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 March 31, 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 March 31, 2004 was 1,626,142.
Transitional Small Business Disclosure Format: Yes ; No X
1
HENNESSY ADVISORS, INC.
INDEX
Page
Number
PART I. Financial Information
Item 1. Financial Statements
Balance Sheets as of March 31, 2004 and
September 30, 2003 3
Statements of Income for the three and
six months ended March 31, 2004 and 2003 4
Statement of Changes in Stockholders' Equity
for the six months ended March 31, 2004 5
Statements of Cash Flows for the six months
ended March 31, 2004 and 2003 6
Notes to Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis 10
Item 3. Controls and Procedures 17
PART II. Other Information and Signatures 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Certifications
2
Hennessy Advisors, Inc.
Balance Sheets
March 31, 2004 and September 30, 2003
March 31 September 30
2004 2003
---- ----
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 3,565,489 $ 2,802,117
Investments in marketable securities, at fair value 4,727 4,372
Investment fee income receivable 914,420 562,743
Prepaid expenses 70,629 36,192
--------------- ----------------
Total current assets $ 4,555,265 $ 3,405,424
--------------- ----------------
Property and equipment, net of accumulated depreciation
of $86,046 and $73,590 $ 84,498 $ 46,212
Management contracts, net of accumulated amortization
of $628,627 14,134,911 5,637,943
Deferred income tax assets 51,000 51,000
Other assets 68,779 8,284
--------------- ----------------
Total assets $ 18,894,453 $ 9,148,863
=============== ================
Liabilities and Stockholders' Equity
Current liabilities:
Accrued liabilities and accounts payable $ 1,182,283 $ 633,333
Income taxes payable 1,705 -
Note payable 527,912 527,912
Current portion of long-term debt 1,128,721 -
--------------- ----------------
Total current liabilities $ 2,840,621 $ 1,161,245
--------------- ----------------
Long-term debt $ 6,772,328 $ -
Deferred income tax liability 244,607 151,000
--------------- ----------------
Total liabilities $ 9,857,556 $ 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:
1,626,142 shares issued and outstanding at March 31, 2004
and September 30, 2003 6,788,205 6,788,205
Additional paid-in capital 24,008 24,008
Retained earnings 2,224,684 1,024,405
--------------- ----------------
Total stockholders' equity $ 9,036,897 $ 7,836,618
--------------- ----------------
Total liabilities and stockholders' equity $ 18,894,453 $ 9,148,863
=============== ================
See accompanying notes to condensed financial statements
3
Hennessy Advisors, Inc.
Statements of Income
Three and Six Months Ended March 31, 2004 and 2003
(Unaudited)
Three Months Ended March 31, Six Months Ended March 31,
2004 2003 2004 2003
---- ---- ---- ----
Revenue
Investment advisory fees $ 2,126,735 $ 886,582 $ 3,910,383 $ 1,717,920
Shareholder service fees 257,729 115,499 479,908 224,251
Expert witness fees - - - 7,150
Other 6,269 6,458 11,960 14,373
--------------- --------------- ----------------- -----------------
Total revenue 2,390,733 1,008,539 4,402,251 1,963,694
--------------- --------------- ----------------- -----------------
Operating expenses
Compensation and benefits 550,237 299,943 1,024,797 593,293
General and administrative 223,376 182,460 451,195 356,058
Mutual fund distribution 481,576 178,691 923,642 322,805
Amortization and depreciation 7,264 5,625 13,014 10,895
--------------- --------------- ----------------- -----------------
Total operating expenses 1,262,453 666,719 2,412,648 1,283,051
--------------- --------------- ----------------- -----------------
Operating income 1,128,280 341,820 1,989,603 680,643
--------------- --------------- ----------------- -----------------
Interest expense 14,371 - 14,371 -
--------------- --------------- ----------------- -----------------
Income before income tax expense 1,113,909 341,820 1,975,232 680,643
--------------- --------------- ----------------- -----------------
Income tax expense 438,137 177,362 774,953 286,220
--------------- --------------- ----------------- -----------------
Net income $ 675,772 $ 164,458 $ 1,214,650 $ 394,423
=============== =============== ================= =================
Basic earnings per share $ 0.42 $ 0.10 $ 0.74 $ 0.24
=============== =============== ================= =================
Diluted earnings per share $ 0.40 $ 0.10 $ 0.71 $ 0.24
=============== =============== ================= =================
See accompanying notes to condensed financial statements
4
Hennessy Advisors, Inc.
Statements of Changes in Stockholders' Equity
Six Months Ended March 31, 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 six months
ended March 31, 2004 - - - 1,200,279 1,200,279
-------------------------------------------------------------------------------------
Balances as of March 31, 2004 1,626,142 $ 6,788,205 $ 24,008 $ 2,224,684 $ 9,036,897
=====================================================================================
See accompanying notes to condensed financial statements
5
Hennessy Advisors, Inc.
Statements of Cash Flows
Six Months Ended March 31, 2004 and 2003
(Unaudited)
2004 2003
---------------- ----------------
Cash flows from operating activities:
Net income $ 1,200,279 $ 394,423
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 13,014 10,894
Deferred income taxes 93,607 82,068
Unrealized gains on marketable securities (305) (103)
(Increase) decrease in operating assets:
Investment fee income receivable (351,677) (107,254)
Expert witness fees receivable - 21,745
Prepaid expenses (34,437) 18,600
Increase (decrease) in operating liabilities:
Accrued liabilities and accounts payable 170,461 94,365
Income taxes payable 1,705 (28,991)
---------------- ----------------
Net cash provided by operating activities 1,092,647 485,747
---------------- ----------------
Cash flows used in investing activities:
Purchases of property and equipment (50,743) (13,761)
Purchases of investments (50) (48)
Payments related to acquisition of management contracts (8,140,026) -
---------------- ----------------
Net cash used in investing activities (8,190,819) (13,809)
---------------- ----------------
Cash flows provided by financing activities:
Proceeds from long-term debt 7,861,544 -
---------------- ----------------
Net cash provided by financing activities 7,861,544 -
---------------- ----------------
Net increase in cash and cash equivalents 763,372 471,938
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 $ 3,565,489 $ 2,568,997
================ ================
Supplemental disclosures of cash flow information:
Cash paid for:
Income taxes $ 695,970 $ 233,813
================ ================
Non-cash investing and financing disclosures:
Costs related to acquisition of management contracts
included in accrued liabilities $ 356,942 $ -
================ ================
Loan acquisition costs withheld from long-term debt proceeds $ 39,505 $ -
================ ================
Loan acquisition costs included in accrued liabilities $ 21,548 $ -
================ ================
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 six months ended March
31, 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
7
expense of providing office space, shareholder servicing, fullfilment, clerical
and bookkeeping services and maintaining books and records of the Funds.
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 contractually 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). 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 (4.0% per annum as
of March 31, 2004). 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.
Amortization for both the three and six months ended March 31, 2004 amounted to
$557. Accumulated amortization amounted to $557 as of March 31, 2004.
Investment Fee Income
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
8
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 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 39.3% and 39.2% for the
three and six months ended March 31, 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 six months ended
March 31, 2004 and 2003:
Three Months Ended Six Months Ended
March 31, March 31,
----------------------------------------- ----------------------------------
2004 2003 2004 2003
---- ---- ---- ----
Weighted Average common
stock outstanding 1,626,142 1,626,142 1,626,142 1,626,142
Common stock equivalents
- stock options 55,512 4,854 62,483 4,854
------------------- --------------- ------------------ ---------------
1,681,654 1,630,996 1,688,625 1,630,996
=================== =============== ================== ===============
9
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 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 six month period ended March 31, 2004, there were
12,500 options granted. No compensation cost has been recognized for these
grants. No options were granted during the six month period ended March 31,
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 six months ended March 31, 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 0.0001%:
Basic Diluted
Net Income EPS EPS
-------------------- ---------------- -------------
For the six months ended March 31, 2004
-------------------------------------------------------------
Net income $ 1,200,279 $ 0.74 $ 0.71
Fair value of stock options - net of tax 12,825 0.01 0.01
-------------------- ---------------- -------------
Proforma net income $ 1,187,454 $ 0.73 $ 0.70
==================== ================ =============
Item 2. Management's Discussion and Analysis
Overview and General Industry Conditions
Our primary sources of revenue are investment fees derived from
managing our five mutual funds. Advisory services include investment research,
supervision of investments, conducting clients' 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.
Shareholder services primarily include providing a call center to respond to
shareholder inquiries, including specific mutual fund account information.
10
Investment advisory fees and shareholder service fees are charged
as a specified percentage of the average daily net value of the assets under
management. Hennessy's total assets under management were $1.352 billion as of
March 31, 2004, of which $1.314 billion were mutual fund assets. Approximately
99% of Hennessy's total revenues were attributable to the five Hennessy mutual
funds for the six months ended March 31, 2004.
Neil J. Hennessy, our Chief Executive Officer, President and
Chairman of the Board 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.
The principal assets on our balance sheet represent the
capitalized costs of investment advisory agreements with all five mutual funds.
As of March 31, 2004, the management contracts asset had a net balance of
$14,134,911 including the capitalized Lindner transaction, begun on February 27,
2004 and completed on March 11, 2004 with a total cost of $8,457,322.
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 (4.0% per annum as of
March 31, 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
March 31, 2004 and 2003:
11
Three Months Ended March 31,
---------------------------------------------------------------
2004 2003
---------------------------------------------------------------
Percent Percent
of Total of Total
Amounts RevenueE Amounts Revenue
---------------------------------------------------------------
Revenue:
Investment advisory fees $ 2,126,735 89.0% $ 886,582 87.9%
Shareholder service fees 257,729 10.8 115,499 11.5
Other 6,269 0.2 6,458 0.6
---------------------------------------------------------------
Total revenue 2,390,733 100.0 1,008,539 100.0
---------------------------------------------------------------
Operating expenses:
Compensation and benefits 550,237 23.0 299,943 29.7
General and administrative 223,376 9.4 182,460 18.1
Mutual fund distribution 481,576 20.1 178,691 17.7
Amortization and depreciation 7,264 0.3 5,625 0.6
---------------------------------------------------------------
Total operating expenses 1,262,453 52.8 666,719 66.1
---------------------------------------------------------------
Operating income 1,128,280 47.2 341,820 33.9
---------------------------------------------------------------
Interest expense 14,371 0.6 - -
---------------------------------------------------------------
Income before income tax expense 1,113,909 46.6 341,820 33.9
---------------------------------------------------------------
Income tax expense 438,137 18.3 177,362 17.6
---------------------------------------------------------------
Net income $ 675,772 28.3% $ 164,458 16.3%
===============================================================
Three Months Ended March 31, 2004 Compared to the Three Months Ended March 31,
2003:
Total revenue increased $1,382,194 (+137.0%) in the three months
ended March 31, 2004, from $1,008,539 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 $816.1 million to $1.314 billion as of March 31, 2004,
compared to $498.0 million as of March 31, 2003 (+163.9%). Net cash inflows
accounted for $124.5 million (15%) of increased assets, the Lindner acquisition
added assets of $301.0 million (37%) and market valuations contributed the
remaining $390.6 million (48%). The revenue we earn from the funds we manage
increased $1,240,153 (+139.9%) in the three months ended March 31, 2004, while
shareholder service fees increased $142,230 (+123.1%).
Total operating expenses increased $595,734 (+ 89.4%) in the
three months ended March 31, 2004, from $666,719 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
52.8% in the three months ended March 31, 2004, compared to 66.1% in the prior
comparable period.
12
Compensation and benefits increased $250,294 (+83.4%) in the
three months ended March 31, 2004, from $299,943 in the prior comparable period.
The increase resulted from the addition of one employee and implementation of
salary increases and performance incentives for officers and staff. As a
percentage of total revenue, compensation and benefits decreased to 23.0% for
the three months ended March 31, 2004, compared to 29.7% in the prior comparable
period.
General and administrative expense increased $40,916 (+22.4%), in
the three months ended March 31, 2004, from $182,460 in the three months ended
March 31, 2003, due to increases in business promotion, marketing programs,
investor communication services, travel expenses and office rent. As a
percentage of total revenue, general and administrative expense decreased to
9.4% in the three months ended March 31, 2004, from 18.1% in the prior
comparable period.
Mutual fund distribution expenses increased $302,885 (+169.5%) in
the three months ended March 31, 2004, from $178,691 in the three months ended
March 31, 2003. As a percentage of total revenue, distribution expenses
increased to 20.1% for the three months ended March 31, 2004, compared to 17.7%
in the prior comparable period. The value of mutual fund assets to which
distribution expenses relate increased approximately 103.4% from March 31, 2003
to March 31, 2004. Additionally, fees charged by Charles Schwab, Inc. increased
to 40 basis points in the three months ended March 31, 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. These expenses represent "no transaction fee" (NTF) programs
through which Hennessy mutual fund shares are distributed. These expenses
increase as assets under management grow through use of "NTF" programs, and
expansion of these programs has been and continues to be an integral part of
management's business growth strategy.
Amortization and depreciation expense increased a modest $1,639
in the three months ended March 31, 2004, from $5,625 for the three months ended
March 31, 2003, resulting from amortization of loan acquisition costs and
limited purchases of furniture and equipment.
Interest expense of $14,371 was accrued for the seventeen days
from March 15th through March 31, 2004, and represents interest due on the $7.9
million loan from US Bank at the prime rate ( 4.0% as of March 31, 2004).
For the three months ended March 31, 2004, the provision for
income taxes increased $260,775, resulting from an increase in pre-tax income of
$772,089.
Net income increased $511,314 to $675,772 in the three months
ended March 31, 2004, compared to $164,458 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 six months ended
March 31, 2004 and 2003:
13
Six Months Ended March 31,
---------------------------------------------------------------
2004 2003
---------------------------------------------------------------
Percent Percent
of Total of Total
Amounts RevenueE Amounts Revenue
---------------------------------------------------------------
Revenue:
Investment advisory fees $ 3,910,383 88.8% $ 1,717,920 87.5%
Shareholder service fees 479,908 10.9 224,251 11.4
Expert witness fees - - 7,150 0.4
Other 11,960 0.3 14,373 0.7
-----------------------------------------------------------
Total revenue 4,402,251 100.0 1,963,694 100.0
-----------------------------------------------------------
Operating expenses:
Compensation and benefits 1,024,797 23.3 593,293 30.2
General and administrative 451,195 10.2 356,058 18.1
Mutual fund distribution 923,642 21.0 322,805 16.4
Amortization and depreciation 13,014 0.3 10,895 0.6
-----------------------------------------------------------
Total operating expenses 2,412,648 54.8 1,283,051 65.3
-----------------------------------------------------------
Operating income 1,989,603 45.2 680,643 34.7
-----------------------------------------------------------
Interest expense 14,371 0.3 - -
-----------------------------------------------------------
Income before income tax expense 1,975,232 44.9 680,643 34.7
-----------------------------------------------------------
Income tax expense 774,953 17.6 286,220 14.6
-----------------------------------------------------------
Net income $ 1,200,279 27.3% $ 394,423 20.1%
===========================================================
Six Months Ended March 31, 2004 Compared to the Six Months Ended March 31, 2003:
Total revenue increased $2,438,557 (+124.2%) in the six months
ended March 31, 2004, from $1,963,694 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 $816.1 million to $1.314 billion as of March 31, 2004,
compared to $498.0 million as of March 31, 2003 (+163.9%). Net cash inflows
accounted for $124.5 million (15%) of increased assets, the Lindner acquisition
added assets of $301.0 million (37%)and market valuations contributed the
remaining $390.6 million (48%). The revenue we earn from the funds we manage
increased $2,192,463 (+127.6%) in the six months ended March 31, 2004, while
shareholder service fees increased $255,657 (+114.0%).
There were no expert witness fees earned in the six months ended
March 31, 2004, a decrease of $7,150 from the six months ended March 31, 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 $1,129,597 (+88.0%) in the six
months ended March 31, 2004, from $1,283,051 in the same period of 2003. The
14
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
54.8% in the six months ended March 31, 2004, compared to 65.3% in the prior
comparable period.
Compensation and benefits increased $431,504 (+72.7%) in the six
months ended March 31, 2004, from $593,293 in the prior comparable period. The
increase resulted from the addition of one employee and implementation of salary
increases and performance incentives for officers and staff. As a percentage of
total revenue, compensation and benefits decreased to 23.3% for the six months
ended March 31, 2004, compared to 30.2% in the prior comparable period.
General and administrative expense increased $95,137 (+26.7%), in
the six months ended March 31, 2004, from $356,058 in the six months ended March
31, 2003, due to increases in advertising and business promotion, marketing
programs, investor communication services, printing projects, travel expenses
and office rent. As a percentage of total revenue, general and administrative
expense decreased to 10.2% in the six months ended March 31, 2004, from 18.1% in
the prior comparable period.
Mutual fund distribution expenses increased $600,837 (+186.1%) in
the six months ended March 31, 2004, from $322,805 in the six months ended March
31, 2003. As a percentage of total revenue, distribution expenses increased to
21.0% for the six months ended March 31, 2004, compared to 16.4% in the prior
comparable period. The value of mutual fund assets to which distribution
expenses relate increased approximately 103.4% from March 31, 2003 to March 31,
2004. Additionally, fees charged by Charles Schwab, Inc. increased to 40 basis
points in the six months ended March 31, 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 point previously. These expenses
represent "no transaction fee" (NTF) programs through which Hennessy mutual fund
shares are distributed. These expenses increase as assets under management grow
through use of "NTF" programs, and expansion of these programs has been and
continues to be an integral part of management's business growth strategy.
Amortization and depreciation expense increased a modest $2,119
in the six months ended March 31, 2004, from $10,895 for the six months ended
March 31, 2003, resulting from amortization of loan acquisition costs and
limited purchases of furniture and equipment.
For the six months ended March 31, 2004, the provision for income
taxes increased $488,733 resulting from an increase in pre-tax income of
$1,294,589.
Interest expense of $14,371 was accrued for the seventeen days
from March 15th through March 31, 2004, and represents interest due on the $7.9
million loan from US Bank at the prime rate ( 4.0% as of March 31, 2004).
Net income increased $805,856 to $1,200,279 in the six months
ended March 31, 2004, compared to $394,423 in the prior comparable period, as a
result of the factors discussed above.
15
Liquidity and Capital Resources
As of March 31, 2004, Hennessy Advisors, Inc. had cash and cash
equivalents of $3,565,489.
Total assets at March 31, 2004 of $18,894,453 include liquid
assets of $4,484,636 (23.9%), 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
growth strategies. The management of Hennessy Advisors, Inc. anticipates that
cash and other liquid assets on hand as of March 31, 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 the
credit facility provided by US Bank, St. Louis, Missouri.
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.
16
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.
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.
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.
17
Part II. OTHER INFORMATION AND SIGNATURES
There were no reportable events for items 1 through 3 or 5 and 6.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of shareholders was conducted on
Wednesday, January 28, 2004.
(b) The eight current members of our Board of Directors were
nominated and elected to serve one year terms, expiring at
the annual meeting of shareholders to be held in year 2005. Votes
cast by proxy or by ballot were tabulated and certified by the
Inspector of Elections, as follows:
For Withheld
--- --------
Neil J. Hennessy 1,245,492 3,500
Teresa M. Nilsen 1,245,492 3,500
Daniel B. Steadman 1,245,492 3,500
Henry Hansel 1,247,992 1,000
Brian A. Hennessy 1,245,492 3,500
Rodger Offenbach 1,247,992 1,000
Daniel G. Libarle 1,247,992 1,000
Thomas L. Seavey 1,247,992 1,000
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.6 Loan Agreement between the Registrant and U.S.
Bank National Association, dated March 15, 2004.
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 Forms 8-K during the quarter ended
March 31, 2004, as follows:
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--Form 8-K, furnished January 29, 2004, Earnings Release for the first
quarter ended December 31, 2003.
--Form 8-K, furnished February 27, 2004, Press Release regarding the
Lindner acquisition.
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: May 12, 2004 By: /s/ Teresa M. Nilsen
-------------------------------------
Teresa M. Nilsen, Executive Vice
President, Chief Financial Officer
and Secretary
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EXHIBIT INDEX
-------------
Exhibit 10.6 Loan agreement between the Registrant and U.S. Bank
National Association, dated March 15, 2004.
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