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, 2003
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, 2003 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 June 30, 2003 and
September 30, 2002 3
Statements of Income for the three and nine
months ended June 30, 2003 and 2002 4
Statement of Changes in Stockholders' Equity
for the nine months ended June 30, 2003 5
Statements of Cash Flows for the nine months
ended June 30, 2003 and 2002 6
Notes to Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis 11
Item 3. Controls and Procedures 17
PART II. Other Information and Signatures 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 18
Certifications 20
2
Hennessy Advisors, Inc.
Balance Sheets
June 30, 2003 and September 30, 2002
June 30 September 30
Assets 2003 2002
---- ----
Cash and cash equivalents $ 2,917,664 $ 2,097,059
Investments in marketable securities, at fair value 4,363 3,830
Investment fee income receivable 439,206 230,019
Expert witness fees receivable - 21,745
Management contracts acquired, net of accumulated amortization
of $628,627 4,480,888 4,480,888
Property and equipment, net of accumulated depreciation
of $68,265 and $52,429 51,537 42,323
Other assets 55,810 57,150
--------------- ----------------
Total assets $ 7,949,468 $ 6,933,014
=============== ================
Liabilities and Stockholders' Equity
Accrued liabilities and accounts payable $ 348,037 $ 125,216
Income taxes payable 31,310 33,168
Deferred income tax liability 115,986 -
--------------- ----------------
Total liabilities 495,333 158,384
--------------- ----------------
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 June 30, 2003
and September 30, 2002 6,788,205 6,788,205
Additional paid-in capital 24,008 24,008
Retained earnings (accumulated deficit) 641,922 (37,583)
--------------- ----------------
Total stockholders' equity 7,454,135 6,774,630
--------------- ----------------
Total liabilities and stockholders' equity $ 7,949,468 $ 6,933,014
=============== ================
See accompanying notes to condensed financial statements
3
Hennessy Advisors, Inc.
Statements of Income
Three Months Ended June 30, 2003 and 2002, and
Nine Months Ended June 30, 2003 and 2002
Three Months Ended Nine Months Ended
June 30 June 30
2003 2002 2003 2002
---- ---- ---- ----
Revenue
Investment advisor fees $1,070,737 $ 585,856 $ 2,788,657 $1,331,276
Shareholder service fees 140,344 - 364,595 -
Expert witness fees - 6,516 7,150 91,993
Gain on repayment of debt - - - 90,214
Other Income 7,029 4,208 21,402 8,221
----------- ---------- -------------- -----------
Total revenue 1,218,110 596,580 3,181,804 1,521,704
----------- ---------- -------------- -----------
Expenses
Compensation and benefits 359,149 156,025 952,442 438,369
General and administrative 158,638 135,642 514,696 257,632
Mutual fund distribution 224,509 86,005 547,314 203,750
Amortization and depreciation 4,941 75,796 15,836 223,958
Interest - - - 177,205
----------- ---------- -------------- -----------
Total expenses 747,237 453,468 2,030,288 1,300,914
----------- ---------- -------------- -----------
Income before income tax expense 470,873 143,112 1,151,516 220,790
----------- ---------- -------------- -----------
Income tax expense 185,791 200 472,011 600
----------- ---------- -------------- -----------
Net income $ 285,082 $ 142,912 $ 679,505 $ 220,190
=========== ========== ============== ===========
Basic earnings per share $ 0.18 $ 0.09 $ 0.42 $ 0.18
=========== ========== ============== ===========
Diluted earnings per share $ 0.17 $ 0.09 $ 0.42 $ 0.18
=========== ========== ============== ===========
See accompanying notes to condensed financial statements
4
Hennessy Advisors, Inc.
Statement of Changes in Stockholders' Equity
Nine Months Ended June 30, 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 nine months
ended June 30, 2003 - - - 679,505 679,505
-----------------------------------------------------------------------
Balances as of June 30, 2003 1,626,142 $ 6,788,205 $ 24,008 $ 641,922 $ 7,454,135
=======================================================================
See accompanying notes to condensed financial statements
5
Hennessy Advisors, Inc.
Statements of Cash Flows
Nine Months Ended June 30, 2003 and 2002
2003 2002
-------------- --------------
Cash flows from operating activities:
Net income $ 679,505 $ 220,190
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 15,836 223,958
Deferred income taxes 115,986 -
Unrealized gains on marketable securities (468) (74)
Realized loss on investments in limited partnership - 4,019
Gain on repayment of debt - (90,214)
(Increase) decrease in operating assets:
Investment fee income receivable (209,187) (87,162)
Expert witness fees receivable 21,745 11,040
Other assets 1,340 12,053
Increase (decrease) in operating liabilities:
Accrued liabilities and accounts payable 222,821 (135,124)
Income taxes payable (1,858) -
-------------- --------------
Net cash provided by operating activities 845,720 158,687
-------------- --------------
Cash flows used in investing activities:
Purchases of property and equipment (25,050) (19,977)
Purchases of investments (65) -
Management contracts acquired - (11,275)
-------------- --------------
Net cash used in investing activities (25,115) (31,252)
-------------- --------------
Cash flows provided by financing activities:
Gross proceeds from issuance of common stock - 5,729,220
Offering costs incurred in issuance of common stock - (145,675)
Repayment of amounts due affiliate - (400)
Liquidation of adjustable rate preferred stock - (40,000)
Repayment of note payable and accrued interest to Netfolio - (1,975,000)
Repayment of note payable to Firstar - (1,840,159)
-------------- --------------
Net cash provided by financing activities - 1,727,986
-------------- --------------
Net increase in cash and cash equivalents 820,605 1,855,421
Cash and cash equivalents at the beginning of the period 2,097,059 28,162
-------------- --------------
Cash and cash equivalents at the end of the period $ 2,917,664 $ 1,883,583
============== ==============
Supplemental disclosures of cash flow information:
Common stock issued in connection with acquisition of
management contracts $ - $ 907,400
============== ==============
Interest paid $ - $ 177,205
============== ==============
Taxes paid $ 345,437 $ 931
============== ==============
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 and results of operations for the periods represented. 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, 2003, are not necessarily indicative of results which may be expected for
the fiscal year ending September 30, 2003. For additional information, refer to
the financial statements for the fiscal year ended September 30, 2002, which are
included in the Company's annual report on Form 10-KSB, filed with the
Securities and Exchange Commission on December 27, 2002.
The operating activities of the Company consist primarily of providing
investment management services to four 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, and the
Hennessy Total Return Fund.
Management Contracts
Hennessy Advisors, Inc. has management agreements with Hennessy Funds,
Inc. for the Hennessy Balanced Fund and Total Return Fund and with Hennessy
Mutual Funds, Inc. for the Hennessy Cornerstone Growth Fund and the Hennessy
Cornerstone Value Fund.
The management agreements were renewed by the Board of Directors of
Hennessy Funds, Inc. and Hennessy Mutual Funds, Inc., at their meeting on March
5, 2003 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
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.
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.
Hennessy Advisors, as deemed necessary and without contractual obligation, may
voluntarily waive its management fee or subsidize other Fund expenses.
7
Investment Fee Income
Advisory and Shareholder Service fees, which comprise investment fee
income, 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,
and 0.60% of the average daily net assets of the Hennessy Balanced Fund and
Hennessy Total Return Fund.
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 Cornerstone Growth and 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 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. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date of such a change.
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 loss 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 rate of 40% differs from the federal
statutory rate of 34% primarily due to the effects of state income taxes.
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,
8
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,
2003 and 2002:
Three Months Ended Nine Months Ended
--------------------------------------- ---------------------------------------
June 30 June 30
--------------------------------------- ---------------------------------------
2003 2002 2003 2002
------------------- ------------------- ------------------- -------------------
Weighted average
common stock outstanding 1,626,142 1,547,131 1,626,142 1,216,401
Common stock equivalents
-stock options 9,000 - 6,936 -
------------------- ------------------- ------------------- -------------------
1,635,142 1,547,131 1,633,078 1,216,401
=================== =================== =================== ===================
Accounting Pronouncements
In June of 2001 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets". SFAS No. 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets and supersedes APB
No, 17, "Intangible Assets". Under SFAS No. 142, goodwill and intangible assets
that have indefinite useful lives will not be amortized but will be tested at
least annually for impairment. The Company considers our mutual fund management
contracts to be intangible assets with an indefinite life. The Company fully
implemented the provisions of SFAS 142 on October 1, 2002, at which time
amortization on these intangible assets ceased. This change is expected to
result in a reduction of annual amortization expense to the Company of $279,390.
Impairment analysis of our management contract asset is performed quarterly, and
as of June 30, 2003, there was no impairment.
The impact of adoption of SFAS 142 on earnings and earnings per share
when comparing the three months ended June 30, 2003 and 2002, was as follows:
Basic /
Net Income Diluted EPS
------------- ---------------
Three months ended June 30, 2003
------------------------------------------------
Net income $ 285,082 $ 0.18/$0.17
Add back management contract amortization, net of tax - -
------------ -----------------
Adjusted net income $ 285,082 $ 0.18/$0.17
============ =================
Three months ended June 30, 2002
------------------------------------------------
Net income $ 142,912 $ 0.09
Add back management contract amortization, net of tax 41,909 0.03
------------ -----------------
Adjusted net income $ 184,821 $ 0.12
============ =================
The impact of adoption of SFAS 142 on earnings and earnings per share
when comparing the nine months ended June 30, 2003 and 2002, was as follows:
9
Basic /
Net Income Diluted EPS
------------- ---------------
Nine months ended June 30, 2003
------------------------------------------------
Net income $ 679,505 $ 0.42
Add back management contract amortization, net of tax - -
------------ --------------
Adjusted net income $ 679,505 $ 0.42
============ ==============
Nine months ended June 30, 2002
------------------------------------------------
Net income $ 220,190 $ 0.18
Add back management contract amortization, net of tax 125,726 0.10
------------ --------------
Adjusted net income $ 345,916 $ 0.28
============ ==============
In December, 2002, FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure". SFAS No. 148 amends SFAS 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, SFAS No. 148 amends the
disclosure requirements of SFAS 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, SFAS
No. 148 requires disclosure of pro-forma results on a quarterly basis as if the
Company had applied the fair value recognition provisions of SFAS 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. 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. No
options were granted during the nine month period ended June 30, 2003. During
the nine month period ended June 30, 2002, 82,000 options were granted. The
following table illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of SFAS 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 in the nine month period ended June 30, 2002 was determined at
the date of grant by using an options pricing model with an assumed risk-free
interest rate of 3.8%, an expected life of 5 years and zero dividends:
Basic /
Net Income Diluted EPS
------------- ---------------
Three months ended June 30, 2002
--------------------------------------------
Net income $ 142,912 $ 0.09
Fair value of stock options - net of tax - -
------------ -------------
Proforma net income $ 142,912 $ 0.09
============ =============
10
Basic /
Net Income Diluted EPS
------------- ---------------
Nine months ended June 30, 2002
--------------------------------------------
Net income $ 220,190 $ 0.18
Fair value of stock options - net of tax 141,040 0.12
------------- ------------
Proforma net income $ 79,150 $ 0.06
============= ============
Item 2. Management's Discussion and Analysis
Overview and General Industry Conditions
Our primary sources of revenue are investment fees derived from
managing our four 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.
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 $689 million as of
June 30, 2003, of which $663 million were mutual fund assets. Approximately 99%
of Hennessy's total revenues were attributable to the four Hennessy mutual funds
for the nine months ended June 30, 2003.
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 asset on our balance sheet represents the capitalized
acquisition costs of the investment advisory agreements with all four Mutual
Funds. As of June 30, 2003 the management contracts acquired asset had a net
balance of $4,480,888, unchanged from the balance at September 30, 2002.
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, 2003 and 2002:
11
Three Months Ended June 30
2003 2002
--------------------------------------------------------------------
Percentage Percentage
of Total of Total
Amounts Revenue Amounts Revenue
Revenue:
Investment advisory fees $ 1,070,737 87.9% $ 585,856 98.2%
Shareholder service fees 140,344 11.5 - -
Expert witness fees - - 6,516 1.1
Other income 7,029 0.6 4,208 0.7
--------------------------------------------------------------------
Total revenue 1,218,110 100.0 596,580 100.0
--------------------------------------------------------------------
Operating Expenses:
Compensation and benefits 359,149 29.5 156,025 26.2
General and administrative 158,638 13.0 135,642 22.7
Mutual fund distribution expenses 224,509 18.4 86,005 14.4
Amortization and depreciation 4,941 0.4 75,796 12.7
--------------------------------------------------------------------
Total operating expenses 747,237 61.3 453,468 76.0
--------------------------------------------------------------------
Income before income taxes 470,873 38.7 143,112 24.0
Income taxes 185,791 15.3 200 -
--------------------------------------------------------------------
Net income $ 285,082 23.4% $ 142,912 24.0%
====================================================================
Three Months Ended June 30, 2003 Compared to the Three Months Ended June 30,
2002:
Total revenue increased $621,530 in the three months ended June 30,
2003, from $596,580 in the same period of 2002, primarily due to fees earned
from increased mutual fund assets under management, resulting from increased net
cash inflows. Investment advisory fees increased $484,881 in the three months
ended June 30, 2003, from $585,856 in the prior comparable period. Shareholder
service fees comprised $140,344 of the increase in investment fees or 22.6%.
There were no expert witness fees earned in the three months ended June
30, 2003, a decrease of $6,516 from the three months ended June 30, 2002. 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 $293,769 or 64.8%, in the three
months ended June 30, 2003, from $453,468 in the same period of 2002. 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
61.3% in the three months ended June 30, 2003, compared to 76.0% in the prior
comparable period.
Compensation and benefits increased $203,124 or 130.2%, in the three
months ended June 30, 2003, from $156,025 in the prior comparable period.
12
The increase resulted from adjustment of Mr. Hennessy's monthly compensation
under his employment contract; the net 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 increased to
29.5% for the three months ended June 30, 2003, compared to 26.2% in the prior
comparable period.
General and administrative expense increased $22,996 or 17.0%, in the
three months ended June 30, 2003, from $135,642 in the three months ended June
30, 2002, due to increases in public relations, insurance, rent, printing,
travel expenses, outside director's fees and shareholder meeting expenses. As a
percentage of total revenue, general and administrative expense decreased to
13.0% in the three months ended June 30, 2003, from 22.7% in the prior
comparable period.
Mutual fund distribution expenses increased $138,504 or 161.0%, in the
three months ended June 30, 2003, from $86,005 in the three months ended June
30, 2002. As a percentage of total revenue, distribution expenses increased to
18.4% for the three months ended June 30, 2003, compared to 14.4% in the prior
comparable period. These expenses represent "no transaction fee" 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 continues to be an integral part of management's
business growth strategy.
Amortization and depreciation expense decreased $70,855 or 93.5% in the
three months ended June 30, 2003, from $75,796 for the three months ended June
30, 2002, due to discontinuance (for book purposes) of amortization of
management contract assets accounted for under the provisions of SFAS 142,
"Goodwill and Other Intangible Assets". Amortization for tax purposes will be
continued however, in accordance with regulations of the Internal Revenue
Service.
For the three months ended June 30, 2003, the provision for income
taxes increased $185,591, resulting from an increase in pre-tax income of
$327,761 and an increase in our effective tax rate from 0.1% to 39.5%. The
change in effective tax rate was primarily due to the elimination of valuation
allowances in the prior period.
Net income increased $142,170 to $285,082 in the three months ended
June 30, 2003, compared to $142,912 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, 2003 and 2002:
13
Nine Months Ended June 30
2003 2002
--------------------------------------------------------------------
Percentage Percentage
of Total of Total
Amounts Revenue Amounts Revenue
Revenue:
Investment advisory fees $ 2,788,657 87.6% $ 1,331,276 87.5%
Shareholder service fees 364,595 11.5 - -
Expert witness fees 7,150 0.2 91,993 6.1
Gain on repayment of debt - - 90,214 5.9
Other income 21,402 0.7 8,221 0.5
--------------------------------------------------------------------
Total revenue 3,181,804 100.0 1,521,704 100.0
--------------------------------------------------------------------
Operating Expenses:
Compensation and benefits 952,442 29.9 438,369 28.8
General and administrative 514,696 16.2 257,632 16.9
Mutual fund distribution expenses 547,314 17.2 203,750 13.4
Amortization and depreciation 15,836 0.5 223,958 14.7
Interest - - 177,205 11.7
--------------------------------------------------------------------
Total operating expenses 2,030,288 63.8 1,300,914 85.5
--------------------------------------------------------------------
Income before income taxes 1,151,516 36.2 220,790 14.5
Income taxes 472,011 14.8 600 -
--------------------------------------------------------------------
Net income $ 679,505 21.4% $ 220,190 14.5%
====================================================================
Nine Months Ended June 30, 2003 Compared to the Nine Months Ended June 30, 2002:
Total revenue increased $1,660,100 in the nine months ended June 30,
2003, from $1,521,704 in the same period of 2002, primarily due to fees earned
from increased mutual fund assets under management, resulting from increased net
cash inflows. Investment advisory fees increased $1,457,381 in the nine months
ended June 30, 2003, from $1,331,276 in the prior comparable period. Shareholder
service fees comprised $364,595 of the increase in investment fees or 20.0%.
Expert witness fees in the nine months ended June 30, 2003, decreased
$84,843 from $91,993 in the nine months ended June 30, 2002. Mr. Hennessy is
working in a limited capacity as a securities litigation mediator, to devote the
majority of his time to managing Hennessy Advisors, Inc.
Total operating expenses increased $729,374 or 56.1%, in the nine
months ended June 30, 2003, from $1,300,914 in the same period of 2002. The
increase resulted from higher compensation expense, increases in several
components of general and administrative expenses and mutual fund distribution
costs. As a percentage of total revenue, total operating expenses decreased to
63.8% in the nine months ended June 30, 2003, compared to 85.5% in the prior
comparable period.
14
Compensation and benefits increased $514,073 or 117.3%, in the nine
months ended June 30, 2003, from $438,369 in the prior comparable period. The
increase resulted from adjustment of Mr. Hennessy's monthly compensation under
his employment contract; the net 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 increased to 29.9% for
the nine months ended June 30, 2003, compared to 28.8% in the prior comparable
period.
General and administrative expense increased $257,064 or 99.8%, in the
nine months ended June 30, 2003, from $257,632 in the nine months ended June 30,
2002, due to increases in public relations, insurance, business development,
accounting and legal fees, rent, printing, travel expenses, outside director's
fees and shareholder meeting expenses. As a percentage of total revenue, general
and administrative expense decreased to 16.2% in the nine months ended June 30,
2003, from 16.9% in the prior comparable period.
Mutual fund distribution expenses increased $343,564 or 168.6%, in the
nine months ended June 30, 2003, from $203,750 in the nine months ended June 30,
2002. As a percentage of total revenue, distribution expenses increased to 17.2%
for the nine months ended June 30, 2003, compared to 13.4% in the prior
comparable period. These expenses represent "no transaction fee" 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 continues to be an integral part of management's
business growth strategy.
Amortization and depreciation expense decreased $208,122 or 92.9% in
the nine months ended June 30, 2003, from $223,958 for the nine months ended
June 30, 2002, due to discontinuance (for book purposes) of amortization of
management contract assets accounted for under the provisions of SFAS 142,
"Goodwill and Other Intangible Assets". Amortization for tax purposes will be
continued however, in accordance with regulations of the Internal Revenue
Service.
Interest expense was zero in the nine months ended June 30, 2003,
compared to $177,205 in the comparable prior period, reflecting payment in full
of notes due Netfolio and Firstar Bank in March 2002.
For the nine months ended June 30, 2003, the provision for income taxes
increased $471,411, resulting from an increase in pre-tax income of $930,726 and
an increase in our effective tax rate from 0.1% to 41.0%. The change in
effective tax rate was primarily due to the elimination of valuation allowances
in the prior period.
Net income increased $459,315 to $679,505 in the nine months ended June
30, 2003, compared to $220,190 in the prior comparable period, as a result of
the factors discussed above.
15
Liquidity and Capital Resources
As of June 30, 2003, Hennessy Advisors, Inc. had cash and cash
equivalents of $2,917,664.
With the exception of property and equipment and management contracts
acquired, which amount to a combined $4,532,425 as of June 30, 2003, remaining
assets of $3,417,043 are very liquid, consisting primarily of cash and
receivables derived from mutual fund asset management activities. Total assets
as of June 30, 2003 were $7,949,468, compared to $6,933,014 at September 30,
2002, an increase of 14.7%.
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 June 30, 2003, will be sufficient to
fund its operations for the foreseeable future. To the extent that liquid
resources and cash provided by operations are not adequate to meet capital
requirements, management may need 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.
On April 14, 2003, Neil Hennessy, Chief Executive Officer and President
of Hennessy Advisors, Inc., announced that Hennessy Advisors, Inc. agreed in
principle to acquire the management contracts for the SYM Select Growth Fund
(SYMFX). The SYM Select Growth Fund is a Mid-Cap growth fund with approximately
$27 million in assets under management. The acquisition transaction is expected
to be completed before fiscal year-end (September 30, 2003), subject to
satisfactory completion of due diligence and approval by the Board of Directors
of both companies and SYM Select Growth Fund shareholders. The acquisition will
be funded through use of existing cash resources.
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 Continued weak market conditions may lower our assets under
management and reduce our revenues and income.
o We face strong competition from numerous and sometimes larger
companies.
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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 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 can occur in our revenue and resulting net income from period to
period. These 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 27, 2002.
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 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.
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Part II. OTHER INFORMATION AND SIGNATURES
There were no reportable events for items 1 through 5 during the three and nine
months ended June 30, 2003.
Item 6. Exhibits and Reports on Form 8-K
(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 or filed Forms 8-K and 8-K/A
during the quarter ended June 30, 2003, as follows:
--Form 8-K, furnished April 22, 2003, Earnings Release for 3/31/03
--Form 8-K/A, furnished May 9, 2003, Revised Earnings Release for
3/31/03
--Form 8-K, filed June 10, 2003, Change in Certifying Accountant
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 12, 2003 By: /s/ Teresa M. Nilsen
------------------------------------
Teresa M. Nilsen, Executive Vice
President, Chief Financial Officer
and Secretary
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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
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