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, 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 March 31, 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 March 31, 2003 and
September 30, 2002 3
Statements of Operations for the three and six
months ended March 31, 2003 and 2002 4
Statement of Changes in Stockholders' Equity
for the six months ended March 31, 2003 5
Statements of Cash Flow for the six months
ended March 31, 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 4. Submission of Matters to a Vote of Security 18
Holders
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Certifications 20
2
Hennessy Advisors, Inc.
Balance Sheets
March 31, 2003 and September 30, 2002
March 31 September 30
Assets 2003 2002
---- ----
Cash and cash equivalents $ 2,568,997 $ 2,097,059
Investments in marketable securities, at fair value 3,981 3,830
Investment fee income receivable 337,273 230,019
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 $63,323 and $52,429 45,190 42,323
Other assets 38,550 57,150
---------------- -----------------
Total assets $ 7,474,879 $ 6,933,014
================ =================
Liabilities and Stockholders' Equity
Accrued liabilities and accounts payable $ 219,581 $ 125,216
Income taxes payable 4,177 33,168
Deferred income tax liability 82,068 -
---------------- -----------------
Total liabilities 305,826 158,384
---------------- -----------------
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 March 31, 2003
and September 30, 2002 6,788,205 6,788,205
Additional paid-in capital 24,008 24,008
Retained earnings (accumulated deficit) 356,840 (37,583)
---------------- -----------------
Total stockholders' equity 7,169,053 6,774,630
---------------- -----------------
Total liabilities & stockholders' equity $ 7,474,879 $ 6,933,014
================ =================
See accompanying notes to condensed financial statements
3
Hennessy Advisors, Inc.
Statements of Operations
Three Months Ended March 31, 2003 and 2002,
and Six Months Ended March 31, 2003 and 2002
Three Months Ended Six Months Ended
March 31 March 31
2003 2002 2003 2002
---- ---- ---- ----
Income
Investment advisor fees $ 886,582 $380,430 $ 1,717,920 $ 738,967
Shareholder service fees 115,499 - 224,251 -
Expert witness fees - 41,183 7,150 85,476
Gain on repayment of debt - 90,214 - 90,214
Other Income 6,458 9,633 14,373 10,469
----------- ---------- -------------- -----------
Total income 1,008,539 521,460 1,963,694 925,126
----------- ---------- -------------- -----------
Expenses
Compensation and benefits 299,943 145,934 593,293 283,132
General and administrative 182,460 80,262 356,058 121,201
Mutual fund distribution 178,691 53,209 322,805 117,747
Amoritization and depreciation 5,625 74,081 10,895 148,162
Interest - 70,718 - 177,205
----------- ---------- -------------- -----------
Total expenses 666,719 424,204 1,283,051 847,447
----------- ---------- -------------- -----------
Income before income tax expense 341,820 97,256 680,643 77,679
----------- ---------- -------------- -----------
Income tax expense 177,362 200 286,220 400
----------- ---------- -------------- -----------
Net earnings $ 164,458 $ 97,056 $ 394,423 $ 77,279
=========== ========== ============== ===========
Basic earnings per share $ 0.10 $ 0.09 $ 0.24 $ 0.07
=========== ========== ============== ===========
Diluted earnings per share $ 0.10 $ 0.09 $ 0.24 $ 0.07
=========== ========== ============== ===========
See accompanying notes to condensed financial statements
4
Hennessy Advisors, Inc.
Statement of Changes in Stockholders' Equity
Six Months Ended March 31, 2003
Retained
Additional Earnings Total
Common Common Paid-in (Accumulated Stockholder's
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 earnings for the six months
ended March 31, 2003 - - - 394,423 394,423
--------------------------------------------------------------------------------------
Balances as of March 31, 2003 1,626,142 $ 6,788,205 $ 24,008 $ 356,840 $ 7,169,053
======================================================================================
See accompanying notes to condensed financial statements
5
Hennessy Advisors, Inc.
Statements of Cash Flow
Six Months Ended March 31, 2003 and 2002
2003 2002
----------------------- -----------------------
Cash flows from operating activities:
Net earnings $ 394,423 $ 77,279
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 10,894 148,162
Deferred income taxes 82,068 -
Unrealized gains on marketable securities (103) (284)
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 (107,254) (26,197)
Expert witness fees receivable 21,745 15,607
Other assets 18,600 13,566
Increase (decrease) in operating liabilities:
Accrued liabilities and accounts payable 94,365 (46,634)
Income taxes payable (28,991) -
----------------------- -----------------------
Net cash provided by operating
activities 485,747 95,304
----------------------- -----------------------
Cash flows used in investing activities:
Purchases of property and equipment (13,761) (8,012)
Purchases of investments (48) -
Management contracts acquired - (11,275)
----------------------- -----------------------
Net cash used in investing
activities (13,809) (19,287)
----------------------- -----------------------
Cash flows provided by financing activities:
Gross proceeds from issuance of common stock - 4,457,700
Offering costs incurred in issuance of common stock - (141,329)
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 - 460,812
----------------------- -----------------------
Net increase in cash and cash equivalents 471,938 536,829
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 $ 2,568,997 $ 564,991
======================= =======================
Supplemental disclosures of cash flow information:
Common stock issued in connection with acquisition of management contracts $ - $ 907,400
======================= =======================
Interest paid $ - $ 217,740
======================= =======================
Taxes paid $ 233,813 $ 800
======================= =======================
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 six months ended March
31, 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.
Deferred tax expense and corresponding deferred tax liabilities of
$82,068 have been recognized under the provisions of FASB 109 "Accounting For
Income Taxes". This amount represents the after tax value of investment
management contract amortization deducted for tax purposes, but not recorded for
book purposes, under the provisions of FASB 142 "Goodwill And Other Intangible
Assets".
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
8
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,
2003 and 2002:
Three Months Ended Six Months Ended
--------------------------------------- ---------------------------------------
March 31 March 31
--------------------------------------- ---------------------------------------
2003 2002 2003 2002
------------------- ------------------- ------------------- -------------------
Weighted average
common stock outstanding 1,626,142 1,141,392 1,626,142 1,051,535
Common stock equivalents
-stock options 4,854 - 4,854 -
------------------- ------------------- ------------------- -------------------
1,630,996 1,141,392 1,630,996 1,051,535
=================== =================== =================== ===================
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 supercedes 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 March 31, 2003, there was no impairment.
The impact of adoption of SFAS 142 on earnings and earnings per share
when comparing the three months ended March 31, 2003 and 2002, was as follows:
Basic &
Net Income Diluted EPS
---------- ------------
Three months ended March 31, 2003
---------------------------------
Net Income $164,458 $ 0.10
Add back management contract amortization,
net of tax - -
----------- ------------
Adjusted net income $164,458 $ 0.10
=========== ============
Three months ended March 31, 2002
---------------------------------
Net Income $ 97,056 $ 0.09
Add back management contract amortization,
net of tax 41,909 0.04
----------- ------------
Adjusted net income $138,965 $ 0.13
=========== ============
The impact of adoption of SFAS 142 on earnings and earnings per share
when comparing the six months ended March 31, 2003 and 2002, was as follows:
9
Basic &
Net Income Diluted EPS
---------- --------------
Six months ended March 31, 2003
-------------------------------
Net Income $394,423 $ 0.24
Add back management contract amortization,
net of tax - -
----------- ------------
Adjusted net income $394,423 $ 0.24
=========== ============
Six months ended March 31, 2002
-------------------------------
Net Income $ 77,279 $ 0.07
Add back management contract amortization,
net of tax 83,818 0.08
----------- ------------
Adjusted net income $161,097 $ 0.15
=========== ============
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. The full provisions of SFAS No. 148 are required to be
implemented in fiscal years beginning after December 15, 2002. The Company does
not expect the implementation of SFAS No. 148 to have a significant impact on
the Company's results of operations or financial condition.
The Company applies APB Opinion 25 in accounting for stock-based
compensation, and accordingly, compensation cost has not been recognized in the
accompanying financial statements for stock options granted through March 31,
2003. During the three month period ended March 31, 2002, 82,000 options were
granted, and had the Company applied SFAS 123 as amended by SFAS 148, the impact
on net income and earnings per share would have been as follows (as determined
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 March 31, 2002
---------------------------------------
Net Income $ 97,056 $ 0.09
Fair value of stock options - net of tax $ 141,040 0.12
----------------- ------------------
Proforma Net (loss) $ (43,984) $ (0.03)
================= ==================
Basic &
Net Income Diluted EPS
----------------- ------------------
Six months ended March 31, 2002
---------------------------------------
Net Income $ 77,279 $ 0.07
Fair value of stock options - net of tax 141,040 0.13
----------------- ------------------
Proforma Net (loss) $ (63,761) $ (0.06)
================= ==================
10
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 $522 million as of
March 31, 2003, of which $498 million were mutual fund assets. Approximately 99%
of Hennessy's total revenues were attributable to the four Hennessy mutual funds
for the six months ended March 31, 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, and has continued as a mediator on a limited basis this quarter. Mr.
Hennessy expects to further limit 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 March 31, 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 statement of operations as
dollar amounts and as percentages of total revenue for the three months ended
March 31, 2003 and 2002:
11
Three Months Ended March 31
2003 2002
------------------------------------------------------------------
Percentage Percentage
of Total of Total
Amounts Revenue Amounts Revenue
Revenue:
-------
Investment fee income $ 1,002,081 99.4% $ 380,430 73.0%
Expert witness fees - - 41,183 7.9
Gain on repayment of debt - - 90,214 17.3
Other income 6,458 0.6 9,633 1.8
------------------------------------------------------------------
Total Revenue 1,008,539 100.0 521,460 100.0
------------------------------------------------------------------
Operating Expenses:
------------------
Compensation and benefits 299,943 29.7 145,934 28.0
General and administrative 182,460 18.1 80,262 15.4
Mutual fund distribution expenses 178,691 17.7 53,209 10.2
Amortization and depreciation 5,625 0.6 74,081 14.2
Interest - - 70,718 13.5
------------------------------------------------------------------
Total operating expenses 666,719 66.1 424,204 81.3
------------------------------------------------------------------
Income before income taxes 341,820 33.9 97,256 18.7
Income taxes 177,362 17.6 200 (0.1)
------------------------------------------------------------------
Net income $ 164,458 16.3% $ 97,056 18.6%
==================================================================
Three Months Ended March 31, 2003 Compared to the Three Months Ended March 31,
2002:
Total revenue increased $487,079 in the three months ended March 31,
2003, from $521,460 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 fee income increased $621,651 in the three months ended
March 31, 2003, from $380,430 in the prior comparable period. Shareholder
Service fees comprised $115,499 of the increase in investment fees or 18.6%.
There were no expert witness fees earned in the three months ended
March 31, 2003, a decrease of $41,183 from the three months ended March 31,
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 $242,515 or 57.2%, in the three
months ended March 31, 2003, from $424,204 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
66.1% in the three months ended March 31, 2003, compared to 81.3% in the prior
comparable period.
12
Compensation and benefits increased $154,009 or 105.5%, in the three
months ended March 31, 2003, from $145,934 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 29.7% for
the three months ended March 31, 2003, compared to 28.0% in the prior comparable
period.
General and administrative expense increased $102,198 or 127.3%, in the
three months ended March 31, 2003, from $80,262 in the three months ended March
31, 2002, due to increases in public relations, insurance, business development,
accounting and legal fees, rent, printing, and outside director's fees. As a
percentage of total revenue, general and administrative expense increased to
18.1% in the three months ended March 31, 2003, from 15.4% in the prior
comparable period.
Mutual fund distribution expenses increased $125,482 or 235.8%, in the
three months ended March 31, 2003, from $53,209 in the three months ended March
31, 2002. As a percentage of total revenue, distribution expenses increased to
17.7% for the three months ended March 31, 2003, compared to 10.2% in the prior
comparable period. These expenses represent "no transaction fee" programs
through which our mutual fund shares are distributed. These expenses increase as
our assets 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 $68,456 or 92.4% in the
three months ended March 31, 2003, from $74,081 for the three months ended March
31, 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 three months ended March 31, 2003,
compared to $70,718 in the comparable prior period, reflecting payment in full
of notes due Netfolio and Firstar Bank in March 2002.
Income tax expense increased $177,362 for the three months ended March
31, 2003, compared to $200 in the prior period, due to significant income
generation in the current quarter, full use of prior period loss carryforward
balances in fiscal year 2002, and current period expenses for deferred income
taxes of $82,068, relating to the after tax value of investment management
contract amortization deducted for income tax purposes but excluded for book
purposes.
Net income increased $67,402 to $164,458 in the three months ended
March 31, 2003, compared to $97,056 in the prior comparable period, as a result
of the factors discussed above.
The following table reflects items in the statement of operations as
dollar amounts and as percentages of total revenue for the six months ended
March 31, 2003 and 2002:
13
Six Months Ended March 31
2003 2002
------------------------------------------------------------------
Percentage Percentage
of Total of Total
Amounts Revenue Amounts Revenue
Revenue:
-------
Investment fee income $ 1,942,171 98.9% $ 738,967 79.9%
Expert witness fees 7,150 0.4 85,476 9.2
Gain on repayment of debt 0 - 90,214 9.8
Other income 14,373 0.7 10,469 1.1
------------------------------------------------------------------
Total revenue 1,963,694 100.0 925,126 100.0
------------------------------------------------------------------
Operating Expenses:
------------------
Compensation and benefits 593,293 30.2 283,132 30.6
General and administrative 356,058 18.1 121,201 13.1
Mutual fund distribution expenses 322,805 16.4 117,747 12.7
Amortization and depreciation 10,895 0.6 148,162 16.0
Interest 0 - 177,205 19.2
------------------------------------------------------------------
Total operating expenses 1,283,051 65.3 847,447 91.6
------------------------------------------------------------------
Income before income taxes 680,643 34.7 77,679 8.4
Income taxes 286,220 14.6 400 -
------------------------------------------------------------------
Net income $ 394,423 20.1% $ 77,279 8.4%
==================================================================
Six Months Ended March 31, 2003 Compared to the Six Months Ended March 31, 2002:
Total revenue increased $1,038,568 in the six months ended March 31,
2003, from $925,126 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 fee income increased $1,203,204 in the six months ended
March 31, 2003, from $738,967 in the prior comparable period. Shareholder
Service fees comprised $224,251 of the increase in investment fees or 18.6%.
Expert witness fees in the six months ended March 31, 2003, decreased
$78,326 from $85,476 in the six months ended March 31, 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 $435,604 or 51.4%, in the six months
ended March 31, 2003, from $847,447 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 65.3% in the
six months ended March 31, 2003, compared to 91.6% in the prior comparable
period.
14
Compensation and benefits increased $310,161 or 109.5%, in the six
months ended March 31, 2003, from $283,132 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 decreased to 30.2% for
the six months ended March 31, 2003, compared to 30.6% in the prior comparable
period.
General and administrative expense increased $234,857 or 193.8%, in the
six months ended March 31, 2003, from $121,201 in the six months ended March 31,
2002, due to increases in public relations, insurance, business development,
accounting and legal fees, rent, printing, and outside director's fees. As a
percentage of total revenue, general and administrative expense increased to
18.1% in the six months ended March 31, 2003, from 13.1% in the prior comparable
period.
Mutual fund distribution expenses increased $205,058 or 174.2%, in the
six months ended March 31, 2003, from $117,747 in the six months ended March 31,
2002. As a percentage of total revenue, distribution expenses increased to 16.4%
for the six months ended March 31, 2003, compared to 12.7% in the prior
comparable period. These expenses represent "no transaction fee" programs
through which our mutual fund shares are distributed. These expenses increase as
our assets 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 $137,267 or 92.6% in
the six months ended March 31, 2003, from $148,162 for the six months ended
March 31, 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 six months ended March 31, 2003,
compared to $177,205 in the comparable prior period, reflecting payment in full
of notes due Netfolio and Firstar Bank in March 2002.
Income tax expense increased $285,820 for the six months ended March
31, 2003, compared to $400 in the prior period, due to significant income
generation in the current quarter, full use of prior period loss carryforward
balances in fiscal year 2002, and current period expenses for deferred income
taxes of $82,068, relating to the after tax value of investment management
contract amortization deducted for income tax purposes but excluded for book
purposes.
Net income increased $317,144 to $394,423 in the six months ended March
31, 2003, compared to $77,279 in the prior comparable period, as a result of the
factors discussed above.
15
Liquidity and Capital Resources
As of March 31, 2003, Hennessy Advisors, Inc. had cash and cash
equivalents of $2,568,997.
With the exception of property and equipment and management contracts
acquired, which amount to a combined $4,526,078 as of March 31, 2003, remaining
assets of $2,948,801 are very liquid, consisting primarily of cash, and
receivables derived from mutual fund asset management activities. Total assets
as of March 31, 2003 were $7,474,879, compared to $6,933,014 at September 30,
2002, an increase of 7.8%.
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, 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.
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.
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 The current conflict in Iraq and the ongoing threat of terrorism
may adversely affect the general economy, financial and capital
markets and our business.
16
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-14(c)
promulgated under the Securities Exchange Act of 1934, as amended, within 90
days of the filing date of 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.
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,
February 5, 2003.
(b) The eight current members of the Board of Directors were nominated
and elected to serve one year terms, expiring at the annual meeting
of shareholders to be held in year 2004. Votes cast by proxy or by
ballot were tabulated and certified by the Inspector of Elections,
as follows:
For Withheld
--- ---------
Neil J. Hennessy 1,196,230 1,000
Teresa M. Nilsen 1,196,230 1,000
Daniel B. Steadman 1,196,230 1,000
Henry Hansel 1,196,230 1,000
Brian A. Hennessy 1,196,230 1,000
Rodger Offenbach 1,196,230 1,000
Daniel G. Libarle 1,196,230 1,000
Thomas L. Seavey 1,196,230 1,000
(c) The only other matter submitted to shareholders was the
ratification of our stock option incentive plan. Results of the
voting, as certified by the Inspector of Elections,
were as follows:
For 987,192
Against 7,800
Abstain 600
Broker Non-votes 201,638
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 99.1 Written Statement of the Chief Executive Officer,
Pursuant to 18 U.S.C. ss. 1350
Exhibit 99.2 Written Statement of the Chief Financial Officer,
Pursuant to 18 U.S.C. ss. 1350
18
(b) Reports on Form 8-K
Hennessy Advisors, Inc. did not file any reports on Form 8-K during
the quarter ended March 31, 2003.
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 14, 2003 By: /s/ Teresa M. Nilsen
--------------------
Teresa M. Nilsen, Executive Vice
President, Chief Financial Officer
and Secretary
19
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
I, Neil J. Hennessy, Chief Executive Officer and President of Hennessy Advisors,
Inc., certify that:
1) I have reviewed this quarterly report on Form 10-QSB of Hennessy Advisors,
Inc. for the quarter ended March 31, 2003.
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered
by this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, is made known to us by others
within Hennessy Advisors, Inc., particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and,
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the Audit Committee
of the registrant's Board of Directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data, and have identified for the
registrant's auditors any material weaknesses in internal controls; and,
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and,
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Neil J. Hennessy Date: May 14, 2003
--------------------------------------------
Neil J. Hennessy, Chief Executive Officer and President
Hennessy Advisors, Inc.
20
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
I, Teresa M. Nilsen, Chief Financial Officer of Hennessy Advisors, Inc., certify
that:
1) I have reviewed this quarterly report on Form 10-QSB of Hennessy Advisors,
Inc. for the quarter ended March 31, 2003.
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered
by this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, is made known to us by others
within Hennessy Advisors, Inc., particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and,
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the Audit Committee
of the registrant's Board of Directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data, and have identified for the
registrant's auditors any material weaknesses in internal controls; and,
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and,
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Teresa M. Nilsen Date: May 14, 2003
--------------------------------------------
Teresa M. Nilsen, Chief Financial Officer
Hennessy Advisors, Inc.
21
EXHIBIT INDEX
-------------
Exhibit 99.1 Written Statement of the Chief Executive Officer,
pursuant to 18 U.S.C.ss.1350
Exhibit 99.2 Written Statement of the Chief Financial Officer,
pursuant to 18 U.S.C.ss.1350
22