FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
Commission File Number 000-49872
HENNESSY ADVISORS, INC.
(Exact name of registrant as specified in its charter)
California 68-0176227
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
750 Grant Avenue, Suite 100
Novato, California 94945
(Address of principal executive offices) (Zip Code)
(415) 899-1555
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (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 ___.
The number of shares outstanding of each of the issuer's classes of common
equity as of June 30, 2004 was 1,633,142.
Transitional Small Business Disclosure Format: Yes ___; No X
HENNESSY ADVISORS, INC.
INDEX
Page
Number
PART I. Financial Information
Item 1. Financial Statements
Balance Sheets as of June 30, 2004 and
September 30, 2003 3
Statements of Income for the three and nine
months ended June 30, 2004 and 2003 4
Statement of Changes in Stockholders' Equity
for the nine months ended June 30, 2004 5
Statements of Cash Flows for the nine months
ended June 30, 2004 and 2003 6
Notes to Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis 11
Item 3. Controls and Procedures 18
PART II. Other Information and Signatures 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Certifications 21
2
Hennessy Advisors, Inc.
Balance Sheets
June 30, 2004 and September 30, 2003
June 30, September 30,
2004 2003
---- ----
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 4,193,756 $ 2,802,117
Investments in marketable securities, at fair value 4,662 4,372
Investment fee income receivable 849,624 562,743
Prepaid expenses 38,293 36,192
Deferred income tax assets 51,000 51,000
Other current assets 30,434 -
------------- ---------------
Total current assets $ 5,167,769 $ 3,456,424
------------- ---------------
Property and equipment, net of accumulated depreciation
of $92,884 and $73,590 $ 80,563 $ 46,212
Management contracts, net of accumulated amortization
of $628,627 14,142,520 5,637,943
Other assets 65,726 8,284
------------- ---------------
Total assets $ 19,456,578 $ 9,148,863
============= ===============
Liabilities and Stockholders' Equity
Current liabilities:
Accrued liabilities and accounts payable $ 1,070,508 $ 633,333
Income taxes payable 38,377 -
Note payable 527,912 527,912
Current portion of long-term debt 1,128,721 -
------------- ---------------
Total current liabilities $ 2,765,518 $ 1,161,245
------------- ---------------
Long-term debt $ 6,490,148 $ -
Deferred income tax liability 313,671 151,000
------------- ---------------
Total liabilities $ 9,569,337 $ 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:
1,633,142 shares issued and outstanding at June 30, 2004
and 1,626,142 at September 30, 2003 6,861,205 6,788,205
Additional paid-in capital 24,008 24,008
Retained earnings 3,002,028 1,024,405
------------- ---------------
Total stockholders' equity $ 9,887,241 $ 7,836,618
------------- ---------------
Total liabilities and stockholders' equity $ 19,456,578 $ 9,148,863
============= ===============
See accompanying notes to condensed financial statements
3
Hennessy Advisors, Inc.
Statements of Income
Three and Nine Months Ended June 30, 2004 and 2003
(Unaudited)
Three Months Ended June 30, Nine Months Ended June 30,
2004 2003 2004 2003
---- ---- ---- ----
Revenue
Investment advisory fees $ 2,324,616 $ 1,070,737 $ 6,234,999 $ 2,788,657
Shareholder service fees 269,980 140,344 749,888 364,595
Expert witness fees - - - 7,150
Other 7,139 7,029 19,099 21,402
------------- -------------- --------------- --------------
Total revenue 2,601,735 1,218,110 7,003,986 3,181,804
------------- -------------- --------------- --------------
Operating expenses
Compensation and benefits 579,462 359,149 1,604,259 952,442
General and administrative 194,450 158,638 645,645 514,696
Mutual fund distribution 471,590 224,509 1,395,232 547,314
Amortization and depreciation 9,891 4,941 22,905 15,836
------------- -------------- --------------- --------------
Total operating expenses 1,255,393 747,237 3,668,041 2,030,288
------------- -------------- --------------- --------------
Operating income 1,346,342 470,873 3,335,945 1,151,516
------------- -------------- --------------- --------------
Interest expense 77,982 - 92,353 -
------------- -------------- --------------- --------------
Income before income tax expense 1,268,360 470,873 3,243,592 1,151,516
------------- -------------- --------------- --------------
Income tax expense 491,016 185,791 1,265,969 472,011
------------- -------------- --------------- --------------
Net income $ 777,344 $ 285,082 $ 1,977,623 $ 679,505
============= ============== =============== ==============
Basic earnings per share $ 0.48 $ 0.18 $ 1.22 $ 0.42
============= ============== =============== ==============
Diluted earnings per share $ 0.46 $ 0.17 $ 1.17 $ 0.42
============= ============== =============== ==============
See accompanying notes to condensed financial statements
4
Hennessy Advisors, Inc.
Statement of Changes in Stockholders' Equity
Nine Months Ended June 30, 2004
(Unaudited)
Additional Total
Common Common Paid-in Retained Stockholders'
Shares Stock Capital Earnings Equity
------ ----- ------- -------- ------
Balances as of September 30, 2003 1,626,142 $ 6,788,205 $ 24,008 $ 1,024,405 $ 7,836,618
Net income for the nine months
ended June 30, 2004 - - - 1,977,623 1,977,623
Employee stock options exercised 7,000 73,000 - - 73,000
-----------------------------------------------------------------------------
Balances as of June 30, 2004 1,633,142 $ 6,861,205 $ 24,008 $ 3,002,028 $ 9,887,241
=============================================================================
See accompanying notes to condensed financial statements
5
Hennessy Advisors, Inc.
Statements of Cash Flows
Nine Months Ended June 30, 2004 and 2003
(Unaudited)
2004 2003
-------------- --------------
Cash flows from operating activities:
Net income $ 1,977,623 $ 679,505
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 22,905 15,836
Deferred income taxes 162,671 115,986
Unrealized gains on marketable securities (224) (468)
(Increase) decrease in operating assets:
Investment fee income receivable (286,881) (209,187)
Expert witness fees receivable - 21,745
Prepaid expenses (2,101) 1,340
Other current assets (30,434) -
Increase (decrease) in operating liabilities:
Accrued liabilities and accounts payable 437,175 222,821
Income taxes payable 38,377 (1,858)
-------------- -----------
Net cash provided by operating activities 2,319,111 845,720
-------------- -----------
Cash flows used in investing activities:
Purchases of property and equipment (53,645) (25,050)
Purchases of investments (66) (65)
Payments related to acquisition of management contracts (8,504,577) -
-------------- -----------
Net cash used in investing activities (8,558,288) (25,115)
-------------- -----------
Cash flows provided by financing activities:
Proceeds from long-term debt 7,861,544 -
Principal payments on long-term debt (282,180) -
Payment of loan acquisition costs (21,548) -
Proceeds from exercise of employee stock options 73,000 -
-------------- -----------
Net cash provided by financing activities 7,630,816 -
-------------- -----------
Net increase in cash and cash equivalents 1,391,639 820,605
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 $ 4,193,756 $ 2,917,664
============== ===========
Supplemental disclosures of cash flow information:
Cash paid for:
Income taxes $ 1,057,207 $ 345,437
============== ==============
Interest $ 75,436 $ -
============== ==============
Non-cash investing and financing transactions:
Loan acquisition costs withheld from long-term debt proceeds $ 39,505 $ -
============== ==============
See accompanying notes to condensed financial statements
6
Hennessy Advisors, Inc.
Notes to Condensed Financial Statements
Basis of Financial Statement Presentation
The accompanying condensed financial statements of Hennessy Advisors,
Inc. (the "Company") are unaudited, but in the opinion of management, such
financial statements have been presented on the same basis as the audited
financial statements and include all adjustments consisting of only normal
recurring adjustments necessary for a fair presentation of the financial
position, results of operations and cash flows for the periods presented. The
condensed financial statements were prepared in accordance with accounting
principles generally accepted in the United States of America for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. Operating results for the three and nine months ended
June 30, 2004, are not necessarily indicative of results which may be expected
for the fiscal year ending September 30, 2004. For additional information, refer
to the financial statements for the fiscal year ended September 30, 2003, which
are included in the Company's annual report on Form 10-KSB, filed with the
Securities and Exchange Commission on December 22, 2003.
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 investment advisor of the Hennessy Cornerstone
Growth Fund, Hennessy Cornerstone Value Fund, Hennessy Balanced Fund, Hennessy
Total Return Fund and Hennessy Focus 30 Fund.
Management Contracts
Hennessy Advisors, Inc. has contractual management agreements with
Hennessy Funds, Inc. for the Hennessy Balanced Fund and the Hennessy Total
Return Fund and with Hennessy Mutual Funds, Inc. for the Hennessy Cornerstone
Growth Fund, the Hennessy Cornerstone Value Fund and the Hennessy Focus 30 Fund.
The management agreements were renewed by the Board of Directors of
Hennessy Funds, Inc. and Hennessy Mutual Funds, Inc., at their meeting on
February 10, 2004 for a period of one year. The agreements may be renewed from
year to year, as long as continuance is specifically approved at least annually
in accordance with the requirements of the 1940 Act. Each management agreement
will terminate in the event of its assignment, or it may be terminated by
Hennessy Funds, Inc. or Hennessy Mutual Funds, Inc. (either by the Board of
Directors or by vote of a majority of the outstanding voting securities of each
Fund) or by Hennessy Advisors, upon 60 days' prior written notice.
Under the terms of the management agreements, each Fund bears all
expenses incurred in its operation that are not specifically assumed by Hennessy
Advisors, the administrator or the distributor. Hennessy Advisors bears the
expense of providing office space, shareholder servicing, fullfilment, clerical
and bookkeeping services and maintaining books and records of the Funds.
7
Hennessy Advisors, as deemed necessary or by contract, may be required to waive
its management fee or subsidize other expenses for the Funds it manages.
Hennessy Advisors has agreed to cap the expense ratio of the Hennessy
Cornerstone Growth Fund, Hennessy Cornerstone Value Fund, Hennessy Total Return
Fund and Hennessy Balanced Fund through June 2005 (these contractual expense
caps were instituted under the terms of the proxy statement and prospectus dated
December 8, 2003 for the reorganization of certain Lindner funds into certain
Hennessy Funds)and to subsidize certain expenses. The expense ratios for each of
the funds are well below the contractual cap and subsidy is not currently
required.
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 (4.0% at June 30, 2004), and is secured by the Company's
assets. The final installment of the then outstanding principal and interest is
due March 10, 2009.
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.
Investment Fee Revenue
Investment Advisory and Shareholder Service fees, which are the primary
sources of revenue, are recorded when earned. The Company receives investment
advisory fees monthly at an annual rate of 0.74% of the average daily net assets
of the Hennessy Cornerstone Growth Fund and the Hennessy Cornerstone Value Fund.
The annual advisory fee for the Hennessy Focus 30 Fund is 1.0%. The annual
advisory fee for the Hennessy Balanced Fund and Hennessy Total Return Fund is
0.60%.
Effective October 1, 2002, the Board of Directors of Hennessy Mutual
Funds, Inc. authorized an additional monthly fee for shareholder support
services provided to the Hennessy Cornerstone Growth and Hennessy Cornerstone
Value Fund, at an annual rate of 0.1% of average daily net assets.
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.
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
8
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 carryforward
periods. Sources of taxable income that may allow for the realization of tax
benefits include income that will result from future operations.
The Company's effective tax rates of 38.7% and 39.0% for the three and
nine months ended June 30, 2004, respectively, differ from the federal statutory
rate of 34% primarily due to the effects of state income taxes.
Reclassification of Prior Period's Statements
Certain items previously reported have been reclassified to conform
with the current period's presentation.
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.
The weighted average common shares outstanding used in the calculation
of basic earnings per share, and the weighted average common shares outstanding,
adjusted for common stock equivalents, used in the computation of diluted
earnings per share, were as follows for the three and nine months ended June 30,
2004 and 2003:
Three Months Ended Nine Months Ended
June 30, June 30,
---------------------------------------- -------------------------------------
2004 2003 2004 2003
---- ---- ---- ----
Weighted Average common 1,628,840 1,626,142 1,627,038 1,626,142
stock outstanding
Common stock equivalents
- stock options 49,822 9,000 68,007 6,936
------------------- ------------------- ------------------ ------------------
1,678,662 1,635,142 1,695,045 1,633,078
=================== =================== ================== ==================
Stock-Based Compensation
In December, 2002, FASB issued FASB Statement No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure" which amended FASB Statement
No. 123, "Accounting for Stock-Based Compensation", to provide alternative
methods of transition for a voluntary change to the fair value based method of
9
accounting for stock-based employee compensation. In addition, FASB Statement
No. 148 amends the disclosure requirements of FASB Statement No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. Effective for interim periods beginning after
December 15, 2002, FASB Statement No. 148 requires disclosure of pro-forma
results on a quarterly basis as if the Company had applied the fair value
recognition provisions of FASB Statement No. 123. 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.
During the three month period ended June 30, 2004, there were 2,000
options granted. No compensation cost has been recognized for these grants. No
options were granted during the three month period ended June 30, 2003. The
following table illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of FASB Statement
No. 123, 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. The value of
options granted during the three months ended June 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 36.5%:
Basic Diluted
Net Income EPS EPS
----------------------- -------------- -------------
For the three months ended June 30, 2004
-------------------------------------------------------------
Net income $ 777,344 $ 0.48 $ 0.46
Fair value of stock options - net of tax 10,992 0.01 0.00
----------------------- -------------- -------------
Proforma net income $ 766,352 $ 0.47 $ 0.46
======================= ============== =============
During the nine month period ended June 30, 2004, there were 14,500
options granted. No compensation cost has been recognized for these grants. No
options were granted during the nine-month period ended June 30, 2003. The
following table illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of FASB Statement
No. 123, 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. The value of
options granted during the nine months ended June 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 36.5%:
10
Basic Diluted
Net Income EPS EPS
----------------------- -------------- -------------
For the nine months ended June 30, 2004
-------------------------------------------------------------
Net income $ 1,977,623 $ 1.22 $ 1.17
Fair value of stock options - net of tax 23,817 0.02 0.02
----------------------- -------------- -------------
Proforma net income $ 1,953,806 $ 1.20 $ 1.15
======================= ============== =============
Subsequent Events
On August 2, 2004, the Company granted 3,500 options to one employee.
Item 2. Management's Discussion and Analysis
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.
Mr. Hennessy also served as expert witness and mediator in securities cases in
the past. Mr. Hennessy has limited his mediation activities to devote more time
to managing the investment advisory business of Hennessy Advisors, Inc.,
resulting in significant reduction of revenue from these activities compared to
prior periods. 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 $1.324
billion as of June 30, 2004, of which $1.285 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
11
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 advisory agreements with all five mutual funds. As of June
30, 2004, the management contracts asset had a net balance of $14,142,520 and
includes 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 liabilities on our balance sheet represent the financed
portion of the investment advisory agreements incurred for the SYM Select Growth
Fund acquisition represented by a note payable in the amount of $527,912 due and
payable on September 18, 2004 and 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 (4.0% at June 30, 2004). The final installment of the then
outstanding principal and interest is due March 10, 2009.
Results of Operations
The following table reflects items in the statements of income as dollar
amounts and as percentages of total revenue for the three months ended June 30,
2004 and 2003:
12
Three Months Ended June 30,
-------------------------------------------------------------
2004 2003
-------------------------------------------------------------
Percent Percent
of Total of Total
Amounts Revenue Amounts Revenue
--------------------------------------------------------------
Revenue:
Investment advisory fees $ 2,324,616 89.3% $ 1,070,737 87.9%
Shareholder service fees 269,980 10.4 140,344 11.5
Other 7,139 0.3 7,029 0.6
-------------------------------------------------------------
Total revenue 2,601,735 100.0 1,218,110 100.0
-------------------------------------------------------------
Operating expenses:
Compensation and benefits 579,462 22.3 359,149 29.5
General and administrative 194,450 7.5 158,638 13.0
Mutual fund distribution 471,590 18.1 224,509 18.4
Amortization and depreciation 9,891 0.4 4,941 0.4
-------------------------------------------------------------
Total operating expenses 1,255,393 48.3 747,237 61.3
-------------------------------------------------------------
Operating income 1,346,342 51.7 470,873 38.7
-------------------------------------------------------------
Interest expense 77,982 3.0 - -
-------------------------------------------------------------
Income before income tax expense 1,268,360 48.7 470,873 38.7
-------------------------------------------------------------
Income tax expense 491,016 18.8 185,791 15.3
-------------------------------------------------------------
Net income $ 777,344 29.9% $ 285,082 23.4%
=============================================================
Total revenue increased $1,383,625 (+113.6%) in the three months ended
June 30, 2004, from $1,218,110 in the same period of 2003, primarily due to fees
earned from increased mutual fund assets under management, resulting from
increased net cash inflows, acquisition of assets from Lindner Asset Management,
Inc. and higher market valuations. In total, assets in the mutual funds we
manage increased $621.5 million to $1.285 billion as of June 30, 2004, compared
to $663.2 million as of June 30, 2003 (+93.7%). The Lindner acquisition added
assets of $301.0 million (48.4%), market valuations contributed $256.7 million
(41.3%) and net cash inflows accounted for the remaining $63.8 million in
increased assets (10.3%). The revenue we earn from the funds we manage increased
$1,253,879 (+117.1%) in the three months ended June 30, 2004, while shareholder
service fees increased $129,636 (+92.4%).
Total operating expenses increased $508,156 (+ 68.0%) in the three
months ended June 30, 2004, from $747,237 in the same period of 2003. 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
48.3% in the three months ended June 30, 2004, compared to 61.3% in the prior
comparable period.
Compensation and benefits increased $220,313 (+61.3%) in the three
months ended June 30, 2004, from $359,149 in the prior comparable period. The
increase resulted from the addition of a marketing director and salary increases
13
and performance incentives for officers and staff. As a percentage of total
revenue, compensation and benefits decreased to 22.3% for the three months ended
June 30, 2004, compared to 29.5% in the prior comparable period.
General and administrative expense increased $35,812 (+22.6%), in the
three months ended June 30, 2004, from $158,638 in the three months ended June
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
7.5% in the three months ended June 30, 2004, from 13.0% in the prior comparable
period.
Mutual fund distribution expenses increased $247,081 (+110.1%) in the
three months ended June 30, 2004, from $224,509 in the three months ended June
30, 2003. As a percentage of total revenue, distribution expenses decreased to
18.1% for the three months ended June 30, 2004, compared to 18.4% in the prior
comparable period. The value of mutual fund assets to which distribution
expenses relate increased approximately 81.7% from June 30, 2003 to June 30,
2004. Additionally, fees charged by Charles Schwab, Inc. increased to 40 basis
points in the three months ended June 30, 2004 compared to 35 basis points in
the prior comparable period. Fees charged by TD Waterhouse increased to 35 basis
points on January 1, 2004, compared to 25 basis points in the prior comparable
period.
Amortization and depreciation expense increased $4,950 in the three
months ended June 30, 2004, from $4,941 for the three months ended June 30,
2003, resulting from amortization of loan acquisition costs and purchases of
furniture and equipment.
Interest expense of $77,982 was generated from the US Bank $7.9 million
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 (4.0% at June 30,
2004).
For the three months ended June 30, 2004, the provision for income
taxes increased $305,225 resulting from an increase in pre-tax income of
$797,487.
Net income increased $492,262 to $777,344 in the three months ended
June 30, 2004, compared to $285,082 in the prior comparable period, as a result
of the factors discussed above.
The following table reflects items in the statements of income as
dollar amounts and as percentages of total revenue for the nine months ended
June 30, 2004 and 2003:
14
Nine Months Ended June 30,
-------------------------------------------------------------
2004 2003
-------------------------------------------------------------
Percent Percent
of Total of Total
Amounts Revenue Amounts Revenue
--------------------------------------------------------------
Revenue:
Investment advisory fees $ 6,234,999 89.0% $ 2,788,657 87.6%
Shareholder service fees 749,888 10.7 364,595 11.5
Expert witness fees - - 7,150 0.2
Other 19,099 0.3 21,402 0.7
-------------------------------------------------------------
Total revenue 7,003,986 100.0 3,181,804 100.0
-------------------------------------------------------------
Operating expenses:
Compensation and benefits 1,604,259 23.0 952,442 29.9
General and administrative 645,645 9.2 514,696 16.2
Mutual fund distribution 1,395,232 19.9 547,314 17.2
Amortization and depreciation 22,905 0.3 15,836 0.5
-------------------------------------------------------------
Total operating expenses 3,668,041 52.4 2,030,288 63.8
-------------------------------------------------------------
Operating income 3,335,945 47.6 1,151,516 36.2
-------------------------------------------------------------
Interest expense 92,353 1.3 - -
-------------------------------------------------------------
Income before income tax expense 3,243,592 46.3 1,151,516 36.2
-------------------------------------------------------------
Income tax expense 1,265,969 18.1 472,011 14.8
-------------------------------------------------------------
Net income $ 1,977,623 28.2% $ 679,505 21.4%
=============================================================
Total revenue increased $3,822,182 (+120.1%) in the nine months ended
June 30, 2004, from $3,181,804 in the same period of 2003, primarily due to fees
earned from increased mutual fund assets under management, resulting from
increased net cash inflows, acquisition of assets from Lindner Asset Management,
Inc. and higher market valuations. In total, assets in the mutual funds we
manage increased $621.5 million to $1.285 billion as of June 30, 2004, compared
to $663.2 million as of June 30, 2003 (+93.7%). The Lindner acquisition added
assets of $301.0 million (48.4%), market valuations contributed $256.7 million
(41.3%) and net cash inflows accounted for the remaining $63.8 million in
increased assets (10.3%). The revenue we earn from the funds we manage increased
$3,446,342 (+123.6%) in the nine months ended June 30, 2004, while shareholder
service fees increased $385,293 (+105.7%).
There were no expert witness fees earned in the nine months ended June
30, 2004, a decrease of $7,150 from the nine months ended June 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 $1,637,753 (+80.7%) in the nine
months ended June 30, 2004, from $2,030,288 in the same period of 2003. 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
52.4% in the nine months ended June 30, 2004, compared to 63.8% in the prior
comparable period.
15
Compensation and benefits increased $651,817 (+68.4%) in the nine
months ended June 30, 2004, from $952,442 in the prior comparable period. The
increase resulted from the addition of a marketing director and salary increases
and performance incentives for officers and staff. As a percentage of total
revenue, compensation and benefits decreased to 23.0% for the nine months ended
June 30, 2004, compared to 29.9% in the prior comparable period.
General and administrative expense increased $130,949 (+25.4%), in the
nine months ended June 30, 2004, from $514,696 in the nine months ended June 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
9.2% in the nine months ended June 30, 2004, from 16.2% in the prior comparable
period.
Mutual fund distribution expenses increased $847,918 (+154.9%) in the
nine months ended June 30, 2004, from $547,314 in the nine months ended June 30,
2003. As a percentage of total revenue, distribution expenses increased to 19.9%
for the nine months ended June 30, 2004, compared to 17.2% in the prior
comparable period. The value of mutual fund assets to which distribution
expenses relate increased 81.7% from June 30, 2003 to June 30, 2004.
Additionally, fees charged by Charles Schwab, Inc. increased to 40 basis points
in the nine months ended June 30, 2004 compared to 35 basis points in the prior
comparable period. Fees charged by TD Waterhouse increased to 35 basis points on
January 1, 2004, compared to 25 basis points previously.
Amortization and depreciation expense increased $7,069 in the nine
months ended June 30, 2004, from $15,836 for the nine months ended June 30,
2003, resulting from amortization of loan acquisition costs and purchases of
furniture and equipment.
Interest expense of $92,353 was generated from the US Bank $7.9 million
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 (4.0% at June 30,
2004).
For the nine months ended June 30, 2004, the provision for income taxes
increased $793,958 resulting from an increase in pre-tax income of $2,092,076.
Net income increased $1,298,118 to $1,977,623 in the nine months ended
June 30, 2004, compared to $679,505 in the prior comparable period, as a result
of the factors discussed above.
Liquidity and Capital Resources
As of June 30, 2004, Hennessy Advisors, Inc. had cash and cash
equivalents of $4,193,756.
Total assets at June 30, 2004 of $19,456,578 include liquid assets of
$5,116,769 (26.3%), consisting primarily of cash and receivables derived from
mutual fund asset management activities.
Capital requirements for Hennessy Advisors, Inc. are continually
reviewed to ensure that sufficient funding is available to support business
16
growth strategies. The management of Hennessy Advisors, Inc. anticipates that
cash and other liquid assets on hand as of June 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., completed the acquisition
of the management contract for the SYM Select Growth Fund (SYM a Mid-cap growth
fund) with $34.7 million in assets. On September 18, 2003, the assets of the SYM
Select Growth Fund were merged into the Hennessy Focus 30 Fund. Under the terms
of the Asset Purchase Agreement the management contract 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 is due and payable on September 18, 2004.
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 prime rate which
may change from time to time (4.0% at June 30, 2004). The final installment of
the then outstanding principal and interest is due March 10, 2009.
Forward Looking Statements
Certain statements in this report are forward-looking within the
meaning of the 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.
Additionally, management does not assume responsibility for the accuracy or
completeness of these statements. 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.
Our business activities are affected by many factors, including
redemptions by mutual fund shareholders, general economic and financial
conditions, movement of interest rates, competitive conditions, industry
regulation, and others, for example:
o Continuing volatility in the equity markets have caused the levels
of our assets under management to fluctuate significantly.
o Weak market conditions or loss of investor confidence in the
mutual fund industry may lower our assets under management and
reduce our revenues and income.
o We face strong competition from numerous and sometimes larger
companies.
o Changes in the distribution channels on which we depend could
reduce our revenues or hinder our growth.
17
o For the next several years, insurance costs are likely to increase
materially and we may not be able to obtain the same types or
amounts of coverage.
o For the next several years, professional service fees are likely
to increase due to increased securities industry legislation.
o Business growth through asset acquisitions may not proceed as
planned and result in significant expenses adversely affecting
earnings.
o Retaining the mutual fund assets associated with acquired
management contracts may prove difficult and result in lower than
expected revenues.
o International conflicts and the ongoing threat of terrorism may
adversely affect the general economy, financial and capital
markets and our business.
o During the next several years, interest rate fluctuations,
particularly increases in the prime rate, may increase our debt
service payments.
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 in our revenue can directly impact our net income from period to
period. Risk factors are described in more detail in the "Risk Factors" section
of the Company's Annual Report, filed on Form 10-KSB with the U.S. Securities
and Exchange Commission on December 22, 2003.
Item 3. 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 has been no significant change in our internal controls over
financial reporting identified in connection with the foregoing evaluation that
occurred during the last quarter and that has materially affected, or is
reasonably likely to materially affect, our internal controls over financial
reporting.
Part II. OTHER INFORMATION AND SIGNATURES
There were no reportable events for items 1 through 5.
Item 6. Exhibits and Reports on Form 8-K
18
(a) Exhibits
Exhibit 31.1 Rule 13a - 14a Certification of the Chief Executive
------------ Officer
Exhibit 31.2 Rule 13a - 14a Certification of the Chief Financial
------------ Officer
Exhibit 32.1 Written Statement of the Chief Executive Officer,
------------ Pursuant to 18 U.S.C. ss. 1350
Exhibit 32.2 Written Statement of the Chief Financial Officer,
------------ Pursuant to 18 U.S.C. ss. 1350
(b) Reports on Form 8-K
Hennessy Advisors, Inc. furnished Form 8-K during the quarter
ended June 30, 2004, as follows:
--Form 8-K, furnished May 12, 2004, Earnings Release for
the second quarter ended March 31, 2004.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized:
HENNESSY ADVISORS, INC.
Date: August 10, 2004 By: /s/ Teresa M. Nilsen
-------------------------------------
Teresa M. Nilsen, Executive Vice
President, Chief Financial Officer
and Secretary
19
EXHIBIT INDEX
Exhibit 31.1 Rule 13a - 14a Certification of the Chief Executive
------------ Officer
Exhibit 31.2 Rule 13a - 14a Certification of the Chief Financial
------------ Officer
Exhibit 32.1 Written Statement of the Chief Executive Officer,
------------ pursuant to 18 U.S.C.ss.1350
Exhibit 32.2 Written Statement of the Chief Financial Officer,
------------ pursuant to 18 U.S.C.ss.1350
20