisure
products, as well as marketing professional athletes. Mr. Seavey spent 12 years
at Nike as head agent for sales in the Midwest, as well as California, and spent
three years at International Management Group as the vice president of products.
While employed at Nike, Mr. Seavey formed a family business selling sport and
leisure products in 1980, and formally took over the management of that company
in 1993, selling half the interest in it in 1998. Mr. Seavey is currently
managing Continental Sports Group (formerly Seavey Corp.)
32
AUDIT COMMITTEE FINANCIAL EXPERT
The Board of Directors of Hennessy Advisors, Inc. has determined that
Daniel G. Libarle, who has served as chairman of our audit committee since 2001,
is also the audit committee financial expert , and is independent as defined by
Rule 4200(a)(15) of the National Association of Securities Dealers, Inc. The
Board based its determination on the fact that Mr. Libarle has extensive
experience evaluating financial statements, and actively supervising financial
managers responsible for preparing financial statements in accordance with
generally accepted accounting priciples, in his capacity as the owner and
president of Lace House Linen, Inc. for the past 20 years. Mr. Libarle has also
acquired an understanding of internal controls, procedures for financial
reporting and audit committee functions as the founding chairman of the board
for Bank of Petaluma, since 1985, and as a member of the audit committee of the
board of directors of Greater Bay Bancorp for the past four years.
CODE OF ETHICS
On November 3, 2004, Hennessy Advisors, Inc. adopted an expanded code
of ethics that applies to the principal executive officer, principal financial
officer, executive vice presidents and all other employees. The code has been
designed in accordance with expanded provisions of the Sarbanes-Oxley Act of
2002, to promote honest and ethical conduct. The code is included in this annual
report in Part III, Item 13, Exhibit 14.1. The amended code applies to Hennessy
Mutual Funds, Inc. and Hennessy Funds as well, and was approved by their
respective directors on November 16, 2004. The revised code is posted on our
website at www.hennessyadvisors.com and all future ammendments to and waivers
from the code will be posted there.
Any person may obtain a copy of the Hennessy Advisors, Inc. Code of
Ethics, at no cost, by forwarding a written request to:
Hennessy Advisors, Inc.
750 Grant Ave., Suite #100
Novato, CA 94945
Attention: Teresa Nilsen
ITEM 10. EXECUTIVE COMPENSATION
The following table summarizes the compensation for services rendered
for the year ended September 30, 2004, by our executive officers, each having
received compensation in excess of $100,000 in fiscal year 2004:
33
Long-term
Compensation
Annual Compensation Awards -
All Other Securities
Annual Underlying All Other
Name and Principal Position Year Salary Bonus Compensation Options Compensation
---------------------------------------------------------------------------------------------------------------------------------
Neil J. Hennessy, Chief 2004 $180,000 $555,356 $ 0 0 $ 8,968 (2)
Executive Officer 2003 $180,000 $223,755 $ 0 7,500 $ 8,968 (2)
2002 $156,500 $ 36,000 $ 4,233 (1) 7,500 $ 8,443 (3)
Teresa M. Nilsen, Chief 2004 $110,000 $105,000 $ 0 0 $ 3,750 (4)
Financial Officer 2003 $ 96,000 $ 55,000 $ 0 7,500 $ 0
2002 $ 75,333 $ 2,500 $ 0 7,500 $ 0
Daniel B. Steadman, 2004 $105,000 $ 90,000 $ 0 0 $ 0
Executive Vice President 2003 $ 96,000 $ 50,000 $ 0 7,500 $ 0
2002 $ 82,000 $ 2,500 $ 0 7,500 $ 0
(1) Auto allowance.
(2) Premiums for life insurance ($5,828) and disability insurance ($3,140) in
2003 and 2004.
(3) Premiums for life insurance ($5,827) and disability insurance ($2,616) in
2002.
(4) 15 year anniversary award.
There were no stock option grants to any of the executive
officers named above during the fiscal year ended September 30, 2004.
As shown in the following table, there have been no stock
options exercised by executive officers during the fiscal year ended
September 30, 2004:
Aggregated Option/SAR Exercises in Last Fiscal Year
And FY-End Option/SAR Values
Name Number of Value Number Of Unexercised Value Of Unexercised
Shares Realized Securities Underlying In-The-Money Options/SARs
Acquired On Options/SARs At At FY-End ($)
Exercise FY-End (#) Exercisable/Unexercisable
Exercisable/Unexercisable
-----------------------------------------------------------------------------------------------------------------------------------
Neil J. Hennessy, Chief
Executive Officer None 15,000/0 $198,750/$0
Teresa M. Nilsen, Chief
Financial Officer and None 15,000/0 $198,750/$0
Secretary
Daniel B. Steadman,
Executive Vice President None 15,000/0 $198,750/$0
Employment Agreements
Neil J. Hennessy entered into an employment agreement relating to his
service as Chairman of the Board of Directors and Chief Executive Officer of
Hennessy Advisors, and as Chief Investment Officer and Portfolio Manager for our
mutual funds, effective at the completion of our initial public offering on
February 28, 2002. Under the employment agreement, Mr. Hennessy is responsible
34
for managing or overseeing the management of our mutual funds, attracting mutual
fund accounts, attracting or managing accounts for high net worth individuals or
retirement accounts or otherwise generating revenues. Mr. Hennessy receives an
annual salary of $180,000, and any other benefit that other employees receive.
In addition to his base compensation, Mr. Hennessy will receive an
incentive-based management fee in the amount of 10% of our pre-tax profit, as
computed for financial reporting purposes in accordance with accounting
principles generally accepted in the United States of America. The term of the
employment agreement extends through the year 2006. The agreement can only be
modified with the consent of our Board of Directors.
Director Compensation
Outside directors have been compensated in cash for their participation
in board meetings ($1,500 per meeting, 5 meetings annually) and committee
meetings ($500 per meeting, 2 committees, 4 meetings annually). Outside
directors have also been granted 20,000 stock options each, through the fiscal
year ended September 30, 2004.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The following table sets forth, as of November 30, 2004, the number and
percentage of outstanding shares of Common Stock owned by (i) each person known
to Hennessy Advisors, Inc. to beneficially own more than 5% of its outstanding
Common Stock, (ii) each director, (iii) each named executive officer, and (iv)
all officers and directors as a group:
35
Number Of Percent Of
Common Shares Owned Class (1)
------------------- ---------
Stock Total
Nature of Beneficial Owner Name and Address Options Shares
-------------------------- ---------------- ------- ------
o 5% Owner, CEO and Director Neil J. Hennessy 22,500 662,822 40.0%
750 Grant Ave.
Novato, CA 94945
o Executive Vice President Teresa M. Nilsen 22,500 42,800 2.6%
and Director 750 Grant Ave.
Novato, CA 94945
o Executive Vice President Daniel B. Steadman 22,500 25,000 1.5%
and Director 750 Grant Ave.
Novato, CA 94945
o Director Henry Hansel 27,500 52,500 3.2%
750 Grant Ave.
Novato, CA 94945
o Director Brian A. Hennessy 27,500 87,000 5.2%
750 Grant Ave.
Novato, CA 94945
o Director Rodger Offenbach 27,500 38,870 2.3%
750 Grant Ave.
Novato, CA 94945
o Director Daniel G. Libarle 27,500 32,500 2.0%
750 Grant Ave.
Novato, CA 94945
o Director Thomas L. Seavey 27,500 32,500 2.0%
750 Grant Ave.
Novato, CA 94945
----------------------------
o Total Officers and Directors 205,000 973,992 52.9%
============================
(1) Total common shares outstanding at November 30, 2004 were
1,635,142.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The Company has adopted an Option Plan (the "Plan") providing for the
issuance of up to 408,786 options for shares of the Company's common stock. An
aggregate of 179,500 options for the Company's common stock had been granted as
of September 30, 2004, to certain employees, executive officers, and directors
of the Company. These options were fully vested when granted, and have a
weighted average exercise price of $11.41 per share. All options granted under
the Plan vest immediately. During the fiscal year ended September 30, 2004,
employees exercised 9,000 options, leaving 170,500 options fully vested and
exercisable at year-end.
36
The following table displays equity compensation plan information as of
the fiscal year ended September 30, 2004:
Equity Compensation Plan Information
Number of securities Weighted-average Number of securities
to be issued upon exercise price of remaining available
exercise of outstanding outstanding options, for issuance under
options, warrants warrants and rights equity compensation
and rights plans (excluding)
securities reflected
in column(a)
(a) (b) (c)
Equity compensation
plans approved by 170,500 $11.41 229,286(1)
security holders
Equity compensation
plans not approved None
by security holders
Total 170,500 $11.41 229,286
(1) The maximum number of shares of common stock that may be issued under the
Company's Option Plan is 25% of the outstanding common stock which =
408,786.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There have been no transactions of more than $60,000 between Hennessy
Advisors, Inc. and any shareholder, director or executive officer during the
last two year period ending September 30, 2004.
37
ITEM 13. EXHIBITS
Exhibits
2.1* Form of Agreement of Merger of Hennessy Advisors, Inc., Hennessy
Management Co., L.P. and Hennessy Management Co. 2, L.P.
3.1* Amended and Restated Articles of Incorporation
3.2* Bylaws
10.1* Management Agreement, dated June 30, 2000, between Registrant and
Hennessy Mutual Funds, Inc.
10.2* Investment Advisory Agreement, dated July 1, 1998, between The
Hennessy Funds, Inc., and the Hennessy Management Co., L.P.
10.3* Investment Advisory Agreement, dated June 30, 1998, between The
Hennessy Funds, Inc., and the Hennessy Management Co., 2, L.P.
10.4* Hennessy Advisors, Inc. 2001 Omnibus Plan**
10.4(a)* Form of Option Award Agreement**
10.5* Employment Agreement of Neil J. Hennessy**
10.6*** Loan Agreement between the Registrant and US Bank National
Association, dated March 15, 2004
10.7 Lindner Acquisition Agreement as amended, January 19, 2004
14.1**** Hennessy Advisors, Inc. Code of Ethics, as amended November 3, 2004
and approved by the mutual fund directors on November 16, 2004.
23.3 Consent of Pisenti & Brinker LLP
31.1 Rule 13a - 14a Certification of the Chief Executive Officer
31.2 Rule 13a - 14a Certification of the Chief Financial Officer
32.1 Written Statement of the Chief Executive Officer, Pursuant to 18
U.S.C. ss. 1350
32.2 Written Statement of the Chief Financial Officer, Pursuant to 18
U.S.C. ss. 1350
Note:
* = incorporated by reference from the Company's Form SB-2 registration
statement (SEC File No. 333-66970)
** = management contract or compensatory plan or arrangement
*** = incorporated by reference from the Company's Form 10-QSB for the
quarter ended March 31, 2004 (SEC File No. 000-49872)
**** = incorporated by reference from the Company's Form 8-K furnished on
December 10, 2004
38