AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON ------------, 2005
REGISTRATION NO. 333-------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
HENNESSY ADVISORS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 6282 (I.R.S.
(STATE OR OTHER (PRIMARY STANDARD EMPLOYER IDENTIFICATION
JURISDICTION OF INDUSTRIAL CLASSIFICATION 68-NO.)227
INCORPORATION OR CODE NUMBER)
ORGANIZATION)
750 GRANT AVENUE, SUITE 100
NOVATO, CALIFORNIA 94945
(415) 899-1555
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES.)
NEIL J. HENNESSY
CHIEF EXECUTIVE OFFICER
HENNESSY ADVISORS, INC.
750 GRANT AVENUE, SUITE 100
NOVATO, CALIFORNIA 94945
(415) 899-1555
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
LINDA Y. KELSO JOHN F. HARTIGAN
FOLEY & LARDNER LLP MORGAN, LEWIS & BOCKIUS LLP
ONE INDEPENDENT DRIVE, SUITE 1300 300 SOUTH GRAND AVENUE, TWENTY-SECOND FLOOR
JACKSONVILLE, FLORIDA 32202-5017 LOS ANGELES, CALIFORNIA 90071-3132
(904) 359-2000 (213) 612-2500
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this registration statement is declared effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
TITLE OF EACH PROPOSED PROPOSED
CLASS OF MAXIMUM MAXIMUM
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
---------------- ----------------- ---------------- --------------------- ----------------
COMMON STOCK 1,800,000 SHARES $26.65 $47,970,000 $5,646.07
(1) Includes 187,500 shares that are subject to the underwriter's over-
allotment option.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) of the Securities Act of 1933 and based upon
the average of the high and low prices of the common stock as reported
on the OTC Bulletin Board on July 22, 2005.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and we are not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED ----------, 2005
PRELIMINARY PROSPECTUS
Shares
---------
[INSERT HENNESSY ADVISORS LOGO]
Hennessy Advisors, Inc.
Common Stock
We are offering -------- shares of our common stock and the selling
shareholders named in this prospectus are offering --------- shares of our
common stock. We will not receive any proceeds from the sale of the shares of
our common stock being sold by the selling shareholders. Our common stock is
currently traded on the OTC Bulletin Board under the symbol "HNNA.OB." The last
reported sale price of our common stock on the OTC Bulletin Board on ----------,
2005 was $ --------- per share. We intend to apply for quotation of our common
stock on The NASDAQ National Market under the symbol "HNNA."
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. BEFORE
BUYING ANY SHARES, YOU SHOULD CAREFULLY CONSIDER THE MATERIAL RISKS OF INVESTING
IN OUR COMMON STOCK DESCRIBED IN "RISK FACTORS" BEGINNING ON PAGE 2 OF THIS
PROSPECTUS.
PER SHARE TOTAL
--------- -----
Public offering price $ $
Underwriting discount $ $
Proceeds, before expenses, to us $ $
Proceeds, before expenses, to the selling shareholders $ $
The underwriters may also purchase up to an additional ----- shares from us
at the public offering price, less the underwriting discount, within 30 days
from the date of this prospectus to cover over-allotments.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The underwriters expect to deliver the shares on or about ------, 2005.
A.G. EDWARDS
The date of this prospectus is --------, 2005.
TABLE OF CONTENTS
PAGE
----
Prospectus Summary...........................................................1
Risk Factors.................................................................9
Cautionary Statement Regarding Forward-Looking Statements...................15
Use of Proceeds.............................................................16
Price Range of Common Stock.................................................17
Dividend Policy.............................................................17
Capitalization..............................................................18
Selected Financial Data.....................................................19
Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................21
Business....................................................................30
Management..................................................................41
Executive Compensation......................................................43
Principal and Selling Shareholders..........................................47
Description of Capital Stock................................................48
Underwriting................................................................49
Legal Matters...............................................................52
Experts.....................................................................52
Where You Can Find More Information.........................................52
Index to Financial Statements..............................................F-1
i
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus
and may not contain all of the information that you should consider before
investing in our common stock. To understand the terms of the securities being
offered by this prospectus, you should read this entire prospectus carefully,
including the section entitled "Risk Factors," the documents identified in the
prospectus under the caption "Where You Can Find More Information" and our
financial statements and the notes to those statements. In this prospectus, the
terms "Hennessy," "we," "us" and "our" refer to Hennessy Advisors, Inc. and the
terms "our mutual funds" or the "Hennessy Funds" refers to the six mutual funds
that we manage. All share and per share amounts have been restated to reflect a
3-for-2 stock split that occurred on March 8, 2005. Unless expressly provided
otherwise, all information assumes that the underwriters do not exercise their
over-allotment option.
OVERVIEW
We are a publicly traded investment management firm. Our principal
business activity is managing, servicing and marketing our six open-end mutual
funds. All of our mutual funds are no-load, meaning investors do not pay any
upfront or deferred sales charges. We use quantitative stock selection
strategies to manage each of the Hennessy Funds. The net assets of the mutual
funds we manage have increased by 856% from $194 million on September 30, 2001
to $1.67 billion as of July 1, 2005, including approximately $299 million in net
assets added on July 1, 2005 in connection with the acquisition of the
management agreement for The Henlopen Fund, which we renamed the Hennessy
Cornerstone Growth Fund, Series II. During this same period, the total number
of shareholders in our mutual funds has increased by 845% from 10,629
shareholders on September 30, 2001 to 100,398 shareholders on July 1, 2005.
Each of the Hennessy Funds pay fees to us for our management services.
Management services include 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. Some of our mutual funds
also pay fees to us for shareholder servicing. Shareholder servicing consists
primarily of providing a call center to respond to shareholder inquiries,
including inquiries regarding specific mutual fund account and investment
information. The fees that we receive for management services and shareholder
servicing are based on a percentage of the average daily net asset value of our
mutual funds.
HISTORY
We have been an investment advisor since 1990. From 1990 until 1996, we
provided management services to private clients and limited partnerships
utilizing strategies similar to those we use in advising our mutual funds today.
In 1996, we launched our first mutual fund, the Hennessy Balanced Fund. In
1998, we launched our second mutual fund, the Hennessy Total Return Fund.
In 2000, we began acquiring the rights to manage the assets of additional
mutual funds by entering into agreements with the funds' investment advisors to
purchase certain assets related to such funds. When we acquire the rights to
manage the assets of a mutual fund, we generally either enter into a management
agreement covering the mutual fund or reorganize the assets of the mutual fund
into one of our existing mutual funds. In this prospectus, we refer to either
of these types of transactions as "acquiring a management agreement."
In June 2000, we completed our first acquisition by entering into a
management agreement covering the O'Shaughnessy Cornerstone Growth Fund and the
O'Shaughnessy Cornerstone Value Fund and changed the names of these funds to the
Hennessy Cornerstone Growth Fund and the Hennessy Cornerstone Value Fund. In
connection with this acquisition, we obtained an exclusive, perpetual license to
use the names and investment strategies of the Cornerstone Growth Fund and
Cornerstone Value Fund from Netfolio, Inc. These two mutual funds had
approximately $197 million in combined net assets at the time we began managing
them.
In September 2003, we acquired the management agreement for the SYM Select
Growth Fund. In connection with that acquisition, we launched our fifth mutual
fund, the Hennessy Focus 30 Fund, into which we reorganized the assets of the
SYM Select Growth Fund. At the time of this acquisition, the SYM Fund had
approximately $35 million in net assets.
1
In March 2004, we acquired the management agreements for five funds, which
we refer to as the Lindner Funds in this prospectus, that were managed by
Lindner Asset Management, Inc. In connection with this acquisition, the assets
of the Lindner Funds were reorganized into four of our existing mutual funds.
At the time of this acquisition, the Lindner Funds had approximately $301
million in combined net assets.
On July 1, 2005, we acquired the management agreement for The Henlopen Fund
and changed the name to the Hennessy Cornerstone Growth Fund, Series II. At the
time of this acquisition, The Henlopen Fund had approximately $299 million in
net assets.
OPERATING PLATFORM
BUSINESS STRATEGY. We intend to increase our revenues by increasing our
assets under management and to increase our profitability through the following
key business strategies.
o UTILIZE OUR BRANDING AND MARKETING CAMPAIGN FOR GROWTH. We will
continue our efforts to make Hennessy a name readily recognizable by
investors through frequent print media, radio and television
appearances. We appear in national print or broadcast media an
average of once every three to four days. We believe that the breadth
and consistency of this campaign will continue to enhance investor
awareness of our mutual funds and of the Hennessy name.
o EXPAND OUR DISTRIBUTION NETWORK. New investors can invest in our
mutual funds through direct investments, mutual fund supermarkets and
third party investment professionals. We are working to increase
accessibility to investors of our mutual funds by (1) expanding our
distribution network to additional mutual fund supermarkets, (2)
increasing our current base of investment professionals that utilize
no-load mutual funds for their clients and (3) securing participation
in the platforms of national full-service firms that permit their
investment professionals to utilize no-load funds for their clients.
o GROW ORGANICALLY. We seek to attract new investors who make
investments in our mutual funds. We believe that our mutual funds
appeal to investors who favor statistical analysis and empirical
evidence as the basis for investment decisions.
o PURSUE SELECTIVE ACQUISITIONS. We intend to continue acquiring
management agreements for mutual funds while managing the acquisition
process to be highly accretive to our shareholders.
o DELIVER STRONG, HIGH QUALITY FINANCIAL RESULTS. We seek to manage our
investment management business to the highest regulatory, ethical and
business standards while strenuously controlling costs and creating
high margins for the Hennessy shareholders. For the year ended
September 30, 2004, we had a pre-tax operating margin of 50.0%.
INVESTMENT STRATEGY. We manage each of the Hennessy Funds using a
quantitative stock selection strategy that we have evaluated and tested over
historical periods for hypothetical performance results. We manage our funds
according to strict, formulaic investment strategies and do not try to outsmart
or time the market. We purchase a portfolio of securities for each of our
mutual funds, as dictated by the funds' strategies, and hold those securities
for approximately one year. A brief description of each of our mutual funds
follows.
o HENNESSY CORNERSTONE GROWTH FUND (HFCGX). The Hennessy Cornerstone
Growth Fund seeks long-term growth of capital by investing primarily
in small-cap, growth-oriented companies.
o HENNESSY CORNERSTONE GROWTH FUND, SERIES II (FORMERLY KNOWN AS THE
HENLOPEN FUND) (HENLX). The Hennessy Cornerstone Growth Fund, Series
II seeks long-term capital appreciation. This fund utilizes the same
investment strategy as the Hennessy Cornerstone Growth Fund but
selects its portfolio at a different time of the year, thus creating a
substantially different portfolio of stocks.
o HENNESSY CORNERSTONE VALUE FUND (HFCVX). The Hennessy Cornerstone
Value Fund seeks total return, consisting of capital appreciation and
current income, by investing in dividend-paying, large-cap companies.
2
o HENNESSY TOTAL RETURN FUND (HDOGX). The Hennessy Total Return Fund
seeks total return, consisting of capital appreciation and current
income, and seeks to exceed, in the long run, the returns of the Dow
Jones Industrial Average but with lower associated risk. Through the
defined strategy of the fund, approximately 75% of its return is based
on the 10 highest dividend yielding common stocks of the Dow Jones
Industrial Average and the remaining 25% of its return is based on
U.S. Treasury securities with a maturity of less than one year. The
10 highest dividend yielding common stocks in the Dow Jones Industrial
Average are commonly referred to as the "Dogs of the Dow" stocks.
o HENNESSY FOCUS 30 FUND (HFTFX). The Hennessy Focus 30 Fund seeks
long-term growth of capital by investing in mid-cap, growth-oriented
companies.
o HENNESSY BALANCED FUND (HBFBX). The Hennessy Balanced Fund seeks a
combination of capital appreciation and current income by investing in
a balance of the Dogs of the Dow stocks and U.S. Treasury securities
with a maturity of less than one year.
HISTORICAL FUND INVESTMENT PERFORMANCE. The following table presents the
average annualized returns for each of our mutual funds and the relevant
benchmark indices for the one-year, three-year, five-year and since inception
periods ended June 30, 2005. Although we did not begin managing the Hennessy
Cornerstone Growth Fund and Hennessy Cornerstone Value Fund until June 2000, we
have included historical performance information for these funds from their
inception date of November 1, 1996 because these funds were previously managed
according to the same strategies that we use today. We have not included
performance information for the Hennessy Cornerstone Growth Fund, Series II
because we only began managing that fund on July 1, 2005 and the previous
manager did not follow the Cornerstone Growth strategy. Returns are presented
net of all expenses borne by mutual fund shareholders, but are not net of fees
waived or expenses borne by us. The past investment performance of our mutual
funds is no guarantee of future performance. All of these funds have
experienced negative performance over various time periods in the past and may
do so again in the future.
SINCE
INCEPTION
HENNESSY CORNERSTONE GROWTH FUND 1 YEAR 3 YEARS 5 YEARS (11/01/96)
-------------------------------- ------ ------- ------- ----------
Average Annual Total Return 15.07% 14.32% 11.89% 16.18%
S&P 500(1)(2) 6.32% 8.28% (2.37%) 8.54%
Russell 2000 Index(2)(3) 9.45% 12.81% 5.71% 8.98%
SINCE
INCEPTION
HENNESSY CORNERSTONE VALUE FUND 1 YEAR 3 YEARS 5 YEARS (11/01/96)
-------------------------------- ------ ------- ------- ----------
Average Annual Total Return 5.83% 6.79% 7.88% 6.89%
S&P 500(1)(2) 6.32% 8.28% (2.37%) 7.93%
Russell 1000 Index(2)(4) 7.92% 9.19% (1.89%) 8.19%
SINCE
INCEPTION
HENNESSY TOTAL RETURN FUND 1 YEAR 3 YEARS 5 YEARS (07/29/98)
-------------------------------- ------ ------- ------- ----------
Average Annual Total Return 3.03% 4.67% 6.15% 3.47%
S&P 500(1)(2) 6.32% 8.28% (2.37%) 2.36%
Dow Jones Industrial Average(2)(5) 0.66% 5.92% 1.69% 4.04%
90-Day U.S. Treasury Securities(2)(6) 2.04% 1.47% 2.49% 3.18%
3
SINCE
INCEPTION
HENNESSY FOCUS 30 FUND 1 YEAR 3 YEARS 5 YEARS (09/17/03)
-------------------------------- ------ ------- ------- ----------
Average Annual Total Return 22.77% N/A N/A 19.82%
S&P 500(1)(2) 6.32% N/A N/A 10.65%
S&P 400 Mid-cap(2)(7) 14.03% N/A N/A 17.38%
SINCE
INCEPTION
HENNESSY BALANCED FUND 1 YEAR 3 YEARS 5 YEARS (03/08/96)
-------------------------------- ------ ------- ------- ----------
Average Annual Total Return (0.17%) 1.93% 3.33% 5.03%
S&P 500(1)(2) 6.32% 8.28% (2.37%) 9.35%
Dow Jones Industrial Average(2)(5) 0.66% 5.92% 1.69% 9.04%
90-Day U.S. Treasury Securities(2)(6) 2.04% 1.47% 2.49% 3.71%
(1) The S&P 500 is the Standard & Poor's Composite Index of 500 stocks, a
widely recognized index of common stocks.
(2) Reflects no deduction for fees or expenses.
(3) The Russell 2000 Index is a recognized small-cap index of the 2,000
smallest stocks of the Russell 3000 Index, which is comprised of the
3,000 largest U.S. stocks as determined by total market
capitalization.
(4) The Russell 1000 Index is comprised of large-cap U.S. stocks and is
commonly used as a benchmark for U.S. large-cap funds.
(5) The Dow Jones Industrial Average is an index of common stocks
comprised of major industrial companies and assumes reinvestment of
dividends.
(6) We believe 90-day U.S. Treasury securities most closely approximate
the treasury securities held by the Total Return Fund and Balanced
Fund because the Total Return Fund and Balanced Fund purchase treasury
securities having a maturity of less than one year.
(7) The S&P 400 Mid-Cap Index is a widely recognized index of common
stocks.
NET ASSETS OF OUR MUTUAL FUNDS. We generate all of our operating revenues
by providing management and shareholder services to our mutual funds. The
revenues that we receive from our mutual funds are based on the amount of
average daily net assets in the funds. Following is a table showing the amount
of net assets of each of our funds as of June 30, 2005, except in the case of
the Hennessy Cornerstone Growth Fund, Series II, which is shown as of July 1,
2005.
NET ASSETS
--------------
(IN THOUSANDS)
Cornerstone Growth Fund $ 995,244
Cornerstone Growth Fund, Series II 299,225
Cornerstone Value Fund 191,001
Total Return Fund 91,658
Focus 30 Fund 73,890
Balanced Fund 21,373
----------
TOTAL $1,672,391
----------
----------
4
DEVELOPMENT OF NEW INVESTMENT STRATEGIES. We begin developing new
investment strategies by identifying client needs and reviewing asset allocation
tables to determine where we can augment our family of mutual funds. Once we
identify an attractive market segment, we develop a new investment strategy by
screening the appropriate universe of stocks with a set of parameters that we
believe identify stocks that will produce higher long-term returns with lower
associated risk than their relative indices. We introduce new investment
strategies into the marketplace by opening and directly marketing a new mutual
fund, by acquiring the management agreement for an existing mutual fund and
implementing our new strategy or potentially by changing the investment strategy
of one of our existing funds.
ACQUISITION STRATEGY AND MARKET OPPORTUNITY. We began acquiring management
agreements in June 2000. We primarily focus on acquiring retail-oriented, no-
load mutual funds with less than $500 million in net assets. The overall U.S.
market for retail-oriented, no-load mutual funds consists of over 2,400
different funds with net assets ranging from less than $1 million to over $100
billion. Of these 2,400 funds, approximately 70%, or 1,700 funds, meet our
acquisition size criteria with less than $500 million in net assets. An active
market for the acquisition of mutual fund management agreements has developed in
recent years, with over 80 such acquisitions having been completed since the
beginning of 2000. Additionally, we believe the regulatory burden imposed upon
the mutual fund industry has compressed the margins of smaller mutual fund
managers, making those managers more receptive to an acquisition. We believe
that we are well positioned to benefit from these attractive acquisition trends
and from the increasing supply of potential targets.
Following are the net assets added to our mutual funds through completed
acquisitions (in thousands):
NET ASSETS
OF ACQUIRED
MUTUAL FUND
DATE OF ON DATE OF
ACQUISITION PRE-ACQUISITION MUTUAL FUND NAME ACQUISITION MUTUAL FUND AFTER CLOSING
----------- -------------------------------- ----------- -------------------------
June 30, 2000 O'Shaughnessy Cornerstone Growth Fund $177,200 Hennessy Cornerstone Growth Fund
June 30, 2000 O'Shaughnessy Cornerstone Value Fund 19,367 Hennessy Cornerstone Value Fund
September 17, 2003 SYM Select Growth Fund 34,928 Hennessy Focus 30 Fund
February 26, 2004 Lindner Growth and Income Fund 179,368 Hennessy Cornerstone Value Fund
February 26, 2004 Lindner Large Cap Growth Fund 96,448 Hennessy Total Return Fund
February 26, 2004 Lindner Communications Fund 8,218 Hennessy Cornerstone Growth Fund
February 26, 2004 Lindner Small-Cap Growth Fund 7,134 Hennessy Cornerstone Growth Fund
March 11, 2004 Lindner Market Neutral Fund 10,046 Hennessy Balanced Fund
July 1, 2005 The Henlopen Fund 299,225 Hennessy Cornerstone Growth Fund, Series II
--------
TOTAL $831,934
--------
--------
COMPETITIVE STRENGTHS
We are well positioned to take advantage of our key competitive strengths,
which are summarized below.
o QUANTITATIVE PORTFOLIO MANAGEMENT STRATEGY. We believe our
quantitative investment philosophy appeals to investors who favor
statistical analysis and empirical evidence as the basis for
investment decisions. As our brand recognition continues to grow, we
believe that we will increase organic growth through new investments
in our mutual funds.
o SCALABLE BUSINESS MODEL. By adhering to our quantitative portfolio
management philosophy, we are able to test new investment strategies
against historical data quickly and cost effectively and implement
them without significant cost. We expect to maintain strong margins
as our assets under management grow since we do not foresee the need
to add personnel proportional to the increase in assets under
management.
o DEMONSTRABLE ACQUISITION EXPERTISE. Since June 2000, we have
successfully acquired and integrated nine mutual funds into our
operating platform. This equates to the addition of $832 million in
net assets to our family of mutual funds over a period of
approximately five years, based on the net assets of the relevant
funds at the time we completed each acquisition.
5
Acquisitions and organic growth through new investments in our mutual funds
combined to increase the net assets of the mutual funds that we manage and the
total number of shareholders in our mutual funds by over six times from
September 30, 2001 to September 30, 2004. During that same period, our revenues
grew at a similar rate, as would be expected, but the low cost structure and
scalability of our business model allowed our net income to increase by over 20
times.
MUTUAL FUND NET ASSETS
($ MILLIONS)
----------------------
2001 $194
2002 $374
2003 $835
2004 $1,222
NUMBER OF SHAREHOLDERS IN THE HENNESSY FUNDS
--------------------------------------------
2001 10,629
2002 31,408
2003 51,023
2004 77,457
NET INCOME
($ THOUSANDS)
-------------
2001 $199
2002 $309
2003 $1,062
2004 $2,765
The address of our principal executive office is 750 Grant Avenue, Suite
100, Novato, California 94945, and our general telephone numbers are (800) 966-
4354 and (415) 899-1555. Our website address is www.hennessyadvisors.com. The
information on, or that can be accessed through, our website is not part of this
prospectus.
6
THE OFFERING
Common Stock offered
by us --------- shares of common stock, or
--------- shares if the underwriters exercise their
overallotment option in full.
Common Stock offered
by the selling
shareholders --------- shares of common stock.
Shares of common stock
outstanding after the
offering. --------- shares of common stock, or
--------- shares if the underwriters exercise their
overallotment option in full.
Use of proceeds We estimate that we will use the net proceeds that
we receive from the sale of the shares of common
stock sold by us in the offering of approximately
$--- million to:
o repay in full our bank loan in the amount
of $---;
o fund acquisitions of management
agreements that we may identify from time
to time; and
o for general corporate purposes.
We will not receive any proceeds from the sale of
shares of our common stock by the selling
shareholders. For more information, see "Use of
Proceeds" on page 16.
Voting rights Each share of our common stock entitles its holder
to one vote on all matters to be voted on by
stockholders generally.
Dividend
policy We paid an annual dividend in March 2005 of $0.10
per share. Upon the successful completion of this
offering, we intend to begin paying quarterly
dividends.
Risk factors The "Risk Factors" section included in this
prospectus contains a discussion of factors that
you should carefully read and consider before
deciding to invest in shares of our common stock.
Listing Our shares are currently sold over the counter
under the symbol "HNNA.OB." We intend to apply for
quotation of our common stock on The NASDAQ
National Market under the symbol "HNNA."
7
SUMMARY FINANCIAL DATA
The statement of operations data set forth below for the fiscal years ended
September 30, 2002, 2003 and 2004 are derived from our audited financial
statements, which are included in this prospectus. The statement of operations
data for the fiscal years ended September 30, 2000 and 2001 have been derived
from our audited financial statements not included in this prospectus. The
following summary interim financial data as of March 31, 2005 and for the six
months ended March 31, 2004 and 2005 are unaudited and are derived from the
interim financial statements included in this prospectus. In the opinion of
management, the unaudited data have been prepared on the same basis as the
audited financial statements and include all adjustments, consisting of normal
recurring adjustments, necessary for fair presentation. Results for interim
periods are not indicative of results for a full year. This information should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Selected Financial Data" and our
financial statements and notes to our financial statements included in this
prospectus.
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
-------------------------------------------- ----------------
2000 2001 2002 2003 2004 2004 2005
---- ---- ---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA: (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Total revenue $663 $1,674 $2,270 $4,787 $9,545 $4,402 $5,512
Operating income 26 448 500 1,783 4,773 1,989 2,863
Net income (loss) (47) 199 309 1,062 2,765 1,200 1,607
Earnings (loss) per share (1)
Basic (0.04) 0.16 0.15 0.43 1.13 0.49 0.65
Diluted (0.04) 0.14 0.15 0.43 1.09 0.47 0.63
Dividends per share -- -- -- -- -- -- 0.10
(1) All per share amounts have been restated to reflect a 3-for-2 stock
split that occurred on March 8, 2005.
The as adjusted presentation below gives effect to the sale by us of
------------ shares of common stock offered hereby at an assumed offering
price of $----, after deducting estimated underwriting costs and commissions and
estimated offering expenses and including $--------- that we will receive upon
exercise of ---------- options to purchase common stock being offered by some of
the selling shareholders.
MARCH 31, 2005
--------------
ACTUAL AS ADJUSTED
------ -----------
(UNAUDITED)
BALANCE SHEET DATA: (IN THOUSANDS)
Total assets $20,425
Short-term obligations 1,129
Long-term debt(1) 5,644
Total liabilities 8,314
Total shareholders' equity 12,111
(1) Does not include $6.7 million of long-term debt we incurred on July 1,
2005 in connection with our acquisition of the management agreement
for The Henlopen Fund (now known as the Hennessy Cornerstone Growth
Fund, Series II).
8
RISK FACTORS
Before you decide to invest in our common stock, you should carefully
consider the risks described below, as well as the other information contained
in this prospectus, including our financial statements and notes. Our business,
results of operations and financial condition may be materially and adversely
affected by any of the following risks.
RISKS RELATING TO OUR BUSINESS
OUR REVENUES WILL DECLINE IF THE VALUE OF THE SECURITIES HELD BY THE MUTUAL
FUNDS WE MANAGE DECLINES.
We derive all of our operating revenues from management and shareholder
service fees paid to us by the mutual funds we manage. These fees are based on
the amount of average daily net assets of our mutual funds. The securities
markets are inherently volatile and may be affected by factors beyond our
control, including global economic conditions, interest rate fluctuations,
inflation rate increases and other factors that are difficult to predict.
Volatility in the securities markets, and the equity markets in particular,
could reduce the net assets of our mutual funds and consequently reduce our
revenues. In addition to declines in the equity markets, failure of these
markets to sustain prior levels of growth or continued short-term volatility in
these markets could result in investors withdrawing their investments from our
mutual funds or decreasing their rate of investment, either of which would
likely adversely affect our revenues.
INVESTORS IN OUR MUTUAL FUNDS CAN REDEEM THEIR INVESTMENTS IN OUR FUNDS AT ANY
TIME AND FOR ANY REASON, INCLUDING POOR INVESTMENT PERFORMANCE, WHICH WOULD
ADVERSELY AFFECT OUR REVENUES.
Fund investors may redeem their investments in any of our mutual funds at
any time and for any reason without prior notice. Investors may also reduce the
total amount of assets that they have invested with us for a number of reasons,
including our investment performance, changes in prevailing interest rates and
financial market performance. Success in the investment management and mutual
fund business is dependent on investment performance, as well as distribution
and client servicing. If our mutual funds perform poorly compared to the mutual
funds of other investment management firms, we may experience a decrease in
purchases of shares of our mutual funds and an increase in redemptions of shares
of our mutual funds. A decrease in the net assets of our mutual funds would
adversely affect our revenues.
ADVERSE OPINIONS OF OUR MUTUAL FUNDS BY THIRD PARTY RATING AGENCIES OR INDUSTRY
ANALYSTS COULD DECREASE NEW INVESTMENTS IN OR ACCELERATE REDEMPTIONS FROM OUR
MUTUAL FUNDS, WHICH WOULD ADVERSELY AFFECT OUR REVENUES.
Many investors rely heavily on the opinions of third party rating agencies
and industry analysts when making decisions to purchase or redeem shares of
mutual funds. Adverse opinions regarding our mutual funds could erode investor
confidence, potentially leading to a decrease in new investments and an increase
in redemptions, thereby reducing the net assets of our mutual funds. A decrease
in the net assets of our mutual funds would adversely affect our revenues.
INVESTOR BEHAVIOR IS INFLUENCED BY SHORT-TERM INVESTMENT PERFORMANCE OF MUTUAL
FUNDS. POOR SHORT-TERM PERFORMANCE OF OUR MUTUAL FUNDS COULD CAUSE A DECREASE
IN NEW INVESTMENTS IN OR ACCELERATE REDEMPTIONS FROM OUR MUTUAL FUNDS, WHICH
WOULD ADVERSELY AFFECT OUR REVENUES.
Investor behavior may be based on many factors, including short-term
investment performance. Poor short-term performance of our mutual funds,
irrespective of longer-term success, could potentially lead to a decrease in new
investments and an increase in redemptions, thereby reducing the net assets of
our mutual funds. A decrease in the net assets of our mutual funds would
adversely affect our revenues.
9
WE UTILIZE QUANTITATIVE INVESTMENT STRATEGIES THAT REQUIRE US TO INVEST IN
SPECIFIC PORTFOLIOS OF SECURITIES AND HOLD THESE POSITIONS FOR APPROXIMATELY ONE
YEAR. ENTERING INTO, MAINTAINING OR LIQUIDATING ONE OR MORE OF THESE POSITIONS
IN ACCORDANCE WITH OUR INVESTMENT STRATEGIES COULD HAVE A MATERIAL ADVERSE
EFFECT ON THE PERFORMANCE OF OUR MUTUAL FUNDS.
We adhere to the investment strategies for each of our mutual funds during
the annual rebalancing period and throughout the course of the year. Adhering
to our investment strategies during the annual rebalancing of our mutual funds
may result in the elimination of better performing assets from our funds'
portfolios and an increase in investments with relatively lower total return.
Additionally, we will maintain a position in a relatively poorly performing
security throughout the course of the portfolio holding period. Either of these
actions could result in relatively lower performance of our mutual funds and
adversely affect the net assets of our mutual funds. A decrease in the net
assets of our mutual funds would adversely affect our revenues.
WE DEPEND UPON NEIL J. HENNESSY TO MANAGE OUR BUSINESS. THE LOSS OF MR.
HENNESSY MAY ADVERSELY AFFECT OUR BUSINESS AND FINANCIAL CONDITION.
Our success is largely dependent on the skills, experience and performance
of key personnel, particularly Neil J. Hennessy, our chairman of the board,
chief executive officer and president. Mr. Hennessy is primarily responsible
for the marketing and management of the portfolio of each of our mutual funds,
developing new investment strategies and executing each existing fund's
investment program. Mr. Hennessy is also our spokesperson and spearheads our
marketing and public relations campaign. The loss of Mr. Hennessy could have an
adverse effect on our business, financial condition and results of operations.
OUR BUSINESS IS EXTENSIVELY REGULATED AND OUR FAILURE TO COMPLY WITH REGULATORY
REQUIREMENTS MAY HARM OUR FINANCIAL CONDITION.
Our business is subject to extensive regulation in the United States,
particularly by the SEC. Our failure to comply with applicable laws or
regulations could result in fines, suspensions of personnel or other sanctions,
including revocation of our registration as an investment advisor. The mutual
fund industry has undergone increased scrutiny by the SEC and state regulators
for the past several years, resulting in numerous enforcement actions, "sweep"
examinations, and new rules and rule proposals. These actions have increased
our costs in managing our mutual funds, and we could continue to experience
higher costs if new rules and other regulatory actions or legislation require us
to spend more time, hire additional personnel or buy new technology to comply
with these rules and laws. Additional changes in laws or regulations, the
interpretation or enforcement of existing laws and rules or governmental
policies could also have a material adverse effect on us by limiting the sources
of our revenues and increasing our costs. Our business may be materially
affected not only by securities regulations, but also by regulations of general
application. For example, the amount of net assets in our mutual funds in a
given time period could be affected by, among other things, existing and
proposed tax legislation and other governmental regulations and policies,
including the interest rate policies of the Federal Reserve Board.
Our management activities are also subject to contractual commitments and
our mutual fund business involves compliance with numerous investment, asset
valuation, distribution and tax requirements. Failure to adhere to these
requirements could result in losses that a client could recover from us. We
have installed procedures and utilize the services of experienced
administrators, accountants and lawyers to assist in satisfying these
requirements. However, there can be no assurance that these precautions will
protect us from potential liabilities.
THE COSTS OF FULL COMPLIANCE WITH NEW SECURITIES REGULATIONS MAY INCREASE
EXPENSES AND REDUCE EARNINGS.
In order to comply with securities regulations, we may have additional
expenses beyond our control, which may have a substantial impact on earnings per
share. In October 2004, we hired a chief compliance officer as required by Rule
206(4)-7 of the Investment Advisors Act of 1940. Under Rule 38a-1 of the
Investment Company Act of 1940, which pertains to mutual fund companies, our
mutual funds were also required to hire a chief compliance officer. The
individual serving as our chief compliance officer was also hired by our mutual
funds to serve as their chief compliance officer. The mutual fund directors or
trustees set the compensation for their chief compliance officer, but we have
agreed to bear all of the related compensation expense.
10
In addition to requiring the hiring of a chief compliance officer, Rule
206(4)-7 of the Investment Advisors Act of 1940 required that we adopt written
compliance policies and procedures. Under Rule 38a-1 of the Investment Company
Act of 1940, our mutual funds were also required to adopt written compliance
policies and procedures, including policies and procedures that provide for
oversight of the funds' key service providers, including us. We may experience
increases in audit, legal, internal technology and other expenses associated
with being listed on The NASDAQ National Market and Sarbanes-Oxley regulations,
especially as they relate to internal controls and compliance with financial
reporting.
ACQUISITIONS INVOLVE INHERENT RISKS THAT COULD ADVERSELY AFFECT OUR OPERATING
RESULTS AND FINANCIAL CONDITION AS WELL AS DILUTE THE HOLDINGS OF CURRENT
SHAREHOLDERS.
As part of our business strategy, we intend to pursue additional
acquisitions of management agreements for other mutual funds. Future
acquisitions of management agreements would be accompanied by risks including,
among others:
o inability to secure enough affirmative votes to gain approval from the
target fund's shareholders of a proposed acquisition;
o the loss of mutual fund assets through redemptions by shareholders of
newly acquired mutual funds;
o higher than anticipated acquisition costs and expenses;
o the potential diversion of our management's time and attention; and
o dilution to our shareholders if the acquisition is made with our
common stock.
If one or more of these risks occur, we may be unable to successfully
complete an acquisition of a management agreement, we may experience an
impairment of management agreement valuations and may not achieve the expected
return on investment. Any of these results could have an adverse effect on our
business, financial condition and results of operations.
OUR MANAGEMENT AND SHAREHOLDER SERVICING AGREEMENTS CAN BE TERMINATED ON SHORT
NOTICE AND ARE SUBJECT TO ANNUAL RENEWALS. IF ANY OF OUR AGREEMENTS ARE
TERMINATED OR NOT RENEWED, OUR REVENUES WOULD SUBSTANTIALLY DECLINE.
We generate all of our operating revenues from our management and
shareholder servicing agreements covering our mutual funds. Management and
shareholder servicing agreements covering our mutual funds are terminable
without penalty on 60 days notice and must be approved at least annually by a
majority of each fund's board of directors or trustees and a majority of the
disinterested members of each fund's board of directors or trustees. If any of
these management or shareholder servicing agreements are terminated or not
renewed, our revenues would substantially decline.
WE FACE INTENSE COMPETITION IN ATTRACTING INVESTORS AND RETAINING NET ASSETS IN
OUR MUTUAL FUNDS.
The investment management business is intensely competitive. We are
considered a small investment management company, but must compete with a large
number of global and U.S. investment advisors, commercial banks, brokerage
firms, broker-dealers, insurance companies and other financial institutions for
investors in our mutual funds. Many organizations are attempting to market to
and service the same investors as we do, not only with mutual fund products and
services, but also with a wide range of other financial products and services.
Many of our competitors have greater marketing, financial, technical, research,
distribution and other capabilities than we do and offer more product lines and
services. These competitors would tend to have a substantial advantage over us
during periods when our investment performance is not strong enough to counter
these competitors' greater resources or due to a wide variety of other factors,
such as the expense ratios of our mutual funds or our small number of mutual
funds. If we are not able to attract investors and retain net assets in our
mutual funds, our revenues could decline and our business, financial condition
and results of operations would suffer.
11
MARKET PRESSURE TO LOWER OUR MANAGEMENT FEES COULD REDUCE OUR PROFIT MARGIN.
The investment management business is intensely competitive. To the extent
we are forced to compete on the basis of the management fees we charge our
mutual funds, we may not be able to maintain our current fee structure.
Historically, we have competed primarily on the performance of our mutual funds
and not on the level of our management fees relative to those of our
competitors. In recent years, however, there has been a trend toward lower fees
in some segments of the investment management industry. In order for us to
maintain our fee structure in a competitive environment, we must be able to
provide our mutual fund shareholders with investment returns and service that
will encourage them to invest in the mutual funds that pay our fees. We cannot
assure you that we will succeed in providing investment returns that will allow
us to maintain our current fee structure. Fee reductions on existing or future
business could have a material adverse effect on our results of operations.
WE MAY BE REQUIRED TO FOREGO ALL OR A PORTION OF OUR FEES UNDER OUR MANAGEMENT
AGREEMENTS COVERING OUR MUTUAL FUNDS.
The board of directors or trustees of each of our mutual funds must make
certain findings regarding the reasonableness of our fees. We monitor ratios of
expenses to average daily net assets and waive management fees that we would
otherwise receive from, or reimburse expenses incurred by, our mutual funds if
we believe that our expense ratios might lead fund investors to redeem their
shares in our mutual funds in order to seek lower expense ratios with other fund
managers. We currently have expense limitation agreements covering the Hennessy
Cornerstone Growth Fund, Series II and the Hennessy Focus 30 Fund that require
us to waive management fees or reimburse expenses incurred by these funds above
a contractually agreed upon percentage of their average daily net assets.
CHANGES IN MUTUAL FUND SUPERMARKETS' FEE STRUCTURES COULD REDUCE OUR REVENUES,
INCREASE OUR EXPENSES AND SLOW OUR GROWTH.
We derive a significant portion of our sales through individual investors
and investment advisors who utilize mutual fund supermarkets. Mutual fund
supermarkets provide services to their customers, but instead of charging their
customers for these services, they charge us and our mutual funds. Fees paid to
mutual fund supermarkets have increased and there may be further increases in
the future. Higher payments to mutual fund supermarkets by us or our mutual
funds could reduce our revenues by increasing our expenses or decreasing our
assets under management, either of which could slow our growth.
WE DEPEND ON THIRD PARTY INVESTMENT PROFESSIONALS AND THE DISTRIBUTION CHANNELS
THEY UTILIZE TO MARKET OUR MUTUAL FUNDS.
Our ability to distribute our mutual funds is highly dependent on access to
the retail distribution systems and client bases of third party investment
professionals that also offer competing investment products. These investment
professionals who recommend our mutual funds may reduce or eliminate their
involvement in marketing our funds at any time, or may elect to emphasize the
investment products of competing sponsors or the proprietary products of their
own firms. In addition, an investment professional may only distribute our
mutual funds for so long as we continue to participate in the platforms of
national full-service firms that permit their investment professionals to
utilize no-load funds for their clients. These firms can terminate their
relationships with us on short notice, limiting our participation in these
platforms. Either of these events could cause the net assets of our mutual
funds to decline, which would decrease our revenues and have a material adverse
effect on our results of operations.
12
RISKS RELATING TO THIS OFFERING AND OUR COMMON STOCK
THE SHAREHOLDERS OF OUR MUTUAL FUNDS MUST APPROVE NEW MANAGEMENT AGREEMENTS AS A
RESULT OF THE CHANGE IN CONTROL OF HENNESSY THAT WILL OCCUR AS A RESULT OF THIS
OFFERING. IF THE SHAREHOLDERS OF ANY OF OUR MUTUAL FUNDS FAIL TO APPROVE A NEW
MANAGEMENT AGREEMENT, THE BOARD OF DIRECTORS OR TRUSTEES OVERSEEING THAT FUND
COULD APPOINT A NEW INVESTMENT ADVISOR TO ADVISE THE MUTUAL FUND IN OUR PLACE.
Neil J. Hennessy, our chairman of the board, chief executive officer and
president, presently owns approximately 39.4% of our outstanding common stock.
He will own ___% of our outstanding common stock following completion of this
offering, or ___% if the underwriters exercise their over-allotment option in
full. If Mr. Hennessy's ownership of our common stock falls below 25% as a
result of this offering, then under the Investment Advisors Act of 1940 and the
Investment Company Act of 1940, we will be deemed to have experienced a change
in control. This change in control will be deemed to constitute an assignment
of the management agreements covering each of our mutual funds, which
automatically terminates such management agreements. Therefore, new management
agreements covering our mutual funds must be approved by the holders of the
lesser of a majority of the outstanding shares of each mutual fund, or two-
thirds of the shares voted, provided that at least a majority of the outstanding
shares are voted.
We expect the board of directors or trustees that oversee our mutual funds
to recommend that the mutual fund shareholders approve new management agreements
with Hennessy covering each of our mutual funds. Each of our mutual funds has
scheduled a meeting of its shareholders on ________ 2005, which we anticipate
will be prior to completion of this offering. However, we cannot assure you
that the requisite vote will be obtained. Any meeting of fund shareholders may
be adjourned for a total of up to 150 days in order to obtain the required vote.
If the shareholders of one or more of our mutual funds fail to approve the
assignment after all adjournments, the board of directors or trustees that
oversee that fund will be required to determine whether a different investment
manager should be engaged to serve as investment manager for the fund. The
board of directors or trustees that oversee our mutual funds could also take
other actions, such as closing a fund whose shareholders do not approve the new
management agreement or merging that fund into one of our other mutual funds.
If any of our mutual funds retains a new investment advisor or is closed
following a change in control, we will lose the management agreement and any
shareholder servicing agreement with that mutual fund, and may lose revenues if
shareholders of a merged fund redeem their shares.
ENTERING INTO NEW MANAGEMENT AGREEMENTS COVERING OUR MUTUAL FUNDS UPON THE
DEEMED CHANGE IN CONTROL THAT WILL OCCUR IN CONNECTION WITH THIS OFFERING MAY
PREVENT US FROM INCREASING OUR MANAGEMENT FEES FOR TWO YEARS.
Under the Investment Company Act of 1940, a fund's manager cannot impose an
"unfair burden" on that fund for a two-year period following the commencement of
a new management agreement covering that fund. The SEC has interpreted the term
"unfair burden" to include certain increases in management fees. We anticipate
that we will be unable to increase the management fees paid to us by our mutual
fees for the two years following the later of the date of this offering or the
date the new management agreements we will enter into covering our mutual funds
become effective. Our inability to raise fees for two years could have an
adverse impact on our results of operations.
WE WILL BEAR THE COST OF SOLICITING PROXIES FOR APPROVAL BY THE SHAREHOLDERS OF
OUR MUTUAL FUNDS OF NEW MANAGEMENT AGREEMENTS UPON THE CHANGE IN CONTROL OF
HENNESSY THAT MAY BE CAUSED BY THIS OFFERING.
We will bear the cost of soliciting proxies for the meetings of
shareholders of our mutual funds called to approve the new management agreements
covering our mutual funds upon the potential change in control of Hennessy. We
estimate that these costs will total approximately $----------- and could be as
high as $------------, depending on the extent to which we require the services
of a proxy solicitation firm. We will pay these costs regardless of the outcome
of the vote even though these costs will not result in any increase in our
revenues or earnings.
13
THERE IS CURRENTLY A LIMITED PUBLIC MARKET FOR OUR COMMON STOCK AND WE CANNOT BE
SURE THAT AN ACTIVE TRADING MARKET WILL DEVELOP FOLLOWING THE OFFERING.
We do not currently have an active trading market for our common stock,
which trades on the OTC Bulletin Board. We intend to apply to list our common
stock on The NASDAQ National Market under the symbol "HNNA" in connection with
this offering, but we cannot be sure that an active trading market will develop
or be sustained after the offering or that you will be able to sell your shares
of our common stock when you want or at the price you want. The offering price
for our common stock will be determined by negotiations between us and
representatives of the underwriters. Because there has not been an active
trading market for our common stock, we cannot be sure that the offering price
will correspond to the price at which our common stock will trade after the
offering, or the price at which it may have previously traded. Consequently,
you may not be able to sell shares of our common stock at prices as high as or
higher than the price you paid in this offering.
THE MARKET PRICE OF OUR COMMON STOCK IS SUBJECT TO SIGNIFICANT PRICE
FLUCTUATIONS.
The market price for our common stock may be volatile and may fluctuate
based on several factors, including, among others:
o our operating results;
o changes in financial estimates by securities analysts for us or our
competitors;
o conditions or trends in the investment management industry;
o news announcements; or
o changes in general economic and market conditions.
In addition, the stock market in recent years and months has experienced
significant price and volume fluctuations that often have been unrelated or
disproportionate to the operating performance of companies. These fluctuations
may materially affect the market price of our shares. Consequently, you may not
be able to sell your shares of our common stock at prices as high as or higher
than the price you paid in this offering.
A LIMITED NUMBER OF OUR SHAREHOLDERS ARE ABLE TO EXERT SIGNIFICANT INFLUENCE
OVER MATTERS REQUIRING SHAREHOLDER APPROVAL.
Our officers and directors currently own 52.9% of our outstanding common
stock and will own approximately ---% after completion of this offering, or ---%
if the underwriters exercise their over-allotment option in full. As a result,
our officers and directors will continue to have a significant influence on the
outcome of any matter requiring a shareholder vote and, as a result, our
management and affairs. Matters that typically require shareholder approval
include the following:
o election of directors;
o merger or consolidation with another company; and
o sale of all or substantially all of our assets.
14
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains "forward-looking statements" within the meaning of
the securities laws, for which we claim the protection of the safe harbors for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995. These forward-looking statements include statements about, among
other things, our anticipated financial performance, business prospects, new
developments and similar matters, and statements preceded by, followed by or
including the words "expect," "anticipate," "intend," "may," "plan," "will,"
"should," "would," "believe," "estimate," "predict," "project," "continue,"
"seek" or similar expressions. We have based these forward-looking statements
on our current expectations and projections about future events, based on
information currently available to us. Forward-looking statements should not be
read as a guarantee of future performance or results, and will not necessarily
be accurate indications of the times at, or means by, which such performance or
results will be achieved. These forward-looking statements are subject to
risks, uncertainties and assumptions, including those described in the section
entitled "Risk Factors" and elsewhere in this prospectus that could cause actual
performance or results to differ substantially from those expressed in or
suggested by the forward-looking statements.
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, many
of which are beyond the control of our management. Statements regarding the
following subjects are forward-looking by their nature:
o our business strategy, including our ability to identify and complete
future acquisitions;
o market trends and risks;
o our estimates for future performance, including, among other things,
revenues we expect to receive from our new management agreement
covering Hennessy Cornerstone Growth Fund, Series II;
o our ability to maintain and grow our distribution channels on which we
depend;
o our estimates regarding anticipated revenues and operating expenses;
o the costs we may incur in complying with increased securities industry
regulation;
o our ability to retain the mutual fund assets we currently manage; and
o the effect international conflicts and the ongoing threat of terrorism
may have on the general economy, financial and capital markets and our
business.
The forward-looking statements in this prospectus speak only as of the date
stated, or if no date is stated, as of the date of this prospectus. We will
not, and we do not undertake any obligation to, publicly update or revise any
forward-looking statements, whether as a result of new information, future
events, actual results, changes in assumptions or other factors affecting the
forward-looking statements, or any other reason, except to the extent required
by applicable securities laws. You should not place undue reliance on any
forward-looking statements contained in this prospectus.
15
USE OF PROCEEDS
We expect to receive net proceeds of approximately $--- million from this
offering, assuming a public offering price of $---, and after deducting the
estimated underwriting discount and estimated offering expenses payable by us.
If the underwriters exercise their over-allotment option in full, we expect our
net proceeds will be approximately $--- million. We will not receive any
proceeds from the sale of shares of our common stock in this offering by the
selling shareholders. See "Principal and Selling Shareholders."
We intend to use approximately $--- million of net proceeds of this
offering to repay in full the long-term debt that is currently outstanding that
we incurred in connection with acquiring management agreements. We incurred
$7.9 million of indebtedness in connection with acquiring the management
agreements for the Lindner Funds and incurred an additional $6.7 million of
indebtedness to acquire the management agreement for The Henlopen Fund. The
indebtedness that we incurred to acquire the management agreement of The
Henlopen Fund was rolled into a single loan with the indebtedness that we
incurred to acquire the management agreements of the Lindner Funds. The
combined indebtedness, which bears interest at U.S. Bank National Association's
prime rate as set by U.S. Bank National Association from time to time (6.25% as
of July 1, 2005), will mature on September 30, 2010.
We intend to use approximately $--- million of the net proceeds of this
offering to fund all or a portion of the costs of any acquisitions we determine
to pursue in the future. We currently have no commitments or agreements and are
not involved in any negotiations with respect to any specific acquisitions, and
we cannot assure you that we will be able to successfully identify or consummate
any such acquisitions. To the extent that we do not use the remaining net
proceeds to consummate acquisitions, any remaining net proceeds will be used for
working capital and general corporate purposes, including expansion of our
business development activities and distribution channels.
Our management will have significant flexibility in applying our net
proceeds from this offering. Pending such decisions, we may invest the net
proceeds of this offering in investment-grade instruments and bank deposits.
16
PRICE RANGE OF COMMON STOCK
Our common stock is traded over the counter on the OTC Bulletin Board under
the trading symbol HNNA.OB. Our common stock began trading on the OTC Bulletin
Board on July 15, 2002. We intend to apply to list our common stock on The
NASDAQ National Market.
The following table sets forth the high and low intra-day sales prices for
our common stock on the OTC Bulletin Board for the periods indicated. These
sale prices have been restated to reflect a 3-for-2 stock split that occurred on
March 8, 2005.
PRICE RANGE
--------------- DIVIDENDS
HIGH LOW PAID PER SHARE
---- --- --------------
FISCAL YEAR ENDED SEPTEMBER 30, 2003:
First Quarter $7.33 $6.87 -
Second Quarter 7.33 7.33 -
Third Quarter 8.67 7.33 -
Fourth Quarter 10.00 8.00 -
FISCAL YEAR ENDED SEPTEMBER 30, 2004:
First Quarter $14.00 $8.67 -
Second Quarter 18.67 12.50 -
Third Quarter 17.33 14.67 -
Fourth Quarter 17.00 15.67 -
FISCAL YEAR ENDED SEPTEMBER 30, 2005:
First Quarter $24.25 18.00 -
Second Quarter 29.75 24.25 $0.10(1)
Third Quarter 29.75 24.25
Fourth Quarter
(through July 22, 2005) 27.00 25.50
(1) We paid an annual dividend on March 8, 2005 of $0.10 per share.
On -------, 2005, the last reported sale price of our common stock on
the OTC Bulletin Board was $--- per share. As of June 16, 2005, there were
approximately 540 holders of record of our common stock.
DIVIDEND POLICY
We paid an annual dividend of $0.10 per share on March 8, 2005. Upon the
successful completion of this offering, we intend to pay quarterly dividends of
$0.025 per share.
The declaration and payment of dividends to holders of our common stock by
us, if any, are subject to the discretion of our board of directors. Our board
of directors will take into account such matters as general economic and
business conditions, our strategic plans, our financial results and condition,
contractual, legal and regulatory restrictions on the payment of dividends by
us, and such other factors as our board of directors may consider to be
relevant.
17
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
capitalization as of March 31, 2005 on an actual basis, and as adjusted to give
effect to the issuance and sale of ---- shares of our common stock offered by
us hereby, and receipt of our estimated net proceeds from this offering. The as
adjusted information in the following table assumes that the underwriters' over-
allotment option is not exercised. If the over-allotment option is exercised in
full, we will issue and sell an additional ---- shares of our common stock.
You should read this table together with "Selected Financial Data," "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and the other financial data included elsewhere in this
prospectus, including our financial statements and the related notes.
As of
March 31, 2005
-----------------------
Actual As Adjusted
------ -----------
(In thousands)
Cash and cash equivalents $ 4,858
-------
-------
Current portion of long-term debt $ 1,129
-------
-------
Long-term debt(1) $ 5,644
Shareholders' 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: 2,456,963(2) shares issued and
outstanding at March 31, 2005; ------ shares
as adjusted) 6,916
Additional paid-in capital 45
Retained earnings 5,151
-------
Total shareholders' equity $12,111
-------
Total capitalization $17,755
-------
-------
(1) Does not include $6.7 million of long-term debt we incurred on July 1,
2005 in connection with our acquisition of the management agreement
for The Henlopen Fund (now know as the Hennessy Cornerstone Growth
Fund, Series II).
(2) Amounts have been restated to reflect a 3-for-2 stock split that
occurred on March 8, 2005.
The number of outstanding shares of our common stock shown in the above
table on an actual and as-adjusted basis is based on 2,456,963 shares of our
common stock outstanding as of March 31, 2005 and excludes 368,250 shares of our
common stock issuable upon the exercise of stock options outstanding as of that
date at a weighted average exercise price of approximately $10.24 and 246,553
shares of our common stock reserved for future issuance under our incentive
plan.
18
SELECTED FINANCIAL DATA
The following tables set forth selected financial data of Hennessy as of
the dates and for the periods indicated. We derived the balance sheet data and
the statement of operations data for the fiscal years ended September 30, 2002,
2003 and 2004 from our audited financial statements included elsewhere in this
prospectus. The balance sheet data and statement of operations data for the
fiscal years ended September 30, 2003 and 2004 were audited by Pisenti & Brinker
LLP. The balance sheet data and statement of operations data for the fiscal
years ended September 30, 2001 and 2002 were audited by KPMG LLP. The balance
sheet data and statement of operations data for the fiscal years ended September
30, 2000 and 2001 have been derived from audited financial statements of
Hennessy not included in this prospectus.
The balance sheet data and statement of operations data for the six months
ended March 31, 2004 and March 31, 2005 are derived from unaudited interim
financial statements included in this prospectus. The 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. Operating results for the six months ended
March 31, 2005 are not necessarily indicative of the results that may be
expected for the entire year ended September 30, 2005.
You should read the following selected financial data along with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and related notes, each of which is
included in this prospectus.
SIX MONTHS
ENDED
YEARS ENDED SEPTEMBER 30, MARCH 31,
-------------------------------------------------- ----------------
2000 2001 2002 2003 2004 2004 2005
---- ---- ---- ---- ---- ---- ----
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue:
Investment management fees $ 512 $1,519 $1,999 $4,192 $8,500 $3,910 $4,896
Shareholder service fees - - - 547 1,014 480 577
Expert witness fees 139 150 163 7 - - -
Other 12 5 108(1) 41 31 12 39
------ ------ ------ ------ ------ ------ ------
Total revenue 663 1,674 2,270 4,787 9,545 4,402 5,512
Operating expenses:
Compensation and benefits 321 583 732 1,330 2,017 1,025 1,165
General and administrative 178 206 409 642 872 451 469
Mutual fund distribution 47 141 329 1,011 1,850 924 991
Amortization and depreciation 79 296 300 21 33 13 24
Commissions and floor
brokerage 12 - - - - - -
------ ------ ------ ------ ------ ------ ------
Total operating expenses 637 1,226 1,770 3,004 4,772 2,413 2,649
------ ------ ------ ------ ------ ------ ------
Operating income 26 448 500 1,783 4,773 1,989 2,863
Interest expense 72 248 177 - 177 14 184
------ ------ ------ ------ ------ ------ ------
Income (loss) before income tax
expense (46) 200 323 1,783 4,596 1,975 2,679
Income tax expense 1 1 14 721 1,831 775 1,072
------ ------ ------ ------ ------ ------ ------
Net income (loss) $ (47) $ 199 $ 309 $ 1,06 $2,765 $1,200 $1,607
------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------
Earnings (loss) per share(2)
Basic $(0.04) $ 0.1 $ 0.15 $ 0.43 $ 1.13 $ 0.49 $ 0.65
Diluted $(0.04) $ 0.1 $ 0.15 $ 0.43 $ 1.09 $ 0.47 $ 0.63
Cash dividends per share - - - - - - $ 0.10
(1) Includes a $90,214 gain on the re-payment of debt.
(2) Earnings per common share data have been restated for all periods
shown to reflect the 3-for-2 common stock dividend paid on March 8,
2005.
19
SEPTEMBER 30, MARCH 31,
------------------------------------------------------ -----------------
2000 2001 2002 2003 2004 2004 2005
---- ---- ---- ---- ---- ---- ----
(UNAUDITED)
BALANCE SHEET DATA (AT PERIOD END):
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Total assets $ 4,367 $ 4,297 $ 6,933 $ 9,149 $ 19,914 $ 18,895 $ 20,425
Short-term obligations - - - 528 1,129 1,657 1,129
Long-term debt 2,311 1,840 - - 6,208 6,772 5,644
Total liabilities 4,360 4,091 158 1,312 9,206 9,858 8,314
Total shareholders' equity 7 206 6,775 7,837 10,708 9,037 12,111
OTHER:
Assets under management $218,703 $194,301 $373,611 $835,139 $1,222,073 $1,314,064 $1,347,881
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL OVERVIEW
We derive our operating revenues from management fees and shareholder
servicing fees paid to us by the Hennessy Funds. These fees are calculated as a
percentage of the average daily net assets in each of our mutual funds and vary
from fund to fund. The fees we receive fluctuate with changes in the total net
asset value of the assets in our mutual funds, which are affected by our
investment performance, our completed acquisitions of management agreements,
market conditions and the success of our marketing efforts. Total assets under
management were $1.67 billion as of July 1, 2005.
The assets we manage have grown rapidly as a result of acquisitions of
management agreements, fund inflows and market appreciation. The following
table illustrates the growth in assets under management since the beginning of
fiscal year 2003:
ASSETS UNDER MANAGEMENT
AT EACH QUARTER END IN FISCAL YEAR 2003
---------------------------------------------------------------------------
12/31/2002 03/31/2003 06/30/2003 09/30/2003
---------- ---------- ---------- ----------
(IN THOUSANDS)
Beginning assets under management $373,611 $493,678 $497,962 $663,243
Acquisition inflows - - - 34,928
Organic inflows 144,817 75,874 110,767 79,619
Redemptions (27,436) (62,488) (35,147) (29,155)
Market appreciation (depreciation) 2,686 (9,102) 89,661 86,504
-------- -------- -------- --------
Ending assets under management $493,678 $497,962 $663,243 $835,139
-------- -------- -------- --------
-------- -------- -------- --------
ASSETS UNDER MANAGEMENT
AT EACH QUARTER END IN FISCAL YEAR 2004
--------------------------------------------------------------------------
12/31/2003 03/31/2004 06/30/2004 09/30/2004
---------- ---------- ---------- ----------
(IN THOUSANDS)
Beginning assets under management $ 835,139 $1,012,903 $1,314,064 $1,284,720
Acquisition inflows - 301,214 - -
Organic inflows 117,651 116,299 48,096 33,306
Redemptions (40,318) (100,389) (94,936) (65,253)
Market appreciation (depreciation) 100,431 (15,963) 17,496 (30,700)
---------- ---------- ---------- ----------
Ending assets under management $1,012,903 $1,314,064 $1,284,720 $1,222,073
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
21
ASSETS UNDER MANAGEMENT
AT EACH QUARTER END IN FISCAL YEAR 2005
-----------------------------------------------------
12/31/2004 03/31/2005 06/30/2005
---------- ---------- ----------
(IN THOUSANDS)
Beginning assets under management $1,222,073 $1,376,303 $1,347,881
Acquisition inflows - - -
Organic inflows 64,390 107,136 72,672
Redemptions (91,804) (108,114) (87,886)
Market appreciation (depreciation) 181,644 (27,444) 40,499
---------- ---------- ----------
Ending assets under management $1,376,303 $1,347,881 $1,373,166(1)
---------- ---------- ----------
---------- ---------- ----------
-------------
(1) Does not include $299 million in assets under management added in
connection with the acquisition of The Henlopen Fund (now known as the
Hennessy Cornerstone Growth Fund, Series II), which was completed on
July 1, 2005.
Historically, we have received operating revenues from providing Mr.
Hennessy's services as an expert witness and mediator in securities cases.
Until June 2005, we also provided management services to high net worth
investors. However, our business strategy has evolved and we no longer generate
any operating revenues from these services.
A significant portion of our expenses, including employee compensation, are
fixed and have historically demonstrated minimal variation. To implement our
business strategy, we intend to expand and upgrade our facilities and
anticipate increasing our staffing. As a result, we expect our fixed expenses
to increase.
Due to the increases in fixed expenses and dilution of the shareholder base
expected in connection with this offering, our earnings per share may decrease
in the short-term.
The principal asset on our balance sheet, management contracts - net of
accumulated amortization, represents the capitalized costs incurred in
connection with the acquisition of management agreements. As of September 30,
2004, this asset had a net balance of $14.1 million.
The principal liability on our balance sheet is the long-term bank debt
incurred in connection with the acquisition of the management agreements for the
Lindner Funds. As of September 30, 2004, this liability, including the current
portion of long-term debt, had a balance of $7.3 million. On July 1, 2005, we
incurred an additional $6.7 million of long-term debt to finance our acquisition
of the management agreement for The Henlopen Fund (now known as the Hennessy
Cornerstone Growth Fund, Series II). We intend to repay in full this bank debt
out of the net proceeds of this offering.
22
RESULTS OF OPERATIONS
The following table sets forth information about components of our revenue
and expense for the periods shown.
YEARS ENDED SEPTEMBER 30, SIX MONTHS ENDED MARCH 31,
----------------------------------------------------------- ---------------------------------------
2002 2003 2004 2004 2005
------------------- ------------------ ----------------- ------------------ -----------------
PERCENT PERCENT PERCENT PERCENT
OF TOTAL OF TOTAL OF TOTAL OF TOTAL OF TOTAL
AMOUNTS REVENUE AMOUNTS REVENUE AMOUNTS REVENUE AMOUNTS REVENUE AMOUNTS REVENUE
------- ------- ------- -------- ------- -------- ------- -------- ------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PERCENTAGES)
Revenue:
Investment
management fees $1,999 88.0% $4,192 87.6% $8,500 89.1% $3,910 88.8% $4,896 88.8%
Shareholder service
fees - - 547 11.4 1,014 10.6 480 10.9 577 10.5
Expert witness fees 163 7.2 7 0.1 - - 12 -0.3 - -
Other 108 4.8 41 0.9 31 0.3 - - 39 0.7
------ ----- ------- ----- ------- ------ ------- ------ ------- ------
Total revenue 2,270 100.0% 4,787 100.0% 9,545 100.0% 4,402 100.0 5,512 100.0%
Operating expenses:
Compensation and
benefits 732 32.3 1,330 27.8 2,017 21.1 1,025 23.3 1,165 21.1
General and
administrative 409 18.0 642 13.4 872 9.1 451 10.2 469 8.5
Mutual fund
distribution 329 14.5 1,011 21.1 1,850 19.4 924 21.0 991 18.0
Amortization and
depreciation 300 13.2 21 0.4 33 0.4 13 0.3 24 0.4
------ ----- ------- ----- ------- ------ ------- ------ ------- ------
Total operating
expenses 1,770 78.0 3,004 62.7 4,772 50.0 2,413 54.8 2,649 48.0
------ ----- ------- ----- ------- ------ ------- ------ ------- ------
Operating income 500 22.0 1,783 37.3 4,773 50.0 1,989 45.2 2,863 52.0
Interest expense 177 7.8 - - 177 1.9 14 0.3 184 3.4
------ ----- ------- ----- ------- ------ ------- ------ ------- ------
Income before
income tax expense 323 14.2 1,783 37.3 4,596 48.1 1,975 44.9 2,679 48.6
Income tax expense 14 0.6 721 15.1 1,831 19.1 775 17.6 1,072 19.4
------ ----- ------- ----- ------- ------ ------- ------ ------- ------
Net income $ 309 13.6% $1,062 22.2% $2,765 29.0% $1,200 27.3% $1,607 29.2%
------ ----- ------- ----- ------- ------ ------- ------ ------- ------
------ ----- ------- ----- ------- ------ ------- ------ ------- ------
SIX MONTHS ENDED MARCH 31, 2005 COMPARED TO SIX MONTHS ENDED MARCH 31, 2004
Revenues. Total revenue increased by $1.1 million, or 25.2%, in the six
months ended March 31, 2005, from $4.4 million in the prior comparable period,
primarily due to fees earned from increased assets under management. Investment
management fees increased by $1.0 million, or 25.2%, in the six months ended
March 31, 2005, from $3.9 million in the prior comparable period, and
shareholder service fees increased by $0.1 million, or 20.2%, in the six months
ended March 31, 2005, from $0.5 million in the prior comparable period. These
increases resulted from increases in the average daily net assets of our mutual
funds, which can differ considerably from net assets of our mutual funds at the
end of an accounting period. Net assets in our mutual funds increased by $33.8
million, or 2.6%, as of March 31, 2005, from $1.31 billion as of the end of the
prior comparable period. This increase in the net assets of our mutual funds
resulted from cash inflows of $253.0 million, redemptions of $360.1 million and
market appreciation of $141.0 million. In comparison, from March 31, 2003 to
March 31, 2004, cash inflows of our mutual funds were $760.5 million, which
included $336.1 million of cash inflows from acquisitions, redemptions were
$205.0 million and market appreciation was $260.6 million. Although the amount
of redemptions increased by $155.1 million for the one year period ending March
31, 2005 as compared to the one year period ending March 31, 2004, redemptions
as a percentage of assets under management decreased from an average of 2.3% per
month to 2.0% per month during the same period.
Operating Expenses. Total operating expenses increased by $0.2 million, or
9.8%, in the six months ended March 31, 2005, from $2.4 million in the prior
comparable period. 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 48.0% in the six months ended March 31, 2005, from 54.8%
in the prior comparable period.
Employee Compensation and Benefits. Compensation and benefits increased by
$0.1 million, or 13.7%, in the six months ended March 31, 2005, from $1.0
million in the prior comparable period. The increase resulted from the addition
of a chief compliance officer, salary increases and performance incentives for
officers and staff and increased medical insurance premiums. As a percentage of
total revenue, compensation and benefits decreased to 21.1% in the six months
ended March 31, 2005, from 23.3% in the prior comparable period.
General and Administrative Expenses. General and administrative expense
increased by $0.02 million, or 4.0%, in the six months ended March 31, 2005,
from $0.5 million in the prior comparable period, primarily due to increases in
business insurance, computer support services and professional fees. As a
percentage of total revenue, general and administrative expense decreased to
8.5% in the six months ended March 31, 2005, from 10.2% in the prior comparable
period.
Mutual Fund Distribution Expense. Mutual fund distribution expenses
increased by $0.07 million, or 7.3%, in the six months ended March 31, 2005,
from $0.9 million in the prior comparable period. As a percentage of total
revenue, distribution expenses decreased to 18.0% in the six months ended March
31, 2005, from 21.0% in the prior comparable period. The proportion of assets
held through mutual fund supermarkets declined in relation to assets held at
other financial institutions primarily as a result of the acquisition of the
management agreements for the Lindner Funds in March 2004. Because most of the
net assets of the Lindner Funds were not held through mutual fund supermarkets
and we do not pay distribution expenses on assets that are not held through
mutual fund supermarkets, our distribution expense as a percentage of total
revenues declined following our acquisition of the management agreements for the
Lindner Funds.
Amortization and Depreciation Expense. Amortization and depreciation
expense increased by $0.01 million, or 76.9%, in the six months ended March 31,
2005, from $0.01 million in the prior comparable period, resulting from
amortization of capitalized loan origination costs and purchases of furniture
and equipment.
Interest Expense. We incurred interest expense of $0.2 million in the six
months ended March 31, 2005 as a result of the $7.9 million loan that we entered
into with U.S. Bank National Association in connection with the acquisition of
the management agreements for the Lindner Funds. The prior comparable period
included only a half-month of interest charges because the loan agreement only
became effective on March 15, 2004. Interest accrues at the prime rate set by
U.S. Bank National Association from time to time, which was 5.75% on March 31,
2005.
Income Taxes. The provision for income taxes increased by $0.3 million, or
38.4%, in the six months ended March 31, 2005, from $0.8 million in the prior
comparable period.
Net Income. Net income increased by $0.4 million, or 33.9%, in the six
months ended March 31, 2005, from $1.2 million in the prior comparable period,
as a result of the factors discussed above.
24
FISCAL YEAR 2004 COMPARED TO FISCAL YEAR 2003
Revenues. Total revenue increased by $4.7 million, or 99.4%, in the year
ended September 30, 2004, from $4.8 million in the prior fiscal year, primarily
due to fees earned from increased assets under management. Assets under
management increased primarily from the acquisition of the management agreements
for the Lindner Funds in March 2004 and market appreciation. Investment
management fees increased by $4.3 million, or 102.8%, in the year ended
September 30, 2004, from $4.2 million in the prior fiscal year, and shareholder
service fees increased by $0.5 million, or 85.4%, in the year ended September
30, 2004, from $0.5 million in the prior fiscal year. Net assets in our mutual
funds increased by $386.9 million, or 46.3%, as of September 30, 2004, from
$835.1 million as of the end of the prior fiscal year. This increase in net
assets of our mutual funds resulted from cash inflows of $616.6 million, which
included $301.2 million of cash inflows from acquisitions, redemptions of $300.9
million and market appreciation of $71.3 million. In comparison, during the
prior year ended September 30, 2003, cash inflows of our mutual funds were
$446.0 million, which included $34.9 million of cash inflows from acquisitions,
redemptions were $154.2 million and market appreciation was $169.7 million.
Although the amount of redemptions increased by $146.0 million for the year
ended September 30, 2004 as compared to the prior fiscal year, redemptions as a
percentage of assets under management decreased from an average of 2.5% per
month to 2.2% per month during the same period.
There were no expert witness fees earned in the year ended September 30,
2004, which was a decrease of $0.07 million from the year ended September 30,
2003. During the year ended September 30, 2004, Mr. Hennessy worked in a
limited capacity on our behalf as a securities litigation mediator, devoting the
majority of his time to managing our business.
Operating Expenses. Total operating expenses increased by $1.8 million, or
58.8%, in the year ended September 30, 2004, from $3.0 million in the prior
fiscal year. 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 50.0% in the year ended September 30, 2004, from 62.7% in the prior
fiscal year.
Employee Compensation and Benefits. Compensation and benefits increased by
$0.7 million, or 51.6%, in the year ended September 30, 2004, from $1.3 million
in the prior fiscal year. The increase resulted from the addition of a
marketing director and chief compliance officer as well as salary increases and
performance incentives for officers and staff. As a percentage of total
revenue, compensation and benefits decreased to 21.1% in the year ended
September 30, 2004, from 27.8% in the prior fiscal year.
General and Administrative Expenses. General and administrative expense
increased by $0.3 million, or 35.9%, in the year ended September 30, 2004, from
$0.6 million in the prior fiscal year, due to increases in business promotion
activities, marketing programs, participation in industry conferences, insurance
costs and office rent. As a percentage of total revenue, general and
administrative expense decreased to 9.1% in the year ended September 30, 2004,
from 13.4% in the prior fiscal year.
Mutual Fund Distribution Expense. Mutual fund distribution expenses
increased by $0.8 million, or 83.0%, in the year ended September 30, 2004, from
$1.0 million in the prior fiscal year. As a percentage of total revenue,
distribution expenses decreased to 19.4% in the year ended September 30, 2004,
from 21.1% in the prior fiscal year. The value of mutual fund assets held
through mutual fund supermarkets, and thus to which distribution expenses
relate, increased approximately 12.0% from September 30, 2003 to September 30,
2004. However, total assets under management increased 46.3% during that same
period, indicating that the proportion of assets held through mutual fund
supermarkets declined in relation to assets held at other financial
institutions. Because we do not pay distribution expenses on assets that are
not held through mutual fund supermarkets, our distribution expense as a
percentage of total revenues declined.
Amortization and Depreciation Expense. Amortization and depreciation
expense increased by $0.01 million, or 57.2%, in the year ended September 30,
2004, from $0.02 million in the prior fiscal year, resulting from amortization
of loan acquisition costs and additional purchases of furniture and equipment.
Interest Expense. We incurred interest expense of $0.2 million in the year
ended September 30, 2004 as a result of the $7.9 million loan that we entered
into with U.S. Bank National Association at the end of fiscal year 2003 in
connection with the acquisition of the management agreements for the Lindner
Funds. Interest accrues at the prime rate set by U.S. Bank National Association
from time to time, which was 5.0% on November 10, 2004.
25
Income Taxes. The provision for income taxes increased by $1.1 million, or
153.9%, in the year ended September 30, 2004, from $0.7 million in the prior
fiscal year, due to an increase in pre-tax income of $2.8 million.
Net Income. Net income increased by $1.7 million, or 160.4%, in the year
ended September 30, 2004, from $1.1 million in the prior fiscal year, as a
result of the factors discussed above.
FISCAL YEAR 2003 COMPARED TO FISCAL YEAR 2002
Revenue. Total revenue increased by $2.5 million, or 110.9%, in the year
ended September 30, 2003, from $2.3 million in the prior fiscal year, primarily
due to fees earned from increased assets under management. Assets under
management increased primarily from the increased cash inflows and market
valuations. Investment management fees increased by $2.2 million, or 109.7%, in
the year ended September 30, 2003, from $2.0 million in the prior fiscal year.
Shareholder service fees became effective October 1, 2003 and increased our
revenues by $0.5 million in the year ended September 30, 2003, constituting
11.4% of our revenues for that year. Net assets in our mutual funds increased
by $461.5 million, or 123.5%, as of September 30, 2003, from $373.6 million as
of the end of the prior fiscal year. This increase in the net assets of our
mutual funds resulted from cash inflows of $446.0 million, which included $34.9
of cash inflows from acquisitions, redemptions of $154.2 million and market
appreciation of $169.7 million. In comparison, during the prior year ended
September 30, 2002, cash inflows of our mutual funds were $304.8 million,
redemptions were $97.0 million and market depreciation was $(27.5) million.
Although the amount of redemptions increased by $57.2 million for the year ended
September 30, 2003 as compared to the prior fiscal year, redemptions as a
percentage of assets under management decreased from an average of 2.9% per
month to 2.5% per month during the same period.
Expert witness fees decreased by $0.16 million, or 95.6%, to $0.07 million
in the year ended September 30, 2003, from $0.2 million in the prior fiscal
year. During the year ended September 30, 2003, Mr. Hennessy worked in a very
limited capacity on our behalf as an expert witness and mediator.
Operating Expenses. Total operating expenses increased by $1.2 million, or
69.7%, in the year ended September 30, 2003, from $1.8 million in the prior
fiscal year. The increase resulted from higher compensation expense and
increased benefits, general and administrative expenses and mutual fund
distribution costs. As a percentage of total revenue, total operating expenses
decreased to 62.7% in the year ended September 30, 2003, from 78.0% in the prior
fiscal year.
Employee Compensation and Benefits. Compensation and benefits increased by
$0.6 million, or 81.7%, in the year ended September 30, 2003, from $0.7 million
in the fiscal year. The increase resulted from an increase in Mr. Hennessy's
compensation under his employment contract, the addition of one employee, staff
salary increases, year-end incentive payments and insurance benefit cost
increases. As a percentage of total revenue, compensation and benefits
decreased to 27.8% in the year ended September 30, 2003, from 32.3% in the prior
fiscal year.
General and Administrative Expenses. General and administrative expense
increased by $0.2 million, or 56.8%, to $0.6 million in the year ended September
30, 2003, from $0.4 million in the prior fiscal year, primarily due to increases
in advertising, public relations, business insurance, professional service fees,
board of directors fees and meeting expenses, shareholder service fees, rent and
travel expenses. As a percentage of total revenue, general and administrative
expense decreased to 13.4% in the year ended September 30, 2003, from 18.0% in
the prior fiscal year.
26
Mutual Fund Distribution Expenses. Mutual fund distribution expenses
increased by $0.7 million, or 207.5%, in the year ended September 30, 2003, from
$0.3 million in the prior fiscal year. As a percentage of total revenue,
distribution expenses increased to 21.1% in the year ended September 30, 2003,
from 14.5% in the prior fiscal year. The value of mutual fund assets held
through mutual fund supermarkets, and thus to which distribution expenses
related, increased approximately 131.0% from September 30, 2002 to September 30,
2003. Additionally, mutual fund supermarket fee rates charged to us by Charles
Schwab, Inc. increased by five basis points in the year ended September 30,
2003.
Amortization and Depreciation Expense. Amortization and depreciation
expense decreased by $0.3 million, or 92.9%, in the year ended September 30,
2003, from $0.3 million in the prior fiscal year, primarily due to the
discontinuance of amortization of intangible management agreements acquired as
required by the provisions of Financial Accounting Standards Board Statement No.
142, "Goodwill and Other Intangible Assets."
Interest Expense. We had no interest expense in the year ended September
30, 2003, compared to interest expense of $0.2 million in the year ended
September 30, 2002. This decrease was due to payment in full of the notes due
Netfolio, Inc. and Firstar Bank, NA in March 2002.
Income Taxes. The provision for income taxes increased by $0.7 million, or
4953.0%, in the year ended September 30, 2003, from $0.1 million in the prior
fiscal year, resulting from an increase in pre-tax income of $1.5 million and an
increase in our effective tax rate from 4.4% to 40.4%. The change in effective
tax rate was primarily due to the elimination of valuation allowances in the
prior fiscal year.
Net Income. Net income increased by $0.8 million, or 244.0%, in the year
ended September 30, 2003, from $0.3 million in the prior fiscal year, primarily
as a result of the factors described above.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have and have not had any off-balance sheet arrangements.
LIQUIDITY AND CAPITAL RESOURCES
We continually review our capital requirements to ensure that we have
sufficient funding available to support our growth strategies. Management
anticipates that cash and other liquid assets on hand as of March 31, 2005 will
be sufficient to meet our 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 or equity markets. There can be no assurance that we will be able to
borrow funds or raise additional equity.
Total assets as of March 31, 2005 were $20.4 million, which was an increase
of $0.5 million, or 2.6%, from September 30, 2004. Property and equipment and
management agreements acquired totaled $14.2 million as of March 31, 2005. Our
remaining assets are very liquid, consisting primarily of cash and receivables
derived from mutual fund asset management activities. As of March 31, 2005, we
had cash and cash equivalents of $4.9 million.
Dividend Payments. On March 8, 2005, we paid a cash dividend of $0.10 per
common share. The total payment from cash on hand was $0.2 million. Upon the
successful completion of this offering, we intend to begin paying dividends on a
quarterly basis.
Our Bank Loan. We have an outstanding bank loan with U.S. Bank National
Association. We incurred $7.9 million of indebtedness in connection with
acquiring the management agreements for the Lindner Funds and an additional $6.7
million of indebtedness in connection with acquiring the management agreement
for The Henlopen Fund (now known as the Hennessy Cornerstone Growth Fund, Series
II). The indebtedness we incurred to acquire the management agreement of The
Henlopen Fund was rolled into a single loan with the indebtedness we incurred to
acquire the management agreements of the Lindner Funds. We currently have $___
million of principal outstanding under our bank loan, which bears interest at
U.S. Bank National Association's prime rate as set by U.S. Bank National
Association from time to time (6.25% as of July 1, 2005). The loan agreement
requires us to make 64 monthly payments in the approximate amount of $0.2
million, plus interest, with the final installment of the then outstanding
principal and interest due on September 30, 2010. We intend to retire this loan
in full with a portion of the proceeds of this offering.
27
CONTRACTUAL OBLIGATIONS
We have a contractual obligation to make future payments to U.S. Bank
National Association for the bank loan used to finance our acquisitions of the
management agreements for the Lindner Funds and The Henlopen Fund (now known as
the Hennessy Cornerstone Growth Fund, Series II). We also have obligations
under the terms of our operating leases for office suites in three locations.
The following table provides information regarding our contractual
obligations as of June 30, 2005:
PAYMENTS DUE BY PERIOD
---------------------------------------------------------------------------
LESS THAN MORE THAN
TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
----- --------- --------- --------- ---------
(IN THOUSANDS)
Long-term debt $13,317 $2,010 $4,355 $4,181 $2,771
Operating lease(1) $ 23 $ 23 $ - $ - $ -
Operating lease(2) $ 1,968 $ 340 $ 806 $ 822 $ -
Operating lease(3) $ 133 $ 39 $ 94 $ - $ -
------- ------ ------ ------ ------
Total $15,441 $2,412 $5,255 $5,003 $5,052
------- ------ ------ ------ ------
------- ------ ------ ------ ------
--------------
(1) This lease, which expires September 30, 2005, is for our principal
executive office located at 750 Grant Avenue, Suite 100, Novato,
California 94945.
(2) This lease, which we expect to commence October 1, 2005, is for the
new location of our principal executive office to be located at 7250
Redwood Boulevard, Suite 204, Novato, California 94945. We have one
five-year extension available under this lease.
(3) This lease, which we expect to commence September 1, 2005, is for
office space located at One Landmark Square, Suite 424, Stamford,
Connecticut 06901.
MARKET RISK
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have exposure to market risk primarily in the areas of securities
pricing and interest rate sensitivity.
Market Risk - Securities Pricing. There is market risk affecting our
revenues due to the potential negative impact that an overall decline in
securities markets would have on the prices of securities held in the portfolios
of our mutual funds and on their net assets. Our management and shareholder
service fees are based on the average value of assets under management, and a
general decline in securities market valuations will likely result in lower
revenue.
Management and shareholder service fees were $9.5 million for the fiscal
year ended September 30, 2004. Had there been a general securities market
decline of 10% in that year, it is likely that our revenues would have declined
approximately $0.95 million, excluding consideration of potential reductions
resulting from a decline in investments in mutual funds, generally.
Market Risk - Interest Rate Sensitivity. We are exposed to interest rate
risk through the variable interest rate terms of our loan agreement with U.S.
Bank National Association. The interest rate on our loan with U.S. Bank
National Association is U.S. Bank National Association's prime rate as set by
U.S. Bank National Association from time to time. When we entered into the loan
agreement in March 2004, the interest rate was 4.0%. As of our fiscal year
ended September 30, 2004, the interest rate was 4.75% and as of July 1, 2005, it
was 6.25%. Based on the current amount of the loan outstanding, which increased
on July 1, 2005 in connection with our acquisition of the management agreement
for The Henlopen Fund (now known as the Hennessy Cornerstone Growth Fund, Series
II), each 1.0% increase in interest rates would decrease our pretax income by
approximately $0.1 million.
CRITICAL ACCOUNTING POLICIES
In June 2001, the Financial Accounting Standards Board issued FASB
Statement No. 142, "Goodwill and Other Intangible Assets." FASB No. 142
addresses financial accounting and reporting for acquired goodwill and other
intangible assets and supersedes APB No, 17, Intangible Assets. Under FASB
Statement No. 142, goodwill and intangible assets that have indefinite useful
lives are not amortized, but are tested at least annually for impairment. We
consider the management agreements acquired to be intangible assets with an
indefinite life. We fully implemented the provisions of FASB Statement No. 142
on October 1, 2002, at which time we ceased amortization of these intangible
assets. Impairment analysis is conducted quarterly and coincides with our
quarterly and annual financial reporting. Based on our detailed assessment of
current fair market value, the value of the management agreements acquired has
not been impaired. If future valuations in the marketplace decline
significantly, the valuation of management agreements acquired may become
impaired and net earnings would be negatively impacted by the resulting
impairment adjustment.
28
SUMMARY QUARTERLY FINANCIAL INFORMATION
Set forth below is summary financial information by quarter for each of our
last two fiscal years.
FISCAL YEAR ENDED SEPTEMBER 30, 2004
--------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Total revenue $2,011 $2,391 $2,602 $2,541
Net income $ 525 $ 676 $ 777 $ 787
Per common share:
Earnings per share
Basic $ 0.21 $ 0.28 $ 0.32 $ 0.32
Diluted $ 0.21 $ 0.27 $ 0.31 $ 0.30
FISCAL YEAR ENDED SEPTEMBER 30, 2003
-------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Total revenue $ 955 $1,008 $1,218 $1,606
Net income $ 230 $ 165 $ 285 $ 382
Per common share:
Earnings per share
Basic $0.09 $ 0.07 $ 0.12 $ 0.15
Diluted $0.09 $ 0.07 $ 0.11 $ 0.15
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
On December 30, 2004, we appointed Stonefield Josephson, Inc. as our new
independent registered public accounting firm, replacing the independent
registered public accounting firm of Pisenti & Brinker LLP. Stonefield
Josephson, Inc. has not yet been through an audit cycle with us and has not
therefore rendered an opinion on any of the financial statements included in
this prospectus.
29
BUSINESS
GENERAL
Overview. We are a publicly traded investment management firm. Our
principal business activity is managing, servicing and marketing our six open-
end mutual funds. All of our mutual funds are no-load, meaning investors do not
pay any upfront or deferred sales charges. We use quantitative stock selection
strategies to manage each of the Hennessy Funds. The net assets of the mutual
funds we manage have increased by 856% from $194 million on September 30, 2001
to $1.67 billion as of July 1, 2005, including approximately $299 million in net
assets added on July 1, 2005 in connection with the acquisition of the
management agreement for The Henlopen Fund, which we renamed the Hennessy
Cornerstone Growth Fund, Series II. During this same period, the total number
of shareholders in our mutual funds has increased by 845% from 10,629
shareholders on September 30, 2001 to 100,398 shareholders on July 1, 2005. We
believe that our broad and diversified shareholder base provides more stability
to the amount of assets under management.
Each of the Hennessy Funds pay fees to us for our management services.
Management services include 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. Some of our mutual funds
also pay fees to us for shareholder services. Shareholder services consists
primarily of providing a call center to respond to shareholder inquiries,
including inquiries regarding specific mutual fund account and investment
information. The fees that we receive for management and shareholder services
are based on a percentage of the average daily net asset values of our mutual
funds.
Historically, we have received operating revenues from providing Mr.
Hennessy's services as an expert witness and mediator in securities cases.
Also, until June 2005, we provided management services to high net worth
investors. However, our business strategy has evolved and we no longer generate
any operating revenues from these services.
Company History. We were founded in 1989 as a California corporation under
the name Edward J. Hennessy Incorporated. We initially registered with the
appropriate federal, state and self-regulatory organizations as a broker-dealer
with a retail business. In addition, we were a member of the National
Association of Securities Dealers, serving mainly individual investors, but we
terminated this registration in July 2000 and are no longer engaged in the
business. In 1990, we registered as an investment advisor. From 1990 to 1996,
we provided management services to private clients and limited partnerships
utilizing strategies similar to those we use in advising our mutual funds today.
In 1996, we launched our first mutual fund, the Hennessy Balanced Fund. We
initially managed the Hennessy Balanced Fund through The Hennessy Management
Co., L.P., a California limited partnership for which we served as the general
partner. As general partner, we performed all of the management functions on
behalf of The Hennessy Management Co., L.P. for the Hennessy Balanced Fund.
In 1998, we launched our second mutual fund, the Hennessy Total Return
Fund. We initially managed the Hennessy Total Return Fund through The Hennessy
Management Co. 2, L.P., another California limited partnership for which we
served as the general partner and as such, performed all of the management
functions on behalf of The Hennessy Management Co. 2, L.P. for the Hennessy
Total Return Fund.
In 2000, we began acquiring the rights to manage the assets of additional
mutual funds by entering into agreements with the funds' investment advisors to
purchase certain assets related to such funds. When we acquire the rights to
manage the assets of a mutual fund, we generally either enter into a management
agreement covering the mutual fund or reorganize the assets of the mutual fund
into one of our existing mutual funds. An attractive acquisition target for us
is a retail-oriented, no-load mutual fund with less than $500 million in net
assets.
In June 2000, we completed our first acquisition by entering into a
management agreement covering the O'Shaughnessy Cornerstone Growth Fund and
O'Shaughnessy Cornerstone Value Fund and changed the names of these funds to the
Hennessy Cornerstone Growth Fund and the Hennessy Cornerstone Value Fund. In
connection with this acquisition, we obtained an exclusive, perpetual license to
use the names and investment strategies of the Cornerstone Growth Fund and
Cornerstone Value Fund from Netfolio, Inc. These two mutual funds had
approximately $197 million in combined net assets at the time we began managing
them.
30
In May 2002, we completed our initial public offering, raising $5.7 million
in a non-underwritten offering at a split-adjusted price of $6.67 and becoming a
1934 Act reporting company as a small-business issuer. At the time of our
initial public offering, assets under management were approximately $211
million. In connection with our initial public offering, the limited partners
of The Hennessy Management Co., L.P. and The Hennessy Management Co. 2, L.P.
agreed to merge these partnerships into us, thereby allowing us to consolidate
all of our management activities directly into Hennessy.
In September 2003, we acquired the management agreement for the SYM Select
Growth Fund. In connection with that acquisition, we launched our fifth mutual
fund, the Hennessy Focus 30 Fund, into which we reorganized the assets of the
SYM Select Growth Fund. At the time of this acquisition, the SYM Fund had
approximately $35 million in net assets.
In March 2004, we acquired the management agreements for five funds managed
by Lindner Asset Management, Inc., which we refer to as the Lindner Funds. In
connection with this acquisition, the assets of the Lindner Funds were
reorganized into four of our existing mutual funds. At the time of this
acquisition, the Lindner Funds had approximately $301 million in combined net
assets.
In July 2005, we acquired the management agreement for The Henlopen Fund
and changed the name to the Hennessy Cornerstone Growth Fund, Series II. At the
time of this acquisition, The Henlopen Fund had approximately $299 million in
net assets.
MANAGEMENT AGREEMENTS AND FEES
We have entered into management agreements covering all of our mutual funds
with the registered investment companies or trusts under which our mutual funds
are organized. Our registered investment companies or trusts are currently The
Hennessy Funds, Inc., The Hennessy Mutual Funds, Inc. and Hennessy Funds Trust.
Our management agreements with The Hennessy Funds, Inc. covers the Hennessy
Total Return Fund and Hennessy Balanced Fund; our management agreement with The
Hennessy Mutual Funds, Inc. covers the Hennessy Cornerstone Growth Fund, the
Hennessy Cornerstone Value Fund and the Hennessy Focus 30 Fund; and our
management agreement with Hennessy Funds Trust covers the Hennessy Cornerstone
Growth Fund, Series II. Under these agreements, we are responsible for overall
investment and management services, subject to the oversight of the applicable
board of directors or trustees and according to each mutual fund's particular
fundamental investment objectives and policies. The boards of each of The
Hennessy Funds, Inc., The Hennessy Mutual Funds, Inc. and Hennessy Funds Trust
consist of four individuals, including our chairman of the board, president and
chief executive officer, Neil J. Hennessy, and three independent directors or
trustees. Under the Investment Company Act of 1940, a majority of the
independent directors or trustees must approve the entry into and continuation
of our management agreements. The independent directors also have sole
responsibility for selecting and nominating other independent directors or
trustees.
We also provide any ordinary clerical and bookkeeping services needed by
our mutual funds that are not provided by the funds' custodian, administrator or
transfer agent. We fulfill requests for information about our mutual funds or
pay the fulfillment expenses that our mutual funds would otherwise incur.
31
In exchange for all of these services, we receive a management fee from
each of our mutual funds, which is based on the amount of each fund's average
daily net assets. The annual management fees payable to us by our mutual funds
are as follows:
MANAGEMENT FEE
(AS A PERCENTAGE OF
FUND FUND ASSETS)
---- -------------------
Hennessy Cornerstone Growth Fund 0.74%
Hennessy Cornerstone Growth Fund, Series II 0.74%
Hennessy Cornerstone Value Fund 0.74%
Hennessy Focus 30 Fund 0.74%
Hennessy Total Return Fund 0.60%
Hennessy Balanced Fund 0.60%
We must waive our management fees for the Hennessy Focus 30 Fund to the
extent that total annual fund operating expenses would otherwise exceed 1.45%.
If we waive our fees in a particular year, we can request reimbursement for that
waiver in subsequent years assuming that reimbursement would not cause total
annual fund operating expenses to exceed 1.45%. This expense cap will be
effective until it is terminated by the board of directors that oversees the
Hennessy Focus 30 Fund.
We must also waive our management fees for the Hennessy Cornerstone Growth
Fund, Series II to the extent that total annual fund operating expenses would
otherwise exceed 1.25%. If we waive our fees in a particular year, we can
request reimbursement for that waiver in subsequent years assuming that
reimbursement would not cause total annual fund operating expenses to exceed
1.25%. This expense cap will be effective until June 2006.
We have, from time to time, had contractual obligations to waive all or
part of our management fees for our funds other than the Hennessy Focus 30 Fund
and Hennessy Cornerstone Growth Fund, Series II, but such agreements are now
expired. We may still choose to voluntarily waive part of our management fees
in order to maintain competitive expense ratios for the funds. We most recently
waived part of our management fees for the Total Return Fund for its fiscal year
ended June 30, 2003.
Our management agreements must be renewed every year by a majority of all
of the directors or trustees and a majority of all of the disinterested
directors or trustees that oversee our mutual funds. Other than not being
renewed, there are generally two circumstances that will lead to our management
agreements being terminated. First, if we try to assign a management agreement
to another advisor, it will automatically terminate. Assignment includes an
indirect assignment through a transfer of shares of our common stock deemed to
constitute a controlling block. See "Risk Factors - Risks Related to this
Offering and Our Common Stock" and "Business - Regulation." Second, if we give
written notice of termination of a management agreement to one of our mutual
fund companies or if one of our mutual fund companies gives written notice to us
of termination of a management agreement, the applicable agreement will
terminate 60 days later.
This offering will result in a deemed assignment of our management
agreements. Neil J. Hennessy presently owns 39.4% of our outstanding common
stock. He will own ---% of our outstanding common stock upon the effectiveness
of this offering, or ---% if the underwriters exercise their over-allotment
option in full. If Mr. Hennessy's ownership of our common stock falls below 25%
as a result of this offering, then under the Investment Advisors Act of 1940 and
the Investment Company Act of 1940, we will be deemed to have experienced a
change in control. This change in control will be deemed to constitute an
assignment of the management agreements between us and each of our mutual funds
that must be approved by the holders of the lesser of a majority of the
outstanding shares of each mutual fund, or two-thirds of the shares voted,
provided that at least a majority of the outstanding shares are voted. We
expect the board of directors or trustees of our mutual funds to recommend that
the mutual fund shareholders approve new management agreements with Hennessy
covering each of our mutual funds. Each of our mutual funds has scheduled a
meeting of its shareholders on ------- 2005, which we anticipate will be prior
to completion of this offering. However, we cannot assure you that the
requisite vote will be obtained. See "Risk Factors - Risks Related to this
Offering and Our Common Stock" for additional information regarding this deemed
assignment.
32
SHAREHOLDER SERVICES
In addition to our management agreements, we also have shareholder service
agreements covering the Hennessy Cornerstone Growth Fund, Hennessy Cornerstone
Growth Fund, Series II, Hennessy Focus 30 Fund and Hennessy Cornerstone Value
Fund. We have provided shareholder services under a shareholder service
agreement to the Hennessy Cornerstone Growth Fund and Hennessy Cornerstone Value
Fund since October 2003, to the Hennessy Focus 30 Fund since June 30, 2005 and
to the Hennessy Cornerstone Growth Fund, Series II since July 1, 2005. Under
these agreements, we provide administrative support services to these funds,
including, among other things, the following:
o maintaining an "800" number that current fund shareholders may
call to ask questions about the funds or their accounts with the
funds;
o assisting shareholders in processing exchange and redemption
requests;
o assisting shareholders in changing dividend options, account
designations and addresses;
o responding generally to questions of shareholders; and
o providing other similar services that the funds may request.
In exchange for these services, we receive an annual shareholder service
fee from each of the above-named funds of 0.10% of the fund's average daily net
assets.
12B-1 PLAN
The Hennessy Total Return Fund and Hennessy Balanced Fund have each adopted
a 12b-1 plan. Under Rule 12b-1 of the Investment Company Act of 1940, mutual
funds can adopt a plan that allows them to make payments to third parties in
connection with the distribution of their shares, including for activities such
as advertising, compensation for sales and marketing activities of financial
institutions and others such as dealers and distributors, shareholder account
servicing, the printing and mailing of prospectuses to other than current
shareholders and the printing and mailing of sales literature. Mutual funds
with a 12b-1 plan can also employ a distributor for their shares and use 12b-1
fees to pay that distributor for items such as compensation to, and expenses
(including overhead and telephone expenses) of, employees of the distributor who
engage in or support distribution of the shares of each of these funds, printing
of prospectuses and reports for other than current shareholders, advertising and
preparation and distribution of sales literature. The 12b-1 plan adopted by the
Hennessy Total Return Fund and the Hennessy Balanced Fund allows each fund to
make payments of up to 0.25% annually of the average net assets of each fund for
the activities described above. The SEC has considered changes to Rule 12b-1 of
the Investment Company Act of 1940 and although no specific proposals are
currently pending, changes to Rule 12b-1 could restrict our current practices.
CUSTODIAL AND BROKERAGE ARRANGEMENTS
All shareholder funds are held by third party custodians. Independent
brokerage firms execute all trades for our funds, at our direction.
Currently, we participate in two "soft dollar" arrangements, which means
that we receive research reports and real-time electronic research to assist us
in trading and managing our mutual funds. Under these soft dollar arrangements,
we pay brokerage commissions for securities trades on behalf of a mutual fund
that may be higher than the commissions that we would pay through a different
brokerage firm, but in exchange we receive research or other services that
benefit our mutual funds. The value of the research that we receive under our
soft dollar arrangements is approximately $120,000 per year. The SEC is
currently examining soft dollar arrangements as they relate to our industry and
could restrict our current practices.
33
LICENSE AGREEMENT
Our ability to use the names and formulaic investment strategies of the
funds now known as the Hennessy Cornerstone Growth Fund and Hennessy Cornerstone
Value Fund are governed by the terms and conditions of a license agreement,
dated as of April 10, 2000, with Netfolio, Inc. Under the license agreement,
Netfolio, Inc. granted to us a perpetual, paid-up, royalty-free, exclusive
license to use certain marks, such as "Strategy Indexing," "Cornerstone Growth"
and "Cornerstone Value," as well as the formula investment strategies used by
the Hennessy Cornerstone Growth Fund and Hennessy Cornerstone Value Fund. All
of our advertising, marketing, promotional and other materials incorporating or
referring to the marks are subject to the prior written approval of Netfolio,
Inc., except that we do not need Netfolio Inc.' s prior written approval to use
the marks in a manner that is not substantially unchanged from any prior use by
Netfolio, Inc. in its own business or from any prior use by us previously
approved by Netfolio, Inc. We can assign the license to another person or
entity if the assignee agrees in writing to be bound by the terms of the license
agreement. There are no ongoing licensing fees associated with this license
agreement and Netfolio, Inc. does not have any contractual rights to terminate
the license agreement.
BUSINESS STRATEGY
Since 1996 when we started our first mutual fund, we have grown to managing
$1.67 billion of assets as of July 1, 2005. We intend to continue increasing
our profitability and assets under management by implementing the following key
strategies.
Utilizing our branding and marketing campaign for growth. We believe that
we can attract investors to our mutual funds by effectively marketing our unique
quantitative investment style. We believe that our investment philosophy
appeals to investors who want to understand exactly how their investments are
managed and who favor statistical analysis and empirical evidence as the basis
for investment decisions. We will continue our efforts to make Hennessy a name
readily recognizable by investors through frequent print media, radio and
television appearances. We use our media appearances to convey to investors
that we manage our funds with the discipline and consistency of an index fund by
never straying from our strategies. We believe that a straightforward,
quantitative approach is easily understood by investors and makes them more
likely to recommend us to others by word of mouth. As our brand recognition
continues to grow, we believe that our investment philosophy will generate above
average organic growth through new investments in our mutual funds.
Expanding our distribution network to additional mutual fund supermarkets.
One of the ways that investors can buy shares of our mutual funds is through
mutual fund supermarkets, principally Schwab One Source, Fidelity, TD Waterhouse
and Pershing. Mutual fund supermarkets can offer funds of many different
investment companies to investors, often without a transaction fee or sales
charge to the investor. Instead of charging a fee to investors, mutual fund
supermarkets are reimbursed for their services by the applicable fund or that
fund's investment advisor. This ability to purchase various mutual funds at no
cost in a single location is very attractive to investors. Mutual fund
supermarkets have been a significant source of our asset growth. Of the $1.67
billion of assets under management in our mutual funds as of July 1, 2005,
approximately 64.1% of those assets came from mutual fund supermarkets. We see
continued opportunities to form new relationships with mutual fund supermarkets,
thereby enhancing the accessibility of our no-load mutual funds to investors.
Increasing our current base of investment professionals who utilize no-load
mutual funds for their clients. Investment professionals generally have a wide
variety of investment products that they can recommend to their clients. A
recommendation by an investment professional to a client to buy one of our
mutual funds can be very influential to that client. Thus, we believe that
expanding our current base of investment professionals who utilize no-load funds
for their clients will help us increase the amount of assets that we manage,
which will in turn increase our revenues.
Securing participation in the platforms of national full-service firms that
permit their investment professionals to utilize no-load funds for their
clients. We will strive to continue developing relationships with national
full-service firms that permit their investment professionals to offer no-load
funds to their clients as a way to increase the amount of assets that we manage,
which will in turn increase our revenues.
34
Pursuing selective acquisitions. We selectively consider strategic
acquisitions of management agreements of additional mutual funds. Through our
acquisition strategy, we have added over $635 million of assets under management
in three separate acquisitions over the past two years. We believe there are a
number of attractive acquisition opportunities from smaller mutual fund managers
who are reaching retirement age or whose investment strategy does not lend
itself to the economies of scale inherent in our strictly quantitative approach.
We have been able to offer lower overall expense ratios to the shareholders of
acquired funds as well as improved performance. We believe these factors have
resulted in retaining approximately 90% of the assets added to our mutual funds
through acquisitions one year after the completion of the acquisition.
Deliver strong, high quality financial results. We seek to manage our
investment management business to the highest regulatory, ethical and business
standards while strenuously controlling costs and creating high margins for the
Hennessy shareholders. Because we apply quantitative investment strategies, we
have been able to rapidly increase assets under management, through both
acquisitions and organic growth, while maintaining a small staff.
MARKETING
We generate all of our operating revenues by providing management and
shareholder services to our mutual funds. The revenues that we receive from our
mutual funds are based on the amount of average daily net assets in the funds
and thus, we can increase our revenues by growing the amount of net assets in
the funds. One of the best ways we can grow the assets of our mutual funds is
by delivering strong investment performance, which we believe should:
o result in an increase in the value of existing assets in the
funds;
o encourage more investors to buy shares of our mutual funds and
decrease the number of investors who redeem their shares and
leave our mutual funds; and
o motivate current investors to invest additional money in our
mutual funds.
We have developed an aggressive public relations outreach program to target
audiences we would otherwise be unable to address. Our public relations
outreach program has resulted in Hennessy Funds being mentioned in national
print and broadcast media an average of once every three to four days in such
vehicles as CNBC, Fox News, The Wall Street Journal, The New York Times, Smart
Money, Barron's, Investors Business Daily to name a few.
We also send sending quarterly information mailings, fund performance
updates, news articles pertaining to the funds or commentaries from our
portfolio manager, Neil J. Hennessy, to clients and prospective clients, and we
exhibit at select investment advisor trade shows throughout the year.
ACQUISITION STRATEGY AND MARKET OPPORTUNITY
Due to demand for our mutual funds and a large number of mutual funds that
are potential acquisition targets, we believe that we are well positioned to
experience continued organic growth and growth by acquisition for the
foreseeable future. Our scalable business model allows us to increase our
profit margins as assets under management grow, since we do not need to add
personnel proportional to the increase in assets under management.
According to the U.S. Census Bureau, the percentage of the U.S. population
aged 55 and over will increase from approximately 23% (approximately 67 million
individuals) in 2005 to 29% (approximately 97 million) in 2020. As increasing
numbers of baby boomers begin or continue to save for retirement, we believe
that they will seek investment products such as mutual funds. The U.S. Social
Security Administration has established that the average life expectancy for
males increased from 62.9 years in 1945 to 74.4 years in 2003. For women, the
average life expectancy increased from 68.4 to 79.5 years over the same period.
This trend in longer life expectancies means that individuals will need to
invest more than they would have needed to in the past to ensure that they do
not outlive their retirement savings. We believe our investment philosophy of
using quantitative investment management strategies appeals to investors who
want a straightforward, quantitative approach that is easily understood. We
believe we are well positioned to offer attractive investment products and
services to the aging U.S. population.
35
Together with organic growth, our growth strategy revolves around the
acquisition of management agreements. An attractive acquisition target for us
is a retail-oriented, no-load mutual fund with less than $500 million in net
assets. The overall U.S. market for retail-oriented, no-load mutual funds
consists of over 2,400 different funds with net assets ranging from less than $1
million to over $100 billion. Of these 2,400 funds, approximately 70%, or 1,700
funds, meet our acquisition size criteria with less than $500 million in net
assets. An active market for the acquisition of mutual fund management
agreements has developed in recent years with over 80 such acquisitions having
been completed since the beginning of 2000. Additionally, we believe the
regulatory burden imposed upon the mutual fund industry has compressed the
margins of smaller mutual fund managers, making those managers more receptive to
an acquisition. We believe that we are well positioned to benefit from these
attractive acquisition trends and from the increasing supply of potential
targets.
INVESTMENT STRATEGY
We manage each of the Hennessy Funds using a quantitative stock selection
strategy that we have evaluated and tested over historical periods for
hypothetical performance results. We manage our funds according to strict,
formulaic investment strategies and do not try to outsmart or time the market.
We purchase a portfolio of securities for each of our mutual funds, as dictated
by the funds' strategies, and hold those securities for approximately one year.
A brief description of each of our mutual funds follows.
Hennessy Cornerstone Growth Fund (HFCGX). The Hennessy Cornerstone Growth
Fund seeks long-term growth of capital by investing primarily in small-cap,
growth-oriented companies. This fund screens a universe of stocks with a market
capitalization of more than $134 million, a price-to-sales ratio of less than
1.5, higher annual earnings than in the previous year and positive relative
strength over the prior three- and six-month periods. From that list, the fund
invests in the 50 stocks with the highest stock price appreciation over the past
year.
Hennessy Cornerstone Growth Fund, Series II (formerly known as The Henlopen
Fund) (HENLX). The Hennessy Cornerstone Growth Fund, Series II seeks long-term
capital appreciation. This fund utilizes the same investment strategy as the
Hennessy Cornerstone Growth Fund but selects its portfolio at a different time
of the year, thus creating a substantially different portfolio of stocks.
Hennessy Cornerstone Value Fund (HFCVX). The Hennessy Cornerstone Value
Fund seeks total return, consisting of capital appreciation and current income,
by investing in dividend-paying, large-cap companies. This fund screens a
universe of stocks to find companies with above average market capitalization,
shares outstanding, cash flow and 12-month sales that are at least 50% higher
than average. From that list, the fund invests in the 50 stocks with the
highest dividend yield, which is calculated as the annual dividends paid by a
company divided by the per share price of its stock.
Hennessy Total Return Fund (HDOGX). The Hennessy Total Return Fund seeks
total return, consisting of capital appreciation and current income, and seeks
to exceed, in the long run, the returns of the Dow Jones Industrial Average but
with lower associated risk. Through the defined strategy of the fund,
approximately 75% of its return is based on the 10 highest dividend yielding
common stocks of the Dow Jones Industrial Average and the remaining 25% of its
return is based on U.S. Treasury securities with a maturity of less than one
year. The 10 highest dividend yielding stocks in the Dow Jones Industrial
Average are commonly referred to as the "Dogs of the Dow" stocks.
Hennessy Focus 30 Fund (HFTFX). The Hennessy Focus 30 Fund seeks long-term
growth of capital by investing in mid-cap, growth-oriented companies. This
fund's strategy is similar to the Cornerstone Growth strategy, but it focuses on
domestic, mid-cap companies. This fund screens a universe of U.S. stocks with a
market capitalization of between $1 to $10 billion, excluding American
Depository Receipts and stocks with a share price of less than $5, to find
companies with a price-to-sales ratio of less than 1.5, higher annual earnings
than in the previous year and positive stock price appreciation over a three-
and six-month period. From that list, the fund invests in the 30 stocks with
the highest stock price appreciation over the past year.
36
Hennessy Balanced Fund (HBFBX). The Hennessy Balanced Fund seeks a
combination of capital appreciation and current income by investing in a balance
of the Dogs of the Dow stocks and U.S. Treasury securities with a maturity of
less than one year.
HISTORICAL FUND INVESTMENT PERFORMANCE
The following table presents the average annualized returns for each of our
mutual funds and the relevant benchmark indices for the one-year, three-year,
five-year and since inception periods ended June 30, 2005. Although we did not
begin managing the Hennessy Cornerstone Growth Fund and Hennessy Cornerstone
Value Fund until June 2000, we have included historical performance information
for these funds from their inception date of November 1, 1996 because the
previous investment manager to these funds managed the funds using the same
strategies that we still use today. We have not included information for the
Hennessy Cornerstone Growth Fund, Series II because we only began managing the
fund on July 1, 2005 and the previous manager did not use the Cornerstone Growth
strategy. Returns are presented net of all expenses borne by mutual fund
shareholders, but are not net of fees waived or expenses borne by us. The past
investment performance of our mutual funds is no guarantee of future performance
and all of these mutual funds have experienced negative performance over various
time periods in the past and may do so again in the future.
SINCE
INCEPTION
HENNESSY CORNERSTONE GROWTH FUND 1 YEAR 3 YEARS 5 YEARS (11/01/96)
-------------------------------- ------ ------- ------- ----------
Average Annual Total Return 15.07% 14.32% 11.89% 16.18%
S&P 500(1)(2) 6.32% 8.28% (2.37%) 8.54%
Russell 2000 Index(2)(3) 9.45% 12.81% 5.71% 8.98%
SINCE
INCEPTION
HENNESSY CORNERSTONE VALUE FUND 1 YEAR 3 YEARS 5 YEARS (11/01/96)
------------------------------- ------ ------- ------- ----------
Average Annual Total Return 5.83% 6.79% 7.88% 6.89%
S&P 500(1)(2) 6.32% 8.28% (2.37%) 7.93%
Russell 1000 Index(2)(4) 7.92% 9.19% (1.89%) 8.19%
SINCE
INCEPTION
HENNESSY TOTAL RETURN FUND 1 YEAR 3 YEARS 5 YEARS (07/29/98)
-------------------------- ------ ------- ------- ----------
Average Annual Total Return 3.03% 4.67% 6.15% 3.47%
S&P 500(1)(2) 6.32% 8.28% (2.37%) 2.36%
Dow Jones Industrial Average(2)(5) 0.66% 5.92% 1.69% 4.04%
90-Day U.S. Treasury Securities(2)(6) 2.04% 1.47% 2.49% 3.18%
SINCE
INCEPTION
HENNESSY FOCUS 30 FUND 1 YEAR 3 YEARS 5 YEARS (09/17/03)
---------------------- ------ ------- ------- ----------
Average Annual Total Return 22.77% N/A N/A 19.82%
S&P 500(1)(2) 6.32% N/A N/A 10.65%
S&P 400 Mid-cap(2)(7) 14.03% N/A N/A 17.38%
37
SINCE
INCEPTION
HENNESSY BALANCED FUND 1 YEAR 3 YEARS 5 YEARS (03/08/96)
---------------------- ------ ------- ------- ----------
Average Annual Total Return (0.17%) 1.93% 3.33% 5.03%
S&P 500(1)(2) 6.32% 8.28% (2.37%) 9.35%
Dow Jones Industrial Average(2)(5) 0.66% 5.92% 1.69% 9.04%
90-Day U.S. Treasury Securities(2)(6) 2.04% 1.47% 2.49% 3.71%
(1) The S&P 500 is the Standard & Poor's Composite Index of 500 stocks, a
widely recognized index of common stocks.
(2) Reflects no deduction for fees or expenses.
(3) The Russell 2000 Index is a recognized small-cap index of the 2,000
smallest stocks of the Russell 3000 Index, which is comprised of the
3,000 largest U.S. stocks as determined by total market
capitalization.
(4) The Russell 1000 Index is comprised of large-cap U.S. stocks and is
commonly used as a benchmark for U.S. large-cap funds.
(5) The Dow Jones Industrial Average is an index of common stocks
comprised of major industrial companies and assumes reinvestment of
dividends.
(6) We believe 90-day U.S. Treasury securities most closely approximate
the treasury securities held by the Total Return Fund and Balanced
Fund because the Total Return Fund and Balanced Fund purchase treasury
securities having a maturity of less than one year.
(7) The S&P 400 Mid-Cap Index is a widely recognized index of common
stocks.
DEVELOPMENT OF NEW INVESTMENT STRATEGIES
We begin developing new investment strategies by identifying client needs
and reviewing asset allocation tables to determine where we can augment our
family of mutual funds. Once we identify an attractive market segment, we
develop a new investment strategy by screening the appropriate universe of
stocks with a set of parameters that we believe identify stocks that will
produce higher long-term returns with lower associated risk than their relative
indices. We introduce new investment strategies into the marketplace by opening
and directly marketing a new mutual fund, by acquiring the management agreement
for an existing mutual fund and implementing our new strategy or potentially by
changing the investment strategy of one of our existing funds.
COMPETITION
We face substantial competition in the investment management industry. The
investment management industry is characterized by a relatively low cost of
entry and by the formation of new investment management entities that may
compete directly with us. There are currently more than 8,000 open-end
investment companies of every size and type. We compete directly with a large
number of global and U.S. investment advisors, commercial banks, brokerage
firms, broker-dealers, insurance companies and other financial institutions.
These institutions range from small boutique firms to large financial service
complexes. We compete on a wide variety of factors, including:
o investment performance of our mutual funds;
o expense ratio of our mutual funds;
o product offerings;
o quality of service;
o brand recognition; and
o business reputation.
We are considered a small investment management firm. Many competing firms
are parts of larger financial services companies and have greater marketing,
financial, technical, research and other capabilities. Most larger firms offer
a broader range of financial services than we do and compete with us for retail
and institutional clients. Nonetheless, we have learned to compete successfully
with these firms by creating unique investment strategies and by branding our
investment style through public relations and outstanding customer service.
38
Our mutual funds also face competition, primarily from nationally and
regionally distributed funds that offer equivalent financial products with
returns equal to or greater than those we offer. The competition for new
investors is intense, but we feel that by increasing our mutual funds'
distribution channels and continuing to brand our investment style, we can
capture portions of the investment business available.
EMPLOYEES
As of June 1, 2005, we had 12 full-time employees, including two assistant
portfolio managers, two sales executives who assist our chief executive officer
in marketing activities and a chief compliance officer.
Because our investment strategies are based on quantitative strategies, we
believe that we can increase the funds under management without proportional
increases in the number of our employees. However, we do intend to hire five
additional employees in the areas of administration, accounting and internal
wholesaling.
FACILITIES
Our principal executive offices are currently located at 750 Grant Avenue,
Suite 100, Novato, California 94945, where we occupy approximately 4,200 square
feet. The term of our current lease expires on September 30, 2005. Although we
have five two-year extensions available under our lease, we have decided to move
our principal executives to a new location that offers additional space and
intend to let our lease for this space expire.
Beginning October 1, 2005, our principal executive offices will be located
at 7250 Redwood Boulevard, Suite 204, Novato, California 94945, where we will
occupy approximately 13,728 square feet and have the right to enjoy all common
areas. Our monthly rent will be higher under our new lease than under our
current lease. The term of our new lease expires on September 30, 2010. We
have one five-year extension available under our new lease.
Beginning September 1, 2005, we will also have offices at One Landmark
Square, Suite 450, Stamford, Connecticut 06901, where we will occupy
approximately 1,400 square feet. The term of our new lease expires on August
31, 2008.
REGULATION
Virtually all aspects of our business are subject to federal and state laws
and regulations. These laws and regulations are primarily intended to protect
shareholders of registered investment companies and clients of registered
investment advisors. We believe that we are in compliance in all material
respects with all laws and regulations.
We are registered as an investment advisor with the Securities and Exchange
Commission, or SEC. As a registered investment advisor, we must comply with the
requirements of the Investment Advisors Act of 1940 and related SEC regulations.
Such requirements relate to, among other things, fiduciary duties to clients,
engaging in transactions with clients, maintaining an effective compliance
program, solicitation arrangements, conflicts of interest, advertising,
limitations on agency cross and principal transactions between an advisor and
advisory clients, recordkeeping and reporting requirements, disclosure
requirements and general anti-fraud provisions. Our mutual funds are registered
with the SEC under the Investment Company Act of 1940. The Investment Company
Act of 1940 imposes additional obligations on both the funds and the advisor,
including detailed operational requirements. The SEC is authorized to institute
proceedings and impose sanctions for violations of the Investment Advisors Act
and Investment Company Act, ranging from fines and censures to termination of an
investment advisor's registration. Our failure to comply with the SEC
requirements could have a material adverse effect on us. We believe we are in
compliance with SEC requirements.
39
In response to recent scandals in the financial services industry regarding
late trading, market timing and selective disclosure of portfolio information,
the U.S. Congress and the various regulatory agencies that supervise our
operations are currently considering, or have already adopted, various
legislative and regulatory proposals. In addition, we are subject to periodic
examination by the SEC under SEC rules and regulations. Finally, the SEC, other
regulators and Congress are investigating certain practices in our industry.
An SEC rule to become effective in January 2006 will significantly change
the corporate governance requirements applicable to mutual funds. Mutual funds
will be required to have a board of directors with at least 75% independent
directors, as well as an independent chairman. In addition, the independent
directors will be required to hold quarterly meetings without fund executives.
Currently, 75% of the directors of our mutual funds are independent directors.
Prior to the effective date of the rule, these independent directors will elect
an independent chairman.
At the end of 2003, the SEC adopted rules requiring investment advisors and
investment companies to adopt written compliance programs designed to prevent
violations of the federal securities laws. These compliance programs must be
reviewed annually for adequacy and effectiveness. Investment advisors and
investment companies must also designate a chief compliance officer to implement
the compliance policies and procedures and to report directly to the fund's
board of directors or trustees.
The Mutual Fund Reform Act was introduced in Congress in 2004 and if
adopted, will, among other things, eliminate asset-based distribution fees or
Rule 12b-1 fees for open-end funds. The Mutual Fund Reform Act would also
prohibit revenue sharing, which allows a mutual fund company to pay for "shelf
space" at brokerage firms or other intermediaries selling mutual funds shares,
as well as "soft dollar" arrangements. If these reforms are adopted, it may
become more expensive for us to distribute and manage our mutual funds, since
mutual fund assets will not be available to defray certain costs.
We derive most of our operating revenues from management services. Under
the Investment Advisors Act, our management agreements covering our mutual funds
terminate automatically if assigned. The term "assignment" is broadly defined
and includes direct assignments as well as a transfer of a controlling block of
our securities. The completion of this offering will result in the transfer of
a controlling block of our securities and thus will result in a deemed
assignment of our management agreements under such statutes. See "Risk Factors
-Risks Relating to this Offering and Our Common Stock." Accordingly, we are
seeking approval of new management agreements from the board of directors or
trustees of our mutual funds and the shareholders of our mutual funds in
connection with this offering.
Compliance with many of the regulations applicable to us involves a number
of risks because regulations are subject to varying interpretations. Regulators
make periodic examinations and review annual, monthly and other reports on our
operations, track record and financial condition. In the event that we violate
or fail to comply with an applicable law or regulation, governmental regulators
may institute administrative or judicial proceedings against us that could
result in censures, fines, compensation orders, civil penalties, criminal
penalties, the issuance of cease-and-desist orders, the deregistration or
suspension of our firm, the suspension or disqualification of our officers or
employees and other adverse consequences. We have not experienced any such
penalties to date. Such violations or non-compliance could also subject us
and/or our employees to civil actions by private persons.
LEGAL PROCEEDINGS
There are no pending or threatened legal proceedings involving us or any of
our mutual funds or any of our officers or directors in connection with their
services on behalf of us.
40
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our board of directors currently consists of eight members. We intend to
add one additional independent director to our board of directors as soon as
practicable, increasing the size of our board to nine members. The following
table identifies our executive officers and directors and indicates their ages
and positions as of the date of this prospectus:
NAME AGE POSITION(S)
---- --- -----------
Neil J. Hennessy 49 President, chief executive officer and
chairman of the board
Teresa M. Nilsen 39 Executive vice president, chief financial
officer, secretary and director
Daniel B. Steadman 49 Executive vice president and director
Henry Hansel 56 Director
Brian A. Hennessy 52 Director
Daniel G. Libarle 63 Director
Rodger Offenbach 53 Director
Thomas L. Seavey 57 Director
Set forth below is biographical information for each of our executive
officers and directors.
Neil J. Hennessy has served as chairman of the board, president and chief
executive officer of Hennessy since 1989 and as director, president and
portfolio manager of our mutual funds since 1996. Mr. Hennessy started his
financial career over 25 years ago as a broker at Paine Webber. He subsequently
moved to Hambrecht & Quist and later returned to Paine Webber. Mr. Hennessy has
served as an expert witness and mediator in matters relating to the securities
industry on our behalf since 1989. From 1987 to 1990, Mr. Hennessy served as a
nominated member of the National Association of Securities Dealers, Inc.' s
District 1 Business Conduct Committee. From January 1993 to January 1995, Mr.
Hennessy served his elected term as chairman of the District 1 Business Conduct
Committee. Mr. Hennessy is the brother of Dr. Brian A. Hennessy. Mr. Hennessy
earned a bachelor of business administration from the University of San Diego.
Teresa M. Nilsen has served as a director, executive vice president, chief
financial officer and secretary of Hennessy since 1989, and is currently the
executive vice president and treasurer of our mutual funds. Ms. Nilsen has
worked in the securities industry for over 16 years. Ms. Nilsen earned a
bachelor of arts in economics from the University of California, Davis.
Daniel B. Steadman has served as a director and executive vice president of
Hennessy since 2000 and is currently the executive vice president and secretary
of our mutual funds. Mr. Steadman has been in the banking and financial
services industry for over 29 years, serving as vice president of WestAmerica
Bank from 1995 through 2000, vice president of Novato National Bank from its
organization in 1984 through 1995, assistant vice president and branch manager
of Bank of Marin from 1980 through 1984 and banking services officer of Wells
Fargo Bank from 1974 through 1980.
41
Henry Hansel has served as a director of Hennessy since 2001. He has been
president of The Hansel Dealer Group since 1982, which includes seven automobile
dealerships. Mr. Hansel has served as a director of the Bank of Petaluma since
its organization in 1987. Mr. Hansel earned a bachelor of science degree in
economics from the University of Santa Clara.
Brian A. Hennessy has served as a director of Hennessy since 1989 and
served as a director of our mutual funds from 1996 to 2001. Dr. Hennessy has
been a self-employed dentist for more than 20 years. Dr. Hennessy is the
brother of our chairman of the board, Neil J. Hennessy. Dr. Hennessy earned a
bachelor of science in biology from the University of San Francisco in 1975. He
earned his D.D.S. from the University of the Pacific.
Daniel G. Libarle has served as a director of Hennessy since 2001. Mr.
Libarle is the owner and president of Lace House Linen, Inc. and has served as a
director and chairman of the board of directors for Bank of Petaluma since its
organization in 1987. Mr. Libarle is currently a director of Greater Bay
Bancorp and serves on Greater Bay Bancorp's audit committee. Mr. Libarle earned
a bachelor of arts in economics from the University of Oregon and San Jose State
University.
Rodger Offenbach has served as a director of Hennessy since 2001 and served
as a director of our mutual funds from 1996 to 2001. Mr. Offenbach has been the
owner of Ray's Catering and Marin-Sonoma Picnics since 1973. Mr. Offenbach
earned a bachelor of science in business administration from California State
University, Sonoma.
Thomas L. Seavey has served as a director of Hennessy since 2001. For the
majority of Mr. Seavey's business career, he has been involved in the sales and
marketing of athletic and leisure products, as well as marketing professional
athletes. From 1981 to 1993, Mr. Seavey worked for Nike as the vice president
of sales in the Midwest, as well as California, and spent three years at
International Management Group as the vice president of products. In 1980, he
formed Seavey Corp., now Continental Sports Group, which sells sport and leisure
products. Mr. Seavey left Nike in 1993 and formally took over the management of
Continental Sports Group, which he is still managing today. Mr. Seavey earned a
bachelor of arts in English and history from Western Michigan University.
COMMITTEES OF THE BOARD
Our board of directors has established two standing committees: an audit
committee and a compensation committee. Members of our committees are elected
annually at the regular board meeting held in conjunction with the annual
shareholders' meeting. Our board of directors does not have a nominating
committee.
COMPENSATION COMMITTEE
Our compensation committee is composed of Rodger Offenbach, who serves as
chairman of the compensation committee, Daniel G. Libarle and Thomas L. Seavey,
all of whom are considered independent under the rules adopted by NASDAQ. The
compensation committee held three meetings during fiscal year 2004 to review
annual performance. This committee has the responsibility of approving the
compensation arrangements for our management, including annual bonus and long-
term compensation. It also makes recommendations to our board of directors
regarding any compensation plans in which our officers and directors are
eligible to participate and makes recommendations regarding grants of employee
stock options and other stock awards under our incentive plan.
AUDIT COMMITTEE
Our audit committee is composed of Daniel G. Libarle, who serves as the
chairman of the audit committee, Henry Hansel and Thomas L. Seavey, all of whom
are considered independent under rules adopted by NASDAQ. Our audit committee
met six times during fiscal year 2004. The principal responsibilities of and
functions to be performed by our audit committee are established in the audit
committee charter, which was adopted in November, 2002. The responsibilities
and functions of our audit committee include reviewing our internal controls and
the integrity of our financial reporting, approving the employment and
compensation of and overseeing our independent auditors, and reviewing the
annual audit with the auditors.
42
Our board of directors has determined that Daniel G. Libarle, who has
served as chairman of our audit committee since 2001, is also an audit committee
financial expert, as defined in the SEC rules and regulations, and is
independent as defined by the rules adopted by the SEC and NASDAQ. Our board
based its determination on the fact that Mr. Libarle has extensive experience
evaluating financial statements prepared in accordance with generally accepted
accounting principles and has also acquired an understanding of internal
controls, procedures for financial reporting and audit committee functions as
the founding chairman of the board of Bank of Petaluma since 1985, and as a
member of the audit committee of the board of directors of Greater Bay Bancorp
for the past five years.
DIRECTOR COMPENSATION
Our outside directors receive annual directors' fees of $1,500 for each
board meeting they attend and $500 for each meeting of a board committee they
attend. In addition, they receive stock options under the Hennessy Advisors,
Inc. 2001 Omnibus Plan. Each of our outside directors had received a total of
41,250 stock options through the end of fiscal year 2004. Our inside directors,
who also serve as members of our management team, do not receive any
compensation for attending board and committee meetings.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table summarizes the compensation for services rendered for
each of the fiscal years ended September 30, 2002, 2003 and 2004, by our
executive officers, each of whom received total salary and bonus in excess of
$100,000 in fiscal year 2004:
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION AWARDS-
--------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL COMPENSATION OPTIONS COMPENSATION
POSITION YEAR SALARY ($) BONUS ($) ($) (#) ($)
------------------ ---- ---------- --------- ------------ ---------- ------------
Neil J. Hennessy 2004 $180,000 $555,356 $ - - $8,968(3)
President and Chief 2003 180,000 223,755 - 11,250 8,968(3)
Executive Officer 2002 156,500(1) 36,000 4,233(2) 11,250 8,443(4)
Teresa M. Nilsen
Executive Vice
President, 2004 110,000 105,000 - - 3,750(5)
Chief Financial
Officer, 2003 96,000 55,000 - 11,250 -
and Secretary 2002 75,333 2,500 - 11,250 -
Daniel B. Steadman 2004 105,000 90,000 - - -
Executive Vice 2003 96,000 50,000 - 11,250 -
President
2002 82,000 2,500 - 11,250 -
1) Mr. Hennessy waived a portion of his base salary in fiscal year 2002.
2) Amount payable to Mr. Hennessy under his employment agreement for an
automobile allowance.
3) Amount of premiums payable by us on behalf of Mr. Hennessy for life
insurance ($5,828) and disability insurance ($3,140).
4) Amount of premiums payable by us on behalf of Mr. Hennessy for life
insurance ($5,827) and disability insurance ($2,616).
5) Represents an award granted to Ms. Nilsen on her 15-year employment
anniversary with us.
43
OPTION GRANTS AND OPTION EXERCISES IN LAST FISCAL YEAR
None of our executive officers received any stock option grants or
exercised any stock options during the fiscal year ended September 30, 2004.
The following table sets forth information about stock options held by our
executive officers as of September 30, 2004:
AGGREGATED FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ------------------------------ -------------------------
Neil J. Hennessy 22,500/0 $198,750/$0
Teresa M. Nilsen 22,500/0 $198,750/$0
Daniel B. Steadman 22,500/0 $198,750/$0
EQUITY INCENTIVE PLANS
Our sole equity incentive plan is the Hennessy Advisors, Inc. 2001 Omnibus
Plan, which was approved by our shareholders in February 2003. The purpose of
this plan is to assist us with attracting and retaining highly competent
individuals to serve as our employees, consultants, advisors or outside board
members.
Our equity incentive plan is administered by our compensation committee
(except that in the case of awards granted to nonemployee directors, our equity
incentive plan is administered by our board of directors). Our compensation
committee has full authority to interpret and administer the equity incentive
plan, to determine those persons eligible to receive awards and to establish the
terms and conditions of any awards. The types of awards that can be granted
under our equity incentive plan include non-qualified stock options, incentive
stock options, stock appreciation rights, performance awards, restricted stock
and other share-based awards, whether granted separately or in combination with
other awards.
The compensation committee (or in the case of nonemployee directors, our
board of directors) can issue awards for an amount of shares of our common stock
representing up to 25% of our outstanding common stock. Accordingly, the amount
of shares of our common stock for which the compensation committee can issue
awards (or in the case of nonemployee directors, our board of directors) will
increase significantly in connection with this offering. To the extent that any
shares of our common stock subject to an award are not issued because the award
expires without having been exercised, is cancelled, terminated or forfeited,
such shares will be available again for grants of awards under our equity
incentive plan.
If any dividend or other distribution (whether in the form of cash, shares
of common stock, other securities or other property), recapitalization, stock
split, reverse stock split, reorganization, merger, consolidation, split-up,
spin-off, combination, repurchase or exchange of shares of common stock subject
to our equity incentive plan, or other similar corporate transaction or event
affects our common stock such that an adjustment is appropriate (as determined
by our compensation committee) in order to prevent dilution or enlargement of
the benefits or potential benefits intended to be made available under our
equity incentive plan, then our compensation committee generally has the
authority to, in such manner as it deems equitable, adjust (1) the number and
type of shares of common stock subject to our equity incentive plan and which
thereafter may be made the subject of awards, (2) the number and type of shares
of common stock subject to outstanding awards and (3) the grant, purchase or
exercise price with respect to any award, or may make provision for a cash
payment to the holder of an outstanding award.
No award granted under our equity incentive plan may be assigned, sold,
transferred or encumbered, other than by will or by the laws of descent and
distribution, except that an award recipient may, to the extent allowed by our
compensation committee and in a manner specified by our compensation committee
or the award agreement, either designate in writing a beneficiary to exercise or
transfer an award after his or her death. Each award will be exercisable during
the award recipient's lifetime only by such award recipient or, if permissible
under applicable law, by his or her guardian or legal representative.
44
Our board of directors may amend, suspend, discontinue or terminate our
equity incentive plan at any time, except that shareholder approval of any
amendment to our equity incentive plan must first be obtained if otherwise
required by (1) the Internal Revenue Code of 1986, as amended, or any rules
thereunder or (2) the listing requirements of any principal securities exchange
or market on which our common stock is then traded. Termination of our equity
incentive plan will not affect the rights of any award recipients with respect
to awards previously granted to them, and all unexpired awards will continue in
force after termination except as they may lapse or be terminated by their own
terms and conditions. The term of awards granted on or prior to the termination
of the equity incentive plan, unless otherwise expressly provided, may extend
beyond such date.
The following table sets forth information regarding our equity incentive
plan. All information presented is as of June 30, 2005. We do not have any
equity compensation plans that have not been approved by our shareholders.
NUMBER OF SECURITIES
REMAINING FOR ISSUANCE UNDER
NUMBER OF SECURITIES WEIGHTED-AVERAGE EQUITY COMPENSATION PLANS
TO BE ISSUED UPON THE EXERCISE PRICE (EXCLUDING SECURITIES
EXERCISE OF OF OUTSTANDING REFLECTED IN THE FIRST
OUTSTANDING OPTIONS OPTIONS COLUMN)(1)
------------------- ---------------- ----------------------------
368,250 $10.24 246,553
(1) The maximum number of shares of common stock that may be issued under
our equity incentive plan is 25% of our outstanding common stock,
which currently equals 614,803 and we expect will equal ____ after the
completion of this offering, assuming that the underwriters' over-
allotment is not exercised.
EMPLOYMENT AGREEMENTS
Neil J. Hennessy entered into an employment agreement relating to his
service to us as our chairman of the board of directors, president and chief
executive officer and to our mutual funds as their president and portfolio
manager, effective as of May 2, 2001. Under the employment agreement, Mr.
Hennessy is responsible for overseeing the management of our mutual funds,
attracting mutual fund accounts or otherwise generating revenues and supervising
all of our officers and employees who report directly to him.
Since the effective date of the employment agreement, Mr. Hennessy has
received an annual base salary of $180,000, which can be increased at the
beginning of each calendar year at the sole discretion of our board of
directors. In addition to his base compensation, Mr. Hennessy receives an
incentive-based bonus in the amount of 10% of our pre-tax profit as computed for
financial reporting purposes in accordance with accounting principles generally
accepted in the United States of America. He also receives an automobile
allowance of $1,250 per month. Mr. Hennessy may participate in any employee
benefit program generally available to other senior employees, including any
401(k) or profit sharing plan and other incentive and/or stock option programs.
If Mr. Hennessy is terminated without cause or resigns for good reason (as
such terms are defined in the employment agreement), then he will receive a lump
sum payment equal to 75% of the average of all of the bonuses based on our pre-
tax profits that Mr. Hennessy has received since May 2, 2001, plus the greater
of (1) Mr. Hennessy's base salary for the remainder of the term of the agreement
and (2) Mr. Hennessy's base salary for one year.
If Mr. Hennessy becomes disabled (as defined in the employment agreement),
then he will continue to receive his base salary and benefits for the lesser of
three months or the time that he begins receiving benefits under a disability
insurance policy.
45
The initial term of the employment agreement expires on May 2, 2006, but
the employment agreement renews automatically for successive one-year terms
unless either we or Mr. Hennessy provide the other with written notice of intent
to terminate at least 60 days before the renewal date. The agreement can only
be modified with the consent of our board of directors.
CERTAIN TRANSACTIONS
There have been no transactions of more than $60,000 between Hennessy and
any of our 5% or more shareholders, directors or executive officers during the
three years ended September 30, 2004.
46
PRINCIPAL AND SELLING SHAREHOLDERS
The following table shows information relating to the beneficial ownership
of our common stock as of June 30, 2005 and as adjusted to give effect to this
offering by (1) each person known to us to be the beneficial owner of more than
5% of our voting stock, (2) the selling shareholders, (3) each of our directors,
(4) each of our executive officers and (5) all directors and executive officers
as a group. Except as otherwise indicated, the shareholders listed exercise
sole voting and dispositive power over the shares.
Beneficial ownership is determined in accordance with the rules of the SEC
and includes voting or investment power with respect to securities. Shares of
our common stock subject to options that are currently exercisable or
exercisable within 60 days of the date of this prospectus are deemed
beneficially owned by the person holding such options, and are deemed
outstanding for purposes of calculating the percentage ownership of our common
stock by that person. These shares, however, are not considered outstanding
when computing the percentage ownership of any other person.
SHARES OF COMMON SHARES OF COMMON STOCK
STOCK BENEFICIALLY BENEFICIALLY OWNED
OWNED PRIOR AFTER THE
TO THE OFFERING SHARES OF OFFERING(1)
------------------ COMMON STOCK ----------------------
NAME AND ADDRESS NUMBER PERCENT OFFERED NUMBER PERCENT
---------------- ------ ------- ------------ ------ -------
Neil J. Hennessy(3)(4)(6) 982,983 39.4%
Brian A. Hennessy(3)(5)(7) 130,500 5.2%
Henry Hansel(3)(5)(7) 78,750 3.1%
Teresa M. Nilsen(3)(4)(6) 64,200 2.6%
Rodger Offenbach(3)(5)(7) 58,305 2.3%
Daniel G. Libarle(3)(5)(7) 48,750 1.9%
Thomas L. Seavey(3)(5)(7) 48,750 1.9%
Daniel B. Steadman(3)(4)(6) 37,650 1.5%
All directors and executive
officers as a group 1,449,888 52.4%
(1) Assumes no exercise of the underwriters' over-allotment option.
(2) Assumes exercise of the underwriters' over-allotment option in full,
in which case we will sell an additional --- shares.
(3) The mailing address for this person is c/o Hennessy Advisors, Inc.,
750 Grant Avenue, Suite 100, Novato, California 94945.
(4) The selling shareholder is one of our directors and executive
officers. See "Management - Directors and Executive Officers."
(5) The selling shareholder is one of our directors. See "Management -
Directors and Executive Officers."
(6) Ownership of each shareholder prior to the offering includes options
to purchase 33,750 shares of our common stock.
(7) Ownership of each shareholder prior to the offering includes options
to purchase 41,250 shares of our common stock.
47
DESCRIPTION OF CAPITAL STOCK
GENERAL OVERVIEW
Our authorized capital stock consists of 15 million shares of common stock,
no par value per share, and five million shares of preferred stock, no par value
per share.
PREFERRED STOCK
Our board of directors is authorized, subject to any limitations prescribed
by law, without further shareholder approval, to issue from time to time shares
of preferred stock in one or more series not to exceed an aggregate of five
million shares. Our board of directors may determine or alter the rights,
preferences, privileges and restrictions granted to or imposed upon any wholly
unissued series of preferred stock, including voting rights, dividend rights,
conversion rights, redemption privileges, and liquidation preferences. The
rights of the holders of our common stock will be subject to, and may be
adversely affected by, the rights of holders of any preferred stock that may be
issued in the future. Issuance of preferred stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from attempting to acquire, a majority
of our outstanding voting stock.
COMMON STOCK
Holders of our common stock are entitled to one vote for each share on all
matters to be voted upon by the shareholders and have cumulative voting rights
in the election of directors. Our bylaws provide that if we are listed on the
NASDAQ stock market or a national securities exchange, holders of our common
stock will no longer have such cumulative voting rights. Subject to preferences
to which holders of any preferred stock we may issue may be entitled, holders of
our common stock are entitled to receive ratably any dividends declared from
time to time by our board of directors out of legally available funds.
In the event of a liquidation, dissolution, or winding up of Hennessy,
holders of our common stock would be entitled to share in our assets remaining
after the payment of liabilities and the satisfaction of any liquidation
preference granted to the holders of any outstanding shares of preferred stock.
Holders of our common stock have no preemptive or conversion rights or other
subscription rights, and there are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are, and
the shares offered hereby when issued and paid for, will be, fully paid and
nonassessable. The rights, preferences and privileges of the holders of common
stock are subject to, and may be adversely affected by the rights of the holders
of shares of any series of preferred stock that we may designate in the future.
TRANSFER AGENT
The transfer agent and registrar for our common stock is Mellon Investor
Services LLC. The transfer agent's address is 235 Montgomery Street, 23rd
Floor, San Francisco, California 94104.
48
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement among us,
the selling shareholders and the underwriters, the underwriters have agreed
severally to purchase from us and the selling shareholders the following number
of shares of common stock at the offering price less the underwriting discount
set forth on the cover page of this prospectus:
UNDERWRITER NUMBER OF SHARES
----------- ----------------
A.G. Edwards & Sons, Inc.
Total
The underwriting agreement provides that the obligations of the
underwriters are subject to certain conditions and that the underwriters will
purchase all such shares of common stock if any of the shares are purchased.
The underwriters are obligated to take and pay for all of the shares of common
stock offered hereby, other than those covered by the over-allotment option
described below, if any are taken.
The underwriters have advised us and the selling shareholders that they
propose to offer the shares of common stock to the public at the offering price
set forth on the cover page of this prospectus and to certain dealers at such
price less a concession not in excess of $--- per share. The underwriters may
allow, and such dealers may re-allow, a concession not in excess of $--- per
share to certain other dealers. After this offering, the offering price and
other selling terms may be changed by the underwriters.
Pursuant to the underwriting agreement, we have granted to the underwriters
an option, exercisable for 30 days after the date of this prospectus, to
purchase up to ------- additional shares of common stock from us at the
offering price, less the underwriting discount set forth on the cover page of
this prospectus, solely to cover over-allotments.
To the extent the underwriters exercise such option, each underwriter will
become obligated, subject to certain conditions, to purchase approximately the
same percentage of such additional shares as the number set forth next to such
underwriter's name in the preceding table bears to the total number of shares in
the table, and we will be obligated, pursuant to the option, to sell such shares
to the underwriters.
We, our directors, senior executive officers and certain of our
shareholders, including the selling shareholders, have agreed, during the 90
days after the date of this prospectus, subject to limited exceptions, we and
they will not, without the prior written consent of A.G. Edwards & Sons, Inc.,
directly or indirectly, issue, sell, offer, agree to sell, grant any option or
contract for the sale of, pledge, make any short sale of, maintain any short
position with respect to, establish or maintain a "put equivalent position"
(within the meaning of Rule 16a-1(h) under the Securities Exchange Act of 1934)
with respect to, enter into any swap, derivative transaction or other
arrangement (whether any such transaction is to be settled by delivery of common
stock, other securities, cash or other consideration) that transfers to another,
in whole or in part, any of the economic consequences of ownership, or otherwise
dispose of, any shares of our common stock (or any securities convertible into,
exercisable for or exchangeable for our common stock or any interest therein or
any capital stock of our subsidiary). These lock-up agreements will cover
approximately --- shares of our outstanding common stock in the aggregate.
A.G. Edwards & Sons, Inc. may, in its sole discretion, allow any of these
parties to dispose of shares of our common stock or other securities prior to
the expiration of the 90-day period. There are, however, no agreements between
A.G. Edwards & Sons, Inc. and the parties that would allow them to do so as of
the date of this prospectus.
49
The following table summarizes the discount to be paid to the underwriters
by us and the selling shareholders in connection with this offering. The
amounts are shown assuming both no exercise and full exercise of the
underwriters' option to purchase additional shares of common stock.
Total
-------------------
Per No Full
Share Exercise Exercise
----- -------- --------
Underwriting discount paid by us
Underwriting discount paid by the
selling shareholders
Total
We will pay all expenses incident to the offering and the sale of shares of
our common stock by us and the selling shareholders, other than the underwriting
discount and the registration fees under the Securities Act of 1933 directly
related to the sale of shares by the selling shareholders, which will be paid by
them. We will also pay an additional fee equal to 0.5% of the gross proceeds we
receive in the offering (including any exercise of the underwriters' over-
allotment option) to A.G. Edwards & Sons, Inc. for financial advisory services.
The selling shareholders will also pay additional fees of 0.5% of the gross
proceeds they receive in the offering to A.G. Edwards & Sons, Inc. for such
services. The advisory fee payable by the selling shareholders will be $----.
We estimate that the total expenses of the offering, excluding the underwriting
discounts and commissions but including the 0.5% advisory fee payable by us
(assuming no exercise of the underwriters' over-allotment option), will be
approximately $--- (including approximately $--- of selling shareholder-
related expenses we will incur in connection with this offering).
We and the selling shareholders have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act of
1933.
Until the distribution of the common stock is completed, rules of the SEC
may limit the ability of the underwriters and certain selling group members to
bid for and purchase the common stock. As an exception to these rules, the
underwriters are permitted to engage in certain transactions that stabilize,
maintain or otherwise affect the price of the common stock.
In connection with this offering, the underwriters may engage in
stabilizing transactions, over-allotment transactions, syndicate covering
transactions and penalty bids in accordance with Regulation M under the
Securities Exchange Act of 1934.
o Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a specified
maximum.
o Over-allotment transactions involve sales by the underwriters of the
shares of our common stock in excess of the number of shares the
underwriters are obliged to purchase, which creates a syndicate short
position. The short position may be either a covered short position
or a naked short position. In a covered short position, the number of
shares over-allotted by the underwriters is not greater than the
number of shares they may purchase in the over-allotment option. In a
naked short position, the number of shares involved is greater than
the number of shares in the over-allotment option. The underwriters
may close out any short position by either exercising their over-
allotment option or purchasing shares of our common stock in the open
market.
o Syndicate covering transactions involve purchases of the shares of our
common stock in the open market after the distribution has been
completed in order to cover syndicate short positions. In determining
the source of the shares of our common stock to close out the short
position, the underwriters will consider, among other things, the
price of shares of our common stock available for purchase in the open
market as compared to the price at which they may purchase shares of
our common stock through the over-allotment option. If the
underwriters sell more shares of our common stock than could be
covered by the over-allotment option, a naked short position, the
position can only be closed out by buying shares of common stock in
the open market. A naked short position is more likely to be created
if the underwriters are concerned that there could be downward
pressure on the price of the shares of our common stock in the open
market after pricing that could adversely affect investors who
purchase in this offering.
50
o Penalty bids permit the representatives to reclaim a selling
concession from a syndicate member when the shares of our common stock
originally sold by the syndicate member are purchased in a stabilizing
or syndicate covering transaction to cover syndicate short positions.
Similar to other purchase transactions, the underwriters' purchases to
cover the syndicate short sales may have the effect of raising or maintaining
the market price of the shares of our common stock or preventing or retarding a
decline in the market price of the shares of our common stock. As a result, the
price of the shares of our common stock may be higher than the price that might
otherwise exist in the open market.
In connection with this offering, some of the underwriters or their
affiliates may engage in passive market making transactions in our common stock
on the OTC Bulletin Board immediately prior to the commencement of sales in this
offering, in accordance with Rule 103 of Regulation M under the Securities
Exchange Act of 1934. Rule 103 generally provides that:
o a passive market maker may not effect transactions or display bids for
our common stock in excess of the highest independent bid price by
persons who are not passive market makers;
o net purchases by a passive market maker on each day are generally
limited to 30% of the passive market maker's average daily trading
volume in our common stock during a specified two-month prior period
or 200 shares, whichever is great, and must be discontinued with that
limit is reached; and
o passive market making bids must be identified as such.
Passive market making may stabilize or maintain the market price of our
common stock at a level above that which might otherwise prevail and, if
commenced, may be discontinued at any time.
The underwriters are not obligated to engage in any of the transactions
described above. If they do engage in any of these transactions, they may
discontinue them at any time.
Our common stock is quoted on the OTC Bulletin Board under the trading
symbol "HNNA.OB." We intend to apply for listing on The NASDAQ National Market
under the trading symbol "HNNA."
51
LEGAL MATTERS
The validity of our common stock offered by this prospectus will be passed
upon for us by Foley & Lardner LLP, Jacksonville, Florida. Certain matters
relating to the offering will be passed upon for the underwriters by Morgan
Lewis & Bockius LLP, Los Angeles, California.
EXPERTS
Our financial statements as of and for the years ended September 30, 2003
and 2004 have been audited by Pisenti & Brinker LLP, an independent registered
public accounting firm, as set forth in its report thereon and have been
included in this prospectus in reliance on such report, given on the authority
of such firm as experts in auditing and accounting.
The financial statements as of and for the year ended September 30, 2002
have been audited by KPMG LLP, independent registered public accounting firm, as
set forth in its report thereon and have been included in this prospectus in
reliance on such report, given on the authority of such firm as experts in
auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We are required to file annual, quarterly, current and other reports with
the SEC. You may read and copy any reports filed by us with the SEC at the
SEC's Public Reference Room at 100 F Street N.E., Washington, D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for further information on the Public
Reference Room. Our filings with the SEC are also available to the public on
the EDGAR Database on the SEC's website at http://www.sec.gov.
You may also learn more about us by visiting our website at
http://www.hennessyadvisors.com.
52
INDEX TO FINANCIAL STATEMENTS
PAGE
Reports of Independent Registered Public Accounting Firm F-2
(Pisenti & Brinker LLP)
Reports of Independent Registered Public Accounting Firm (KPMG LLP) F-3
Statements of Financial Condition as of September 30, 2003
and 2004, and as of March 31, 2005 (unaudited) F-4
Statements of Income for years ended September 30, 2002, 2003, and
2004, and for the six months ended March 31, 2004 and 2005
(unaudited) F-5
Statements of Changes in Shareholders' Equity for the years ended
September 30, 2002, 2003, and 2004, and for the six months ended
March 31, 2005 (unaudited) F-6
Statements of Cash Flows for the years ended September 30, 2002,
2003, and 2004, and for the six months ended March 31, 2004
and 2005 (unaudited) F-7
Notes to the Financial Statements F-8
F-1
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
The Board of Directors and Shareholders
Hennessy Advisors, Inc.:
We have audited the accompanying balance sheet of Hennessy Advisors, Inc. (the
"Company") as of September 30, 2004 and 2003, and the related statements of
income, changes in stockholders' equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the Company's financial position as of September 30, 2004
and 2003, and the results of its operations and its cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States of America.
/s/ Pisenti & Brinker LLP
Petaluma, California
November 4, 2004
F-2
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
The Board of Directors and Stockholders
Hennessy Advisors, Inc.:
We have audited the accompanying statements of income, changes in stockholders'
equity and cash flows for the year ended September 30, 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows for Hennessy
Advisors, Inc. for the year ended September 30, 2002, in conformity with U.S.
generally accepted accounting principles.
/s/ KPMG LLP
San Francisco, California
November 4, 2002
F-3
HENNESSY ADVISORS, INC.
BALANCE SHEETS
September 30,
------------------------ March 31,
2003 2004 2005
---- ---- ----
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $2,802,117 $ 4,568,323 $ 4,858,135
Investments in marketable securities, at fair value 4,372 4,582 4,703
Investment fee income receivable 562,743 831,371 982,771
Prepaid expenses 36,192 65,004 114,763
Other current assets - 24,413 7,977
---------- ----------- -----------
TOTAL CURRENT ASSETS 3,405,424 5,493,693 5,968,349
---------- ----------- -----------
Property and equipment, net of accumulated depreciation
of $73,590; $100,200 and $84,598 46,212 88,092 93,225
Management contracts, net of accumulated amortization
of $628,627 5,637,943 14,142,520 14,142,520
Deferred income tax assets 51,000 126,900 126,900
Other assets 8,284 62,674 94,387
---------- ----------- -----------
TOTAL ASSETS $9,148,863 $19,913,879 $20,425,381
---------- ----------- -----------
---------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued liabilities and accounts payable $ 633,333 $ 1,416,505 $ 900,728
Income taxes payable - 772 -
Note payable 527,912 - -
Current portion of long-term debt - 1,128,721 1,128,721
---------- ----------- -----------
TOTAL CURRENT LIABILITIES 1,161,245 2,545,998 2,029,449
---------- ----------- -----------
Long-term debt - 6,207,967 5,643,607
Deferred income tax liabilities 151,000 452,200 640,860
---------- ----------- -----------
TOTAL LIABILITIES 1,312,245 9,206,165 8,313,916
---------- ----------- -----------
STOCKHOLDERS' EQUITY:
Adjustable rate preferred stock, $25 stated value, 5,000,000 shares
authorized: zero shares issued and outstanding - - -
Common stock, no par value, 22,500,000 shares authorized:
2,439,213 ; 2,452,713 and 2,456,963 shares issued
and outstanding 6,788,205 6,881,205 6,915,542
Additional paid-in capital 24,008 37,098 45,138
Retained earnings 1,024,405 3,789,411 5,150,785
---------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY 7,836,618 10,707,714 12,111,465
---------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $9,148,863 $19,913,879 $20,425,381
---------- ----------- -----------
---------- ----------- -----------
See accompanying notes to financial statements
F-4
HENNESSY ADVISORS, INC.
STATEMENTS OF INCOME
Years Ended September 30, Six Months Ended March 31,
---------------------------------- --------------------------
2002 2003 2004 2004 2005
---- ---- ---- ---- ----
(Unaudited) (Unaudited)
REVENUE
Investment advisory fees $1,998,956 $4,192,176 $8,500,245 $3,910,383 $4,896,450
Shareholder service fees - 547,297 1,014,467 479,908 576,740
Expert witness fees 162,556 7,150 - - -
Gain on repayment of debt 90,214 - - - -
Other 18,561 40,905 30,477 11,960 38,748
---------- ---------- ---------- ---------- ----------
Total revenue 2,270,287 4,787,528 9,545,189 4,402,251 5,511,938
OPERATING EXPENSES
Compensation and benefits 732,500 1,330,645 2,016,895 1,024,797 1,165,319
General and administrative 409,329 641,718 871,804 451,195 469,327
Mutual fund distribution 328,672 1,010,802 1,849,977 923,642 990,736
Amortization and depreciation 299,612 21,161 33,274 13,014 23,015
---------- ---------- ---------- ---------- ----------
Total operating expenses 1,770,113 3,004,326 4,771,950 2,412,648 2,648,397
---------- ---------- ---------- ---------- ----------
Operating income 500,174 1,783,202 4,773,239 1,989,603 2,863,541
Interest expense 177,204 - 177,433 14,371 184,239
---------- ---------- ---------- ---------- ----------
Income before income tax expense 322,970 1,783,202 4,595,806 1,975,232 2,679,302
Income tax expense 14,273 721,214 1,830,800 774,953 1,072,253
---------- ---------- ---------- ---------- ----------
Net income $ 308,697 $1,061,988 $2,765,006 $1,200,279 $1,607,049
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Earnings per share:
Basic $ 0.15 $ 0.43 $ 1.13 $ 0.49 $ 0.65
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Diluted $ 0.15 $ 0.43 $ 1.09 $ 0.47 $ 0.63
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Weighted average shares outstanding:
Basic 1,979,517 2,439,213 2,443,604 2,439,213 2,453,629
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Diluted 1,979,517 2,453,537 2,550,839 2,532,938 2,556,834
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
See accompanying notes to financial statements
F-5
HENNESSY ADVISORS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2002, 2003 AND 2004
AND SIX MONTHS ENDED MARCH 31, 2005
Retained
Adjustable Additional Earnings Total
Rate Preferred Common Common Paid-in (Accumulated Stockholders'
Stock Shares Stock Capital Deficit) Equity
-------------- ------ ------ ---------- ------------ -------------
Balances as of September 30, 2001 $ 40,000 1,441,020 $ 487,840 $24,008 $ (346,280) $ 205,568
Net income for the year
ended September 30, 2002 - - - - 308,697 308,697
Issuance of common shares, net of
offering costs of $354,255 - 862,083 5,392,965 - - 5,392,965
Redemption of adjustable rate
preferred shares (40,000) - - - - (40,000)
Issuance of common shares as a
result of the merger with Hennessy
Management Co, L.P. and Hennessy
Management Co. 2, L.P. - 136,110 907,400 - - 907,400
-------- --------- ---------- ------- ---------- -----------
Balances as of September 30, 2002 $ - 2,439,213 $6,788,205 $24,008 $ (37,583) $ 6,774,630
Net income for the year
ended September 30, 2003 - - - - 1,061,988 1,061,988
-------- --------- ---------- ------- ---------- -----------
Balances as of September 30, 2003 $ - 2,439,213 $6,788,205 $24,008 $1,024,405 $ 7,836,618
Net income for the year
ended September 30, 2004 - - - - 2,765,006 2,765,006
Employee stock options exercised 13,500 93,000 - - 93,000
Tax benefit of employee stock sales - - - 13,090 - 13,090
-------- --------- ---------- ------- ---------- -----------
Balances as of September 30, 2004 $ - 2,452,713 $6,881,205 $37,098 $3,789,411 $10,707,714
Net income for the six months
ended March 31, 2005 - - - - 1,607,049 1,607,049
Dividends paid - - - - (245,675) (245,675)
Employee stock options exercised 4,250 34,337 - - 34,337
Tax benefit of employee stock sales - - - 8,040 - 8,040
-------- --------- ---------- ------- ---------- -----------
Balances as of March 31, 2005 (unaudited) $ - 2,456,963 $6,915,542 $45,138 $5,150,785 $12,111,465
-------- --------- ---------- ------- ---------- -----------
-------- --------- ---------- ------- ---------- -----------
See accompanying notes to financial statements
F-6
HENNESSY ADVISORS, INC.
STATEMENTS OF CASH FLOWS
Years Ended September 30, Six Months Ended March 31,
---------------------------------- --------------------------
2002 2003 2004 2004 2005
---- ---- ---- ---- ----
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net income $ 308,697 $1,061,988 $ 2,765,006 $ 1,200,279 $1,607,049
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 299,612 21,161 33,274 13,014 (9,497)
Deferred income taxes (19,695) 119,695 225,300 93,607 188,660
Tax benefit from exercise of employee stock options - - 13,090 - 8,040
Unrealized (gains) losses on marketable securities 619 (467) (130) (305) (89)
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 (103,444) (332,724) (268,628) (351,677) (151,400)
Expert witness fees receivable 2,436 21,745 - - -
Prepaid expenses (21,772) (14,421) (28,812) (34,437) (49,759)
Other current assets 5,361 7,400 (24,413) - 16,436
Other assets - - - - (37,820)
Increase (decrease) in operating liabilities:
Accrued liabilities and accounts payable (60,370) 508,117 783,171 170,461 (515,775)
Income taxes payable 33,168 (33,168) 772 1,705 (772)
----------- ---------- ----------- ----------- ----------
Net cash provided by operating activities 358,417 1,359,326 3,498,630 1,092,647 1,055,073
----------- ---------- ----------- ----------- ----------
Cash flows provided by (used in) investing activities:
Purchases of property and equipment (19,978) (25,050) (68,491) (50,743) (22,043)
Disposal of fully depreciated assets - - - - 32,512
Purchases of investments (169) (75) (80) (50) (32)
Payments related to acquisition of management contracts (11,275) (629,143) (8,504,577) (8,140,026) -
----------- ---------- ----------- ----------- ----------
Net cash provided by (used in)
investing activities (31,422) (654,268) (8,573,148) (8,190,819) 10,437
----------- ---------- ----------- ----------- ----------
Cash flows provided by (used in) financing activities:
Gross proceeds from issuance of common stock 5,747,220 - - - -
Offering costs incurred in issuance of common stock (149,759) - - - -
Repayments 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) - - - -
Proceeds from long-term debt - - 7,861,544 7,861,544 -
Principal payments on note payable - - (527,912) - -
Principal payments on long-term debt - - (564,360) - (564,360)
Payment of loan acquisition costs - - (21,548) - -
Proceeds from exercise of employee stock options - - 93,000 - 34,337
Dividend payment - - - - (245,675)
----------- ---------- ----------- ----------- ----------
Net cash provided by (used in)
financing activities 1,741,902 - 6,840,724 7,861,544 (775,698)
----------- ---------- ----------- ----------- ----------
Net increase in cash and cash equivalents 2,068,897 705,058 1,766,206 763,372 289,812
Cash and cash equivalents at the beginning of the period 28,162 2,097,059 2,802,117 2,802,117 4,568,323
----------- ---------- ----------- ----------- ----------
Cash and cash equivalents at the end of the period $ 2,097,059 $2,802,117 $ 4,568,323 $ 3,565,489 $4,858,135
----------- ---------- ----------- ----------- ----------
----------- ---------- ----------- ----------- ----------
Supplemental disclosures of cash flow information:
Cash paid for:
Income taxes $ 931 $ 642,401 $ 1,583,924 $ 695,970 $ 875,513
----------- ---------- ----------- ----------- ----------
----------- ---------- ----------- ----------- ----------
Interest $ 177,204 $ - $ 157,629 $ - $ 180,810
----------- ---------- ----------- ----------- ----------
----------- ---------- ----------- ----------- ----------
Non-cash investing and financing transactions:
Common stock issued in connection with
acquisition of management contracts $ 907,400 $ - $ - $ - $ -
----------- ---------- ----------- ----------- ----------
----------- ---------- ----------- ----------- ----------
Management contract acquired with note
payable to SYM Financial Corporation $ - $ 527,912 $ - $ - $ -
----------- ---------- ----------- ----------- ----------
----------- ---------- ----------- ----------- ----------
Loan acquisition costs withheld
from long-term debt proceeds $ - $ - $ 39,505 $ 39,505 $ -
----------- ---------- ----------- ----------- ----------
----------- ---------- ----------- ----------- ----------
Loan acquisition costs included
in accrued liabilities $ - $ - $ - $ 21,548 $ -
----------- ---------- ----------- ----------- ----------
----------- ---------- ----------- ----------- ----------
Acquisition costs of management contracts
included in accrued liabilities $ - $ - $ - $ 356,942 $ -
----------- ---------- ----------- ----------- ----------
----------- ---------- ----------- ----------- ----------
See accompanying notes to financial statements
F-7
HENNESSY ADVISORS, INC.
NOTES TO FINANCIAL STATEMENTS
Fiscal Years Ended September 30, 2002, 2003 and 2004
and Six Months Ended March 31, 2005
(1) Summary of the Organization, Description of Business and Significant
Accounting Policies
(a) Organization and Description of Business
Hennessy Advisors, Inc. (the "Company") was founded on
February 1, 1989, as a California corporation under the name Edward J.
Hennessy, Incorporated. In 1990, the Company became a registered
investment advisor and on April 15, 2001, the Company changed its name
to Hennessy Advisors, Inc.
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 the investment advisor to
the Hennessy Balanced Fund, the Hennessy Total Return Fund, the
Hennessy Cornerstone Value Fund, the Hennessy Cornerstone Growth Fund
and the Hennessy Focus 30 Fund.
(b) Cash and Cash Equivalents
Cash and cash equivalents include all cash balances and highly
liquid investments which are readily convertible into cash.
(c) Investments in Marketable Securities
The Company holds investments in publicly traded mutual funds
which are accounted for as trading securities under FASB Statement No.
115, "Accounting for Certain Investments in Debt and Equity
Securities". Accordingly, any unrealized gains and losses on the
investments are recognized currently in operations.
Dividend income is recorded on the ex-dividend date. Purchases
and sales of marketable securities are recorded on a trade date basis,
and realized gains and losses recognized on sale are determined on a
specific identification/average cost basis.
(d) Management Contracts Acquired
The Company was appointed as investment advisor to the Hennessy
Cornerstone Growth Fund and Hennessy Cornerstone Value Fund concurrent
with its acquisition of patented automated investment strategies from
Netfolio, Inc. in June 2000.
The initial management contracts acquired were capitalized at
$4,190,840. In February of 2002, the Company recorded $918,675 as the
incremental value of management contracts acquired in connection with
its mergers with Hennessy Management Co. L.P. and Hennessy Management
Co. 2 L.P. Until February 28, 2002, the Hennessy Balanced Fund and
Hennessy Total Return Fund were managed by Hennessy Management Co.,
L.P. and Hennessy Management Co. 2, L.P., respectively, each of which
was a California limited partnership. Hennessy Advisors was the
general partner of each limited partnership and as general partner,
performed all advisory functions on behalf of the partnerships for the
funds. In order to consolidate all investment advisory activities
directly into Hennessy Advisors, the limited partners of these limited
partnerships agreed to merge the partnerships into Hennessy Advisors,
subject to the closing of an intial minimum public offering of common
stock, which occurred on February 28, 2002. Limited partners received
an aggregate of 90,740 shares of common stock and cash of $11,275, in
exchange for their partnership interests in the merger, and the
Company was appointed advisor to the Balanced and Total Return
(formerly Leveraged Dogs) funds.
F-8
In accordance with FASB Statement No. 142, intangible assets with
an indefinite life acquired after June 30, 2001 are not subject to
amortization. Accordingly, the Company has not recorded any
amortization for the value of the contracts acquired in connection
with the mergers of the partnerships.
On September 18, 2003, the Company was appointed investment
advisor to the Hennessy Focus 30 Fund, concurrent with the acquisition
of all the assets of the SYM Select Growth Fund, which were
immediately merged into the Hennessy Focus 30 Fund.
On March 11, 2004, Hennessy Advisors, Inc. completed the
acquisition of the management contract for the majority of the mutual
fund assets managed by Lindner Asset Management, Inc. ("Lindner"),
based in Deerfield, Illinois. In conjunction with the Asset Purchase
Agreement, the assets of five of Lindner's mutual funds were merged
into four of the five Hennessy Funds. The purchase price was equal to
2.625% of those assets valued by the Lindner Funds custodian at
closing. The transaction was funded through a credit facility provided
by US Bank, St. Louis, Missouri. The loan agreement requires fifty-
nine (59) monthly payments in the amount of $94,060 plus interest at
the bank's prime rate which may change from time to time (6.0%
effective May 3, 2005). The final installment of the then outstanding
principal and interest is due March 10, 2009.
The Company periodically reviews the carrying value of management
contracts acquired to determine if any impairment has occurred. Based
on a detailed assessment of current fair value and anticipated future
cash flows, it is the opinion of the Company's management that there
has been no impairment.
Under FASB Statement No. 142, goodwill and intangible assets that
have indefinite useful lives are not amortized but tested at least
annually for impairment. The Company considers our mutual fund
management contracts to be intangible assets with an indefinite useful
life.
(e) Property and Equipment
Property and equipment are stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line method
over the estimated useful lives of the assets, generally three to
twelve years.
(f) Fair Value of Financial Instruments
FASB Statement No. 107 requires disclosures regarding the fair
value of all financial instruments for financial statement purposes.
The estimates presented in these statements are based on information
available to management as of March 31, 2005. Accordingly, the fair
value presented in financial statements for the year then ended may
not be indicative of amounts that could be realized on disposition of
the financial instruments. The fair value of receivables, accounts
payable and notes payable has been estimated at carrying value due to
the short maturity of these instruments. The fair value of management
contracts acquired is estimated at the cost of acquisition. The fair
value of marketable securities and money market accounts is based on
closing net asset values as reported by securities exchanges
registered with the Securities and Exchange Commission.
F-9
(g) Expert Witness Fees
The Company has received 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 were
recognized when earned.
(h) 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.
A valuation allowance is then established to reduce that deferred
tax asset to the level at which it is "more likely than not" that the
tax benefits will be realized. Realization of tax benefits of
deductible temporary differences and operating losses or credit
carryforwards depends on having sufficient taxable income of an
appropriate character within the carryforward periods. Sources of
taxable income that may allow for the realization of tax benefits
include income that will result from future operations.
The Company's effective tax rates of 4.4%, 40.4%, 39.8%, 39.2%
and 40.0% for the fiscal years ended September 30, 2002, 2003, 2004
and the six months ended March 31, 2005, respectively, differ from the
federal statutory rate of 34% primarily due to the effects of state
income taxes, except in year 2002, when our valuation allowance
declined $108,675.
(i) 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.
(j) Authorized Common and Preferred Shares
Authorized common and preferred shares are 15.0 million and 5.0
million shares, respectively.
(k) Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those
estimates.
F-10
(2) Investment Advisory Agreements
Pursuant to investment management agreements (the "Agreements"), the
Company provides investment advisory services to the five Hennessy Funds.
The Agreements are renewable annually based upon approval by a majority of
the Funds' disinterested directors. Additionally, each agreement may be
terminated prior to its expiration upon 60 days notice by either the
Company or the Fund.
As provided in the Agreements with the five Hennessy Funds, the
Company receives investment advisory fees monthly based on a percentage of
the respective Fund's average daily net assets. The Agreements also contain
expense limitation provisions whereby the Company has agreed to reimburse
certain Funds annually, under certain conditions, an amount equal to all or
a portion of its investment advisory fees.
(3) Property and Equipment
Property and equipment were comprised of the following at the periods
ended:
September 30, March 31,
------------------ ---------
2003 2004 2005
---- ---- ----
(Unaudited)
Leasehold Improvements $ 43,294 $ 80,625 $ 80,625
Furniture and fixtures 9,664 19,622 19,622
Equipment 56,054 69,908 59,439
Software 10,790 18,137 18,137
119,802 188,292 177,823
-------- --------- --------
Less: accumulated depreciation (73,590) (100,200) (84,598)
-------- --------- --------
$ 46,212 $ 88,092 $ 93,225
-------- --------- --------
-------- --------- --------
(4) Notes Payable
In June of 2000, the Company entered into a borrowing agreement with
Firstar Bank, N.A. ("Firstar") in order to finance its acquisition of the
patented automated investment trading strategies from Netfolio, Inc. Under
terms of the agreement, the Company borrowed $2,310,897, with annual
interest charged at the prime rate and due monthly. On March 1, 2002,
following the issuance of shares in an initial public offering, the note
was repaid in full.
In June of 2001, the Company became obligated through a subordinated
note payable to Netfolio, in the amount of $1,849,709, in connection with
the acquisition of certain patented automated investment trading
strategies. In March of 2002, the Company entered into an agreement with
Netfolio whereby for total consideration of $1,975,000 the subordinated
note payable and all accrued and unpaid interest thereon would be
considered paid in full. The Company recorded a gain of $90,214 on the
repayment of the note, which represented the difference between the
consideration paid and $1,849,709 in principal and $215,505 in accrued but
unpaid interest, which was outstanding under the terms of the note as of
the date of repayment.
In September of 2003, the Company entered into a borrowing agreement
with SYM Financial Corporation ("SYM") in order to finance its acquisition
of the assets in the SYM Select Growth Fund. Under terms of the agreement,
the Company borrowed $527,912, interest free, with the balance due and
payable on September 18, 2004. The note was paid in full in September 2004.
F-11
(5) 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 (6.0% effective May 3, 2005), and is
secured by the Company's assets. The final installment of the then
outstanding principal and interest is due March 10, 2009. The note
maturity schedule is as follows:
Year ending September 30:
2005 $1,128,721
2006 $1,128,720
2007 $1,128,720
2008 $1,128,720
2009 $2,821,807
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. Future amortization expense over the next five years is as follows:
Year ending September 30:
2005 $12,211
2006 $12,211
2007 $12,211
2008 $12,211
2009 $ 5,547
(6) Convertible Preferred Stock
In June 2001, all 200,000 shares of the Company's convertible
preferred stock, which had no voting rights, were converted into shares of
common stock.
(7) Adjustable Rate Preferred Stock
On March 25, 2002, all 40,000 shares of adjustable rate preferred
stock were redeemed at a price of $1.00 per share. Prior to redemption,
holders of adjustable rate preferred stock had no voting rights and were
only entitled to those dividends that were declared by the Board of
Directors to be adjustable rate preferred dividends.
F-12
(8) Income Taxes
The provision for income taxes is comprised of the following for the
periods ended:
September 30, March 31,
---------------------------- ------------------
2002 2003 2004 2004 2005
---- ---- ---- ---- ----
(Unaudited) (Unaudited)
Current:
Federal $ 18,219 $474,919 $1,263,400 $530,694 $ 684,274
State 15,749 126,600 342,100 150,652 199,319
-------- -------- ---------- -------- ----------
33,968 601,519 1,605,500 681,346 883,593
-------- -------- ---------- -------- ----------
Deferred:
Federal (17,595) 85,895 159,600 73,101 147,188
State (2,100) 33,800 65,700 20,506 41,472
-------- -------- ---------- -------- ----------
(19,695) 119,695 225,300 93,607 188,660
-------- -------- ---------- -------- ----------
$ 14,273 $721,214 $1,830,800 $774,953 $1,072,253
-------- -------- ---------- -------- ----------
-------- -------- ---------- -------- ----------
The principal reasons for differences from the federal statutory rate
of 34% are as follows:
September 30, March 31,
--------------------------------- --------------------
2002 2003 2004 2004 2005
---- ---- ---- ---- ----
(Unaudited) (Unaudited)
Tax provision at statutory rate $109,810 $606,289 $1,562,574 $671,579 $ 910,963
State taxes, net of federal benefit 9,008 105,864 269,148 103,374 161,290
Decrease in valuation allowance (108,675) - - - -
Permanent differences - 2,625 (5,792) - -
Other 4,130 6,436 4,870 - -
-------- -------- ---------- -------- ----------
Income tax provision $ 14,273 $721,214 $1,830,800 $774,953 $1,072,253
-------- -------- ---------- -------- ----------
-------- -------- ---------- -------- ----------
F-13
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities are presented below for the
periods ended:
September 30,
------------------ March 31,
2003 2004 2005
---- ---- ----
(Unaudited)
Deferred tax assets:
Accrued compensation $ 8,000 $ 11,500 $ 11,500
State taxes 43,000 115,400 115,400
--------- --------- ---------
Total deferred tax assets 51,000 126,900 126,900
--------- --------- ---------
Deferred tax liabilities:
Property and equipment - (900) (900)
Management contracts (151,000) (451,300) (639,960)
--------- --------- ---------
Total deferred tax liabilities (151,000) (452,200) (640,860)
--------- --------- ---------
Net deferred tax liabilities $(100,000) $(325,300) $(513,960)
--------- --------- ---------
--------- --------- ---------
The components giving rise to the net deferred tax liabilities
described above have been included in the accompanying balance
sheets as follows for the periods ended:
September 30,
------------------ March 31,
2003 2004 2005
---- ---- ----
(Unaudited)
Current assets $ 51,600 $ 127,800 $ 127,800
Non-current assets 11,400 34,100 34,100
Current liabilities (600) (900) (900)
Non-current liabilities (162,400) (486,300) (674,960)
--------- --------- ---------
Net deferred tax liabilities $(100,000) $(325,300) $(513,960)
--------- --------- ---------
--------- --------- ---------
F-14
(9) Earnings Per Share
The weighted average common shares outstanding used in the calculation
of basic earnings per share and weighted average common shares outstanding,
adjusted for common stock equivalents, used in the computation of diluted
earnings per share were as follows for the periods ended:
Six Months Ended
Years Ended September 30, March 31,
---------------------------------- -------------------
2002 2003 2004 2004 2005
---- ---- ---- ---- ----
(Unaudited) (Unaudited)
Weighted average common stock
outstanding 1,979,517 2,439,213 2,443,604 2,439,213 2,453,629
Common stock equivalents:
Stock options - 14,324 107,235 93,725 103,205
--------- --------- --------- --------- ---------
1,979,517 2,453,537 2,550,839 2,532,938 2,556,834
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
(10) Reclassification of Prior Period's Statements
Certain items previously reported have been reclassified to conform
with the current period's presentation.
(11) Commitments
The Company leases office space under a single non-cancelable
operating lease that covers three suites at 750 Grant Ave. in Novato,
California. The initial lease expires September 30, 2005 with five
consecutive two-year options available thereafter. Total rent expense for
the six months ended March 31, 2005 was $46,950. The minimum future rental
commitment under this lease as of March 31, 2005 is $46,950 for the
remaining six months of this fiscal year. The minimum future rental
commitment is $93,900 per year for the ten year option period.
(12) 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 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 75,000 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.
F-15
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.
Options granted during the fiscal years ended September 30, 2002, 2003 and
2004 were 138,750, 108,750 and 27,000 respectively. Options granted during
the six months ended March 31, 2005 were 115,500. 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 in the fiscal year ended September 30,
2002 was determined at the date of grant by using an options pricing model
with an assumed risk-free interest rate of 3.80%, an expected life of 5
years, zero dividends and a volatility factor of 0.0001%:
Basic Diluted
Net Income EPS EPS
---------- ----- -------
For the year ended September 30, 2002
-------------------------------------
Net income $308,697 $0.15 $0.15
Fair value of stock options - net of tax 138,807 0.06 0.06
-------- ----- -----
Proforma net income $169,890 $0.09 $0.09
-------- ----- -----
-------- ----- -----
The value of options granted in the fiscal year ended September 30,
2003 was determined at the date of grant by using an options pricing model
with an assumed risk-free interest rate of 3.24%, an expected life of 5
years, zero dividends and a volatility factor of 0.0001%:
Basic Diluted
Net Income EPS EPS
---------- ----- -------
For the year ended September 30, 2003
-------------------------------------
Net income $1,061,988 $0.43 $0.43
Fair value of stock options - net of tax 77,431 0.03 0.03
---------- ----- -----
Proforma net income $ 984,557 $0.40 $0.40
---------- ----- -----
---------- ----- -----
The value of options granted in the fiscal year ended September
30, 2004 was determined at the date of grant by using an options pricing
model with an assumed risk-free interest rate of 2.84%, an expected life
of 5 years, zero dividends and a volatility factor of 34.68%:
F-16
Basic Diluted
Net Income EPS EPS
---------- ----- -------
For the year ended September 30, 2004
-------------------------------------
Net income $2,765,006 $1.13 $1.09
Fair value of stock options - net of tax 56,160 0.02 0.02
---------- ----- -----
Proforma net income $2,708,846 $1.11 $1.07
---------- ----- -----
---------- ----- -----
The value of options granted during the six months ended March 31,
2004 was determined at the date of grant by using an options pricing model
with an assumed risk-free interest rate of 2.84%, an expected life of 5
years, zero dividends and a volatility factor of 0.0001%:
Basic Diluted
Net Income EPS EPS
---------- ----- -------
For the six months ended March 31, 2004
---------------------------------------
Net income $1,200,279 $0.49 $0.47
Fair value of stock options - net of tax 12,825 - -
---------- ----- -----
Proforma net income $1,187,454 $0.49 $0.47
---------- ----- -----
---------- ----- -----
The value of options granted during the six months ended March 31,
2005 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 23.91%:
Basic Diluted
Net Income EPS EPS
---------- ----- -------
For the six months ended March 31, 2005
---------------------------------------
Net income $1,607,049 $0.65 $0.63
Fair value of stock options - net of tax 321,552 0.13 0.13
---------- ----- -----
Proforma net income $1,285,497 $0.52 $0.50
---------- ----- -----
---------- ----- -----
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.
The Company has reserved up to 613,179 options for shares of the
Company's common stock, in accordance with terms of the Plan, wherein a
maximum of 25% of the outstanding common stock may be issued as stock
options. An aggregate of 384,750 options have been granted to certain
employees, executive officers, and directors of the Company as of March 31,
2005. These options were fully vested at the date of grant, and have a
weighted average exercise price of $10.24 per share. Through March 31,
2005, employees exercised a total of 17,750 options, leaving 367,000
options fully vested and exercisable as of that date.
A summary of the status of stock options granted is presented in the
following table for the fiscal years ended September 30, 2002, 2003 and
2004, and for the six months ended March 31, 2005:
F-17
Weighted Weighted Weighted
2002 Average 2003 Average 2004 Average
Number Of Exercise Number Of Exercise Number Of Exercise
Options Price Options Price Options Price
--------- -------- --------- -------- --------- --------
Outstanding at the
beginning of the period - - 133,500 $6.67 242,250 $7.27
------- ----- ------- ----- ------- -----
Granted 138,750 $6.67 108,750 $8.00 27,000 $10.69
Exercised - - - - (13,500) $6.89
Forfeited (5,250) $6.67 - - - -
Expired - - - - - -
Outstanding at the end
of the period 133,500 $6.67 242,250 $7.27 255,750 $7.61
------- ----- ------- ----- ------- -----
Exercisable at the end
of the period 133,500 $6.67 242,250 $7.27 255,750 $7.61
------- ----- ------- ----- ------- -----
Weighted average fair
value of options $6.67 $6.81 $3.47
----- ----- -----
Six Months Ended March 31,
(Unaudited)
-----------------------------------
2005 Weighted Avg.
Number Of Exercise
Options Price
--------- -------------
Outstanding at the
beginning of the period 255,750 $7.61
------- -----
Granted 115,500 $16.00
Exercised (4,250) $0.00
Forfeited - -
Expired - -
Outstanding at the end
of the period 367,000 $10.24
------- ------
Exercisable at the end
of the period 367,000 $10.24
------- ------
Weighted average fair
value of options $10.24
-------
F-18
(13) Initial Public Offering
On November 29, 2001 the Company filed a Registration Statement on
Form SB-2, which provided for the offering of between 450,000 and 900,000
shares of the Company's common stock. As of May 31, 2002, the offering was
closed and 574,722 shares had been sold by Hennessy Advisors, Inc., at a
price of $10.00 per share.
The following table sets forth information about the offering and
shares sold. Ten percent of all shares sold were supplied from shares owned
by Neil J. Hennessy, our Chairman and Chief Executive officer:
Amount Sold
through
No. of Aggregate May 31, 2002
Shares Offering At $10.00
Registered Price Per share
---------- --------- ------------
Hennessy Advisors, Inc. 900,000 $9,000,000 $5,747,220
Neil J. Hennessy
100,000 $1,000,000 $ 638,580
Total offering expenses incurred were $354,255, consisting primarily
of legal and accounting fees. There were no underwriting discounts or
commissions, as shares were offered by officers of the Company.
The net offering proceeds reflecting shares sold less offering
expenses recorded were $5,392,965. Net proceeds of the offering were
allocated as follows:
O $1,975,000 to repay the note and accrued interest to Netfolio.
O $1,840,159 to repay the note to Firstar Bank.
O $40,000 to redeem the adjustable preferred stock held by the
Chairman and Chief Executive Officer, Neil J. Hennessy and his
brother, Brian Hennessy, who is a Director of the Company and who
owned approximately 5.22% of the common stock before the
offering.
The remaining net proceeds of $1,537,806 were invested in a money
market account, to be used for working capital and to finance business
growth.
(14) Concentration of Credit Risk
The Company maintains its cash accounts with two commercial banks
which, at times, may exceed federally insured limits. The amount on
deposit at March 31, 2005 exceeded the insurance limits of the Federal
Deposit Insurance Corporation by approximately $6,000. In addition, total
cash and cash equivalents include $4,670,885 held in the First American
Prime Obligations Fund which is not federally insured. The Company believes
it is not exposed to any significant credit risk on cash and cash
equivalents.
F-19
(15) New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (FASB)
issued FASB Statement No. 123R "Share-Based Payment", which amended the
provisions of FASB Statement No. 123 "Accounting for Stock-Based
Compensation." During the first fiscal year that stock options were granted
(year ended September 30, 2002) and through the nine months ended June 30,
2005, we have not recorded any compensation expense for stock option
grants, as allowed by the intrinsic value recognition and measurement
principles of APB Opinion No. 25. Proforma effects on net income and
earnings per common share have been estimated and reported using the Black-
Scholes option pricing model, as displayed in note #12 above.
In accordance with the provisions of the new FASB Statement No. 123R,
we will begin reporting compensation expense for all stock option grants in
our first quarterly report for fiscal year 2006 (quarter ending December
31, 2005). We will use the Black-Scholes option pricing model to determine
compensation expense at fair value, as of the grant date.
F-20
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED
IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANY
PERSON TO PROVIDE YOU WITH INFORMATION DIFFERENT
FROM THAT CONTAINED IN THIS PROSPECTUS. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR SALE OF COMMON
STOCK MEANS THAT INFORMATION CONTAINED IN THIS
PROSPECTUS IS CORRECT AFTER THE DATE OF THIS
PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO
SELL OR SOLICITATION OF AN OFFER TO BUY THESE
SHARES OF COMMON STOCK IN ANY CIRCUMSTANCES UNDER
WHICH THE OFFER OF SOLICITATION IS UNLAWFUL
TABLE OF CONTENTS
PAGE
----
Prospectus Summary 1
Risk Factors 9
Cautionary Statement Regarding
Forward-Looking Statements 15
Use of Proceeds 16
Price Range of Common Stock 17
Dividend Policy 17
Capitalization 18
Selected Financial Data 19
Management's Discussion and Analysis of
Financial Condition and Results
of Operations 21
Business 30
Management 41
Executive Compensation 43
Principal and Selling Shareholders 47
Description of Capital Stock 48
Underwriting 49
Legal Matters 52
Experts 52
Where You Can Find More Information 52
Index to Financial Statements F-1
-------- Shares
[INSERT HENNESSY LOGO]
Common Stock
PROSPECTUS
A.G. EDWARDS
-------------, 2005
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Hennessy will pay all expenses other than the SEC registration fee for the
shares being sold by the selling shareholders, who will pay the SEC registration
fee on the shares they are selling. The expenses in connection with the
issuance and distribution of the securities being registered are as follows
(estimated where noted):
SEC registration fee $ 5,434.21*
NASD filing fee **
Printing and engraving expenses **
Accounting fees and expenses **
Legal fees and expenses **
Transfer agent's fees and expenses **
Miscellaneous **
----------
Total $
----------
----------
* Estimated.
** To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Hennessy has authority under Section 317 of the California Corporations
Code to indemnify corporate "agents," including directors, officers and
employees of the corporation, against expenses, judgments, fines, settlements
and other amounts actually and reasonably incurred in connection with defending
non-derivative actions if such person acted in good faith and in a manner such
person reasonably believed to be in the best interests of the corporation and,
in the case of a criminal proceeding, had no reasonable cause to believe their
conduct was unlawful. Hennessy is also authorized under Section 317 to
indemnify corporate agents against expenses actually and reasonably incurred by
such person in connection with defending or settling derivative actions if such
person acted in good faith and in a manner such person believed to be in the
best interests of the corporation and its shareholders. Indemnification is
obligatory to the extent that an agent of a corporation has been successful on
the merits in defense of any such proceeding, but otherwise may be made only
upon a determination in each instance either by a majority vote of a quorum of
the board of directors, other than directors involved in such proceeding, by
independent legal counsel in a written opinion if such a quorum of directors is
not obtainable, by the shareholders by an affirmative vote of a majority of the
shares in which a quorum is present other than shareholders to be indemnified,
or by the court, that indemnification is proper because the agent has met the
applicable statutory standards of conduct.
Additionally, under Section 317, Hennessy may also advance expenses
incurred in defending proceedings against corporate agents, upon receipt of an
undertaking that the agent will reimburse the corporation if it is ultimately
determined that the agent is not entitled to be indemnified.
In accordance with Section 317, Hennessy's Amended and Restated Articles of
Incorporation eliminate the liability of its directors for monetary damages to
the fullest extent permissible under California law. Additionally, Hennessy's
Amended and Restated Bylaws provide that Hennessy has the right to purchase and
maintain insurance on behalf of any agent of the corporation, whether or not
Hennessy would have the power to indemnify such person against the liability
insured against.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, Hennessy has not sold any shares of common
stock in transactions that have not been registered under the Securities Act of
1933.
II-1
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
Reference is made to the Exhibit Index following the signature pages
hereto, which Exhibit Index is hereby incorporated into this Item.
(b) Financial Statement Schedules
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes that:
1. For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
2. For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act, and will be governed by the final adjudication
of such issues.
II-2
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
this registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Novato, State of California, on
July 26, 2005.
HENNESSY ADVISORS, INC.
By:/s/Neil J. Hennessy
-----------------------------------------
Neil J. Hennessy, Chief Executive Officer,
President and Chairman of the Board
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears on
the Signature Page to this Registration Statement constitutes and appoints Neil
J. Hennessy, Teresa M. Nilsen, and Daniel B. Steadman, and each or any of them,
his or her true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him or her and in his or her name, place
and stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, including any
amendment or registration statement filed pursuant to Rule 462, and to file the
same, with all exhibits hereto, and other documents in connection therewith,
with the Securities and Exchange Commission, and grants unto said attorneys-in-
fact and agents, full power and authority to do and perform each and every act
and thing requisite and necessary to be done in about the premises, as fully to
all intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or his or
her substitute or substitutes may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated.
II-3
NAME DATE
---- ----
/s/Neil J. Hennessy
----------------------------------------- July 26, 2005
Neil J. Hennessy, Chief Executive Officer, President,
Chairman of the Board and Director
/s/Teresa M. Nilsen
----------------------------------------- July 26, 2005
Teresa M. Nilsen, Chief Financial Officer,
Chief Accounting Officer and Director
/s/Daniel B. Steadman
----------------------------------------- July 26, 2005
Daniel B. Steadman, Director
/s/Brian A. Hennessy
----------------------------------------- July 26, 2005
Brian A. Hennessy, Director
/s/Daniel G. Libarle
----------------------------------------- July 26, 2005
Daniel G. Libarle, Director
/s/Rodger Offenbach
----------------------------------------- July 26, 2005
Rodger Offenbach, Director
/s/Thomas L. Seavey
----------------------------------------- July 26, 2005
Thomas L. Seavey, Director
/s/Henry Hansel
----------------------------------------- July 26, 2005
Henry Hansel, Director
II-4
EXHIBIT INDEX
1.1 Form of Underwriting Agreement between the registrant and A.G.
Edwards & Sons, Inc. (4)
2.1 Asset Purchase Agreement, dated as of September 10, 2003, between
the registrant and Lindner Asset Management, Inc., as amended by
First Amendment, dated as of January 19, 2004(1)
2.2 Asset Purchase Agreement, dated as of March 15, 2005, between the
registrant and Landis Associates LLC(2)
2.3 Asset Purchase Agreement, dated as of March 15, 2005, between the
registrant and Michael L. Hershey(2)
3.1 Amended and Restated Articles of Incorporation(3)
3.2 Amended and Restated Bylaws(3)
5.1 Opinion on legality
10.1 License Agreement, dated as of April 10, 2000, between Edward J.
Hennessy Incorporated and Netfolio, Inc.(3)
10.2 Management Agreement, dated as of June 30, 2000, between Edward J.
Hennessy Incorporated and The Hennessy Mutual Funds, Inc. on behalf
of the Cornerstone Growth Fund, Cornerstone Value Fund and Focus
30 Fund)(3)
10.3 Restated Investment Advisory Agreement, dated as of February 28,
2002, between the registrant and The Hennessy Funds, Inc. (on behalf
of the Total Return Fund)
10.4 Restated Investment Advisory Agreement, dated as of February 28, 2002,
between the registrant and The Hennessy Funds, Inc. (on behalf of the
Balanced Fund)
10.5 Investment Advisory Agreement, dated as of July 1, 2005, between the
registrant and Hennessy Funds Trust (on behalf of the Cornerstone
Growth Fund, Series II)
10.6 Servicing Agreement, dated as of October 1, 2002, between the
registrant and The Hennessy Mutual Funds, Inc.
10.7 Amendment to Servicing Agreement, dated as of June 30, 2005, between
the registrant and The Hennessy Mutual Funds, Inc. with respect to
the Focus 30 Fund
10.8 Servicing Agreement, dated as of July 1, 2005, between the
registrant and Hennessy Funds Trust
10.9 Hennessy Advisors, Inc. 2001 Omnibus Plan(3)
10.9(a) Form of Option Award Agreement(3)
10.10 Employment Agreement of Neil J. Hennessy(3)
10.11 Amended and Restated Loan Agreement between the registrant and U.S.
Bank National Association, dated July 1, 2005
10.12 Non-Competition Agreement, dated as of March 15, 2005, between the
registrant and Michael L. Hershey(2)
14.1 Code of Ethics, as amended November 3, 2004(1)
23.1 Consent of Foley & Lardner LLP (included in Exhibit 5.1)
23.2 Consent of KPMG LLP
23.3 Consent of Pisenti & Brinker LLP
(1) Incorporated by reference from the registrant's Form 8-K filed on
December 10, 2004.
(2) Incorporated by reference from the registrant's Form 10-QSB for the
quarter ended March 31, 2005.
(3) Incorporated by reference from the registrant's Form SB-2 registration
statement (SEC File No. 333-66970).
(4) To be filed by amendment.
II-5