0000897069-01-500478.txt : 20011019
0000897069-01-500478.hdr.sgml : 20011019
ACCESSION NUMBER: 0000897069-01-500478
CONFORMED SUBMISSION TYPE: SB-2/A
PUBLIC DOCUMENT COUNT: 6
FILED AS OF DATE: 20011011
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: HENNESSY ADVISORS INC
CENTRAL INDEX KEY: 0001145255
STANDARD INDUSTRIAL CLASSIFICATION: INVESTMENT ADVICE [6282]
FILING VALUES:
FORM TYPE: SB-2/A
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-66970
FILM NUMBER: 1757006
BUSINESS ADDRESS:
STREET 1: 750 GRANT AVENUE SUITE 100
CITY: NOVATO
STATE: CA
ZIP: 94945
MAIL ADDRESS:
STREET 1: 750 GRANT AVENUE SUITE 100
CITY: NOVATO
STATE: CA
ZIP: 94945
SB-2/A
1
dkm72.txt
AMENDMENT NO. 2 TO FORM SB-2
As filed with the Securities and Exchange Commission on October 11, 2001
Registration No. 333-66970
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------------
Amendment No. 2
to
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------
Hennessy Advisors, Inc.
(Name of small business issuer in its charter)
California 6282 68-0176227
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or
organization)
----------------------------------
750 Grant Avenue, Suite 100
Novato, California 94945
(415) 899-1555
(Address and telephone number of principal executive offices
and principal place of business)
----------------------------------
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, Esq.
Miriam K. Greenhut, Esq.
Foley & Lardner
200 Laura Street
Jacksonville, Florida 32202
(904) 359-2000
----------------------------------------
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, check the following box. |X|
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. |_|
----------------
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 Commission, acting pursuant to said Section 8(a),
may determine.
The information in this preliminary prospectus is not complete and may be
changed. These securities may not be sold until the registration statement filed
with the Securities and Exchange Commission is effective. This preliminary
prospectus is not an offer to sell nor does it seek an offer to buy these
securities in any jurisdiction where the offer or sale is not permitted.
Subject to Completion. Dated October ___, 2001.
450,000 Shares Minimum
1,000,000 Shares Maximum
Minimum Investment $1,000 (100 shares)
Maximum Investment $300,000 (30,000 shares)
[LOGO]
Hennessy Advisors, Inc.
Common Stock
--------------------------
This is an initial public offering of shares of common stock
of Hennessy Advisors, Inc. Except for up to 100,000 shares which may be sold by
Neil J. Hennessy, the president and chief executive officer of Hennessy
Advisors, all of the 1,000,000 shares of common stock are being sold by Hennessy
Advisors. Our selling shareholder will be entitled to sell up to 10% of the
shares we sell in this offering, even if only the minimum offering is sold.
Hennessy Advisors will not receive any of the proceeds from the sale of the
selling shareholder's shares.
We will not close this offering unless we receive commitments
to purchase at least 450,000 shares, which may include 45,000 shares to be sold
by our selling shareholder, by January 31, 2002. If we receive commitments to
purchase 450,000 shares by January 31, 2002, we will hold the initial closing
and we will continue to offer up to an additional 550,000 shares until March 31,
2002. Until the initial closing, funds will be held in escrow by Firstar Bank,
N.A. If we have not received commitments to purchase 450,000 shares by January
31, 2002, the offering will terminate and all funds held by the escrow agent
will be returned promptly to the purchasers without interest.
Hennessy Advisors will sell these shares through its officers
without employing underwriters or other sales agents. Neil J. Hennessy is deemed
to be an "underwriter" within the meaning of the Securities Act of 1933 with
respect to the shares of our stock owned by him that are sold in the offering.
Prior to this offering, there has been no public market for
the common stock. The initial public offering price per share will be $10.00.
See "Risk Factors" on page 6 to read about factors you should
consider before buying shares of the common stock.
--------------------------
Neither the Securities and Exchange Commission nor any other
regulatory body has approved or disapproved of these securities or passed upon
the accuracy or adequacy of this prospectus. Any representation to the contrary
is a criminal offense.
Notice to California Investors only: the shares of common
stock in this offering may be purchased in California only by those California
Investors who indicated in writing that the investor either has (i) a combined
annual income of not less than $50,000 and a net worth of not less than $150,000
or (ii) a minimum net worth of not less than $250,000 (no minimum net income
requirement). In both instances, net worth is calculated exclusive of home, home
furnishings and automobiles and the investment in the shares must not exceed 10%
of the investor's net worth.
--------------------------
Minimum Maximum
Per Share Total Total
--------- ----- -----
Initial public offering price .................................... $ 10.00 $ 4,500,000 $ 10,000,000
Proceeds to selling shareholder................................... $ 10.00 $ 450,000 $ 1,000,000
Proceeds, before expenses, to Hennessy Advisors................... $ 10.00 $ 4,050,000 $ 9,000,000
Because the offering will be made by officers of Hennessy
Advisors, no underwriting discounts or commissions will be paid.
------------------------
Prospectus dated ____________, 2001
You should rely only on the information contained in this
document or to which we have referred you. We have not authorized anyone to
provide you with information that is different. This document may only be used
where it is legal to sell these securities. The information in this document may
only be accurate on the date of this document.
2
PROSPECTUS SUMMARY
You should read the following summary together with the more
detailed information about our company and the common stock being sold in this
offering and financial statements and the notes to those statements included
elsewhere in this prospectus.
Hennessy Advisors, Inc.
Hennessy Advisors, Inc. provides investment advisory services
to four no-load mutual funds as well as high net worth investors primarily
located in the United States. We generally manage assets on a discretionary
basis (i.e., we do not need to seek the client's approval for securities
transactions). We invest primarily through a set of quantitative criteria rather
than based on qualitative judgments. Under investment management agreements with
the mutual funds described below, we invest the assets of the funds, which raise
capital for investment by selling shares to the public. Our investment
management agreements with high net worth individuals generally give us
discretion to invest the accounts these clients place with us for management. We
apply the quantitative criteria described below to the fund portfolios. We apply
many of the same criteria to the accounts we manage for individuals, modified in
each instance by specific investment criteria specified by the client. As of
June 30, 2001, we managed approximately $217 million in total assets, of which
approximately $197 million were managed on behalf of the mutual funds.
The mailing address for our principal executive office is 750
Grant Avenue, Suite 100, Novato, California 94945, and our telephone number is
(415) 899-1555. We were originally incorporated in California in 1989 as Edward
J. Hennessy Incorporated. We changed our name to Hennessy Advisors, Inc. in
2001. The web site for information on our mutual funds is located at
http://www.hennessy-funds.com. The information on our web site is not a part of
this prospectus.
Our Mutual Funds Investment Strategies
We employ an investment strategy with the "Dogs of the Dow,"
each year purchasing the 10 highest yielding Dow Jones stocks in approximately
equal dollar amounts and holding that portfolio for one year. We apply this
investment strategy to a portion of Hennessy Balanced Fund and Hennessy
Leveraged Dogs Fund, two of the mutual funds we founded and manage. We also
apply quantitative-based as opposed to qualitative strategies to the management
of Hennessy Cornerstone Growth Fund and Hennessy Cornerstone Value Fund, each
maintaining a 50-stock portfolio. The funds are described beginning on page 21.
3
The Offering
Unless noted otherwise, information in this prospectus is
based on 960,680 shares outstanding as of June 30, 2001 and assumes (i) the
issuance of 900,000 shares in this offering by Hennessy Advisors, subscriptions
for the maximum offering amount and the selling shareholder's sale of 10% of
this amount, (ii) the issuance of 90,740 shares to limited partners in the
merger into Hennessy Advisors of The Hennessy Management Co., L.P. and The
Hennessy Management Co. 2, L.P. upon the closing of the offering, and (iii) the
redemption for cash of all of the outstanding adjustable rate preferred stock
upon closing of the offering, but does not include the grant, subject to
completion of the offering, of 87,500 fully vested common stock options at an
exercise price equal to the offering price.
Minimum shares offered .................................. 450,000 shares (includes 45,000 shares
which may be sold by the selling
shareholder)
Maximum shares offered .................................. 1,000,000 shares (includes 100,000 shares
which may be sold by the selling
shareholder)
Maximum shares offered by selling shareholder............ Up to 10% of share subscriptions
Offering price per share................................. $10.00
Shares outstanding after this offering................... 1,951,420 shares
Minimum subscription amount.............................. $1,000 (100 shares)
Maximum subscription amount.............................. $300,000 (30,000 shares)
Use of proceeds.......................................... For the repayment of debt, retirement of
all of the outstanding shares of
adjustable rate preferred stock and for
general corporate purposes.
Terms of the offering.................................... We may close this offering when we have
received commitments to purchase a
minimum of 450,000 shares and may hold
additional closings for up to an
aggregate maximum of 1,000,000 shares
during the offering period. We will hold
all funds received up to the minimum
offering amount in an escrow account. If
we do not receive commitments to purchase
the minimum amount during the escrow
period, we will return all proceeds to
investors without interest.
Selling shareholder...................................... Neil J. Hennessy may elect to sell up to
10% of the shares subscribed for at any
closing of this offering. For example,
if we receive subscriptions for the
minimum offering amount of 450,000
shares, Mr. Hennessy may sell 45,000
shares at the closing and we will sell
405,000 shares.
Conditions to closing.................................... We will not close this offering if we do
not receive subscriptions to purchase at
least the minimum offering amount.
4
Escrow period............................................ Funds will be held in escrow until the
earlier of our receipt of commitments to
purchase 450,000 shares or January 31,
2002.
Offering period.......................................... We may continue to sell shares after
breaking escrow until March 31, 2002.
No underwriting.......................................... We intend to sell the offering directly
without the payment of any third party
commissions or fees.
How to purchase shares................................... To purchase shares, you must complete and
deliver a subscription agreement in the
form attached as Annex A to this
prospectus. You should review the
instructions included in the subscription
agreement.
Escrow agent............................................. Firstar Bank, N.A. will serve as escrow
agent for the subscription funds pending
the closing of the minimum offering.
5
RISK FACTORS
An investment in our common stock involves risk. You should
carefully consider the following risks before making an investment decision. If
any of the following risks occur, our business, results of operations, or
financial condition could be materially and adversely affected.
Our revenues will decline if the value of the securities held by the mutual
funds we manage declines.
We primarily obtain our revenues from advisory fees paid by the mutual
funds we manage. These advisory fees are based on a percentage of the value of
the assets of the funds. For the nine months ended June 30, 2001, 92.4% of our
revenues were from advisory fees. The securities markets in general have
experienced significant volatility, with declines in market value since March
2000. Any further decline in the securities markets, in general, and the equity
markets, in particular, could further reduce our assets under management and
consequently reduce our revenues. In addition, any continuing decline in the
equity markets, failure of these markets to sustain their prior levels of
growth, or continued short-term volatility in these markets could result in
investors withdrawing from the mutual funds we manage or decreasing their rate
of investment, either of which would be likely to further adversely affect us.
Our management fees are based on the value of our assets under management which
is subject to significant fluctuations.
Global economic conditions, interest rates, inflation rates
and other factors that are difficult to predict affect the mix, market values,
and levels of our assets under management. The Hennessy Balanced Fund and
Hennessy Leveraged Dogs Fund invest approximately 50% of their portfolios in
U.S. Treasury securities with a remaining maturity of one year. Fluctuations in
interest rates affect the value of such fixed-income assets under management. In
turn, this affects our management fees. Similarly, all four of our funds are
affected by changes in the equity marketplace, which may significantly affect
the level of our assets under management. The factors above often have inverse
effects on equity assets and fixed-income assets, making it difficult for us to
predict the net effect of any particular set of conditions on our business and
to decide effective strategies to counteract those conditions.
Poor investment performance by our mutual funds could decrease sales of our
funds.
Success in the investment management and mutual fund business
is dependent on investment performance as well as distribution and client
servicing. Good performance generally stimulates sales of our investment
products and tends to keep withdrawals and redemptions low, generating higher
management fees (which are based on the amount of assets under management).
Conversely, relatively poor performance tends to result in decreased sales,
increased withdrawals and redemptions, with corresponding decreases in our
revenues. Many analysts of the mutual fund industry believe that investment
performance is the most important factor for the growth of no-load mutual funds,
such as those we offer. Failure of our investment products to perform well
could, therefore, have a material adverse effect on us.
Our failure to comply with regulatory requirements may harm our financial
condition.
Our investment management activities are subject to client
guidelines, and our mutual fund business involves compliance with numerous
investment, asset valuation, distribution and tax requirements. A failure to
adhere to these guidelines or satisfy these requirements could result in losses
which 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 such
precautions will protect us from potential liabilities.
Our businesses are subject to extensive regulation in the
United States, including by the Securities and Exchange Commission. 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
6
investment adviser. Changes in laws or regulations or in governmental policies
could have a material adverse effect on us.
See "Business -- Regulation."
Our investment management agreements can be terminated on short notice.
Substantially all of our revenues are derived from investment
management agreements. Investment management agreements with our mutual funds
are terminable without penalty on 60 days' notice and must be approved at least
annually by the disinterested members of each mutual fund's board of directors
or trustees. If any of our investment management agreements are terminated or
not renewed, our revenues could materially decline.
We will use a portion of the offering proceeds to pay debt incurred in
connection with the acquisition of management contracts, the carrying value of
which could be required to be written down in the future.
Our June 30, 2001 balance sheet includes $4,190,840 of
capitalized management contracts acquired in connection with our June 2000
license agreement with Netfolio, Inc. We will use approximately $3.8 million of
the net proceeds from this offering to pay indebtedness incurred for the
management contracts acquired. Of this amount, $1,849,709 represents the
principal amount of debt owed to Netfolio which has accrued interest since July
15, 2001 at a default rate of 18% per annum.
We may be required to write down from time to time in the
future the carrying value on our balance sheet of the management contracts
acquired, based on our assessment of any decline in our ability to earn revenues
under these management contracts. The revenues from these management contracts
could decrease if the assets under management under these contracts decrease. In
addition, by law the management contracts are cancellable on 60 days' notice. If
the management contracts were cancelled, we would be required to expense the
entire remaining capitalized amount of these contracts. Any write-downs or
write-offs, although a non-cash expense, would adversely affect our income
statement and balance sheet.
We face intense competition from larger companies.
The investment management business is intensely competitive,
with low barriers to entry, and is undergoing substantial consolidation. Many
organizations in this industry are attempting to market to and service the same
clients 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 distribution capabilities, offer more product lines and services,
and may also have a substantially greater amount of assets under management and
financial resources. 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 marketing resources.
Market pressure to lower our advisory fees would reduce our profit margin.
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 shareholders
with investment returns and service that will encourage them to be willing to
pay our fees. There can be no assurance that we will be able to maintain our
current fee structure. Fee reductions on existing or future new business could
have an adverse impact on our results of operations.
We may be required to forego all or a portion of our fees under our investment
management agreements with the mutual funds.
Market conditions may require that we waive our investment
advisory fees from the mutual funds we manage to the extent that the mutual
fund's operating expenses, including our fees (but excluding interest, taxes,
brokerage commissions and extraordinary expenses such as litigation), exceed
competitive expense limitations. We monitor ratios of expenses to average assets
under management and waive advisory fees if we believe that our ratios might
lead fund investors to redeem their shares in our mutual funds in order to seek
lower expense ratios with other fund managers. During the fiscal year
7
2000, and the nine months ended June 30, 2001, The Hennessy Management Co. 2,
L.P., the investment advisor to the Hennessy Leveraged Dogs Fund, waived fees
for the Hennessy Leveraged Dogs Funds of $80,726 and $74,875, respectively.
We depend upon Neil 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, chief
executive officer and president, who is the driving force in our company's
success. Mr. Hennessy is primarily responsible for the day-to-day management of
the portfolio of each of our mutual funds and for developing and executing each
fund's investment programs. The loss of Mr. Hennessy could have an adverse
effect on our business, financial condition and results of operations.
Changes in the distribution channels on which we depend could reduce our
revenues and slow our growth.
We derive a significant portion of our sales through
investment advisors who utilize no transaction fee programs also referred to as
mutual fund supermarkets. A no transaction fee program means that the mutual
fund customer does not pay a transaction fee. Rather, the fees are paid by the
mutual fund itself or its investment advisor or distributor. Increasing
competition in these distribution channels has caused our distribution costs to
rise and could cause further increases in the future. Higher distribution costs
lower our net revenues and earnings. Moreover, our failure to maintain strong
business relationships with these advisors would impair our ability to
distribute and sell our products, which would have a negative effect on our
level of assets under management, related revenues and overall financial
condition.
Our officers and directors own enough of our shares to significantly influence
our company, which will limit your ability to influence corporate matters.
Before this offering, our officers and directors own 75.85% of
our outstanding common stock. Following the closing of this offering, assuming
we sell 900,000 shares in the offering and Mr. Hennessy sells 100,000 shares,
our executive officers and directors will beneficially own approximately 35.75%
of our outstanding common stock. As a result, these stockholders will be able to
significantly influence the outcome of any matter requiring a stockholder vote
and, as a result, our management and affairs. Matters that typically require
stockholder approval include the following:
* election of directors;
* merger or consolidation with another company; and
* sale of all or substantially all of our assets.
There are 960,680 shares of our common stock immediately available for resale
following the offering which, if sold, could adversely affect our stock's market
price.
Following the merger of the limited partnerships into Hennessy
Advisors, we will have 1,051,420 shares of common stock which are "restricted
securities" under the Securities Act. Of that amount, 960,680 shares are
currently available for resale following the offering because the Rule 144
holding period has expired. Resale of these shares could have an immediate and
adverse effect on our stock's market price and adversely affect the development
of a public market in the stock.
Managing the growth of our business may be difficult.
Our business has dramatically grown over the past several
years. For example, our revenue has increased to $1,218,508 for the nine months
ended June 30, 2001 from $663,367 for the year ended September 30, 2000 and
$314,902 for the year ended September 30, 1999. If our growth exceeds our
expectations, our current managerial resources and infrastructure may be
inadequate to handle our rapid growth. Also, our senior management team has
limited collective experience managing a business the
8
current size of Hennessy or a public company. We cannot assure you that our
historical rate of growth will continue.
Our officers, directors and affiliates may purchase shares in the offering and
shares purchased by them will count towards the 450,000 share minimum required
to close.
We will permit our officers, directors and affiliates to
purchase shares in the offering on the same terms as other investors. If we have
not sold the minimum of 450,000 shares as the January 31, 2002 deadline
approaches, officers, directors or affiliates may purchase shares to ensure
closing of the offering.
Our stock has not been and may not be available on a public market. Even if
publicly traded, our stock price could be extremely volatile.
Prior to this offering, our common stock could not be bought
or sold publicly. Therefore, we do not know if investor interest in our stock
will be sufficient to create or sustain a public trading market. We intend to
seek one or more market makers through the securities industry contacts of our
president and chief executive officer, Neil J. Hennessy, and to have our common
stock traded on the Nasdaq Bulletin Board. We are currently in discussion with
one market maker. If we are not able to develop a public trading market for the
shares, investors may have limited liquidity and may be forced to hold the
shares for an indefinite period of time.
Because we determine the initial public offering price for the
shares, it may not be representative of the prices that our stock will command
later in the market. Recently, the stock market has experienced significant
price and volume fluctuations.
If our common stock suffers from this volatility, we could be
subject to securities class action litigation, similar to that which has been
brought against companies following periods of volatility in the market price of
their common stock. Litigation could result in substantial costs and could
divert our resources and senior management team's attention. This could harm our
financial condition and operating results.
We set the price of the shares in this offering without any arms' length
negotiations.
We are acting as our own selling agent for the offering. As a
result, we have set the initial public offering price of our common stock
without arms' length negotiations with underwriters.
You will experience immediate and substantial dilution.
The initial public offering price is expected to be
substantially higher than the net tangible book value of each outstanding share
of common stock. If you purchase common stock in this offering, you will suffer
immediate and substantial dilution. Assuming we sell the maximum number of
shares offered for sale, the dilution will be $4.98 per share in the net book
value of the common stock from the initial public offering price of $10.00 per
share. Excluding our management contract acquired assets in determining net
tangible book value, dilution would be $7.45 per share.
You may not agree with the ways in which we use the proceeds of this offering.
We expect to use the proceeds of this offering for the
repayment of debt and the remainder, if any, for general corporate purposes. We
have no specific plan for the use of such proceeds other than the repayment of
debt, nor can we tell you that you will agree with our use of the proceeds.
Pending their use, we intend to invest any net proceeds from this offering which
are not used to repay debt in short-term, investment grade securities or money
market instruments or any mutual funds that we manage.
9
CAPITALIZATION
The following table sets forth our capitalization as of June
30, 2001, and as adjusted to give effect to the sale of the minimum and maximum
offering amounts at the public offering price of $10.00 per share and the
receipt of estimated net proceeds therefrom. This table assumes that our selling
shareholder elects to sell the maximum shares allotted to him in this offering,
resulting in minimum shares sold by Hennessy Advisors of 405,000 shares and
maximum shares sold by Hennessy Advisors of 900,000 shares. Our stockholders'
equity in this table is also adjusted to reflect the issuance of 90,740 shares
of common stock issuable to limited partners in the merger of our limited
partnerships and retirement of adjustable rate preferred stock for $40,000 cash,
as if each had occurred on June 30, 2001, but does not include the grant of
87,500 fully vested common stock options at an exercise price equal to the
offering price. Each of these transactions is subject to completion of the
offering.
As Adjusted
----------------------------------
Actual Minimum Maximum
------ ------- -------
Short-Term Payables....................................... $ 127,210 $ 127,210 $ -
============= ============ ==========
Long-Term Debt............................................ $ 3,818,251 $ 58,251 $ -
Stockholders' Equity:
Adjustable rate preferred stock, $25 stated
value; 25,000 shares authorized, 1,600,
0 and 0 shares issued and outstanding,
as adjusted, respectively............................ 40,000 - -
Common stock, no par value; 10,000,000 shares authorized;
960,680, 1,456,420 and 1,951,420 shares issued and
outstanding, as adjusted, respectively............... 487,840 5,195,240 10,145,240
============= ============ ==========
Additional paid-in capital............................. 24,008 24,008 24,008
Accumulated deficit.................................... (357,262) (368,471) (368,471)
------------- ------------ ----------
Total stockholders' equity.......................... 194,586 4,850,777 9,800,777
------------- ------------ ----------
Total Capitalization................................... $ 4,012,837 $ 4,909,028 $ 9,800,777
============= ============ ============
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Except for any historical information, this prospectus
contains forward-looking statements that involve risks and uncertainties.
Forward-looking statements may be located in the material set forth under
"Management's Discussion and Analysis of Financial Condition and Results of
Operation," as well as in the prospectus generally. Any statements contained in
this prospectus that are not of historical fact are intended to be and are
"forward-looking statements," which involve known and unknown risks. We use the
following terms and similar expressions to identify forward-looking statements:
"anticipates," "believes", "estimates," "expects," "intends," "may," "plans,"
"potential," "should" and "will." Our actual results could differ from those
indicated by the forward-looking statements made in this prospectus.
Accordingly, you should not place undue reliance on these forward-looking
statements.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. Additionally, we do not assume
responsibility for the accuracy or completeness of these statements. We are
under no duty to update any of the forward-looking statements after the date of
this prospectus to conform these statements to actual results or to changes in
our expectations.
USE OF PROCEEDS
Assuming that our selling shareholder elects to sell the
maximum shares which he may sell in this offering, we estimate that our net
proceeds from the sale of our minimum offering amount will be
10
$3,800,000 and that our net proceeds from the sale of our maximum offering
amount will be $8,750,000. We intend to use $40,000 of the net proceeds to
redeem $40,000 of adjustable rate preferred stock from Neil J. Hennessy, our
chairman and chief executive officer, and his brother, Brian Hennessy, who owns
approximately 5.22% of our common stock and is a director of Hennessy Advisors.
We will use the balance of the net proceeds of the offering to pay amounts owed
in connection with the management contracts acquired with our 2000 license
agreement with Netfolio, Inc. (formerly O'Shaughnessy Capital Management, Inc.)
for the use of the names of and investment strategies applied to Hennessy
Cornerstone Value Fund and the Hennessy Cornerstone Growth Fund, including bank
debt incurred to make payments under this agreement. If we sell only the minimum
offering amount, and our selling shareholder sells his full allotment of that
amount, we will not have sufficient net proceeds to pay all of the obligations
outlined above. Accordingly, at the time we close the minimum offering amount,
if our net proceeds , together with cash flow from operations, are not
sufficient to pay these obligations, our selling shareholder will sell fewer
shares so that we may sell more and increase our net proceeds to satisfy these
obligations. To the extent our selling shareholder defers the sale of his
allotted shares in this manner, he may sell his deferred allotment following the
closing of the minimum offering amount. Based on our existing obligations to be
paid with the net proceeds of this offering, we do not anticipate that there
will be net proceeds available for general working capital if only the minimum
offering amount is sold.
As of June 30, 2001, amounts owed to Netfolio were estimated
to be $1,849,709. We have issued a subordinated promissory note payable to
Netfolio dated as of June 30, 2001 for $1,849,709. The note is payable in 60
equal monthly installments, together with interest at Firstar Bank's prime rate
and is subordinated to our debt to Firstar Bank. The note matures on June 30,
2006. Because we have not made payments to Netfolio on its subordinated note,
Netfolio has declared the note to be in default, and interest on the note
accrues at 18% per annum instead of the prime rate. However, notwithstanding
Netfolio's declaration of a default, our subordination agreement with Netfolio
and Firstar Bank prevents Netfolio from exercising any right to collect the
subordinated note until we pay our debt to Firstar Bank in full.
As of June 30, 2001, the debt to Firstar Bank incurred in
connection with prior payments to Netfolio had an outstanding balance of
$1,968,542 (which accrues interest at Firstar Bank prime rate) and matures on
April 10, 2005. We make principal payments to Firstar Bank each month of
approximately $40,000.
11
The following table shows how we intend to use the proceeds of the
offering if we sell only the minimum of 450,000 shares and if we sell the full
1,000,000 shares and, in either case, assuming closing on January 31, 2002:
If only the minimum If maximum offering
offering is sold is sold
Net proceeds $3,800,000 $8,750,000
Less:
Pay off of Netfolio note 2,084,706 2,084,706
Pay off of Firstar loan1 1,707,943 1,707,943
Redemption of adjustable
rate preferred stock 40,000 40,000
Available for working capital (32,649) 4,917,351
--------------------------------------
1 The balance due to Firstar assumes that we continue to make
monthly payments of principal and interest when due.
2 We anticipate that we will have sufficient cash flow to make
up the deficit.
We will use the balance of the net proceeds, if any, for
general corporate purposes, including working capital and the expansion of our
business through enhanced distribution and marketing of our existing investment
products, strategic acquisitions and new personnel. Management will have
significant discretion as to the use of the net proceeds from this offering.
SELLING SHAREHOLDER
Neil J. Hennessy, our chairman, chief executive officer and
president, is offering for sale up to 100,000 shares of common stock. Mr.
Hennessy may elect to sell up to 10% of the shares subscribed for at any
closing, including the closing of the minimum offering amount. For example, if
we receive subscriptions for the minimum offering amount of 450,000 shares, Mr.
Hennessy may sell 45,000 shares in our initial closing and we will sell only
405,000 shares. We will receive no proceeds from Mr. Hennessy's sale of shares.
If we only sell the minimum amount and in the unanticipated event that the net
proceeds to Hennessy Advisors together with cash flow from operations would not
be sufficient to pay all our obligations outlined above, Mr. Hennessy will
reduce the number of shares he sells in the offering in order to allow Hennessy
Advisors to sell more shares.
Mr. Hennessy is currently our 67.69% shareholder, owning
711,680 shares of common stock. Assuming the sale of 100,000 shares by Mr.
Hennessy, Mr. Hennessy will be our 31.35% shareholder, owning 611,680 shares of
common stock.
DIVIDEND POLICY
We have not declared nor paid cash dividends on our common
stock. After this offering, we do not anticipate paying cash dividends in the
foreseeable future and we intend to retain future earnings, if any, to be
applied towards the expansion and operation of our business. Our board of
directors has sole discretion to pay cash dividends based on our financial
condition, results of operations, capital requirements, contractual obligations,
and other relevant factors. Our loan agreement with Firstar Bank prohibits us
from paying dividends until the loan is paid off.
DILUTION
If you invest in our common stock, your interest will be
diluted to the extent of the difference between the initial public offering
price per share of our common stock and the pro forma as adjusted net tangible
book value per share of our common stock after this offering. We calculate pro
forma net book value per share by calculating the total assets (excluding assets
attributable to adjustable rate preferred stockholders) less total liabilities,
and dividing it by the number of outstanding shares of common stock.
After giving effect to this offering, less estimated expenses,
there will be an immediate increase in the pro forma as adjusted net book value
per share to existing stockholders and an immediate dilution per
12
share to new investors. The following table illustrates this per share dilution
on a pro forma basis as of June 30, 2001:
Maximum Offering(1) Minimum Offering(1)
Per Per
Dollar Share Dollar Share
Value Shares Value Value Shares Value
------ ------ ----- ------ ------ -----
Net book value per common share 154,586 960,680 $ 0.16 154,586 960,680 $ 0.16
Increase per share
attributable to
new investors:
Gross proceeds from
offering 9,000,000 900,000 4,050,000 405,000
Expenses of offering (250,000) (250,000)
Value of shares issued in
merger of limited
partnerships 907,400 90,740 907,400 90,740
Liquidation of investments
in limited partnerships (11,209) (11,209)
--------- --------- --------- ---------
9,646,191 990,740 4,696,191 495,740
Pro forma net book value per
common share after offering 9,800,777 1,951,420 5.02 4,850,777 1,456,420 3.33
Increase in net book value
per common share
attributable to new
investors $ 4.86 $ 3.17
======= =======
Initial public offering price
per share $ 10.00 $ 10.00
Pro forma net book value per
common share after offering 5.02 3.33
======= =======
Dilution per share to new
investors $ 4.98 $ 6.67
======= =======
---------------------
(1) The amounts computed do not reflect the impact of the options to
purchase 87,500 shares of common stock which are to be awarded upon the
sale of the minimum offering amount.
The management contracts acquired asset recorded as of June
30, 2001 and the management contracts acquired to be recorded upon the issuance
of shares in connection with the merger of the limited partnerships into
Hennessy Advisors represent intangible assets which management believes to be
fully recoverable. The following table represents the per share dilution on a
pro forma basis as of June 30, 2001, excluding the management contracts acquired
assets in determining the net tangible book value.
13
Maximum Offering(1) Minimum Offering(1)
Per Per
Dollar Share Dollar Share
Value Shares Value Value Shares Value
------ ------ ----- ------ ------ -----
Net tangible book value per
common share (3,756,865) 960,680 $ (3.91) (3,756,865) 960,680 $ (3.91)
Increase per share
attributable to
new investors:
Gross proceeds from offering 9,000,000 900,000 4,050,000 405,000
Expenses of offering (250,000) (250,000)
Shares issued in merger
of limited partnerships 90,740 90,740
Cash paid to limited
partners who elected
not to receive common shares (11,275) (11,275)
Liquidation of investments
in limited partnerships (11,209) (11,209)
---------- -------- ---------- --------
8,727,516 990,740 3,777,516 495,740
Pro forma net tangible book
value per common share
after offering 4,970,651 1,951,420 2.55 20,651 1,456,420 .01
-------- ---------
Maximum Offering(1) Minimum Offering(1)
Per Per
Dollar Share Dollar Share
Value Shares Value Value Shares Value
------ ------ ----- ------ ------ -----
Increase in net tangible book
value per common share
attributable to new investors $ 6.46 $ 3.92
======= =========
Initial public offering price $ 10.00 $ 10.00
per share
Pro forma net tangible book
value per common share
after offering 2.55 0.01
======= =========
Dilution per share to new $ 7.45 $ 9.99
======= =========
The following table summarizes on a pro forma basis, as of June
30, 2001, the total number of shares of common stock purchased, the total
consideration paid to us, and the average price per share paid by existing
stockholders and purchasers of shares in this offering, assuming our sale
of 900,000 shares at $10.00 per share: (2)
Shares Purchased Total Consideration Average Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
Existing stockholders................ 960,680 49.23% $ 511,848 4.91% $ 0.53
New investors........................ 990,740 50.77% 9,907,400 95.09% $ 10.00
Totals.................. 1,951,420 100.00% $ 10,419,248 100.00%
14
---------------------
(1) The amounts computed do not reflect the impact of the options to
purchase 87,500 shares of common stock which are to be awarded upon the
sale of the minimum offering amount.
(2) Assumes that we sell the maximum offering amount and our selling
shareholder elects to sell the maximum he may sell in this offering,
resulting in 900,000 shares sold by Hennessy, and that we issue 90,740
shares in connection with the merger of our limited partnerships, but
excludes the impact of the options to purchase 87,500 shares of common
stock which are to be awarded upon completion of the offering.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with
our financial statements, together with the notes to those statements, included
elsewhere in this prospectus. The following discussion contains forward-looking
statements that involve risks, uncertainties, and assumptions such as statements
of our plans, objectives, expectations, and intentions. Our actual results may
differ materially from those discussed in these forward-looking statements
because of risks and uncertainties inherent in future events, particularly those
identified in "Risk Factors."
Overview and General Industry Conditions
Our primary sources of revenue are investment advisory fees. Advisory
services include investment research, supervision of investments, conducting
clients' investment programs, including evaluation, sale and reinvestment of
assets, the placement of orders for purchase and sale of securities,
solicitation of brokers to execute transactions and the preparation and
distribution of reports and statistical information.
Investment advisory fees are charged as a specified percentage of the
average annual daily net value of the assets under management. Hennessy's total
assets under management were $217 million, $236 million and $45 million as of
June 30, 2001, September 30, 2000 and September 30, 1999, respectively.
Approximately 91% of Hennessy's total revenues were attributable to the four
Hennessy mutual funds for the nine months ended June 30, 2001. On June 30, 2000,
our assets under management increased by approximately $197 million as the
result of management contracts acquired for the two Cornerstone Funds on that
date in connection with acquiring automated investment trading strategies from
Netfolio, Inc., the Cornerstone Funds' former investment advisor.
The following table provides additional information about the
mutual funds and private client accounts for which we serve as investment
advisor:
Advisory Advisory Advisory Advisory
fees fees fees fees
Net assets 12 months Net assets 12 months Net assets 9 months Net assets 9 months
outstanding 10/1/98 to outstanding 9/30/99 to outstanding 10/1/99 to outstanding 10/1/00 to
as of 9/30/99 9/30/99 as of 9/30/00 9/30/00 as of 6/30/00 6/30/00 as of 6/30/01 6/30/01
------------- ---------- ------------- ---------- ------------- ---------- ------------- ----------
Hennessy Balanced
Fund $ 24,601,305 $ 63,572 $ 15,752,780 $ 74,833 $ 16,079,119 $ 67,122 $ 15,235,054 $ 127,944
Hennessy Leveraged
Dogs Fund(1) $ 5,554,375 $ 93,724 $ 2,927,971 $ 26,669 $ 3,383,472 $ 26,668 $ 3,132,413 $ 0
Hennessy Cornerstone N/A N/A $ 17,432,367 $ 53,767 $ 19,358,896 N/A $ 22,959,377 $ 113,270
Value Fund
Hennessy Cornerstone N/A N/A $ 182,589,429 $ 324,214 $177,165,271 N/A $ 156,135,162 $ 869,176
Growth Fund
Private Client Assets $ 15,701,622 $ 36,081 $ 17,077,842 $ 32,303 $ 16,702,784 $ 20,700 $ 19,803,994 $ 15,467
Totals $ 45,857,302 $ 193,377 $ 235,780,389 $ 511,786 $232,689,542 $114,490 $ 217,266,000 $1,125,857
(1) Includes amounts paid by Hennessy Management Co. 2, L.P. to Hennessy
Advisors in excess of advisory fees paid by Hennessy Leveraged Dog Fund to the
partnership as follows: year ended September 30, 1999 and 2000, $88,046 and
$21,238; and nine months ended June 30, 2000, $21,237.
15
Value of Management Contracts Acquired As Of
----------------------------------------------------------------------
09/30/1999 09/30/2000 06/30/2000 06/30/2001
-------------- ----------------- --------------- -----------------
Hennessy Balanced Fund N/A $0 $0 $0
Hennessy Leveraged Dogs Fund N/A $0 $0 $0
Hennessy Cornerstone Value Fund N/A $434,139 $441,497 $412,064
Hennessy Cornerstone Growth Fund N/A $3,686,854 $3,749,343 $3,499,387
Total Net of Amortization N/A $4,120,993 $4,190,840 $3,911,451
Neil J. Hennessy, our chief executive officer, president and
chairman of the board served as expert witness and mediator in securities cases
in the past and will continue as an expert witness on a limited basis in the
future. Since July 2000 any and all fees attributable to the foregoing were
revenues of Hennessy Advisors. Prior to that time, such fees were paid to Mr.
Hennessy directly and Mr. Hennessy in turn paid a portion to Hennessy Advisors
for office support and related services. Mr. Hennessy expects to further limit
his expert witnessing at the completion of this offering.
In July 2000, we withdrew our registration as a broker-dealer. While
licensed as a broker-dealer, we earned commissions on trades executed for the
mutual funds and private client accounts we managed.
The principal asset on our balance sheet other than investment advisory
fees receivable consists of the management contracts acquired in connection with
the Cornerstone Funds. We are amortizing the capitalized cost of these contracts
over 15 years, resulting in a carrying value of $3,911,451 at June 30, 2001
compared to $4,120,993 at September 30, 2000.
Our principal business activities are affected by many factors,
including redemptions by mutual fund shareholders, general economic and
financial conditions, movement of interest rates and competitive conditions.
Although we seek to maintain cost controls, a significant portion of our
expenses are fixed and do not vary greatly due to the factors listed above. As a
result, substantial fluctuations can occur in our revenue and net income from
period to period.
Results of Operations
The following table reflects items in the statements of operations as
dollar amounts and as percentages of total revenue.
Nine Months Ended June 30,
2001 2000
---- ----
Percentage of Percentage of
Amounts Total Revenue Amounts Total Revenue
------- ------------- ------- -------------
REVENUE:
Advisor fees $ 1,125,857 92.40% $ 114,490 48.66%
Expert witness fees $ 90,244 7.40% $ 109,239 46.43%
Commissions $ 0 0.00% $ 10,804 4.59%
Other income $ 2,407 0.20% $ 764 0.32%
Total Revenue $ 1,218,508 100.00% $ 235,297 100.00%
OPERATING EXPENSES:
Employee compensation and
benefits $ 436,849 35.85% $ 195,679 83.16%
General and administrative $ 137,462 11.28% $ 79,312 33.71%
Mutual fund distribution
expenses $ 106,669 8.76% $ 0 0.00%
Commissions and floor
brokerage $ 0 0.00% $ 12,354 5.25%
Amortization and depreciation $ 220,712 18.11% $ 6,987 2.97%
Interest $ 133,769 10.98% $ 10,765 4.58%
Total operating expenses $ 1,035,461 84.98% $ 305,097 129.67%
Income (loss) before income
taxes $ 183,047 15.02% $ (69,800) (29.67%)
Income taxes $ 600 0.05% $ 600 0.25%
Net income (loss) $ 182,447 14.97% $ (70,400) (29.92%)
16
Year Ended September 30,
2000 1999
---- ----
Percentage of Percentage of
Amounts Total Revenue Amounts Total Revenue
REVENUE:
Investment advisory fees $ 511,786 77.15% $ 193,377 61.41%
Expert witness fees $ 138,500 20.88% $ 70,253 22.31%
Commissions $ 10,804 1.63% $ 51,272 16.28%
Other income $ 2,277 0.34% $ 0 0.00%
Total Revenue $ 663,367 100.00% $ 314,902 100.00%
OPERATING EXPENSES:
Employee compensation and $ 320,693 48.34% $ 187,309 59.48%
benefits
General and administrative $ 172,722 26.04% $ 102,888 32.67%
Mutual fund distribution
expenses $ 47,506 7.16% $ 0 0.00%
Commissions and floor
brokerage $ 12,354 1.86% $ 16,267 5.17%
Amortization and depreciation $ 79,158 11.94% $ 4,041 1.28%
Interest $ 71,510 10.78% $ 0 0.00%
Total operating expenses $ 703,943 106.12% $ 310,505 98.60%
Income (loss) before income taxes -6.12% $ 4,397 1.40%
$ (40,576)
Income taxes $ 800 0.12% $ 800 0.25%
Net income (loss) $ (41,376) -6.24% $ 3,597 1.15%
Nine Months Ended June 30, 2001 Compared to Nine Months Ended June 30, 2000
Total revenue increased by $983,211 or 417.9% in the nine months ended
June 30, 2001 from $235,297 in the same period of 2000. Advisory fee revenue
increased by $1,011,367 or 883.4% in the nine months ended June 30, 2001 from
$114,490 in the prior comparable period reflecting an increase in assets under
management due largely to the addition on June 30, 2000 of the Hennessy
Cornerstone Value Fund and Hennessy Cornerstone Growth to the mutual funds we
manage.
Expert witness fees decreased by $18,995 or 17.4% to $90,244 in the
nine months ended June 30, 2001 from $109,239 in the same period of 2000 as a
result of Mr. Hennessy limiting his expert witness activities. Up until July
2000, expert witness fees were paid by clients directly to Mr. Hennessy and Mr.
Hennessy paid Hennessy Advisors for support and related services. Since July
2000, expert witness fees are paid directly to Hennessy Advisors. Mr. Hennessy
is only working in a limited capacity as an expert witness and plans to further
limit his expert witness activity to devote the majority of his time to managing
Hennessy Advisors.
Compensation and benefits expense increased by $241,170, or 123.2%, to
$436,849 for the nine months ended June 30, 2001 from $195,679 in the prior
comparable period due primarily to the addition of two new employees. As a
percentage of total revenues, compensation and benefits expense decreased to
35.9% in the nine months ended June 30, 2001 compared to 83.2% in the prior
comparable period.
General and administrative expense increased by $58,150, or 73.3%, to
$137,462 in the nine months ended June 30, 2001 from $79,312 in the nine months
ended June 30, 2000 due primarily to an increase in total managed assets and, to
a lesser degree, to an increase in overall business. As a percentage of total
revenue, general and administrative expense decreased to 11.3% in the nine
months ended June 30, 2001 from 33.7% in the prior comparable period.
17
Expense for amortization and depreciation increased by
$213,725, or 3,058.9%, to $220,712 in the nine months ended June 30, 2001 from
$6,987 in the nine months ended June 30, 2000 due to amortization expense
associated with the management contracts acquired for the Hennessy Cornerstone
Funds. In June 2000, Hennessy Advisors capitalized the fair value of management
contracts acquired in the amount of $4,190,840 relating to its execution of
these agreements.
Interest expense increased $123,004, or 1,142.6%, to $133,769
in the nine months ended June 30, 2001 from $10,765 in the nine months ended
June 30, 2000. This increase is due to interest costs associated with financing
to license the automated trading strategies from Netfolio. For the nine months
ended June 30, 2001, the average amount borrowed was $2,142,947 with an average
interest rate of 8.3%.
Mutual fund distribution expenses were $106,669 in the nine months
ended June 30, 2001, a 100% increase from $0 in the nine months ended June 30,
2000 due to the costs of the "no transaction fee" programs through which our
mutual fund shares are distributed. This increase was due to our becoming the
investment advisor to the Cornerstone Funds on June 30, 2000.
Our income tax expense remained the same for the nine months ended June
30, 2001, compared to the prior period and represents California state franchise
taxes. We recorded no income tax expense during the first nine months ended June
30, 2001 or 2000 due to a tax loss carry forward from prior years.
Due to the factors discussed above, total expense increased $730,364,
or 239.4%, in the nine months ended June 30, 2001 from $305,097 in the same
period of 2000. As a percent of total revenue, total expense decreased to 85.0%
in the nine months ended June 30, 2001 compared to 129.7% in the prior
comparable period due to an increase in revenue from assets under management.
Net income increased by $252,847, or 359.2%, to $182,447 in the nine
months ended June 30, 2001 compared to a loss of $70,400 in the prior comparable
period as a result of the factors discussed above.
Fiscal Year Ended September 30, 2000 Compared to Fiscal Year Ended September 30,
1999
Total revenue increased by $348,465, or 110.7%, in the fiscal year
ended September 30, 2000 from $314,902 in the same period of 1999. Investment
advisory fee revenue increased by $318,409, or 164.7%, in the fiscal year ended
September 30, 2000 from $193,377 in the prior comparable period reflecting an
increase in assets under management due largely to the acquisition of management
contracts for the Hennessy Cornerstone Value Fund and Hennessy Cornerstone
Growth Fund on June 30, 2000.
Expert witness fees increased $68,247 or 97.1% to $138,500 in fiscal
2000 from $70,253 in fiscal 1999 as a result of an increase in demand for expert
witness services. Up until July 2000, expert witness fees were paid by clients
directly to Mr. Hennessy and Mr. Hennessy paid Hennessy Advisors for support and
related services. Since July 2000, expert witness fees are paid directly to
Hennessy Advisors. However, Mr. Hennessy is only working in a limited capacity
as an expert witness and plans to further limit his expert witness activity to
devote the majority of his time to managing Hennessy Advisors.
Revenues from commissions declined 78.9% from $51,272 in fiscal 1999 to
$10,804 in fiscal 2000 as a result of our terminating our brokerage business in
July 2000.
Compensation and benefits expense increased by $133,384, or 71.2%, to
$320,693 for the fiscal year ended September 30, 2000 from $187,309 in the prior
comparable period due primarily to the addition of two new employees. As a
percentage of total revenues, compensation and benefits expense decreased to
48.3% in the fiscal year ended September 30, 2000 compared to 59.5% in the prior
comparable period.
General and administrative expense increased by $69,834, or 67.9%, to
$172,722 in the fiscal year ended September 30, 2000 from $102,888 in the fiscal
year ended September 30, 1999 due primarily to an increase in total managed
assets and, to a lesser degree, to an increase in overall
18
business. As a percentage of total revenue, general and administrative expense
decreased to 26.0% in the fiscal year ended September 30, 2000 from 32.7% in the
prior comparable period.
Mutual fund distribution expenses increased from $0 in fiscal 1999 to
$47,506 in fiscal 2000 due to assumption of management responsibilities with
respect to the Cornerstone Funds in July 2000. Commissions and floor brokerage
expense (including commissions to our clearing broker) decreased by 24.1% from
16,267 to $12,354 despite the higher amount of assets under management, due to
the fact that we withdrew our registration as a broker/dealer with the NASD,
Inc. in July 2000 to focus our attention solely on the management of mutual
funds.
Amortization and depreciation increased by 1,858.9% from $4,041 in
fiscal 1999 to $79,158 in fiscal 2000 as a result of amortizing the management
contracts acquired for the Hennessy Cornerstone Funds.
Interest expense was $71,510 for the year ended September 30, 2000,
increasing from $0 for the year ended September 30, 1999. This increase is due
to interest cost associated with financing to license the automated trading
strategies from Netfolio. During the period ended September 30, 2000, the
average amount borrowed was $751,327 and the average interest rate paid was
9.3%.
Our income tax expense of $800 in the fiscal year ended September 30,
2000, remained unchanged from the prior comparable period and represents
California state franchise taxes. We incurred no income tax expense during
fiscal 2000 or 1999 due to the utilization of tax loss carry forward from prior
years.
As a result of the factors discussed above, total expense increased
$393,438, or 126.7%, in the fiscal year ended September 30, 2000 from $310,505
in the same period of 1999. As a percent of total revenue, total expense
increased to 106.1% in the fiscal year ended September 30, 2000 compared to
98.6% in the prior comparable period largely due to the acquisition costs
incurred in connection with acquisition of the management contracts.
We incurred a net loss of ($41,376) in the fiscal year ended September
30, 2000 compared to net income of $3,597 in the prior comparable period as a
result of the factors discussed above.
Liquidity and Capital Resources
Historically, we have financed our operations through capital
contributions from our principal shareholders. The cost we incurred for the
automated licensed strategy from Netfolio was financed by Netfolio and a loan
from Firstar Bank. Our liquid assets consist primarily of cash and marketable
securities.
Our outstanding bank debt incurred with Firstar Bank in connection with
prior payments to Netfolio as of June 30, 2001 and September 30, 2000 was
$1,968,542 and $2,310,897, respectively. We will use the net proceeds from this
offering to repay all of this bank debt. This bank debt matures on April 10,
2005 and accrues interest at the Firstar Bank prime rate.
We also intend to use the net proceeds of the offering to pay amounts
owed in connection with management contracts acquired with our 2000 licensing
agreement with Netfolio, Inc. (formerly O'Shaughnessy Capital Management, Inc.)
for the use of the names of and investment strategies applied to Hennessy
Cornerstone Value Fund and the Hennessy Cornerstone Growth Fund. As of June 30,
2001 amounts owed to Netfolio were estimated to be $1,849,709. We have issued a
subordinated promissory note payable to Netfolio dated as of June 30, 2001 for
$1,849,709. The note is payable in 60 equal monthly installments, together with
interest at Firstar Bank's prime rate, and is subordinated to our debt to
Firstar Bank. Under the terms of the Netfolio note, if we do not make a required
monthly payment to Netfolio, interest on the subordinated note accrues at 18%
per annum. We have not made any required monthly payments on the Netfolio note.
As a result, Netfolio has declared the note to be in default and since July 15,
2001 interest has accrued on the note at 18% per annum. However, notwithstanding
Netfolio's declaration of a default, our subordination agreement with Netfolio
and Firstar Bank prevents Netfolio from exercising any right to collect the
subordinated note until we pay our debt to Firstar Bank in full.
19
BUSINESS
The Company
We provide investment advisory services to four no-load mutual
funds and high net worth investors primarily located in the United States. We
generally manage assets on a discretionary basis and invest primarily though
formula based investment strategies. As of June 30, 2001 we had approximately
$217 million in total assets under management, of which approximately $197
million was managed on behalf of the mutual funds.
Business Overview
Hennessy Advisors was founded in 1989 as a California
corporation under the name Edward J. Hennessy, Inc. acting as a NASD
broker-dealer serving mainly individual investors. In 1996, we became an
investment adviser to mutual funds, building our assets under management through
Hennessy Balanced Fund and Hennessy Leveraged Dogs Fund, two no-load mutual
funds which we founded as The Hennessy Funds, Inc. Since their inception, we
have managed a portion of these funds utilizing the "Dogs of the Dow" investment
strategy, periodically purchasing the 10 highest yielding Dow Jones stocks in
approximately equal dollar amounts and holding those stocks for one year.
On June 30, 2000, we entered into a license agreement with
Netfolio, Inc. (formerly O'Shaughnessy Capital Management, Inc.) to obtain the
right to use the names of and investment strategies applied to the Hennessy
Cornerstone Value Fund and Hennessy Cornerstone Growth Fund, two no-load
open-end mutual funds with approximately $197 million in assets under
management. Under our agreement with Netfolio, we paid Netfolio $2,210,897 on
June 30, 2000, and we also issued Netfolio a subordinated promissory note for
$1,849,709 on June 30, 2001. In June 2000, satisfying a condition of the license
agreement and as required by the Investment Company Act of 1940, shareholders of
the two Cornerstone Funds approved investment management agreements for Hennessy
Advisors to serve as the funds' investment manager in place of Netfolio. Each of
these funds is a series of Hennessy Mutual Funds, Inc. and maintains a 50-stock
portfolio selected using formula-based strategies that we acquired from
Netfolio.
The Hennessy Cornerstone management agreements have an initial
term of two years ending June 30, 2002, and may be renewed from year to year
thereafter so long as such continuance is specifically approved at least
annually in accordance with the requirements of the 1940 Act. Each management
agreement will terminate in the event of its assignment, or it may be terminated
by Hennessy Mutual Funds (either by the board of directors or by vote of a
majority of the outstanding voting securities of that Fund) or by Hennessy
Advisors upon 60 days' prior written notice.
Under the terms of the Hennessy Cornerstone management
agreements, each Fund bears all expenses incurred in its operation that are not
specifically assumed by Hennessy Advisors, the administrator or the distributor.
Hennessy Advisors bears the expense of providing office space, clerical and
bookkeeping services and maintaining books and records of the Funds. Hennessy
Advisors may voluntarily waive its management fee or subsidize other Fund
expenses.
Our fund shares are primarily sold through mutual fund
supermarkets. Currently, our principal supermarkets are Schwab One Source and
Fidelity.
Hennessy Balanced Fund and Hennessy Leveraged Dogs Fund are
respectively managed by Hennessy Management Co., L.P. and Hennessy Management
Co. 2, L.P., each of which is a California limited partnership. Hennessy
Advisors is the general partner of each limited partnership and as general
partner performs all advisory functions on behalf of the partnerships for the
funds. In order to consolidate all our investment advisory activities directly
into Hennessy Advisors, the limited partners of these limited partnerships have
agreed to merge the partnerships into Hennessy Advisors, subject to the closing
of the minimum offering. Limited partners will receive an aggregate of 90,740
shares of common stock in exchange for their partnership interests in the
merger. Limited partners who did not exercise statutory dissenters' rights with
respect to the merger will receive one share for each $10 of capital they
invested in each partnership. The exchange ratio was determined based on
original invested capital rather than on the revenues or results of operations
of the partnerships.
20
The acquisition of the unconsolidated partnership interests
will be accounted for using the purchase method of accounting. It is the
intention of Hennessy Advisors, as general partner to make a full accounting of
the partnership assets and liabilities as of the date of merger, to settle the
payment of all liabilities of the partnerships, and then distribute any
remaining cash to the accounts of the limited partners in proportion to their
adjusted invested capital as of the merger date. Management currently estimates
the cash to be distributed to the limited partners of Hennessy Management Co.
L.P. and Hennessy Management Co. 2. L.P. to be $15,000 and $0, respectively.
Following these distributions, the partnership interests will
be converted by operation of law in the merger into shares of common stock of
Hennessy Advisors. At that point, the partnerships' sole asset will be their
management contracts with Hennessy Advisors. The partnerships have no fixed
assets. In exchange for the value of the shares issued, the sole asset to be
recorded by Hennessy Advisors will be the management contracts acquired asset,
an intangible asset which had not been recorded on the financial statements of
the partnerships.
Three limited partners of Hennessy Management Co., L.P. who
would receive an aggregate of 2,500 shares, based on the merger exchange ratio,
have dissented from the merger and have agreed to accept cash totaling $11,275
in exchange for their partnership interests, subject to completion of the
merger.
We do not expect that our revenues will differ materially as a
result of the merger. Nearly all revenues of the partnerships from advisory fees
are being used to pay Hennessy Advisors advisory fees on an hourly basis for
services performed in managing the partnerships, including investment advisory
services performed by Hennessy Advisors in its capacity as general partner of
the partnerships. Following the merger of the partnerships into Hennessy
Advisors, Hennessy Advisors will be the advisor to Hennessy Balanced Fund and
Hennessy Leveraged Dogs Fund. In that capacity, it will receive directly from
these funds all advisory fees currently being paid by these funds to the
partnerships.
The general partner is not entitled to receive any partnership
distributions in its capacity as general partner until the partners have
received a return of all their invested capital. Partnership cash distributions
have been made to the limited partners of Hennessy Management Co., L.P. that
represent a return of approximately 60% of their invested capital, but not to
the general partner, which has declined to receive a return of any of its 1%
capital until the limited partners have received all their capital back.
Hennessy Management Co. 2., L.P. has never made any cash distributions to its
partners, because partner capital contributions have been needed to cover fund
management expenses.
Summary of Investment Products and Strategies
Hennessy Balanced Fund (HBFBX)
This Fund seeks capital appreciation and current income.
Approximately half of its portfolio is invested in U.S. Treasury bills, having a
maturity of approximately one year, and the other half of the portfolio is
invested in the ten highest yielding common stocks in the Dow Jones Industrial
Average, known as the "Dogs of the Dow" stocks.
Hennessy Leveraged Dogs Fund (HDOGX)
This Fund seeks a combination of capital appreciation and
current income that in the long run exceeds that of the Dow Jones Industrial
Average. The Fund's strategy is similar to that of the Hennessy Balanced Fund
except that up to 75% of its return is based on the performance of the ten
stocks with the highest dividend yield in the Dow Jones Industrial Average,
known as the "Dogs of the Dow" stocks. The other 25% is based on the return of
U.S. Treasury bills maturing in a year or less.
21
Hennessy Cornerstone Value Fund (HFCVX)
This Fund seeks total return, consisting of capital
appreciation and current income. This Fund consists of a 50 stock portfolio of
market leading stocks (those with the highest sales, gross cash, shares
outstanding and market values) with the highest dividend yields. The goal of
this strategy is to produce a slightly higher rate of return versus the overall
market, while virtually taking the same level of risk.
Hennessy Cornerstone Growth Fund (HFCGX)
This Fund seeks the long-term growth of capital. This Fund
consists of a 50 stock portfolio of stocks with higher annual earnings than in
the previous year, low price-to-sales ratios and strong relative price
performance. The goal of this strategy is to produce a higher rate of return
versus the overall market, while taking on more risk.
Business Strategy:
We intend to leverage our asset management strengths in order
to increase our assets under management and profitability through the following
key elements:
* Attract investors through our investment style of
disciplined and quantitative analysis.
* Expand our distribution network to additional mutual
fund supermarkets.
* Expand our current base of registered investment
advisors (RIA's) that utilize no-load funds for their
clients by hiring 2 to 4 experienced individuals who
meet with, explain and sell funds to RIA's and broker/
dealers for use in their clients' portfolios.
* Participate in the platforms of national full service
firms that permit their registered representatives to
utilize no-load funds for their clients in a wrap fee
account.
* Pursue acquisitions. We believe that we will be in a
better position after the offering to pursue
acquisitions. We have no plans, arrangements or
understandings relating to any specific acquisitions at
this time.
* Introduce new funds in the future.
Description of our Business
Our revenues are largely based on the level of assets under
management in our mutual funds. Growth in revenues generally depends on good
investment performance which increases assets under management by:
* increasing the value of existing assets under
management,
* contributing to higher investment and lower redemption
rates, and
* attracting additional investors while maintaining
current fee levels.
Growth in assets under management is also dependent on
accessing various distribution channels, which is based on several factors,
including performance and service. Fluctuations in financial markets also have a
substantial effect on assets under management and the results of our operations.
Advisory fees from the mutual funds are computed daily. These revenues vary
depending upon the level of sales compared with redemptions, financial market
conditions and the fee structure for assets under management. Shareholders of
our mutual funds other than the Cornerstone Funds are allowed to exchange shares
among the funds at no additional cost as economic conditions, market conditions
and investor needs change. Shareholders of the Cornerstone Funds must pay a 1.5%
exchange fee if they have not owned the fund shares for 90 days when they make
an exchange.
Our marketing efforts for the mutual funds are currently
focused on increasing the distribution and sales of our existing funds. We
believe that our marketing efforts for the mutual funds will continue to
generate additional revenues from investment advisory fees. Initially, we
distributed our mutual funds by using a variety of direct response marketing
techniques, including telemarketing and articles published in
22
business periodicals, and as a result we maintain direct relationships with a
majority of our mutual fund customers. Beginning in late 1996, our mutual funds
were offered through no transaction fee programs (NTF programs). A no
transaction fee program means that the mutual fund customer does not pay a
transaction fee. Rather, the fees are paid by the mutual fund itself or its
investment advisor or distributor. NTF programs have become an increasingly
important source of asset growth. Of the $197 million of assets under management
in the mutual funds as of June 30, 2001, approximately 42.8% were generated from
NTF programs. NTF programs typically charge 25 to 35 basis points.
We provide investment advisory and management services
pursuant to an investment management agreement with each mutual fund. While the
specific terms of the investment management agreements vary to some degree, the
basic terms of the investment management agreements are similar. The investment
management agreements generally provide that we are responsible for overall
investment and management services, subject to the oversight of each mutual
fund's board of directors and in accordance with each mutual fund's fundamental
investment objectives and policies. Our investment management agreements may
continue in effect from year to year only if specifically approved at least
annually by the mutual funds' board of directors.
Currently, Hennessy Advisors participates in two "soft dollar"
arrangements in which we receive research reports and real time electronic
research in order to assist us in trading and managing our mutual funds. Soft
dollar arrangements involve paying brokerage commissions for securities trades
on behalf of a client where the commissions may be higher than those obtained
elsewhere, in exchange for research or other services that also benefit other
clients. The value of the research we receive under our soft dollar arrangements
is approximately $60,000 per annum.
Employees
As of June 30, 2001, we had 8 employees, 6 of whom were
full-time employees.
Properties
As of June 30, 2001, we leased for use in our business
property located at 750 Grant Avenue, Suite 100, Novato, California 94945. Our
lease expires on December 31, 2004, and contains two 2-year extension options.
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 investment advisory clients and shareholders of registered
investment companies. Agencies that regulate investment advisers have broad
administrative powers, including the power to limit, restrict or prohibit an
adviser from carrying on its business in the event that it fails to comply with
applicable laws and regulations. In such event, the possible sanctions that may
be imposed include the suspension of individual employees, limitations on
engaging in certain lines of business for specified periods of time, revocation
of investment adviser and other registrations, censures, and fines. We believe
that we are in substantial compliance with all material laws and regulations.
Our business is subject to regulation at both the federal and
state level by the SEC and other regulatory bodies. We are registered with the
SEC under the Investment Advisers Act, and the mutual funds are registered with
the SEC under the Investment Company Act.
We are regulated by and subject to examination by the SEC. The
Investment Advisers Act imposes numerous obligations on registered investment
advisers including fiduciary duties, record keeping requirements, operational
requirements, marketing requirements and disclosure obligations. The SEC is
authorized to institute proceedings and impose sanctions for violations of the
Investment Advisers Act, ranging from censure to termination of an investment
adviser's registration. Our failure to comply with the SEC requirements could
have a material adverse effect on us. We believe we are in substantial
compliance with the requirements of the SEC.
23
We primarily derive our revenues from investment advisory
services. Under the Investment Advisers Act, our investment management
agreements terminate automatically if assigned without the client's consent.
Under the Investment Company Act, management agreements with registered
investment companies such as the mutual funds terminate automatically upon
assignment. The term "assignment" is broadly defined and includes direct
assignments as well as assignments that may be deemed to occur, under certain
circumstances, upon the transfer, directly or indirectly, of a controlling
interest in Hennessy Advisors. Neither this offering nor the merger of the
limited partnerships into Hennessy Advisors will constitute an assignment for
these purposes.
Competition
Our investment advisory business competes with a number of
larger, more established investment advisors and securities firms. Competition
is influenced by various factors, including product offering, quality of service
and price. All aspects of our advisory business are competitive, including
competition for assets to manage. The investment advisory industry is
characterized by relatively low cost of entry and the formation of new
investment advisory entities which may compete directly with us. Large national
firms, often with more personnel, have much greater marketing, financial,
technical, research, and other capabilities. These firms offer a broader range
of financial services than we do and compete not only with us and among
themselves but also with commercial banks, insurance companies and others for
retail and institutional clients. The investment funds we manage are similarly
subject to competition from nationally and regionally distributed funds offering
equivalent financial products with returns equal to or greater than those we
offer. A large number of investment products including closed-end companies and
mutual funds, are sold to the public by investment management firms,
broker/dealers, insurance companies and banks in competition with the investment
products we offer. Many of our competitors apply substantial resources to
advertising and marketing their investment products which may adversely affect
our ability to attract new assets or our mutual funds. We expect that there will
be increasing pressures among investment advisors to obtain and hold market
share.
Legal Matters
We are not a party to any litigation. From time to time, we
could be a defendant in various lawsuits incidental to our business.
MANAGEMENT
Executive Officers and Directors
Our executive officers and directors as of the date of this
prospectus are as follows:
Name Age Position
---- --- --------
Neil J. Hennessy 45 President, Chief Executive Officer and
Chairman
Teresa M. Nilsen 35 Executive Vice President, Secretary and
Director
Daniel B. Steadman 45 Executive Vice President and Director
Daniel G. Libarle 60 Director
Henry Hansel 53 Director
Thomas L. Seavey 54 Director
Rodger Offenbach 50 Director
Brian A. Hennessy 48 Director
Neil J. Hennessy has served as director and president of Hennessy
Advisors, Inc. since 1989, as president and investment manager of The Hennessy
Funds, Inc. since 1996 and as director and president of Hennessy Mutual Funds,
Inc. since 2000. He is the portfolio manager to four no-load mutual funds. Mr.
Hennessy started his financial career over 22 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 to the securities industry
since 1989, and has heard approximately four hundred and fifty cases to date in
which he has prepared, reviewed, consulted, and evaluated securities sensitive
issues. Mr. Hennessy served as the co-chairman of the National Association of
Securities Dealer Business Conduct Committee District 1 from 1987 to 1989 and
Chairman in 1994. Mr. Hennessy is the brother of Dr. Brian A. Hennessy.
24
Teresa M. Nilsen has served as director, executive vice president and
secretary of Hennessy Advisors, Inc. since 1989, as executive vice president and
secretary of The Hennessy Funds, Inc. since 1996 and as executive vice president
and secretary of Hennessy Mutual Funds, Inc. since 2000. Ms. Nilsen has worked
in the securities industry for over 14 years. Ms. Nilsen graduated with a
bachelor's degree in economics from the University of California, Davis, in
1987.
Daniel B. Steadman has served as director and executive vice president
of Hennessy Advisors, Inc. since 2000, as executive vice president of The
Hennessy Funds, Inc. since 2000 and as executive vice president of Hennessy
Mutual Funds, Inc. since 2000. Mr. Steadman has been in the financial services
industry for over 25 years, serving as vice president of WestAmerica Bank from
1995 through 2000, vice president and an organizing officer of Novato National
Bank from 1984 through 1995, assistant vice president and manager of Bank of
Marin from 1980 through 1984, and banking services officer of Wells Fargo Bank
from 1974 through 1980.
Brian A. Hennessy has served as director of Hennessy Advisors, Inc.
since 1989, as director of The Hennessy Funds, Inc. since 1996, and as director
of Hennessy Mutual Funds, Inc. since 2000. Dr. Hennessy has been a self-
employed dentist for more than twenty years. Dr. Hennessy is the brother of our
chairman, Neil J. Hennessy. Dr. Hennessy attended the University of San
Francisco where he earned a B.S. in Biology in 1975. Dr. Hennessy received his
D.D.S. from the University of the Pacific in 1980.
Rodger Offenbach has served as a director of Hennessy Advisors, Inc.
since 2001 and a director of The Hennessy Funds, Inc. since 1996. Mr. Offenbach
attended California State University, Chico where he received a B.S. in Business
Administration in 1972. Mr. Offenbach has been the owner of Ray's Catering and
Marin-Sonoma Picnics since 1973.
Daniel G. Libarle has been a director of Hennessy Advisors, Inc. since
2001. Mr. Libarle attended the University of Oregon and San Jose State
University, where he graduated in 1963 with a B.A. in economics. Mr. Libarle is
the owner and president of Lace House Linen, Inc. and is a founding director and
chairman of the board of Bank of Petaluma. Mr. Libarle is currently a director
of Greater Bay Bancorp and serves on the bank's audit committee.
Thomas L. Seavey has served as a director of Hennessy Advisors, Inc.
since 2001. Mr. Seavey graduated from Western Michigan University with a B.A.
in English and History in 1969. 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. Mr. Seavey spent 12 years
at Nike as head agent for sales in the Midwest, as well as California, and spent
three years at International Management Group as the Vice President of Products.
While employed at Nike, Mr. Seavey formed a family business selling sport and
leisure product in 1980, and formally took over the management of that company
in 1993, selling half the interest in it in 1998. Mr. Seavey is currently
managing Continental Sports Group (formerly Seavey Corp.)
Henry Hansel has served as a director of Hennessy Advisors, Inc. since
2001. Mr. Hansel attended the University of Santa Clara where he graduated in
1970 with a B.S. in economics. He is president and proprietor of Hansel Dealer
Group, which includes 7 automobile dealerships. Mr. Hansel is a founding
director of the Bank of Petaluma.
Key Employees
We have other key employees, as follows:
Frank Ingarra, age 30, is currently head trader and director
of marketing of Hennessy Advisors, Inc., and has been employed in that capacity
since 2000. Prior to joining Hennessy, Mr. Ingarra was the vice president and
head trader at O'Shaughnessy Funds in charge of all trading and back-office
operations with respect to approximately $900 million in assets from 1998 to
2000. Prior to that, he worked in the direct marketing industry for Publishers
Clearing House from 1996 to 1998 where he was responsible for managing all
aspects of their Targeted Marketing Program. Mr. Ingarra holds a Bachelor of
Mechanical Engineering degree from Villanova University and a Masters of
Business Administration degree in Finance from Hofstra University.
25
Jeffrey Colella, age 31, is currently vice president of The
Hennessy Funds, Inc., and has been employed by Hennessy Advisors, Inc., in
various capacities essential to our mutual fund business since 1996, including
operations, sales support and direct sales.
Ana Miner, age 43, has been vice president - operations of
The Hennessy Funds, Inc., and has been employed by Hennessy Advisors, Inc. since
1998. From 1990 to 1998, Merrill Lynch Capital Markets employed Ms. Miner as an
institutional sales assistant. Ms. Miner has over twenty years of experience in
the securities industry, beginning her career in 1980.
Board Composition
We currently have eight directors. Our directors serve for one
year terms.
Board Committees
The audit committee reviews our audited financial statements
and accounting procedures and recommends the employment of, and approves the fee
arrangements with, independent auditors for both audit functions and for
advisory and other consulting services. The audit committee consists of Daniel
G. Libarle, Henry Hansel and Thomas L. Seavey.
The compensation committee reviews and approves the
compensation and benefits for our key executive officers, administers our
employee benefits and stock purchase plans, and makes recommendations to our
board of directors regarding grants of stock options and any other incentive
compensation arrangements. The compensation committee consists of Rodger
Offenbach, Thomas L. Seavey and Daniel G. Libarle.
Directors' Compensation
Directors of the company who are also employees receive no
additional compensation for their services as a director. Non-employee directors
do not currently receive fees for their services as directors, although it is
anticipated that non-employee directors will receive fees in the future. Such
fees may be in the form of cash, stock or stock options, or a combination of the
foregoing. The company will reimburse all directors of the company for travel
expenses incurred in attending meetings of the board of directors and its
committees.
Executive Compensation
The following table summarizes the compensation we paid or
accrued for services rendered for the year ended September 30, 2000, to our
chief executive officer in 2000. No executive officer received compensation in
excess of $100,000 in 2000.
Annual Compensation
All Other
Annual Long-term
Name and Principal Position Year Salary Bonus Compensation Compensation
--------------------------- ---- ------ ----- ------------ ------------
Neil J. Hennessy, Chief 2000 $ 15,000(1) $ 0 $ 7,090(2) $ 0
Executive Officer..............
(1) The amounts shown exclude expert witness fees of $228,430 paid by
clients directly to Mr. Hennessy. Of that amount, Mr. Hennessy paid
Hennessy Advisors $119,238 for office support and related services
during the fiscal year ended September 30, 2000.
(2) Includes auto allowance of $4,030 and health club membership of $3,040.
Employment Agreements
Neil J. Hennessy has entered into an employment agreement
relating to his service as our chairman of the board and chief executive officer
and as chief investment officer and portfolio manager for our mutual funds,
effective at the completion of this offering. Under the employment agreement,
Mr.
26
Hennessy will be responsible for managing or overseeing the management of
our mutual funds, attracting mutual fund accounts, attracting or managing
accounts for high net worth individuals or retirement accounts or otherwise
generating revenues. Mr. Hennessy will receive an annual salary of $180,000 plus
a car, insurance, and any other benefit that other employees receive. In
addition to his base compensation, Mr. Hennessy will receive an incentive-based
management fee in the amount of 10% of our pre-tax profit, if any, as computed
for financial reporting purposes in accordance with accounting principles
generally accepted in the United States of America. The term of the employment
agreement extends through the year 2006. The agreement can only be modified with
the consent of our board of directors.
Employee Benefit Plans
On May 2, 2001 we established an incentive 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 other key employees. The maximum number of shares which
may be issued under the plan is 25% of the outstanding common stock. Based on
shares outstanding as of June 30, 2001 of 960,680 and the maximum number of
shares outstanding after the offering of 1,953,920, the maximum number of shares
which could be offered under the plan would be 240,170 and 488,480,
respectively. The compensation committee of the board of directors will have the
authority to determine the terms of awards granted under the plan, including,
among other things, the individuals who receive awards, the times when they
receive them, vesting schedules, performance goals triggering the exercisability
of options or the payment of performance awards, whether an option is an
incentive or non-qualified option and the number of shares to be subject to each
award. However, no participant may receive options or stock appreciation rights
under the plan for an aggregate of more than 50,000 shares in any calendar year.
The exercise price and term of each option or stock appreciation right will be
fixed by the compensation committee, except that the exercise price for each
stock option which is intended to qualify as an incentive stock option must be
at least equal to the fair market value of the stock on the date of grant and
the term of the option cannot exceed 10 years. In the case of an incentive stock
option granted to a 10% shareholder, the exercise price must be at least 110% of
the fair market value on the date of grant and the term 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 his options in cash or
shares of common stock or any combination thereof.
Options to purchase an aggregate of 87,500 shares of common
stock are to be awarded to our employees, executive officers and directors when
we sell the minimum offering amount. The options will have an exercise price
equal to the offering price, have a term of ten years and will vest immediately.
All our employees are eligible to participate in our 401(k)
program after they reach the age of 21 and work 1,000 hours of service during
each 12-month eligibility. Matching employer contributions for the plan year are
discretionary each plan year. Employer account vesting is 20% after two years of
service then 20% each year thereafter until fully vested at 100% (after 6 years
of employment). Family health care insurance is available for all employees who
work a minimum of 30 hours per week. Hennessy Advisors pays the premium.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Neil J. Hennessy, the president and chief executive officer of
Hennessy Advisors, provides expert witness services relating to securities
sensitive issues. Prior to July 2000, clients paid Mr. Hennessy directly for
these services and he reimbursed Hennessy Advisors for support and related
services. During the fiscal year ended September 30, 2000, Mr. Hennessy received
$228,430 in expert witness fees and paid Hennessy Advisors $119,238 for support
and related services. Since July 2000, expert witness fees are paid directly to
Hennessy Advisors.
There have been no other transactions since October 1, 1999 of
more than $60,000 between Hennessy Advisors and any 5% or more shareholder,
director or executive officer of the company.
27
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the
beneficial ownership of our common stock as of June 30, 2001. We have listed
each person that beneficially owns more than five percent of the outstanding
common stock; each of our directors and named executive officers; and all
directors and executive officers as a group.
Unless otherwise indicated, each of the stockholders has sole
voting and investment power with respect to the shares beneficially owned. The
address for each principal stockholder is 750 Grant Avenue, Suite 100, Novato,
California 94945.
The percentage of beneficial ownership before this offering is
based on 1,051,420 shares outstanding as of June 30, 2001, including 90,740
shares issuable in the mergers of our limited partnerships. The percentage of
beneficial ownership after this offering is based on an assumed 1,953,920 shares
outstanding after this offering. For this purpose, the number of shares deemed
outstanding after this offering includes all shares deemed to be outstanding
before the offering, the maximum shares being sold in this offering (900,000,
assuming our selling shareholder elects to sell the maximum shares possible).
Percent of Common Stock
-----------------------------------
Number of Shares Before After
of Common Stock Offering(1) Offering
------------------------ -----------------------------------
Executive Officers and Directors
Neil J. Hennessy(1)..................... 711,680 67.69% 31.35%(2)
Teresa M. Nilsen........................ 20,000 1.90% 1.02%
Brian A. Hennessy(1).................... 55,000 5.23% 2.82%
Daniel B. Steadman...................... 0 0.00% 0.00%
Tom Seavey.............................. 0 0.00% 0.00%
Henry Hansel............................ 0 0.00% 0.00%
Rodger Offenbach........................ 8,870 * *
Daniel G. Libarle....................... 2,000 * *
All executive officers
and directors as a
group (8 persons)....................... 797,550 75.85% 35.75%
Five Percent Stockholders
Helen Hennessy(1)....................... 55,000 5.23% 2.82%
------------------------------------------
* Less than 1%
(1) The address for Neil J. Hennessy, Brian A. Hennessy and Helen Hennessy
is 750 Grant Avenue, Suite 100, Novato, California 94945. Helen
Hennessy is the mother of Neil J. Hennessy and Brian A. Hennessy. Neil
Hennessy and Brian Hennessy disclaim any beneficial ownership of the
shares owned by Helen Hennessy.
(2) Assumes the sale by Mr. Hennessy of 100,000 shares in this offering.
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DESCRIPTION OF CAPITAL STOCK
General
Upon the closing of this offering, our authorized capital
stock will consists of 15 million shares of common stock, no par value per
share, and 5 million shares of preferred stock, no par value per share.
Common Stock
As of June 30, 2001, there were 960,680 shares of common stock
outstanding that were held of record by two stockholders. Based upon the number
of shares outstanding as of June 30, 2001, and giving effect to the 90,740
shares issuable to limited partners in the merger of our limited partnerships
and the issuance of 900,000 shares of common stock in this offering, there will
be 1,951,420 shares of common stock outstanding upon completion of this
offering.
Holders of common stock are entitled to one vote for each
share on all matters to be voted upon by the stockholders and have cumulative
voting rights. Our bylaws provide that if we are listed on the Nasdaq stock
market or a national securities exchange, holders of common stock will no longer
have cumulative voting rights. Subject to preferences to which holders of any
preferred stock issued after the sale of the common stock in this offering may
be entitled, holders of common stock are entitled to receive ratably any
dividends, declared from time to time by our board of directors out of legally
available funds. Please see "Dividend Policy."
In the event of a liquidation, dissolution, or winding up of
Hennessy, holders of common stock would be entitled to share in Hennessy's
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 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 of common stock offered by us in this offering, 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.
Preferred Stock
The board of directors is authorized, subject to any
limitations prescribed by law, without further stockholder approval, to issue
from time to time shares of preferred stock in one or more series not to exceed
an aggregate of 5 million shares. The board of directors may determine or alter
the preferences, including voting rights, dividend rights, conversion rights,
redemption privileges, and liquidation preferences. The rights of the holders of
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 the outstanding voting
stock of Hennessy. At June 30, 2001, there were 1,600 shares of adjustable rate
preferred stock outstanding, which will be redeemed out of the proceeds of the
offering. We have no plans to issue any additional shares of preferred stock.
Limitation of Liability and Indemnification
Section 317 of the California Corporations Code provides that
a corporation may indemnify a corporate "agent" (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 the conduct of such person was unlawful. Section 317 also authorizes
indemnification of a corporate agent against expenses actually and reasonably
incurred in connection with defending 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
29
majority vote of a quorum of the board of directors (other than directors
involved in such proceeding), by independent legal counsel if such a quorum of
directors is not obtainable, by the shareholders (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. Corporations may also
advance expenses incurred in defending proceedings against corporate agents,
upon receipt of an undertaking that the agent will reimburse the corporation
unless it is ultimately determined that the agent is entitled to be indemnified
against expenses reasonably incurred.
We intend to enter into agreements to indemnify our directors
and executive officers. We may also secure insurance on behalf of any officer,
director, employee, or other agent for any liability arising out of his or her
actions in such capacity.
At present, there is no pending litigation or proceeding
involving a director or officer of Hennessy in which indemnification is required
or permitted, and we are not aware of any threatened litigation or proceeding
that may result in a claim for such indemnification.
Transfer Agent
The transfer agent and registrar for our common stock is
Firstar Bank, N.A. The transfer agent's address is 425 Walnut Street, 6th Floor,
Cincinnati, Ohio 45202 and its telephone number is (513) 632-5578.
30
SHARES ELIGIBLE FOR FUTURE SALE
Shares Eligible for Future Sale
Before this offering there has been no market for our common
stock. Future sales of substantial amounts of common stock in the public market
could adversely affect the market price of our common stock.
Upon completion of this offering, we will have outstanding an
aggregate of 1,951,420 shares of common stock, assuming the issuance of 900,000
shares of common stock in this offering. Of these shares, the 900,000 shares
sold in this offering will be freely tradable without restriction or further
registration under the Securities Act, except for any shares purchased by
existing "affiliates" of Hennessy. Our affiliates are people or entities that
directly or indirectly control our company, are controlled by our company, or
are under common control of our company. Sales by our affiliates would be
subject to the restrictions described below.
The remaining 1,051,420 shares of common stock held by
existing stockholders were issued and sold by us in reliance on exemptions from
the registration requirements of the Securities Act. Of these, (1) 90,740 shares
will be "restricted" securities within the meaning of Rule 144 under the
Securities Act and may not be sold in the absence of registration under the
securities laws unless an exemption from registration is available, and (2) the
remaining 960,680 shares are owned by affiliates and must also be sold in
compliance with Rule 144 other than Rule 144's one-year holding period, which
has already been satisfied.
Rule 144
Rule 144 is one of the exemptions referred to above.
Generally, Rule 144 as currently in effect permits a shareholder (including an
affiliate) who has beneficially owned restricted shares for a least one year to
sell, beginning three months after the date of this prospectus, within any
three-month period shares which do not exceed the greater of:
* 1% of the outstanding shares of common stock of the
company (1% will equal approximately 19,514 shares
immediately after this offering); or
* the average weekly trading volume in the common stock
during the four calendar weeks preceding the sale.
Shares properly sold in reliance on Rule 144 must be sold
through "broker's transactions" or to market makers, and there must be current
public information about the company available. Shares sold under Rule 144 to
persons who are not affiliates become freely tradable without restriction or
registration under the securities laws. The restrictions of Rule 144 do not
apply to a person who has beneficially owned their shares for at least two years
(including "tacked on" holding periods) and who is not an affiliate of the
company. Therefore, unless otherwise restricted by contract, "144(k) shares" may
be sold immediately upon the completion of this offering.
Stock Options
Following this offering, we intend to file a registration
statement covering approximately 488,480 shares of common stock issuable upon
the exercise of stock options which may be granted under our stock option plan.
Accordingly, once options are issued under the plan, shares to be registered in
this manner will be available for sale in the open market, except to the extent
the shares are subject to vesting restrictions. No stock options are currently
outstanding under the plan. Affiliates will still be required to comply with
Rule 144.
31
PLAN OF DISTRIBUTION
We are offering up to a maximum of 1,000,000 shares and a minimum of
450,000 shares at $10.00 per share. The minimum investment requirement is $1,000
and the maximum per investor is $300,000. If the minimum offering amount is not
sold by December 31, 2001, we may extend the escrow period to January 31, 2002.
If the minimum offering amount is sold, and we continue to sell shares after the
escrow period, the offering will terminate on the earlier to occur of: the date
selected by Hennessy; the date of the sale of the maximum offering amount; or
March 31, 2002. All proceeds from subscriptions will be deposited promptly into
an escrow account with Firstar Bank, N.A. serving as escrow agent. If the
minimum offering amount is not sold by the termination of the offering, all
funds will be returned promptly to investors without deduction or interest.
During the offering period, before the minimum offering amount is sold,
investors who purchase shares will not be entitled to a refund of their
payments. If the minimum offering amount is sold before the termination of the
offering, a closing will be held at our offices as to the minimum. At such
closing, the funds held in the escrow account will be released and the investors
will become stockholders of Hennessy. Our officers, directors and affiliates
will be permitted to purchase shares in the offering, and any shares for which
they subscribe will count toward the minimum of 450,000 shares. Because our
selling shareholder may elect to sell up to 10% of the shares we sell in any
closing, we may only sell 405,000 shares at our closing of the minimum offering
and 900,000 shares in the aggregate.
Prior to this offering, there has been no public market for the common
stock. There can be no assurance that the common stock will be quoted in the
over-the-counter market. The offering is not conditioned upon a quotation of our
stock in the over-the-counter market.
We plan to sell the shares of this offering through our own officers,
directors and employees; in other words, we will be acting as our own selling
agent for the offering. This is called a self-underwritten offering. No broker
or dealer has been retained or is under any obligation to buy or sell any
shares. Our officers and directors cannot be paid any commissions or special
fees for the shares they sell. Our officers and directors are not engaged in the
business of effecting securities transactions for the account of others. Their
securities sales activities during the last 12 months have been limited to
acting on our behalf. As a result, they are not required to register as
securities brokers.
Our officers and directors will contact prospective investors through
direct, personal meetings and telephone calls to people they know. All such
meetings and other contacts will include an invitation to receive a copy of this
prospectus. We will not accept any subscription unless the subscriber has
already received a prospectus. Depending on state laws, we may not be permitted
to sell shares in all states.
Neil J. Hennessy, the selling shareholder and our president and chief
executive officer, is deemed to be an "underwriter" within the meaning of the
Securities Act of 1933 with respect to the shares of our stock owned by him that
are sold in the offering.
We have set the initial public offering price of our common
stock without arms' length negotiations with third parties. Investment
management companies typically are bought and sold at a price based on a
percentage of assets under management. Accordingly, we looked at the percentages
in publicly announced acquisitions during the preceding year and used the
mid-point of these percentages in arriving at an estimate for the total value of
Hennessy Advisors. We applied this percentage to the total assets we managed at
June 30, 2001, and then increased the resulting amount by a premium that ranges
from approximately 23% to 34%. There is no assurance that the same per share
price would result from negotiations with underwriters or from a sale of our
company to a third party. The other transactions we looked at are for companies
that are not necessarily comparable with our size or operations. We do not plan
on adjusting the initial public offering price of our common stock for any
increase or decrease after June 30, 2001 in the assets we manage.
After the Securities and Exchange Commission grants our registration
statement an effective date, we may find an underwriter for this offering. If
one is found, we will file a post-effective amendment to the registration
statement of which this prospectus is a part. Such an amendment would include
the necessary information about the underwriter, what the underwriter will do,
and what it will charge as far as commissions and other fees. If an amendment of
this kind is filed, we will suspend the offering until the
32
Securities and Exchange Commission has given its permission to proceed under the
new underwriting arrangement.
To subscribe for shares, you must complete, sign, date, and deliver to
us a subscription agreement that includes the purchase price in check or money
order payable to "Hennessy Advisors, Inc." A copy of the subscription agreement
is provided with this prospectus. We reserve the right to reject any
subscription in its entirety, or to allocate shares among subscribers if the
offering is subscribed above the maximum offering amount. If any subscription is
rejected, the funds included for that subscription will be returned to the
subscriber without interest or deduction. We might reject a subscription in its
entirety for one or more reasons, including:
* A subscriber is a resident of a state in which this
offering has not been registered,
* We determine that a subscription - either on its own or
in conjunction with subscriptions from related investors
- constitutes an acquisition of a controlling interest
that has not been executed in the manner prescribed by
applicable securities laws; or
* We deem that the investment is not suitable for the
investor, or that the manner in which the investor was
solicited was in some way inappropriate.
The above reasons are not the only ones we might have for rejecting a
subscription in its entirety, but they are the ones we believe most likely to
occur.
LEGAL MATTERS
The validity of the shares of common stock issued in this
offering will be passed upon for us by the law firm of Foley & Lardner,
Jacksonville, Florida.
EXPERTS
The financial statements of Hennessy Advisors, Inc. as of
September 30, 2000, and for the year then ended have been included herein and in
the registration statement in reliance upon the report of KPMG LLP, independent
auditors, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
The financial statements of Hennessy Advisors, Inc. for the
year ended September 30, 1999 have been included herein and in the registration
statement in reliance upon the report of Bregante & Co., LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
CHANGES IN ACCOUNTANTS
On July 19, 2001, we advised Bregante & Co., LLP, which had
served as our auditors since September 30, 1999, that we would be engaging
another auditing firm in preparation for an initial public offering. Bregante &
Co., LLP's report on our financial statements for the year ended September 30,
1999 did not contain an adverse opinion or disclaimer of opinion and was not
modified as to uncertainty, audit scope, or accounting principles. We did not
have any disagreements with Bregante & Co., resolved or not, on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure which, if not resolved to its satisfaction, would have caused
it to make reference to the subject matter of the disagreement in its report.
In June 2001, we engaged KPMG LLP ("KPMG") as our auditors.
The board of directors approved the engagement because of KPMG's extensive
experience in auditing public companies. Prior to their engagement, we did not
consult with KPMG regarding the application of accounting principles to a
specific completed or contemplated transaction, or the type of audit opinion
that might be rendered on our financial statements, and KPMG did not provide any
written or oral advice that was an important factor considered by us in reaching
a decision as to an accounting, auditing or financial reporting issue.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a
registration statement (of which this prospectus is a part) under the Securities
Act of 1933, relating to the common stock we are offering. This prospectus does
not contain all the information that is in the registration statement. Portions
of the
33
registration statement have been omitted as allowed by the rules and
regulations of the Securities and Exchange Commission. Statements in this
prospectus which summarize documents are not necessarily complete, and in each
case you should refer to the copy of the document filed as an exhibit to the
registration statement. For further information regarding our company and our
common stock, please see the registration statement and its exhibits and
schedules. You may examine the registration statement free of charge at the
public reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional
offices of the Commission as Suite 1400, 500 West Madison Street, Chicago,
Illinois 60661 and 7 World Trade Center, Thirteenth Floor, New York, New York
10048. Copies of the registration statement may also be obtained from the public
reference facilities of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, or by calling the Commission at 1-800-SEC-0330, regarding
registrants, such as Hennessy, that file electronically with the Commission. In
addition, the registration statement and other public filings can be obtained
from the Commission's Web site at http://www.sec.gov.
We intend to furnish our shareholders written annual reports
containing audited financial statements certified by an independent public
accounting firm.
34
ANNEX A
Subscription Agreement
HENNESSY ADVISORS, INC.
Hennessy Advisors, Inc.
750 Grant Avenue, Suite 100
Novato, CA 94945
Gentlemen:
The undersigned, by signing the signature page attached
hereto, hereby tenders this subscription to Hennessy Advisors, Inc., a
California corporation (the "Company"), and applies for the purchase of shares
of the Company's common stock (the "Shares") shown on the signature page, at a
total price set forth on the signature page, on the terms and conditions set
forth herein. The undersigned has read the Company's prospectus dated
_______________, 2001, together with any supplements, including the risk factors
described therein.
1. No Interest on Subscription Funds. The undersigned understands
that the undersigned's subscription funds will be deposited with Firstar Bank,
N.A., as escrow agent, to be held in escrow for the benefit of investors pending
(i) receipt by the Company of subscriptions for at least 450,000 shares of
common stock, including 45,000 shares which may be sold by a selling shareholder
(the "Minimum Offering"), at which time the undersigned's subscription funds
will automatically be delivered to the Company. The undersigned understands that
if this event has not occurred by December 31 (or January 31, 2002, if the
Company exercises its right to extend the escrow period of the offering), the
offering of Shares will be canceled and the Company will refund all of the
undersigned's subscription funds, without interest. The undersigned further
understands that once the Minimum Offering has been completed, subscription
funds will be paid directly to the Company and will not be placed in escrow.
2. Representative Capacity. If the undersigned is a fiduciary,
corporation, partnership or other business entity, the undersigned represents
and warrants that it has full power and authority to make the representations
herein, to enter into this Subscription Agreement and to purchase the Shares,
and the person signing on behalf of the undersigned in a representative capacity
is duly authorized to do so.
3. Revocation of Subscription. The undersigned acknowledges and
agrees that the undersigned is not entitled to cancel, terminate or revoke this
subscription, or any agreements of the undersigned hereunder. The undersigned
acknowledges and agrees that the subscription and the agreements hereunder shall
survive changes in the transactions, documents, and instruments previously
reviewed by the undersigned which in the aggregate are not material; provided,
however, that if the Company shall not accept this subscription, all agreements
of the undersigned hereunder shall automatically be canceled, terminated and
revoked.
4. Agreement Binding. This Subscription Agreement and the
representations and warranties contained herein shall be binding upon the heirs,
legal representatives, successors and assigns of the undersigned.
5. State of Residence. The undersigned represents and warrants
that the its true and correct state of residence is listed on the signature page
attached hereto.
6. Right of Rejection. The undersigned understands that the
Company reserves the right to reject this Subscription Agreement for any reason
and to return the undersigned's subscription funds without interest.
Hennessy Advisors, Inc.
Subscription Agreement Signature Page
SUBSCRIPTION. The undersigned hereby executes the
Subscription Agreement and subscribes for shares of common stock as follows:
(1) Number of Shares (minimum 100 shares,
maximum 30,000 shares) _________________
(2) Amount of check or money order payable
to Firstar Bank, N.A., Escrow Agent
($10.00 per share) $_________________
The undersigned agrees to purchase the Shares subscribed
herein for the purchase price of $10.00 per share and has delivered to our
escrow agent, (Firstar Bank, N.A., with this Subscription Agreement, a check
made payable to "Firstar Bank, N.A., escrow agent" and mailed to the following
address:
Firstar Bank, N.A., Escrow Agent
425 Walnut Street, 6th Floor
Cincinnati, Ohio 45202
Attention: Theresa Crawford
Telephone: (513) 632-5578
(If the broker would like to wire money, please contact the
escrow agent for wiring instructions.)
For California Investors Only
California investors who are purchasing shares of the
Company's common stock (the "Shares") in this offering must meet certain minimum
suitability requirements as a condition to registration of the Shares under the
California Corporate Securities Law of 1968. This Subscription Agreement as
executed by the investor will serve to declare the investor's qualification to
purchase the Shares pursuant to the minimum suitability requirements.
By executing and delivering this Subscription Agreement, I
hereby represent and warrant that I have (i) a combined annual income of not
less than $50,000 and a net worth of not less than $150,000 (exclusive of home,
home furnishings and automobiles) or (ii) a minimum net worth of not less than
$250,000 (no minimum net income requirement) (exclusive of home, home
furnishings and automobiles), and, in either case, my investment in the Shares
will not exceed 10% of my net worth.
Executed this ____ day of ______________, 2001, at
_______________, _________.
(City) (State)
_________________________________________
Print Name:______________________________
_________________________________________
Print Name:______________________________
Address:
-------
__________________________________________
__________________________________________
__________________________________________
Accepted this ___ day of ____________, 2001.
HENNESSY ADVISORS, INC.
By:______________________________________________
Neil J. Hennessy, President, Chief Executive
Officer and Chairman of the Board
For the shares to be delivered to you, you must complete the reverse side.
Issue a certificate and mail to the address below |_|
Credit the shares to my broker account. (Broker section below must be filled out
by your broker) |_|
--------------------------------------------------------------------------------
Please type or print the information requested below. When determining the
registration desired on your stock certificate, please refer to the definitions
and examples below.
Type of Registration Definition/Example
Individual one person; John Doe
Joint tenants with rights two or more people John Doe and Jane Doe JT TEN
of survivorship
Tenants in common two or more people John Doe and Jane Doe TEN COM
Gift to Minors one custodian and one minor John Doe CUST
Jane Minor UTMA-CA (state)
Trust name of trustee John Doe TR (trustee)
name of trust Jane Doe Trust
date of trust Dated 01/01/01
IRA name of custodian Any Broker CUST
name of IRA owner John Doe IRA
--------------------------------------------------------------------------------
Registration (please print) ____________________________________________
____________________________________________
Address (to issue a certificate) ____________________________________________
________________, _____________ ___________
City, State Zip
Social Security or Tax ID Number ______________________________________________
--------------------------------------------------------------------------------
If you would like to have the shares delivered to your broker account, please
have the broker fill in this section. [Once the subscription closes, we will
contact the name and phone number below, to have the deposit initiated on the
DWAC system at DTC.]
____________________________, ___________________________
phone number contact name
_________________________________________________________
name of cleaning broker
____________________________ ___________________________
DTC participant number F/B/O registration name
--------------------------------------------------------------------------------
Index to Financial Statements
Reports of Independent Auditors.......................................... F-2
Balance Sheets as of September 30, 2000 and June 30, 2001 (unaudited).... F-4
Statements of Operations for the Years ended September 30, 1999 and
September 30, 2000 and for the Nine Months ended June 30, 2000
(unaudited) and June 30, 2001 (unaudited)............................. F-5
Statements of Changes in Stockholders' Equity for the Years Ended
September 30, 1999 and September 30, 2000 and the Nine Months
Ended June 30, 2001 (unaudited)....................................... F-6
Statements of Cash Flows for the Years ended September 30, 1999 and
September 30, 2000 and for the Nine Months ended June 30, 2000
(unaudited) and June 30, 2001 (unaudited)............................. F-7
Notes to Financial Statements............................................ F-8
F-1
Independent Auditors' Report
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, 2000, and the related statements of operations,
changes in stockholders' equity and cash flows for the year 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hennessy Advisors, Inc. as of
September 30, 2000, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States of America.
/s/ KPMG LLP
San Francisco, California
July 30, 2001, except as to note 1(e)
which is as of September 21, 2001
F-2
BREGANTE & CO., LLP
Board of Directors
Hennessy Advisors, Inc. (formerly Edward J. Hennessy Incorporated)
We have audited the accompanying statements of operations, changes in
stockholders' equity and cash flows of Hennessy Advisors, Inc., formerly Edward
J. Hennessy Incorporated, for the year ended September 30, 1999. 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 generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statements of operations, changes in stockholders'
equity and cash flows are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
statements of operations, changes in stockholders' equity and cash flows. 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 provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of Hennessy Advisors, Inc. operations,
changes in stockholders' equity and cash flows for the year ended September 30,
1999, in conformity with generally accepted accounting principles.
/s/ Bregante & Co., LLP
December 6, 1999
San Francisco, California
F-3
HENNESSY ADVISORS, INC.
Balance Sheets
Assets September 30, June 30,
2000 2001
------------------- -----------------
(unaudited)
Cash $ 5,650 $ 5,621
Investments in marketable securities, at fair value 4,031 3,729
Investments in limited partnerships 11,209 11,209
Investment advisory fees receivable 127,297 142,508
Expert witness fees receivable 21,993 11,828
Management contracts acquired, net of accumulated amortization of $69,847
and $279,389 at September 30, 2000 and June 30, 2001, respectively 4,120,993 3,911,451
Property and equipment, net of accumulated depreciation of $15,272
and $26,442 at September 30, 2000 and June 30, 2001, respectively 57,233 49,068
Other assets 23,917 4,633
------------------- -----------------
Total assets $ 4,372,323 $ 4,140,047
=================== =================
Liabilities and Stockholders' Equity
Accrued liabilities and accounts payable $ 165,060 $ 112,954
Payable for management contracts acquired 1,849,709 1,849,709
Due to affiliate 34,518 14,256
Note payable 2,310,897 1,968,542
------------------- -----------------
Total liabilities 4,360,184 3,945,461
------------------- -----------------
Stockholders' equity:
Convertible preferred stock, $1 stated value; 300,000 shares authorized;
200,000 shares issued and outstanding
at September 30, 2000 200,000 --
Adjustment rate preferred stock, $25 stated value; 25,000 shares
authorized, 1,600 shares issued and outstanding 40,000 40,000
Common stock, no par value; 10,000,000 shares authorized;
760,680 and 960,680 shares issued and
outstanding at September 30, 2000 and June 30, 2001, respectively 287,840 487,840
Additional paid-in capital 24,008 24,008
Accumulated deficit (539,709) (357,262)
------------------- -----------------
Total stockholders' equity 12,139 194,586
------------------- -----------------
Commitments
Total liabilities and stockholders' equity $ 4,372,323 $ 4,140,047
=================== =================
See accompanying notes to financial statements.
F-4
HENNESSY ADVISORS, INC.
Statements of Operations
Years ended September 30, Nine-Months ended June 30,
2000 1999 2001 2000
------------- ------------- ------------- -------------
(unaudited)
Income:
Investment advisory fees $ 511,786 193,377 $ 1,125,857 114,490
Expert witness fees 138,500 70,253 90,244 109,239
Commissions 10,804 51,272 -- 10,804
Other income 2,277 -- 2,407 764
------------- ------------- ------------- -------------
Total income 663,367 314,902 1,218,508 235,297
------------- ------------- ------------- -------------
Expenses:
Compensation and benefits 320,693 187,309 436,849 195,679
General and administrative 172,722 102,888 137,462 79,312
Mutual fund distribution expenses 47,506 -- 106,669 --
Commissions and floor brokerage 12,354 16,267 -- 12,354
Amortization and depreciation 79,158 4,041 220,712 6,987
Interest 71,510 -- 133,769 10,765
------------- ------------- ------------- -------------
Total expenses 703,943 310,505 1,035,461 305,097
------------- ------------- ------------- -------------
Earnings before income tax expense (40,576) 4,397 183,047 (69,800)
Income tax expense 800 800 600 600
------------- ------------- ------------- -------------
Net earnings (loss) $ (41,376) 3,597 $ 182,447 (70,400)
============= ============= ============= =============
Earnings (loss) per share-Basic $ (0.05) -- 0.24 (0.09)
============= ============= ============= =============
Earnings (loss) per share-Diluted $ (0.05) -- 0.19 (0.09)
============= ============= ============= =============
See accompanying notes to financial statements.
F-5
HENNESSY ADVISORS, INC.
Statements of Changes in Stockholders' Equity
Years Ended September 30, 2000 and 1999
and the Nine-Months Ended June 30, 2001 (unaudited)
Adjustable
rate Additional Total
Preferred preferred Common paid-in Accumulated stockholders'
stock stock stock capital deficit equity
------------ ------------ ------------ ------------ ------------ -------------
Balances as of September 30, 1998 $ 200,000 40,000 287,840 24,008 (501,930) 49,918
Net earnings for the year ended
September 30, 1999 -- -- -- -- 3,597 3,597
------------ ------------ ------------ ------------ ------------ -------------
Balances as of September 30, 1999 200,000 40,000 287,840 24,008 (498,333) 53,515
Net loss for the year ended
September 30, 2000 -- -- -- -- (41,376) (41,376)
------------ ------------ ------------ ------------ ------------ -------------
Balances as of September 30, 2000 $ 200,000 40,000 287,840 24,008 (539,709) 12,139
Conversion of Convertible
Preferred Stock (200,000) -- 200,000 -- -- --
Net earnings for the nine months
ended June 30, 2001 (unaudited) -- -- -- -- 182,447 182,447
------------ ------------ ------------ ------------ ------------ -------------
Balances at June 30, 2001 $ -- 40,000 487,840 24,008 (357,262) 194,586
(unaudited) ============ ============ ============ ============ ============ =============
See accompanying notes to financial statements.
F-6
HENNESSY ADVISORS, INC.
Statements of Cash Flows
Years Ended September 30, Nine Months Ended June 30,
2000 1999 2001 2000
-------------- ------------- ------------- -------------
(unaudited)
Cash flows from operating activities:
Net earnings (loss) $ (41,376) 3,597 182,447 (70,400)
Adjustments to reconcile net earnings (loss)
to net cash provided by operating activities:
Depreciation and amortization 79,158 4,041 220,712 6,987
Unrealized net losses (gains) on marketable
securities 548 (472) 439 374
(Increase) decrease in operating assets
Investment advisory fees receivable (119,770) (5,014) (15,211) 1,131
Expert witness fees receivable (21,993) -- 10,165 --
Other assets (11,432) 12,256 19,284 (2,392)
Decrease (increase) in operating liabilities
Due to/from affiliate 18,182 -- 1,738 17,079
Accrued liabilities and accounts payable 157,039 (13,033) (52,106) 1,096
-------------- ------------- ------------- -------------
Net cash provided by (used in) operating
activities 60,356 1,375 367,468 (46,125)
-------------- ------------- ------------- -------------
Cash flows from investing activities:
Management contracts acquired (2,341,131) -- -- (2,248,057)
Purchases of property and equipment (59,767) (1,229) (3,005) (47,467)
Purchases of investments (332) (5,774) (137) (52)
Sales of investments -- 3,996 -- --
-------------- ------------- ------------- -------------
Net cash used in investing activities (2,401,230) (3,007) (3,142) (2,295,576)
-------------- ------------- ------------- -------------
Cash flows provided by (used in) financing activities
Proceeds lent from affiliate 36,761 -- -- 36,761
Repayment of amounts due to affiliate (5,000) -- (22,000) --
Proceeds from note payable 2,310,897 -- -- 2,310,897
Repayment of note payable -- -- (342,355) --
-------------- ------------- ------------- -------------
Net cash provided by (used in) financing
activities 2,342,658 -- (364,355) 2,347,658
Net increase (decrease) in cash and cash equivalents 1,784 (1,632) (29) 5,957
Cash and cash equivalents at beginning of year 3,866 5,498 5,650 3,866
-------------- ------------- ------------- -------------
Cash and cash equivalents at end of year $ 5,650 3,866 5,621 9,823
============== ============= ============= =============
Supplemental disclosures of cash flow information:
Cash paid for income taxes $ 800 1,600 600 600
Cash paid for interest 56,556 -- 133,768 10,765
Other noncash items
Management contracts acquired 1,849,709 -- -- 1,942,783
Forgiveness of secured note receivable 75,000 -- -- --
Forgiveness of secured note payable 75,000 -- -- --
See accompanying notes to financial statements.
F-7
HENNESSY ADVISORS, INC.
Notes to Financial Statements
September 30, 2000 and June 30, 2001 (unaudited)
(1) Summary of the Organization and Significant Accounting Policies
(a) Organization
Hennessy Advisors, Inc. (the Company) was founded on February
1, 1989 as a California corporation under the name Edward J.
Hennessy Incorporated and operated as a registered broker
dealer serving mainly individual investors. In 1990, the
Company became a registered investment advisor and on July 28,
2000, the Company ceased its operations as a broker dealer.
The Company changed its name to Hennessy Advisors, Inc on
April 15, 2001.
The operating activities of the Company consist primarily of
providing investment management services to four open end
mutual funds (the Hennessy Funds). The Company, as general
partner of Hennessy Management Co., L.P., serves as the
investment advisor to the Hennessy Balanced Fund, and, as
general partner of Hennessy Management Co. 2, L.P., serves as
investment advisor to the Hennessy Leveraged Dogs Fund. In
June 2000, following the acquisition of the rights to use
certain patented automated investment trading strategies, the
Company also became the advisor to the Hennessy Cornerstone
Value Fund and the Hennessy Cornerstone Growth Fund (formerly
the O'Shaughnessy Cornerstone Funds).
(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 Statement
of Financial Accounting Standards (SFAS) 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) Investments in Limited Partnerships
Investments in the Hennessy Management Co., Hennessy
Management Co. 2 and Total Return Portfolio limited
partnerships are carried at cost. The Company's general
partnership ownership percentage in each of these entities as
of September 30, 2000 is 5% or less, based on invested
capital. Based on the voting structure of each limited
partnership which allows the limited partners to remove the
general partner, the Company is not deemed to have significant
control and as such the investments have not been
consolidated.
The Company is not entitled to receive any partnership
distributions in its capacity as general partner until the
partners have received a return of all their invested capital.
Partnership cash distributions have been made to the limited
partners of Hennessy Management Co., L.P. that represent a
return of approximately 60% of their invested capital, but not
to the general partner, which has declined to receive a return
of any of its 1% capital until the limited partners have
received all their capital back. Hennessy Management Co. 2.,
L.P. has never made any cash distributions to its partners,
because partner capital contributions have been needed to
cover fund management expenses.
F-8
(e) Management Contracts Acquired
The Company was appointed as investment advisor to two mutual
funds concurrent with its acquisition of patented automated
investment trading strategies from Netfolio, Inc. The
acquisition agreement provided for payment by the Company as
of the closing date of the transaction of June 30, 2000 in the
amount of $2,210,897 with a second payment due June 30, 2001
in the form of a subordinated promissory note in an amount
subject to adjustment based on the aggregate net assets of the
funds under management as of June 30, 2001, as adjusted for
the impact of certain fund share redemptions during the year
ended June 30, 2001. The Company has issued the subordinated
promissory note effective as of June 30, 2001 in the amount of
$1,849,709. The terms of the promissory note call for payments
to be made in sixty monthly installments to Netfolio, Inc.
commencing June 30, 2001 with interest charged at the prime
rate unless payments are not made to Netfolio, Inc. when due,
at which time interest will be charged at an annual rate of
18%.
On August 16, 2001, Netfolio declared the Company to be in
default under the $1,849,709 subordinated promissory note
dated as of June 30, 2001, because the Company has not made
the required monthly payments on the note. Notwithstanding the
declaration of default, the terms of a subordination agreement
that the Company entered into with Netfolio and Firstar Bank
preclude Netfolio from exercising any rights that it may have
to collect amounts due it under the subordinated note until
the Company's debt to Firstar Bank is paid in full.
The total management contracts acquired capitalized of
$4,190,840 reflect the consideration paid on June 30, 2000 of
$2,210,897, associated costs incurred with the acquisition of
$130,234, and management's estimate of the additional
consideration to be remitted on June 30, 2001 in the form of a
promissory note of $1,849,709. This additional consideration
is included within the recorded asset for management contracts
acquired and is recorded as a corresponding liability in the
accompanying financial statements. In accordance with APB 17,
the total acquisition costs capitalized are being amortized on
a straight-line basis over a period of 15 years based on
management's analysis of the appropriate useful life.
In accordance with Statement of Financial Accounting Standards
No. 121 "Accounting for the Improvement of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of," the Company
periodically analyzes the carrying value of management
contracts acquired to determine whether any impairment has
occurred. Based upon anticipated future income from
operations, it is the opinion of Company management that there
has been no impairment.
(f) 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 five years.
(g) Fair Value of Financial Instruments
All of the Company's financial instruments are carried at fair
value or amounts approximating fair value.
(h) Expert Witness Fees
The Company receives fees for services provided by the
Company's president and staff in mediating, reviewing, and
consulting on various cases within the securities industry.
Such fees are recognized when earned.
F-9
(i) Commissions
Securities transactions and the related revenues and expenses
were recorded on a settlement date basis, which did not differ
materially from the trade date basis.
(j) Income Taxes
Income taxes are accounted for under the asset and liability
method. 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 temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date of such a
charge.
A valuation allowance is then established to reduce that
deferred tax asset to the level at which it is "more likely
than not" that the tax benefits will be realized. Realization
of tax benefits of deductible temporary differences and
operating loss or credit carryforwards depends on having
sufficient taxable income of an appropriate character within
the carryforward periods. Sources of taxable income that may
allow for the realization of tax benefits include taxable
income that will result from future operations.
(k) Earnings per share
Basic earnings (loss) per share is determined by dividing net
earnings (loss) by the weighted average number of shares of
common stock outstanding, while diluted earnings (loss) 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.
(l) 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 these estimates.
(m) Reclassification
Certain prior year amounts have been reclassified to conform
with current year's presentation.
(2) Investment Advisory Agreements
Pursuant to investment management agreements (the Agreements), the
Company provides investment advisory services to the Hennessy Funds,
either directly or as general partner to Hennessy Management Co. L.P.
and Hennessy Management Co. 2, L.P. 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 Hennessy Cornerstone Value Fund
and the Hennessy Cornerstone Growth Fund, the Company receives
investment advisory fees monthly on an annual percentage basis 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.
F-10
Advisory fees earned by the Company through its general partner
interest in various limited partnerships (including Hennessy Management
Co. L.P. and Hennessy Management Co. 2, L.P.) are based on actual costs
incurred. During the year ended September 30, 2000 the Company
voluntarily waived certain investment advisory fees earned from
Hennessy Management Co. 2, L.P. The Hennessy Balanced Fund and Hennessy
Leveraged Dogs Fund pay investment advisory fees to the respective
limited partnerships based on the contractual annual advisory fee rates
applied to the respective fund's average daily net assets, subject to
any expense limitation provisions.
(3) Property and Equipment
Property and equipment were comprised of the following as of September
30, 2000:
Leasehold improvements $ 41,531
Furniture and fixtures 4,583
Equipment 18,864
Software 7,527
-------------------
72,505
Less accumulated depreciation (15,272)
-------------------
$ 57,233
===================
(4) Due to Affiliate
Amounts reported as due to an affiliate in the accompanying financial
statements represent amounts owed by the Company to its President under
the terms of a promissory note dated January 3, 2000. On that date the
President loaned $36,761 to the Company, with interest to be charged at
a rate of 10.00% per annum. The principal balance and any accrued
interest thereon is payable on demand. As of September 30, 2000 the
balance represents the remaining principal amount plus interest accrued
to date.
(5) Note Payable
In June of 2000, the Company entered into a borrowing agreement with
Firstar Bank, National Association in order to finance its acquisition
of the patented automated investment trading strategies from Netfolio,
Inc. Under the terms of the agreement, the Company borrowed $2,310,897,
with annual interest charged at the prime rate and due monthly. The
loan is to be repaid in fifty four equal installments, payable monthly,
beginning November 10, 2000. Under the terms of the loan agreement, the
Company is prohibited from paying dividends while the debt is
outstanding.
(6) Convertible Preferred Stock
Holders of the convertible preferred stock have no voting rights. The
preferred shares may be converted into an equal number of common shares
at the option of the preferred stockholders. In June of 2001 the
200,000 shares of the Company's convertible preferred stock were
converted into shares of common stock.
(7) Adjustable Rate Preferred Stock
Holders of adjustable rate preferred stock may not convert shares to
common stock and have no voting rights. Adjustable rate preferred
stockholders are only entitled to those dividends which are declared by
the Board of Directors to be adjustable rate preferred dividends.
(8) Income Taxes
The provision for income taxes is comprised of the following for the
years ended September 30, 2000 and 1999:
F-11
2000 1999
------------- ---------------
Current:
Federal $ -- --
State 800 800
------------- ---------------
800 800
------------- ---------------
Deferred:
Federal -- --
State -- --
------------- ---------------
-- --
------------- ---------------
800 800
============= ===============
The principal reasons for the differences from the federal statutory
rate of 34% are as follows:
2000 1999
------------- ---------------
Tax provision at statutory rate $ (13,796) 1,495
State taxes, net of federal benefit 528 528
Increase (decrease) in valuation allowance 11,198 (1,233)
California net operating loss write-off 5,236 --
Other (2,366) 10
------------- ----------------
Income tax provision $ 800 800
============= ================
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities as of September 30,
2000 and 1999 are presented below:
2000 1999
------------- --------------
Deferred tax assets:
Other $ 1,144 --
Net operating loss carryforward 181,395 171,341
------------- --------------
Total deferred tax assets 182,539 171,341
Valuation allowance (182,539) (171,341)
------------- --------------
Net deferred tax assets $ -- --
============= ==============
As of September 30, 2000, the Company's net operating loss
carryforwards were $511,000 and $131,000 for federal and state
purposes, respectively. These loss carryforwards are scheduled to
expire through 2020 and 2005 for federal and state purposes,
respectively, and may be subject to certain annual and separate return
limitation year utilization restrictions under current laws.
(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 years
ended September 30, 2000 and 1999 and the nine months ended June 30,
2001 and 2000, respectively. For the year ended September 30, 2000 and
the nine months ended June 30, 2000 the convertible preferred stock is
not considered to be a common stock equivalent as its impact is
anti-dilutive.
F-12
Year ended Nine Months ended
September 30, June 30,
------------------------- -----------------------
2000 1999 2001 2000
-------- --------- ---------- -------
(unaudited)
Weighted average common stock
outstanding 760,680 760,680 765,612 760,680
Common stock equivalents
Convertible preferred stock -- 200,000 195,068 --
-------- --------- ---------- -------
760,680 960,680 960,680 760,680
======== ========= ========== =======
(10) Commitments
The Company leases office space under a noncancelable operating lease
expiring on December 31, 2004. The total rent expense under operating
leases for the years ended September 30, 2000 and 1999 was $20,703 and
$9,137, respectively. The annual minimum future rental commitments
under this lease as of September 30, 2000 are as follows:
Year ending September 30:
2001 $ 49,656
2002 52,656
2003 52,656
2004 52,656
2005 13,164
---------------
$ 220,788
===============
(11) New Accounting Pronouncements
In June of 2001 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations and SFAS No. 142 Goodwill and Other Intangible Assets.
SFAS No. 141 is effective for business combinations initiated after
June 30, 2001 and requires that all business combinations be accounted
for using the purchase method of accounting. Disclosure must also be
provided as to the primary reasons for a business combination, the
allocation of the purchase price paid to the assets and liabilities
(including intangible assets) assumed by major balance sheet caption,
and the allocation of goodwill to the various reportable segments of
the business acquired. The Company does not expect the implementation
of the SFAS to have a material effect on its financial position or
results of operations.
SFAS No. 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes APB Opinion No. 17,
Intangible Assets. The provisions of the SFAS are to be applied
starting with fiscal years beginning after December 15, 2001. Under the
SFAS, goodwill and intangible assets that have indefinite useful lives
will not be amortized but rather will be tested at least annually for
impairment. Intangible assets that have finite useful lives will
continue to be amortized over their useful lives. The Company considers
the recorded asset for management contracts acquired to be an
intangible asset with an indefinite life. Upon implementation of the
SFAS on October 1, 2002, the Company's amortization of the asset,
which represents an annual expense of $279,389 will cease, and any
impairment loss identified on that date relating to the management
contracts acquired asset will be recognized.
(12) Stock Options
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. The compensation committee
of the board of directors will have 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 triggering the exercisability of
options or the payment of performance awards, whether an option is an
incentive or non-qualified option and the number of shares to be
F-13
subject to each award. However, no participant may receive options or
stock appreciation rights under the Plan for an aggregate of more than
50,000 shares in any calendar year. The exercise price and term of each
option or stock appreciation right will be fixed by the compensation
committee except that the exercise price for each stock option which is
intended to qualify as an incentive stock option must be at least equal
to the fair market value of the stock on the date of grant and the term
of the option cannot exceed 10 years. In the case of an incentive stock
option granted to a 10% shareholder, the exercise price must be at
least 110% of the fair market value on the date of grant and cannot
exceed five years. Incentive stock options may be granted only within
ten years from the date of adoption of the Plan. The aggregate fair
market value (determined at the time the option is granted) of shares
with respect to which incentive stock options may be granted to any one
individual, which stock options are exercisable for the first time
during any calendar year, may not exceed $100,000. An optionee may,
with the consent of the compensation committee, elect to pay for the
shares to be received upon exercise of their options in cash or shares
of common stock or any combination thereof. As of June 30, 2001 no
options, stock appreciation rights, restricted stock, performance
awards, or stock loans had been granted under the Plan.
Options to purchase an aggregate of 87,500 shares of common stock are
to be awarded under the Plan to certain employees, executive officers
and directors of the Company following the sale of a minimum number of
shares under a public offering (see Note 13). Such options are to have
an exercise price equal to the price of the common stock in the initial
public offering, have a term of ten years, and vest immediately.
(13) Subsequent Events
The Company intends to file an initial public offering with the U.S.
Securities and Exchange Commission. Under the terms of the offering,
the minimum number of common shares to be offered is 450,000 and the
maximum number is 1,000,000. In anticipation of the offering, the
Company's Board of Directors has adopted a resolution to merge Hennessy
Management Co., L.P. and Hennessy Management Co. 2 L.P. into the
Company subject to approval of the limited partners. Under the terms of
the proposed mergers, the limited partners would receive an aggregate
of up to 93,240 shares of the Company's common stock in exchange for
their partnership interests. If limited partners elect not to receive
common stock in exchange for their interests, they have to elect to
receive cash in exchange for the fair market value of their partnership
interests.
The Company does not expect that its revenues will differ materially as
a result of the merger. Nearly all revenues of the partnerships from
advisory fees are being used to pay the Company advisory fees on an
hourly basis for services performed in managing the partnerships,
including investment advisory services performed by the Company in its
capacity as general partner of the partnerships. Following the merger
of the partnerships into the Company, the Company will be the advisor
to Hennessy Balanced Fund and Hennessy Leveraged Dogs Fund. In that
capacity, it will receive directly from these funds all advisory fees
currently being paid by these funds to the partnerships.
On May 2, 2001, the Board approved the Company's Plan to increase the
number of common and preferred shares authorized to 15 million and 5
million shares, respectively, subject to the successful completion of
the offering.
F-14
Until ________, 200__, all dealers that effect
transactions in these securities, whether or
not participating in this offering, may be 450,000 Shares Minimum
required to deliver a prospectus. This is in
addition to the dealers' obligation to deliver 1,000,000 Shares Maximum
a prospectus when acting as underwriters and
with respect to their unsold allotments or
subscriptions.
Table of Contents
Page
Prospectus Summary.................... 3
Risk Factors.......................... 6
Capitalization........................10 HENNESSY ADVISORS, INC.
Cautionary Note Regarding
Forward-Looking Statements...........10 Common Stock
Use of Proceeds.......................11
Selling Shareholder...................12
Dividend Policy.......................12
Dilution..............................12
Management's Discussion and Analysis
of Financial Condition and
Results of Operations................15
Business..............................20
Management............................25
Certain Relationships and Related
Transactions.........................28
Principal Stockholders................29
Description of Capital Stock..........30
Shares Eligible for Future Sale.......32
Plan of Distribution..................33
Legal Matters.........................34
Experts...............................34
Changes in Accountants................34
Additional Information................35
Prospectus
Dated _________, 2001
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Hennessy Advisors, Inc (the "Registrant") 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 the conduct of such person was
unlawful. The Registrant is also authorized under Section 317 to indemnify
corporate agents against expenses actually and reasonably incurred in connection
with defending 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 if such a quorum of
directors is not obtainable, by the shareholders (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 the Registrant may also advance
expenses incurred in defending proceedings against corporate agents, upon
receipt of an undertaking that the agent will reimburse the corporation unless
it is ultimately determined that the agent is entitled to be indemnified against
expenses reasonably incurred. The Registrant intends to enter into agreements to
indemnify its directors and executive officers.
In accordance with Section 317, the Registrant's Amended and Restated
Articles of Incorporation eliminate the liability of its directors to the
fullest extent permissible by California law. The Registrant's Amended and
Restated Articles of Incorporation and Amended and Restated Bylaws provide for
the indemnification of the Registrant's corporate agents to the fullest extent
permissible under California law. Additionally, the Registrant's Amended and
Restated Bylaws provide that the Registrant has the right to purchase and
maintain insurance on behalf of such persons whether or not the Registrant would
have the power to indemnify such person against the liability insured against.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses in connection with the issuance and distribution of the
securities being registered are as follows (estimated except as noted):
Securities and Exchange Commission registration fee............ $ 2,500
Printing and engraving expenses (estimate)..................... 30,000
Accounting fees and expenses (estimate)........................ 75,000
Legal fees and expenses (estimate)............................. 110,000
Transfer Agent's fees and expenses (estimate).................. 8,000
Miscellaneous (estimate)....................................... 24,500
--------
Total........................................ $ 250,000
=======
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the Registrant has not sold any
unregistered securities, except as follows:
In June 2001, the Registrant issued an aggregate of 200,000
shares of common stock to the holders of its convertible preferred stock upon
conversion of the preferred stock in accordance with its terms. The convertible
preferred stock was originally issued in November, 1989 at a price of $1.00 per
share. The following table lists the convertible preferred stockholders and the
number of shares of common stock acquired by each:
Name No. of Shares
---- -------------
Brian A. Hennessy and Sue Hennessy 55,000
Timothy Hennessy 50,000
Bill Reilly 10,000
W. P. Reilly 25,000
Steve Benedetti and Helen Benedetti 15,000
Mitchell Nilsen and Teresa Nilsen 20,000
Steve Boro 10,000
Helen Hennessy 5,000
Don Wihlborg and Loretta Wihlborg 5,000
Liam Hennessy 5,000
In August 2001, the Registrant received the consent of a
majority in interest of the limited partners in The Hennessy Management Co., LP
and The Hennessy Management Co. 2, LP to the merger of the partnerships into the
Registrant. The merger is conditioned on the successful completion of the
Registrant's initial public offering. If the merger is consummated, limited
partners will receive one share of common stock for each ten dollars of invested
capital in the partnerships, resulting in the issuance of a maximum aggregate of
90,740 shares. The following table lists the limited partners and the number of
shares of common stock they will receive if the merger is consummated :
Name No. of Shares
---- -------------
First Trust Corp. TTEE FAO James E. Banfield IRA 500
Chase Manhattan Bank Cust FAO Richard W. Bickett IRA 1,000
William F. Bosque, Jr. TTEE of the William F.
& Ruth C. Bosque 1990 Trust dtd. 7/9/90 1,000
Marshall Cheney 500
Steven Compagno and Julie Compagno 2,000
John Davis and Susan Davis 500
Dennis DeTomasi and Dawn DeTomasi 500
First Trust Corp. TTEE FAO Matthew V. Dowley IRA 4,000
David A. Duysen 500
William T. Elliott 1,000
C/ R/ Fedrick 2,000
First Trust Corp. TTEE FAO Gary R. Frugoli IRA 2,000
Brian K. Garrett 500
Robert S. Gartrell 500
E. Joe Graham and Susan M. Graham 1,000
First Trust Corp. TTEE FAO Neil J. Hennessy IRA 1,000
Sandra E. Ingrish 500
Carl E. Jacobson, TTEE of the Carl E. Jacobson Trust
dtd 7/14/92 1,000
Jo Ann Johnson 1,000
Ann L. Kofron 500
Daniel G. Libarle and Carol L. Libarle 2,000
II-2
Name No. of Shares
---- -------------
Keltie McCloskey and Deborah McCloskey 500
First Trust Corp. TTEE FAO Michael J. Murphy IRA 500
First Trust Corp. TTEE FAO Rita Mantegani IRA 500
Kathryn B. Nagel Trust u/a dtd 3/27/91 500
Raymond Nizibian and Louis Nizibian, TTEES of
the Raymond & Louise Nizibian Trust 3,000
Rodger Offenbach and Sidra Offenbach 8,500
Linda J. Paine Survivor Trust 1,000
First Trust Corp., TTEE Jeffrey Pottorff Rollover IRA 500
Joseph W. Price 1,000
Peggy Repka IRA Rollover 500
Schalich Brothers Construction 1,000
William C. Schalich and Elizabeth A. Schalich, TTEES,
Schalich Trust u/a dtd 10/2/92 500
V.K. Scotto Trust 1,500
Richard E. Smith and Patricia A. Smith Rev. Inter Vivos
Trust dtd 4/15/89 1,000
First Trust Corp. TTEE FAO Mark J. Wagner Rollover IRA 1,000
Robert Warnock 500
James D. Wilson and Nancy Wilson 1,000
The Barella Family Trust u/a dtd 12/23/91 5,000
First Trust Corp. FAO Denise Churchill IRA 1,000
Paul Della Santina and Kathy Della Santina 1,500
Romano Della Santina and Maria Della Santina 2,500
Michael A. Dittmann 2,500
The Eastman Family Trust u/a dtd 12/4/91 1,500
Don M. Farmer 1,000
Ronald M. Fedrick 5,000
Ann Finnegan 1,000
Steven and Marilyn Geney 1996 Trust u/a dtd 9/4/96 1,000
Ann B. Grauss 1,000
Steve Henris 1,000
Carl E. Jacobson 1,000
Michael J. Mariani and Anna V. Mariani 1,000
The William & Vicki McDill Family Trust u/a dtd 12/13/95 1,000
First Trust Corp. TTEE FAO Carole McSweeney 500
First Trust Corp. TTEE FAO Timothy McSweeney 500
Tim G. Mosley and Carol K. Mosley 2,500
Michael J. Lawson and Nancy P. McCarthy 1,000
Mark J. Nizibian and Ramona Nizibian 1,000
First Trust Corp. TTEE FAO Rodger Offenbach IRA 370
First Trust Corp. TTEE FAO Sidra Offenbach IRA 370
First Trust Corp. TTEE FAO Chris D. Offenbach IRA 500
II-3
Name No. of Shares
---- -------------
First Trust Corp. TTEE FAO Margaret Offenbach IRA 500
John M. Pope and Cheryl L. Pope 1,000
First Trust Corp. TTEE FAO Sandra A. Raffi-Rashed IRA 2,500
Mike Rolovich 1,500
Sam J. Sebastiani 2,500
First Trust Corp. TTEE FAO Charlene Vervais IRA 1,000
Caroline L. Vieira 1,000
First Trust Corp. TTEE FAO Daniel A. Zell IRA 2,000
II-4
Each offer and sale described above was or is being effected pursuant
to the exemption from registration afforded by Section 4(2) of the Securities
Act of 1933, as amended. In addition, the conversion of the convertible
preferred shares was exempt pursuant to Section 3(a)(9) of that Act.
ITEM 27. EXHIBITS
2.1* Form of Agreement of Merger of Hennessy Advisors,
Inc., Hennessy Management Co., L.P. and Hennessy
Management Co. 2, L.P.
3.1* Amended and Restated Articles of Incorporation
3.2* Amended and Restated Bylaws of the Company
5.1* Opinion on legality
10.1 Management Agreement dated as of June 30, 2000
between registrant and Hennessy Mutual Funds, Inc.
10.2 Investment Advisory Agreement dated as of July 1,
1998 between The Hennessy Funds, Inc. and the
Hennessy Management Co., LP
10.3 Investment Advisory Agreement dated as of June 30,
1998 between The Hennessy Funds, Inc. and the
Hennessy Management Co. 2, LP
10.4* Hennessy Advisors, Inc. 2001 Omnibus Plan
10.4(a)* Form of Option Award Agreement
10.5* Employment Agreement of Neil J. Hennessy
10.6* Netfolio Agreement dated April 10, 2000
10.6(a)* Subordinated Promissory Note
10.7* Loan agreement dated April 10, 2000 between
registrant and Firstar Bank, N.A.
10.7(a)* Term Promissory Note in the amount of $2,500,000
16.1* Letter of Bregante & Co., LLP
23.1* Consent of Foley & Lardner (included in Exhibit 5.1)
23.2 Consent of KPMG LLP
23.3 Consent of Bregante & Co., LLP
24.1* Directors' Power of Attorney
99.1* Escrow Agreement between Hennessy Advisors, Inc. and
Firstar Bank, N.A. dated September 12, 2001
* previously filed
ITEM 28. UNDERTAKINGS
The registrant will:
(1) File during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration statement;
and
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
II-5
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Act") may be permitted to directors, officers, and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer 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 liabilities (other than
the payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer 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 small business issuer 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 Securities Act and will be governed by
the final adjudication of such issue.
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
the Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Novato, State of California, on October 10, 2001.
HENNESSY ADVISORS, INC.
By: /s/ Neil J. Hennessey
--------------------------------------
Neil J. Hennessy, Chief Executive
Officer, President and Chairman of
the Board
In accordance with 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.
Date: October 10, 2001 /s/ Neil J. Hennessy
-----------------------------------------
Neil J. Hennessy, Chief Executive
Officer, President, Chairman of the Board
and Director
Date: October 10, 2001 /s/ Teresa M. Nilsen
------------------------------------------
Teresa M. Nilsen, Executive Vice
President, Chief Financial Officer, Chief
Accounting Officer, Secretary and Director
Date: October 10, 2001 /s/ Daniel B. Steadman
-----------------------------------------
Daniel B. Steadman, Executive Vice
President and Firector
Date: October 10, 2001 /s/ Brian A. Hennessy
------------------------------------------
Brian A. Hennessy, Director
Date: October 10, 2001 /s/ Daniel G. Libarle
------------------------------------------
Daniel G. Libarle, Director
Date: October 10, 2001 /s/ Rodger Offenbach
------------------------------------------
Rodger Offenbach, Director
Date: October 10, 2001 /s/ Thomas L. Seavey
------------------------------------------
Thomas L. Seavey, Director
II-7
Date: October 10, 2001 /s/ Henry Hansel
------------------------------------------
Henry Hansel, Director
II-8
EXHIBITS INDEX
2.1* Form of Agreement of Merger of Hennessy Advisors,
Inc., Hennessy Management Co., L.P. and Hennessy
Management Co. 2, L.P.
3.1* Amended and Restated Articles of Incorporation
3.2* Amended and Restated Bylaws of the Company
5.1* Opinion on legality
10.1 Management Agreement dated as of June 30, 2000
between registrant and Hennessy Mutual Funds, Inc.
10.2 Investment Advisory Agreement dated as of July 1,
1998 between The Hennessy Funds, Inc. and the
Hennessy Management Co., LP
10.3 Investment Advisory Agreement dated as of June 30,
1998 between The Hennessy Funds, Inc. and the
Hennessy Management Co. 2, LP
10.4* Hennessy Advisors, Inc. 2001 Omnibus Plan
10.4(a)* Form of Option Award Agreement
10.5* Employment Agreement of Neil J. Hennessy
10.6* Netfolio Agreement dated April 10, 2000
10.6(a)* Subordinated Promissory Note
10.7* Loan agreement dated April 10, 2000 between
registrant and Firstar Bank, N.A.
10.7(a)* Term Promissory Note in the amount of $2,500,000
16.1* Letter of Bregante & Co., LLP
23.1* Consent of Foley & Lardner (included in Exhibit 5.1)
23.2 Consent of KPMG LLP
23.3 Consent of Bregante & Co., LLP
24.1* Directors' Power of Attorney
99.1* Escrow Agreement between Hennessy Advisors, Inc. and
Firstar Bank, N.A. dated September 12, 2001
* previously filed
II-9
EX-10
3
sks3c.txt
EXHIBIT 10.1 - MANAGEMENT AGREEMENT
Exhibit 10.1
MANAGEMENT AGREEMENT
AGREEMENT made this 30th day of June, 2000 by and between HENNESSY MUTUAL
FUNDS, INC., a Maryland corporation (hereinafter referred to as the
"Corporation"), on behalf of each of its investment series set forth on Schedule
A hereto as it may be amended from time to time (hereinafter referred to each as
a "Fund" and together, as the "Funds"), and EDWARD J. HENNESSY, INCORPORATED, a
California corporation (hereinafter referred to as the "Manager").
W I T N E S S E T H:
WHEREAS, the Corporation is engaged in business as a diversified open-end
management investment company registered under the Investment Company Act of
1940, as amended (hereinafter referred to as the "Investment Company Act"); and
WHEREAS, the Manager is engaged principally in rendering management and
investment advisory services and is registered as an investment adviser under
the Investment Advisers Act of 1940; and
WHEREAS, the Corporation on behalf of the Funds desires to retain the
Manager to provide management and investment advisory services to the Funds in
the manner and on the terms hereinafter set forth; and
WHEREAS, the Manager is willing to provide management and investment
advisory services to the Funds on the terms and conditions hereafter set forth;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, the Corporation, on behalf of the Funds, and the Manager
hereby agree as follows:
ARTICLE I
DUTIES OF THE MANAGER
The Corporation hereby employs the Manager to act as a manager and
investment adviser of the Funds and to furnish the management and investment
advisory services described below, subject to the policies of the Funds and the
review by and overall consent of the Board of Directors of the Corporation, for
the period and on the terms and conditions set forth in this Agreement. The
Manager hereby accepts such employment and agrees during such period, at its own
expense, to render, or arrange for the rendering of, such services and to assume
the obligations herein set forth for the compensation provided for herein. The
Manager shall for all purposes herein be deemed to be an independent contractor
and shall, unless otherwise expressly provided or authorized, have no authority
to act for or
represent the Corporation or the Funds in any way or otherwise be
deemed agents of the Corporation or the Funds. Additional investment series may
from time to time be added to those covered by this Agreement by the parties by
executing a new Schedule A which shall become effective upon its execution and
shall supersede any Schedule A having an earlier date.
(a) MANAGEMENT SERVICES. The Manager shall perform the management services
necessary for the operation of the Funds as hereinafter provided. The Manager
shall generally monitor each Fund's compliance with investment policies and
restrictions as set forth in its currently effective Prospectus and Statement of
Additional Information relating to the shares of the Fund under the Securities
Act of 1933, as amended (each a "Prospectus" and "Statement of Additional
Information", respectively). The Manager shall provide the Corporation with such
other services as the Manager, subject to review by the Directors, shall from
time to time determine to be necessary or useful to perform its obligations
under this Agreement. The Manager shall make reports to the Directors of its
performance of obligations hereunder and furnish advice and recommendations with
respect to such other aspects of the business and affairs of the Corporation as
it shall determine to be desirable.
(b) INVESTMENT ADVISORY SERVICES. With respect to each Fund:
(i) The Manager shall provide such investment research, advice and
supervision as the Fund may from time to time consider necessary for the proper
supervision of the assets of the Fund, shall furnish continuously an investment
program for the Fund and shall determine from time to time which securities
shall be purchased, sold or exchanged and what portion of the assets of the Fund
shall be held in the various securities in which the Fund invests, options,
futures, options on futures or cash, subject always to the restrictions of the
Articles of Incorporation and By-Laws of the Corporation, as amended from time
to time, the provisions of the Investment Company Act and the statements
relating to the Fund's investment objectives, investment policies and investment
restrictions as the same are set forth in the Fund's currently effective
Prospectus and Statement of Additional Information. Should the Directors at any
time, however, make any definite determination as to investment policy and
notify the Manager thereof in writing, the Manager shall be bound by such
determination for the period, if any, specified in such notice or until
similarly notified that such determination has been revoked.
(ii) To the extent applicable, the Manager shall also make decisions for
the Fund as to foreign currency matters and make determinations as to foreign
exchange contracts.
(iii) The Manager shall make decisions for the Fund as to the manner in
which voting rights, rights to consent to corporate action and any other rights
pertaining to the Fund's portfolio securities shall be exercised.
(iv) The Manager shall take, on behalf of the Fund, all actions which it
deems necessary to implement the Fund's investment policies, and in particular
to place all orders for the purchase or sale of portfolio securities for the
Fund's account with brokers or dealers selected by it, and to that end, the
Manager is authorized as the agent of the Fund to
2
give instructions to the custodian of the Fund as to deliveries of securities
and payments of cash for the account of the Fund.
(v) In connection with the selection of such brokers or dealers and the
placing of such orders with respect to assets of the Fund, the Manager is
directed at all times to seek to obtain execution and prices within the policy
guidelines determined by the Directors and set forth in the Fund's Prospectus
and Statement of Additional Information. Subject to this requirement and the
provisions of the Investment Company Act, the Securities Exchange Act of 1934,
as amended, and other applicable provisions of law, the Manager may select
brokers or dealers with which it or the Corporation is affiliated (if any).
ARTICLE II
ALLOCATION OF CHARGES AND EXPENSES
(a) THE MANAGER. The Manager assumes and shall pay for maintaining the
staff and personnel necessary to perform its obligations under this Agreement,
shall pay all compensation relating to service to the Corporation of Officers
and Directors of the Corporation who are affiliated persons of the Manager, and
shall pay the expenses of the Funds incurred in connection with the continuous
offering of Fund shares.
(b) THE CORPORATION. Except as described in paragraph (a) hereof, the
Corporation, on behalf of each Fund, assumes and shall pay all other Fund
expenses, including, without limitation: taxes, expenses for legal and auditing
services, costs of printing proxies, stock certificates, shareholder reports,
Prospectuses and Statements of Additional Information, charges of the custodian,
any sub-custodian and transfer agent, expenses of portfolio transactions,
expenses of redemption of shares, Securities and Exchange Commission fees,
expenses of registering the shares under federal, state and foreign laws, fees
and actual out-of-pocket expenses of Directors who are not affiliated persons of
the Manager, accounting and pricing costs (including the daily calculation of
the net asset value), insurance, interest, brokerage costs, litigation and other
extraordinary or non-recurring expenses, and other expenses properly payable by
each Fund.
ARTICLE III
COMPENSATION OF THE MANAGER
(a) MANAGEMENT AND INVESTMENT ADVISORY FEE. For the services rendered, the
facilities furnished and expenses assumed by the Manager, each Fund shall pay to
the Manager at the end of each calendar month a fee, commencing on the day
following effectiveness hereof, based upon the average daily value of the net
assets of such Fund, as determined and computed in accordance with the
description of the determination of net asset value contained in the relevant
Prospectus and Statement of Additional Information. The fee payable by each Fund
is set forth on Schedule A hereto.
If this Agreement becomes effective subsequent to the first day of a month
or shall terminate before the last day of a month, compensation for that part of
the month that this
3
Agreement is in effect shall be prorated in a manner consistent with the
calculation of the fee as set forth above. Subject to the provisions of
subsection (b) hereof, payment of the Manager's compensation for the preceding
month shall be made as promptly as possible after completion of the computations
contemplated by subsection (b) hereof. During any period when the determination
of net asset value is suspended by the Directors, the net asset value of a share
as of the last business day prior to such suspension shall for this purpose be
deemed to be the net asset value at the close of each succeeding business day
until it is again determined.
(b) EXPENSE LIMITATION. In the event the operating expenses of a Fund,
including amounts payable to the Manager pursuant to subsection (a) hereof, for
any fiscal year ending on a date on which this Agreement is in effect exceed the
expense limitations applicable to the Fund imposed by applicable state
securities laws or regulations thereunder, as such limitations may be raised or
lowered from time to time, the Manager shall reduce its management fee with
respect to such Fund by the extent of such excess and, if required pursuant to
any such laws or regulations, will reimburse such Fund in the amount of such
excess; provided, however, to the extent permitted by law, there shall be
excluded from such expenses the amount of any interest, taxes, brokerage fees
and commissions, distribution fees and extraordinary expenses (including but not
limited to legal claims and liabilities and litigation costs and any
indemnification related thereto) paid or payable by such Fund. Whenever the
expenses of a Fund exceed a pro rata portion of the applicable annual expense
limitations, the estimated amount of reimbursement under such limitations shall
be applicable as an offset against the monthly payment of the fee due to the
Manager with respect to such Fund. Should two or more such expense limitations
be applicable at the end of the last business day of the month, that expense
limitation which results in the largest reduction in the Manager's fee shall be
applicable.
ARTICLE IV
LIMITATION OF LIABILITY OF THE MANAGER
The Manager shall not be liable for any error of judgment or mistake of law
or for any loss arising out of any investment or for any act or omission in the
management of a Fund, except for willful misfeasance, bad faith or gross
negligence in the performance of its duties, or by reason of reckless disregard
of its obligations and duties hereunder. As used in this Article IV, the term
"Manager" shall include any directors, officers and employees of the Manager.
ARTICLE V
ACTIVITIES OF THE MANAGER
The services of the Manager to the Funds are not to be deemed exclusive,
and the Manager is free to render services to other investment advisory clients.
It is understood that Directors, officers, employees and shareholders of the
Corporation are or may become interested in the Manager, as directors, officers,
employees and shareholders or otherwise, and that directors, officers, employees
and shareholders of the Manager are or may become similarly interested in the
Corporation.
4
ARTICLE VI
DURATION AND TERMINATION OF THIS AGREEMENT
This Agreement shall become effective as of the date first above written
and shall remain in force with respect to each Fund until June 30, 2002, and
thereafter, but only so long as such continuance is specifically approved with
respect to each Fund at least annually by: (i) the Directors, or by the vote of
a majority of the outstanding voting securities of the Fund, and (ii) a majority
of those Directors who are not parties to this Agreement or interested persons
of any such party cast in person at a meeting called for the purpose of voting
on such approval.
This Agreement my be terminated at any time with respect to a Fund, without
the payment of any penalty, by the Directors or by the vote of a majority of the
outstanding voting securities of such Fund, or by the Manager, on sixty days'
written notice to the other party. This Agreement shall automatically terminate
in the event of its assignment.
ARTICLE VII
AMENDMENTS OF THIS AGREEMENT
With respect to a Fund, this Agreement may be amended by the parties only
if such amendment is specifically approved by: (i) the vote of a majority of
outstanding voting securities of such Fund, and (ii) a majority of those
Directors who are not parties to this Agreement or interested persons of any
such party cast in person at a meeting called for the purpose of voting on such
approval.
ARTICLE VIII
DEFINITIONS OF CERTAIN TERMS
The term "vote of a majority of the outstanding voting securities,"
"assignment," "affiliated person" and "interested person," when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act and the rules thereunder, subject, however, to such exemptions as
may be granted by the Securities and Exchange Commission under said Act.
ARTICLE IX
GOVERNING LAW
This Agreement shall be construed in accordance with laws of the State of
New York and the applicable provisions of the Investment Company Act. To the
extent that the applicable laws of the State of New York, or any of the
provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
5
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
HENNESSY MUTUAL FUNDS, INC.
By: /s/ Neil J. Hennessy
--------------------------------------------
Name: Neil J. Hennessy
Title: President
EDWARD J. HENNESSY, INCORPORATED
By: /s/ Neil J. Hennessy
-------------------------------------------
Name: Neil J. Hennessy
Title: President
6
Schedule A
Name of Fund Compensation
------------
(as a % of average daily net assets)
------------------------------------
Hennessy Cornerstone Value Fund 0.74%
Hennessy Cornerstone Growth Fund 0.74%
EX-10
4
sks3a.txt
EXHIBIT 10.2 - INVESTMENT ADVISORY AGREEMENT
Exhibit 10.2
INVESTMENT ADVISORY AGREEMENT
Agreement made this 1st day of July, 1998 between The Hennessy Funds, Inc.,
a Maryland corporation (the "Company"), and The Hennessy Management Co., L.P., a
California limited partnership (the "Adviser").
W I T N E S S E T H:
WHEREAS, the Company is registered with the Securities and Exchange
Commission under the Investment Company Act of 1940 (the "Act") as an open-end
management investment company consisting of two series, the Hennessy Balanced
Fund and the Hennessy Leveraged Dogs Fund; and
WHEREAS, the Company desires to retain the Adviser, which is an investment
adviser registered under the Investment Advisers Act of 1940, as the investment
adviser for the Hennessy Balanced Fund (the "Fund");
NOW, THEREFORE, the Company and the Adviser do mutually promise and agree
as follows:
1. Employment. The Company hereby employs the Adviser to manage the
investment and reinvestment of the assets of the Fund for the period and on the
terms set forth in this Agreement. The Adviser hereby accepts such employment
for the compensation herein provided and agrees during such period to render the
services and to assume the obligations herein set forth.
2. Authority of the Adviser. The Adviser shall supervise and manage the
investment portfolio of the Fund, and, subject to such policies as the board of
directors of the Company may determine, direct the purchase and sale of
investment securities in the day to day management of the Fund. The Adviser
shall for all purposes herein be deemed to be an independent contractor and
shall, unless otherwise expressly provided or authorized, have no authority to
act for or represent the Company or the Fund in any way or otherwise be deemed
an agent of the Company or the Fund. However, one or more limited partners of
the Adviser or one or more shareholders, officers, directors or employees of the
general partner of the Adviser may serve as directors and/or officers of the
Company, but without compensation or reimbursement of expenses for such services
from the Company. Nothing herein contained shall be deemed to require the
Company to take any action contrary to its Limited Partnership Agreement or
Certificate of Limited Partnership, as either document may be amended, restated
or supplemented from time to time, or any applicable statute or regulation, or
to relieve or deprive the board of directors of the Company of its
responsibility for and control of the affairs of the Fund.
3. Expenses. The Adviser, at its own expense and without reimbursement from
the Company or the Fund, shall furnish office space, and all necessary office
facilities,
equipment and executive personnel for managing the investments of
the Fund. The Adviser shall not be required to pay any expenses of the Fund
except as provided herein if the total expenses borne by the Fund, including the
Adviser's fee and the fees paid to the Fund's Administrator but excluding all
federal, state and local taxes, interest, brokerage commissions and
extraordinary items, in any year exceed that percentage of the average net
assets of the Fund for such year, as determined by valuations made as of the
close of each business day, which is the most restrictive percentage provided by
the state laws of the various states in which the Fund's shares are qualified
for sale or, if the states in which the Fund's shares are qualified for sale
impose no such restrictions, 3%. The expenses of the Fund's operations borne by
the Fund include by way of illustration and not limitation, directors fees paid
to those directors who are not officers of the Company or interested persons of
the Adviser, the costs of preparing and printing registration statements
required under the Securities Act of 1933 and the Act (and amendments thereto),
the expense of registering its shares with the Securities and Exchange
Commission and in the various states, the printing and distribution cost of
prospectuses mailed to existing shareholders, the cost of stock certificates (if
any), director and officer liability insurance, reports to shareholders, reports
to government authorities and proxy statements, interest charges, taxes, legal
expenses, salaries of administrative and clerical personnel, association
membership dues, auditing and accounting services, insurance premiums, brokerage
and other expenses connected with the execution of portfolio securities
transactions, fees and expenses of the custodian of the Fund's assets, expenses
of calculating the net asset value and repurchasing and redeeming shares,
printing and mailing expenses, charges and expenses of dividend disbursing
agents, registrars and stock transfer agents and the cost of keeping all
necessary shareholder records and accounts.
The Company shall monitor the expense ratio of the Fund on a monthly basis.
If the accrued amount of the expenses of the Fund exceeds the expense limitation
established herein, the Company shall create an account receivable from the
Adviser in the amount of such excess. In such a situation the monthly payment of
the Adviser's fee will be reduced by the amount of such excess, subject to
adjustment month by month during the balance of the Company's fiscal year if
accrued expenses thereafter fall below the expense limitation.
4. Compensation of the Adviser. For the services to be rendered by the
Adviser hereunder, the Company, through and on behalf of the Fund, shall pay to
the Adviser an advisory fee, paid monthly, based on the average net assets of
the Fund, as determined by valuations made as of the close of each business day
of the month. The monthly advisory fee shall be 1/12 of 0.60% (0.60% per annum)
of the average daily net assets of the Fund. For any month in which this
Agreement is not in effect for the entire month, such fee shall be reduced
proportionately on the basis of the number of calendar days during which it is
in effect and the fee computed upon the average daily net assets of the business
days during which it is so in effect.
5. Ownership of Shares of the Fund. The Adviser shall not take an ownership
position in the Fund, and shall not permit any of its partners or any of the
shareholders, officers, directors or employees of its general partner to take a
long or short position in the shares of the Fund, except for the purchase of
shares of the Fund for
investment purposes at the same price as that available to the public at the
time of purchase or in connection with the initial capitalization of the Fund.
6. Exclusivity. The services of the Adviser to the Fund hereunder are not
to be deemed exclusive and the Adviser shall be free to furnish similar services
to others as long as the services hereunder are not impaired thereby. Although
the Adviser has agreed to permit the Fund and the Company to use the name
"Hennessy", if they so desire, it is understood and agreed that the Adviser
reserves the right to use and to permit other persons, firms or corporations,
including investment companies, to use such name, and that the Fund and the
Company will not use such name if the Adviser ceases to be the Fund's sole
investment adviser. During the period that this Agreement is in effect, the
Adviser shall be the Fund's sole investment adviser.
7. Liability. In the absence of willful misfeasance, bad faith, gross
negligence or reckless disregard of obligations or duties hereunder on the part
of the Adviser, the Adviser shall not be subject to liability to the Fund or to
any shareholder of the Fund for any act or omission in the course of, or
connected with, rendering services hereunder, or for any losses that may be
sustained in the purchase, holding or sale of any security.
8. Brokerage Commissions. The Adviser, subject to the control and direction
of the Company's Board of Directors, shall have authority and discretion to
select brokers and dealers to execute portfolio transactions for the Fund and
for the selection of the markets on or in which the transactions will be
executed. The Adviser may cause the Fund to pay a broker-dealer which provides
brokerage and research services, as such services are defined in Section 28(e)
of the Securities Exchange Act of 1934 (the "Exchange Act"), to the Adviser a
commission for effecting a securities transaction in excess of the amount
another broker-dealer would have charged for effecting such transaction, if the
Adviser determines in good faith that such amount of commission is reasonable in
relation to the value of brokerage and research services provided by the
executing broker-dealer viewed in terms of either that particular transaction or
his overall responsibilities with respect to the accounts as to which he
exercises investment discretion (as defined in Section 3(a)(35) of the Exchange
Act). The Adviser shall provide such reports as the Company's Board of Directors
may reasonably request with respect to the Fund's total brokerage and the manner
in which that brokerage was allocated.
9. Code of Ethics. The Adviser has adopted a written code of ethics
complying with the requirements of Rule 17j-1 under the Act and has provided the
Company with a copy of the code of ethics and evidence of its adoption. Upon the
written request of the Company, the Adviser shall permit the Company to examine
any reports required to be made by the Adviser pursuant to Rule 17j-1(c)(1)
under the Act.
10. Amendments. This Agreement may be amended by the mutual consent of the
parties; provided, however, that in no event may it be amended without the
approval of the board of directors of the Company in the manner required by the
Act, and by the vote of the majority of the outstanding voting securities of the
Fund, as defined in the Act.
11. Termination. This Agreement may be terminated at any time, without the
payment of any penalty, by the board of directors of the Company or by a vote of
the majority of the outstanding voting securities of the Fund, as defined in the
Act, upon giving sixty (60) days' written notice to the Adviser. This Agreement
may be terminated by the Adviser at any time upon the giving of sixty (60) days'
written notice to the Company. This Agreement shall terminate automatically in
the event of its assignment (as defined in Section 2(a)(4) of the Act). Subject
to prior termination as hereinbefore provided, this Agreement shall continue in
effect for an initial period beginning as of the date hereof and ending June 30,
1999 and indefinitely thereafter, but only so long as the continuance after such
initial period is specifically approved annually by (i) the board of directors
of the Company or by the vote of the majority of the outstanding voting
securities of the Fund, as defined in the Act, and (ii) the board of directors
of the Company in the manner required by the Act, provided that any such
approval may be made effective not more than sixty (60) days thereafter.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the day first above written.
THE HENNESSY MANAGEMENT CO., L.P.
By: Edward J. Hennessy, Incorporated,
General Partner
By: /s/ Neil J. Hennessey
------------------------------
President
THE HENNESSY FUNDS, INC.
By: /s/ Neil J. Hennessy
-----------------------------------
President
EX-10
5
sks3b.txt
EXHIBIT 10.3 - INVESTMENT ADVISORY AGREEMENT
Exhibit 10.3
INVESTMENT ADVISORY AGREEMENT
Agreement made this 30th day of June, 1998 between The Hennessy Funds,
Inc., a Maryland corporation (the "Company"), and Hennessy Management Company 2,
L.P., a California limited partnership (the "Adviser").
W I T N E S S E T H:
WHEREAS, the Company is registered with the Securities and Exchange
Commission under the Investment Company Act of 1940 (the "Act") as an open-end
management investment company consisting of two series, the Hennessy Balanced
Fund and the Hennessy Leveraged Dogs Fund; and
WHEREAS, the Company desires to retain the Adviser, which is an investment
adviser registered under the Investment Advisers Act of 1940, as the investment
adviser for the Hennessy Leveraged Dogs Fund (the "Fund").
NOW, THEREFORE, the Company and the Adviser do mutually promise and agree
as follows:
1. Employment. The Company hereby employs the Adviser to manage the
investment and reinvestment of the assets of the Fund for the period and on the
terms set forth in this Agreement. The Adviser hereby accepts such employment
for the compensation herein provided and agrees during such period to render the
services and to assume the obligations herein set forth.
2. Authority of the Adviser. The Adviser shall supervise and manage the
investment portfolio of the Fund, and, subject to such policies as the board of
directors of the Company may determine, direct the purchase and sale of
investment securities in the day to day management of the Fund. The Adviser
shall for all purposes herein be deemed to be an independent contractor and
shall, unless otherwise expressly provided or authorized, have no authority to
act for or represent the Company or the Fund in any way or otherwise be deemed
an agent of the Company or the Fund. However, one or more limited partners of
the Adviser or one or more shareholders, officers, directors or employees of the
general partner of the Adviser may serve as directors and/or officers of the
Company, but without compensation or reimbursement of expenses for such services
from the Company. Nothing herein contained shall be deemed to require the
Company to take any action contrary to its Articles of Incorporation or Bylaws,
as either document may be amended, restated or supplemented from time to time,
or any applicable statute or regulation, or to relieve or deprive the board of
directors of the Company of its responsibility for and control of the affairs of
the Fund.
3. Expenses. The Adviser, at its own expense and without reimbursement from
the Company or the Fund, shall furnish office space, and all necessary office
facilities, equipment and executive personnel for managing the investments of
the Fund. The Adviser shall not be required to pay any expenses of the Fund
except as provided herein if the total
expenses borne by the Fund, including the Adviser's fee and the fees paid
to the Fund's Administrator but excluding all federal, state and local taxes,
interest, brokerage commissions and extraordinary items, in any year exceed that
percentage of the average net assets of the Fund for such year, as determined by
valuations made as of the close of each business day, which is the most
restrictive percentage provided by the state laws of the various states in which
the Fund's shares are qualified for sale or, if the states in which the Fund's
shares are qualified for sale impose no such restrictions, 3%. The expenses of
the Fund's operations borne by the Fund include by way of illustration and not
limitation, directors fees paid to those directors who are not officers of the
Company or interested persons of the Adviser, the costs of preparing and
printing registration statements required under the Securities Act of 1933 and
the Act (and amendments thereto), the expense of registering its shares with the
Securities and Exchange Commission and in the various states, the printing and
distribution cost of prospectuses mailed to existing shareholders, the cost of
stock certificates (if any), director and officer liability insurance, reports
to shareholders, reports to government authorities and proxy statements,
interest charges, taxes, legal expenses, salaries of administrative and clerical
personnel, association membership dues, auditing and accounting services,
insurance premiums, brokerage and other expenses connected with the execution of
portfolio securities transactions, fees and expenses of the custodian of the
Fund's assets, expenses of calculating the net asset value and repurchasing and
redeeming shares, printing and mailing expenses, charges and expenses of
dividend disbursing agents, registrars and stock transfer agents and the cost of
keeping all necessary shareholder records and accounts.
The Company shall monitor the expense ratio of the Fund on a monthly basis.
If the accrued amount of the expenses of the Fund exceeds the expense limitation
established herein, the Company shall create an account receivable from the
Adviser in the amount of such excess. In such a situation the monthly payment of
the Adviser's fee will be reduced by the amount of such excess, subject to
adjustment month by month during the balance of the Company's fiscal year if
accrued expenses thereafter fall below the expense limitation.
4. Compensation of the Adviser. For the services to be rendered by the
Adviser hereunder, the Company, through and on behalf of the Fund, shall pay to
the Adviser an advisory fee, paid monthly, based on the average net assets of
the Fund, as determined by valuations made as of the close of each business day
of the month. The monthly advisory fee shall be 1/12 of 0.60% (0.60% per annum)
on the average daily net assets of the Fund. For any month in which this
Agreement is not in effect for the entire month, such fee shall be reduced
proportionately on the basis of the number of calendar days during which it is
in effect and the fee computed upon the average daily net assets of the business
days during which it is so in effect.
5. Ownership of Shares of the Fund. The Adviser shall not take an ownership
position in the Fund, and shall not permit any of its partners or any of the
shareholders, officers, directors or employees of its general partner to take a
long or short position in the shares of the Fund, except for the purchase of
shares of the Fund for investment purposes at the same price as that available
to the public at the time of purchase or in connection with the initial
capitalization of the Fund.
-2-
6. Exclusivity. The services of the Adviser to the Fund hereunder are not
to be deemed exclusive and the Adviser shall be free to furnish similar services
to others as long as the services hereunder are not impaired thereby. Although
the Adviser has agreed to permit the Fund and the Company to use the name
"Hennessy", if they so desire, it is understood and agreed that the Adviser
reserves the right to use and to permit other persons, firms or corporations,
including investment companies, to use such name, and that the Fund and the
Company will not use such name if the Adviser ceases to be the Fund's sole
investment adviser. During the period that this Agreement is in effect, the
Adviser shall be the Fund's sole investment adviser.
7. Liability. In the absence of willful misfeasance, bad faith, gross
negligence or reckless disregard of obligations or duties hereunder on the part
of the Adviser, the Adviser shall not be subject to liability to the Fund or to
any shareholder of the Fund for any act or omission in the course of, or
connected with, rendering services hereunder, or for any losses that may be
sustained in the purchase, holding or sale of any security.
8. Brokerage Commissions. The Adviser, subject to the control and direction
of the Company's Board of Directors, shall have authority and discretion to
select brokers and dealers to execute portfolio transactions for the Fund and
for the selection of the markets on or in which the transactions will be
executed. The Adviser may cause the Fund to pay a broker-dealer which provides
brokerage and research services, as such services are defined in Section 28(e)
of the Securities Exchange Act of 1934 (the "Exchange Act"), to the Adviser a
commission for effecting a securities transaction in excess of the amount
another broker-dealer would have charged for effecting such transaction, if the
Adviser determines in good faith that such amount of commission is reasonable in
relation to the value of brokerage and research services provided by the
executing broker-dealer viewed in terms of either that particular transaction or
his overall responsibilities with respect to the accounts as to which he
exercises investment discretion (as defined in Section 3(a)(35) of the Exchange
Act). The Adviser shall provide such reports as the Company's Board of Directors
may reasonable request with respect to the Fund's total brokerage and the manner
in which that brokerage was allocated.
9. Code of Ethics. The Adviser has adopted a written code of ethics
complying with the requirements of Rule 17j-1 under the Act and has provided the
Company with a copy of the code of ethics and evidence of its adoption. Upon the
written request of the Company, the Adviser shall permit the Company to examine
any reports required to be made by the Adviser pursuant to Rule 17j-1(c)(1)
under the Act.
10. Amendments. This Agreement may be amended by the mutual consent of the
parties; provided, however, that ------------------- in no event may it be
amended without the approval of the board of directors of the Company in the
manner required by the Act, and by the vote of the majority of the outstanding
voting securities of the Fund, as defined in the Act.
11. Termination. This Agreement may be terminated at any time, without the
payment of any penalty, by the board of directors of the Company or by a vote of
the
-3-
majority of the outstanding voting securities of the Fund, as defined in the
Act, upon giving sixty (60) days' written notice to the Adviser. This Agreement
may be terminated by the Adviser at any time upon the giving of sixty (60) days'
written notice to the Company. This Agreement shall terminate automatically in
the event of its assignment (as defined in Section 2(a)(4) of the Act). Subject
to prior termination as hereinbefore provided, this Agreement shall continue in
effect for an initial period beginning as of the date hereof and ending June 30,
2000 and indefinitely thereafter, but only so long as the continuance after such
initial period is specifically approved annually by (i) the board of directors
of the Company or by the vote of the majority of the outstanding voting
securities of the Fund, as defined in the Act, and (ii) the board of directors
of the Company in the manner required by the Act, provided that any such
approval may be made effective not more than sixty (60) days thereafter.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the day first above written.
HENNESSY MANAGEMENT COMPANY 2, L.P.
By: Edward J. Hennessy, Incorporated,
General Partner
By: /s/ Neil J. Hennessy
--------------------------------------
President
THE HENNESSY FUNDS, INC.
By: /s/ Neil J. Hennessy
-------------------------------------------
President
EX-23
6
dkm72a.txt
EXHIBIT 23.2 - CONSENT OF KPMG LLP
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Hennessy Advisors, Inc.
We consent to the use of our report dated July 30, 2001, except as to note 1(e)
which is dated as of September 21, 2001, included herein and to the references
to our firm under the headings "Experts" and "Changes in Accountants" in the
prospectus.
/s/ KPMG LLP
San Francisco, California
October 10, 2001
EX-23
7
dkm72b.txt
EXHIBIT 23.3 - CONSENT OF BREGANTE & CO. LLP
Exhibit 23.3
BREGANTE + COMPANY LLP
CERTIFIED PUBLIC ACCOUNTANTS
55 Hawthorne Street 330 Ignacio Boulevard
Suite 910 Suite 201
San Francisco, CA 94105-3914 Novato, CA 94949-6036
(415) 777-1001 Tel Tel (415) 883-4262
(415) 546-9745 Fax Fax (415) 883-4290
Board of Directors
Hennessy Advisors, Inc. (formerly Edward J. Hennessy Incorporated)
We consent to the use of our report included herein and to the reference to our
firm under the headings "EXPERTS" and "CHANGES IN ACCOUNTANTS" in the
prospectus.
/s/ Bregante & Company LLP
October 10, 2001
San Francisco, California