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 December 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 December 31, 2004 was 1,635,142.
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 December 31, 2004 and
September 30, 2004 3
Statements of Income for the three months
ended December 31, 2004 and 2003 4
Statement of Changes in Stockholders' Equity
for the three months ended December 31, 2004 5
Statements of Cash Flows for the three months
ended December 31, 2004 and 2003 6
Notes to Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis 11
Item 3. Controls and Procedures 16
PART II. Other Information 16
Item 6. Exhibits 16
Signatures 17
2
Hennessy Advisors, Inc.
Balance Sheets
December 31, September 30,
2004 2004
---- ----
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 4,598,658 $ 4,568,323
Investments in marketable securities, at fair value 4,781 4,582
Investment fee income receivable 949,722 831,371
Prepaid expenses 128,669 65,004
Other current assets - 24,413
--------------- ----------------
Total current assets $ 5,681,830 $ 5,493,693
--------------- ----------------
Property and equipment, net of accumulated depreciation
of $75,675 and $100,200 $ 88,976 $ 88,092
Management contracts, net of accumulated amortization
of $628,627 14,142,520 14,142,520
Deferred income tax assets 126,900 126,900
Other assets 59,620 62,674
--------------- ----------------
Total assets $ 20,099,846 $ 19,913,879
=============== ================
Liabilities and Stockholders' Equity
Current liabilities:
Accrued liabilities and accounts payable $ 588,757 $ 1,416,505
Income taxes payable 422,837 772
Current portion of long-term debt 1,128,721 1,128,721
--------------- ----------------
Total current liabilities $ 2,140,315 $ 2,545,998
--------------- ----------------
Long-term debt $ 5,925,787 $ 6,207,967
Deferred income tax liabilities 548,030 452,200
--------------- ----------------
Total liabilities $ 8,614,132 $ 9,206,165
--------------- ----------------
Stockholders' equity:
Adjustable rate preferred stock, $25 stated value, 5,000,000
sharesauthorized: zero shares issued and outstanding $ - $ -
Common stock, no par value, 15,000,000 shares authorized:
1,635,142 shares issued and outstanding at December 31, 2004
and September 30, 2004 6,881,205 6,881,205
Additional paid-in capital 37,098 37,098
Retained earnings 4,567,411 3,789,411
--------------- ----------------
Total stockholders' equity $ 11,485,714 $ 10,707,714
--------------- ----------------
Total liabilities and stockholders' equity $ 20,099,846 $ 19,913,879
=============== ================
See accompanying notes to condensed financial statements
3
Hennessy Advisors, Inc.
Statements of Income
Three Months Ended December 31, 2004 and 2003
(Unaudited)
2004 2003
---- ----
Revenue
Investment advisory fees $ 2,401,371 $ 1,783,648
Shareholder service fees 282,544 222,179
Other 16,349 5,691
--------------- ---------------
Total revenue 2,700,264 2,011,518
Operating expenses
Compensation and benefits 594,974 474,560
General and administrative 234,783 227,819
Mutual fund distribution 472,266 442,066
Amortization and depreciation 11,039 5,750
--------------- ---------------
Total operating expenses 1,313,062 1,150,195
--------------- ---------------
Operating income 1,387,202 861,323
Interest expense 90,535 -
--------------- ---------------
Income before income tax expense 1,296,667 861,323
Income tax expense 518,667 336,816
--------------- ---------------
Net income $ 778,000 $ 524,507
=============== ===============
Basic earnings per share $ 0.48 $ 0.32
=============== ===============
.
Diluted earnings per share $ 0.46 $ 0.31
=============== ===============
See accompanying notes to condensed financial statements
4
Hennessy Advisors, Inc.
Statements of Changes in Stockholders' Equity
Three Months Ended December 31, 2004
(Unaudited)
Additional Total
Common Common Paid-in Retained Stockholders'
Shares Stock Capital Earnings Equity
------ ----- ------- -------- ------
Balances as of September 30, 2004 1,635,142 $6,881,205 $ 37,098 $ 3,789,411 $ 10,707,714
Net income for the three months
ended December 31, 2004 - - - 778,000 778,000
--------------------------------------------------------------------------------
Balances as of December 31, 2004 1,635,142 $6,881,205 $ 37,098 $ 4,567,411 $ 11,485,714
================================================================================
See accompanying notes to condensed financial statements
5
Hennessy Advisors, Inc.
Statements of Cash Flows
Three Months Ended December 31, 2004 and 2003
(Unaudited)
2004 2003
-------------- --------------
Cash flows from operating activities:
Net income $ 778,000 $ 524,507
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization (21,472) 5,750
Deferred income taxes 95,830 29,364
Unrealized gains on marketable securities (193) (336)
(Increase) decrease in operating assets:
Investment fee income receivable (118,351) (145,172)
Prepaid expenses (63,665) (9,256)
Other current assets 24,413 (14,855)
Increase (decrease) in operating liabilities:
Accrued liabilities and accounts payable (827,747) (143,488)
Income taxes payable 422,065 299,738
------------ ------------
Net cash provided by operating activities 288,880 546,252
------------ ------------
Cash flows provided by (used) in investing activities:
Purchases of property and equipment (8,871) (46,944)
Disposal of fully depreciated assets 32,512 -
Purchases of investments (6) (43)
Payments related to acquisition of management contracts - (151,843)
------------ ------------
Net cash provided by (used) in investing activities 23,635 (198,830)
------------ ------------
Cash flows used in financing activities:
Principal payments on long-term debt (282,180) -
------------ ------------
Net cash used in financing activities (282,180) -
------------ ------------
Net increase in cash and cash equivalents 30,335 347,422
Cash and cash equivalents at the beginning of the period 4,568,323 2,802,117
------------ ------------
Cash and cash equivalents at the end of the period $ 4,598,658 $ 3,149,539
============ ============
Supplemental disclosures of cash flow information: Cash paid for:
Income taxes $ 772 $ -
============ ============
Interest $ 87,901 $ -
============ ============
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 months ended December 31,
2004, are not necessarily indicative of results which may be expected for the
fiscal year ending September 30, 2005. For additional information, refer to the
financial statements for the fiscal year ended September 30, 2004, which are
included in the Company's annual report on Form 10-KSB, filed with the
Securities and Exchange Commission on December 14, 2004.
The operating activities of the Company consist primarily of providing
investment management services to five open-end mutual funds (the "Hennessy
Funds"). The Company serves as investment advisor of the Hennessy Cornerstone
Growth Fund, Hennessy Cornerstone Value Fund, Hennessy Balanced Fund, Hennessy
Total Return Fund and Hennessy Focus 30 Fund.
Management Contracts
Hennessy Advisors, Inc. has contractual management agreements with
Hennessy Funds, Inc. for the Hennessy Balanced Fund and the Hennessy Total
Return Fund and with Hennessy Mutual Funds, Inc. for the Hennessy Cornerstone
Growth Fund, the Hennessy Cornerstone Value Fund and the Hennessy Focus 30 Fund.
The management agreements were renewed by the Board of Directors of
Hennessy Funds, Inc. and Hennessy Mutual Funds, Inc., at their meeting on
February 10, 2004 for a period of one year. The agreements may be renewed from
year to year, as long as continuance is specifically approved at least annually
in accordance with the requirements of the 1940 Act. Each management agreement
will terminate in the event of its assignment, or it may be terminated by
Hennessy Funds, Inc. or Hennessy Mutual Funds, Inc. (either by the Board of
Directors or by vote of a majority of the outstanding voting securities of each
Fund) or by Hennessy Advisors, upon 60 days' prior written notice.
Under the terms of the management agreements, each Fund bears all
expenses incurred in its operation that are not specifically assumed by Hennessy
Advisors, the administrator or the distributor. Hennessy Advisors bears the
expense of providing office space, shareholder servicing, fullfilment, clerical
and bookkeeping services and maintaining books and records of the Funds.
7
Hennessy Advisors, as deemed necessary or by contract, may be required to waive
its management fee or subsidize other expenses for the Funds it manages.
Hennessy Advisors has agreed to cap the expense ratio of the Hennessy
Cornerstone Growth Fund, Hennessy Cornerstone Value Fund, Hennessy Total Return
Fund and Hennessy Balanced Fund through June 2005 (these contractual expense
caps were instituted under the terms of the proxy statement and prospectus dated
December 8, 2003 for the reorganization of certain Lindner funds into certain
Hennessy Funds)and to subsidize certain expenses. The expense ratios for each of
the funds are well below the contractual cap and subsidy is not currently
required.
Long-term Debt
On March 11, 2004, Hennessy Advisors, Inc. secured financing from US
Bank National Association to acquire the management contracts for certain
Lindner funds. The loan agreement requires fifty-nine (59) monthly payments in
the amount of $94,060 plus interest at the bank's prime rate as it may change
from time to time (5.25% at December 31, 2004), and is secured by the Company's
assets. The final installment of the then outstanding principal and interest is
due March 10, 2009.
In connection with securing the financing, Hennessy Advisors, Inc.
incurred loan costs in the amount of $61,052. These costs are included in other
assets and are being amortized on a straight-line basis over 60 months.
Investment Fee Revenue
Investment Advisory and Shareholder Service fees, which are the primary
sources of revenue, are recorded when earned. The Company receives investment
advisory fees monthly at an annual rate of 0.74% of the average daily net assets
of the Hennessy Cornerstone Growth Fund and the Hennessy Cornerstone Value Fund.
The annual advisory fee for the Hennessy Focus 30 Fund is 1.0%. The annual
advisory fee for the Hennessy Balanced Fund and Hennessy Total Return Fund is
0.60%.
Effective October 1, 2002, the Board of Directors of Hennessy Mutual
Funds, Inc. authorized an additional monthly fee for shareholder support
services provided to the Hennessy Cornerstone Growth and Hennessy Cornerstone
Value Fund, at an annual rate of 0.1% of average daily net assets.
Income Taxes
Income taxes are accounted for under the asset and liability method, in
accordance with the provisions of FASB Statement No. 109 "Accounting For Income
Taxes".
Under this method, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those differences are expected to be recovered or settled. Deferred tax assets
and liabilities are adjusted for the effects of changes in tax laws and rates on
the date of enactment.
8
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 rate of 40.0% for the three months ended
December 31, 2004, differs 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 months ended December 31, 2004
and 2003:
Three Months Ended
December 31,
------------------------------------------
2004 2003
---- ----
Weighted Average common
stock outstanding 1,635,142 1,626,142
Common stock equivalents
- stock options 56,349 46,675
------------------ -------------------
1,691,491 1,672,817
================== ===================
Stock-Based Compensation
On May 2, 2001, the Company established an incentive plan (the Plan)
providing for the issuance of options, stock appreciation rights, restricted
stock, performance awards, and stock loans for the purpose of attracting and
retaining executive officers and key employees. The maximum number of shares
which may be issued under the Plan is 25% of the outstanding common stock of the
Company, subject to adjustment by the compensation committee of the Board of
Directors. The 25% limitation shall not invalidate any awards made prior to a
decrease in the number of outstanding shares, even though such awards have
resulted or may result in shares constituting more than 25% of the outstanding
shares being available for issuance under the Plan. Shares available under the
9
Plan which are not awarded in one particular year may be awarded in subsequent
years. The compensation committee of the Board of Directors has the authority to
determine the awards granted under the Plan, including among other things, the
individuals who receive the awards, the times when they receive them, vesting
schedules, performance goals, whether an option is an incentive or nonqualified
option and the number of shares to be subject to each award. However, no
participant may receive options or stock appreciation rights under the Plan for
an aggregate of more than 50,000 shares in any calendar year. The exercise price
and term of each option or stock appreciation right will be fixed by the
compensation committee except that the exercise price for each stock option
which is intended to qualify as an incentive stock option must be at least equal
to the fair market value of the stock on the date of grant and the term of the
option cannot exceed 10 years. In the case of an incentive stock option granted
to a 10% shareholder, the exercise price must be at least 110% of the fair
market value on the date of grant and cannot exceed five years. Incentive stock
options may be granted only within ten years from the date of adoption of the
Plan. The aggregate fair market value (determined at the time the option is
granted) of shares with respect to which incentive stock options may be granted
to any one individual, which stock options are exercisable for the first time
during any calendar year, may not exceed $100,000. An optionee may, with the
consent of the compensation committee, elect to pay for the shares to be
received upon exercise of their options in cash or shares of common stock or any
combination thereof.
As the exercise price of all options granted under the Plan were equal
to the market price of the underlying common stock on the grant date, no
stock-based employee compensation cost was recognized in net income. During the
three months ended December 31, 2004, 77,000 options were granted. During the
three months ended December 31, 2003, 12,500 options were granted. The following
tables illustrate the effect on net income and earnings per share if the Company
had applied the fair value recognition provisions of FASB Statement No. 123,
"Accounting for Stock-Based Compensation", as amended, to options granted under
the stock option plan. Because the estimated value is determined as of the date
of grant, the actual value ultimately realized by the employee may be
significantly different.
As required under FASB Statement No. 123 and FASB Statement No. 148,
"Accounting for Stock-based Compensation - Transition and Disclosure", the
proforma effects of stock-based compensation on net income and earnings per
common share have been estimated at the date of grant using the Black-Scholes
option pricing model.
The value of options granted during the three months ended December 31,
2004, was determined at the date of grant by using an options pricing model with
an assumed risk-free interest rate of 3.44%, an expected life of 5 years, zero
dividends and a volatility factor of 16.15%:
Basic Diluted
Net Income EPS EPS
--------------------- ------------- ------------
For the three months ended December 31, 2004
--------------------------------------------
Net income $ 778,000 $ 0.48 $ 0.46
Fair value of stock options - net of tax 257,796 0.16 0.15
--------------------- ------------- ------------
Proforma net income $ 520,204 $ 0.32 $ 0.31
===================== ============= ============
10
The value of options granted during the three months ended December 31,
2003, 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 three months ended December 31, 2003
--------------------------------------------
Net income $ 524,507 $ 0.32 $ 0.31
Fair value of stock options - net of tax 12,825 0.01 -
----------------- ------------- ------------
Proforma net income $ 511,682 $ 0.31 $ 0.31
================= ============= ============
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.
Item 2. Management's Discussion and Analysis
Overview
Hennessy Advisors, Inc. ("Hennessy Advisors"), a California
corporation, is a publicly traded investment management firm. The Company's
principal business activity is managing and marketing mutual funds. Hennessy
Advisors is the investment manager of the Hennessy Funds, a family of five
no-load mutual funds. Each of the Hennessy Funds employs a unique mutual fund
money management approach combining time-tested stock selection formulas.
Neil J. Hennessy, Chairman, President and CEO of Hennessy Advisors also
serves as the Portfolio Manager, President and Director of the Hennessy Funds.
Hennessy Advisors, under the direction of Neil Hennessy, provides advisory
services to the Hennessy Funds, including investment research, supervision of
investments, conducting investment programs, including evaluation, sale and
reinvestment of assets, the placement of orders for purchase and sale of
securities, solicitation of brokers to execute transactions and the preparation
and distribution of reports and statistical information.
Hennessy Funds pay fees to Hennessy Advisors for these services, which
are charged as a percentage of the average daily net value of the assets under
management in the funds. Fees paid to Hennessy Advisors are based on the value
of the funds managed and fluctuate with changes in the total value of the assets
under management. Hennessy Advisors' total assets under management were $1.419
billion as of December 31, 2004, of which $1.376 billion were mutual fund
assets. Hennessy Advisors also provides shareholder servicing for the Hennessy
Funds, which consists primarily of providing a call center to respond to
shareholder inquiries, including specific mutual fund account information.
11
Hennessy Advisors' principal business activities are affected by many
factors, including redemptions by mutual fund shareholders, general economic and
financial conditions, movement of interest rates and competitive conditions.
Although we seek to maintain cost controls, a significant portion of our
expenses are fixed and do not vary greatly. As a result, substantial
fluctuations can occur in our revenue and net income from period to period.
Hennessy Advisors distributes its funds through third-party
broker/dealers and independent financial institutions such as Charles Schwab,
Inc., Fidelity, TD Waterhouse and Pershing. These distribution platforms are
considered an integral part of Hennessy Advisors' sales/distribution strategy.
Hennessy Advisors participates in "no transaction fee" ("NTF") programs with
these companies, which allow customers to purchase the Hennessy Funds through
third party distribution channels without paying a transaction fee. The use of
"NTF" programs and expansion of these programs have been, and continue to be, an
important part of our business growth strategy. Hennessy Advisors compensates
these third party distributors under a pre-determined contractual agreement.
The principal assets on our balance sheet represent the capitalized
costs of investment advisory agreements with all five mutual funds. As of
December 31, 2004, the management contracts asset had a net balance of
$14,142,520 and includes the capitalized Lindner transaction, which began on
February 27, 2004 and completed on March 11, 2004 with a total cost of
$8,464,931.
The principal liability on our balance sheet is the long-term debt
incurred for the acquisition of the Lindner Funds contract. On March 11, 2004,
Hennessy Advisors, Inc. secured financing from US Bank National Association to
acquire the management contracts for certain Lindner funds. The agreement
requires fifty-nine (59) monthly payments in the amount of $94,060 plus interest
at the bank's prime rate as it may change from time to time (5.25% at December
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 December
31, 2004 and 2003:
12
Three Months Ended December 31,
-------------------------------------------------------------
2004 2003
-------------------------------------------------------------
Percent Percent
of Total of Total
Amounts Revenue Amountse Revenue
---------------------------------------------------------------
Revenue:
Investment advisory fees $ 2,401,371 88.9% $ 1,783,648 88.7%
Shareholder service fees 282,544 10.5 222,179 11.0
Other 16,349 0.6 5,691 0.3
-------------------------------------------------------------
Total revenue 2,700,264 100.0 2,011,518 100.0
-------------------------------------------------------------
Operating expenses:
Compensation and benefits 594,974 22.0 474,560 23.6
General and administrative 234,783 8.7 227,819 11.3
Mutual fund distribution 472,266 17.5 442,066 22.0
Amortization and depreciation 11,039 0.4 5,750 0.3
-------------------------------------------------------------
Total operating expenses 1,313,062 48.6 1,150,195 57.2
-------------------------------------------------------------
Operating income 1,387,202 51.4 861,323 42.8
Interest expense 90,535 3.4 - -
-------------------------------------------------------------
Income before income tax expense 1,296,667 48.0 861,323 42.8
Income tax expense 518,667 19.2 336,816 16.7
-------------------------------------------------------------
Net income $ 778,000 28.8% $ 524,507 26.1%
=============================================================
Total revenue increased $688,746 (+34.2%) in the three months ended
December 31, 2004, from $2,011,518 in the same period of 2003, primarily due to
fees earned from increased mutual fund assets under management. In total, assets
in the mutual funds we manage increased to $1.376 billion as of December 31,
2004, compared to $1.013 billion as of December 31, 2003(+35.9%). The increase
in assets under management was a direct result of increased market valuations of
approximately $166.6 million and net purchases and acquisitions of $196.8
million. The revenue we earn from the funds we manage increased $617,723
(+34.6%) in the three months ended December 31, 2004, while shareholder service
fees increased $60,365 (+27.2%).
Total operating expenses increased $162,867 (+14.2%) in the three
months ended December 31, 2004, from $1,150,195 in the same period of 2003. The
increase resulted from higher compensation expense, increases in several
components of general and administrative expense and mutual fund distribution
costs. As a percentage of total revenue, total operating expenses decreased to
48.6% in the three months ended December 31, 2004, compared to 57.2% in the
prior comparable period.
Compensation and benefits increased $120,414 (+25.4%) in the three
months ended December 31, 2004, from $474,560 in the prior comparable period.
The increase resulted from the addition of a Chief Compliance Officer and salary
increases and performance incentives for officers and staff. As a percentage of
total revenue, compensation and benefits decreased to 22.0% for the three months
ended December 31, 2004, compared to 23.6% in the prior comparable period.
13
General and administrative expense increased $6,964 (+3.1%), in the
three months ended December 31, 2004, from $227,819 in the three months ended
December 31, 2003, primarily due to increases in business promotion activities
and insurance costs. As a percentage of total revenue, general and
administrative expense decreased to 8.7% in the three months ended December 31,
2004, from 11.3% in the prior comparable period.
Mutual fund distribution expenses increased $30,200 (+6.8%) in the
three months ended December 31, 2004, from $442,066 in the three months ended
December 31, 2003. As a percentage of total revenue, distribution expenses
decreased to 17.5% for the three months ended December 31, 2004, compared to
22.0% in the prior comparable period. The proportion of assets held by NTF
providers has declined in relation to assets held at other financial
institutions. This change in proportion has lowered the percentage of NTF
expenses in relation to total revenues.
Amortization and depreciation expense increased $5,289 in the three
months ended December 31, 2004, from $5,750 for the three months ended December
31, 2003, resulting from amortization of loan acquisition costs and purchases of
furniture and equipment.
Interest expense of $90,535 was generated from the US Bank National
Association $7.9 million loan used to acquire assets from Lindner Asset
Management, Inc. Interest accrues at the prime rate in effect as it may change
from time to time (5.25% at December 31, 2004).
For the three months ended December 31, 2004, the provision for income
taxes increased $181,851 resulting from an increase in pre-tax income of
$435,344.
Net income increased $253,493 to $778,000 in the three months ended
December 31, 2004, compared to $524,507 in the prior comparable period, as a
result of the factors discussed above.
Liquidity and Capital Resources
As of December 31, 2004, Hennessy Advisors, Inc. had cash and cash
equivalents of $4,598,658.
With the exception of property and equipment and management contracts
acquired, which amount to a combined $14,231,496 as of December 31, 2004, the
remaining assets are very liquid, consisting primarily of cash and receivables
derived from mutual fund asset management activities. Total assets as of
December 31, 2004 were $20,099,846, compared to $19,913,879 at September 30,
2004, an increase of $185,967 or 0.9%.
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 December 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
14
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 Weak market conditions or loss of investor confidence in the
mutual fund industry may lower our assets under management and
reduce our revenues and income.
o We face strong competition from numerous and sometimes larger
companies.
o Changes in the distribution channels on which we depend could
reduce our revenues or hinder our growth.
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 and
compliance costs are likely to increase due to increased
securities industry legislation.
o Business growth through asset acquisitions may not proceed as
planned and result in significant expenses adversely affecting
earnings.
o Retaining the mutual fund assets associated with acquired
management contracts may prove difficult and result in lower than
expected revenues.
o International conflicts and the ongoing threat of terrorism may
adversely affect the general economy, financial and capital
markets and our business.
o During the next several years, interest rate fluctuations,
particularly increases in the prime rate, may increase our debt
service payments.
Although we seek to maintain cost controls, a significant portion of
our expenses are fixed and do not vary greatly. As a result, substantial
fluctuations in our revenue can directly impact our net income from period to
period. Risk factors are described in more detail in the "Risk Factors" section
of the Company's Annual Report, filed on Form 10-KSB with the U.S. Securities
and Exchange Commission on December 14, 2004.
15
Item 3. Controls and Procedures
Under the supervision and with the participation of the Company's
management, including the Company's principal executive officer and principal
financial officer, the Company conducted an evaluation of its disclosure
controls and procedures, as such term is defined under Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as amended, as of the end
of the period covered by this report. Based on such evaluation, the Company's
principal executive officer and principal financial officer have concluded that
the Company's disclosure controls and procedures are effective.
There has been no significant change in our internal controls over
financial reporting identified in connection with the foregoing evaluation that
occurred during the last quarter and that has materially affected, or is
reasonably likely to materially affect, our internal controls over financial
reporting.
Part II. OTHER INFORMATION
There were no reportable events for items 1 through 5.
Item 6. 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
16
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: January 27, 2005 By: /s/ Teresa M. Nilsen
------------------------------------
Teresa M. Nilsen, Executive Vice
President, Chief Financial Officer
and Secretary
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
17