HNNA

Hennessy Advisors Inc. 10-K Summary (Fiscal Year Ended Sept 30, 2009)

Business Context and Reporting Period

Company: Hennessy Advisors, Inc.
Filing Type: Form 10-K (Annual Report)
Period: Fiscal year ended September 30, 2009
Business Overview: A publicly traded investment management firm managing ten open-end mutual funds (the "Hennessy Funds") and one private pooled fund. The firm utilizes quantitative strategies for its "Cornerstone Series" and employs seasoned sub-advisors for its "Select Series." As of September 30, 2009, total assets under management (AUM) were $923 million.

Key Financial Metrics

Profitability: The company reported a net loss of $195,000 for the fiscal year, a reversal from the $1.6 million net income in the prior year. Operating expenses ($6.0 million) exceeded total revenue ($5.8 million), resulting in an operating loss.

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased 43.4% to $5.8 million. This was driven by a significant drop in average daily net assets due to market depreciation and net fund outflows, despite year-end AUM increasing to $923 million from $876 million.
• Expense Structure: While total operating expenses decreased 20.4% to $6.0 million, they rose as a percentage of revenue from 73.4% to 103.3%. Compensation and benefits remained relatively flat ($3.0 million) but increased as a percentage of revenue due to the revenue drop.
• Debt Reduction: The company significantly reduced its debt load. Long-term debt was eliminated, with only $1.95 million remaining as current portion of long-term debt, down from $6.5 million in total debt the prior year. Principal payments of $4.6 million were made during the year.
• Acquisitions: The firm acquired management agreements for four new funds (Tamarack Funds and SPARX Funds) in 2009, adding $232.5 million in assets, funded by existing cash rather than new debt.

Outlook, Risks, and Management Commentary

Management Commentary: Management attributes the revenue decline to market volatility and redemptions, noting that average daily net assets hit a low of $475 million in March 2009. The company continues to pursue growth through organic inflows, marketing its quantitative strategies, and selective acquisitions of management agreements.

Risks and Contingencies:

• Market Risk: Revenue is directly tied to the market value of AUM. A 10% decrease in equity prices would reduce estimated annual revenue by approximately $786,000.
• Key Person Risk: The business is heavily dependent on Neil J. Hennessy (Chairman, CEO, CIO).
• Contract Renewal: Management and shareholder servicing agreements are terminable on 60 days' notice and require annual renewal by fund boards.
• Intangible Asset Impairment: Management contracts (valued at $22.2 million) are indefinite-life intangible assets. While not impaired as of year-end, future declines in AUM could trigger impairment charges.
• Loan Covenants: The bank waived a default regarding financial ratios for the quarter ended September 30, 2009, but the company remains subject to strict covenants.

Investor Verification Checklist

• Revenue Sensitivity: Verify the correlation between market performance and the company's revenue stability, given the 43% revenue drop.
• Debt Servicing: Confirm the ability to service the remaining $1.95 million bank loan (due Sept 30, 2010) given the current operating loss.
• Asset Retention: Monitor redemption rates, particularly from mutual fund supermarkets which hold 52% of AUM and are noted as having higher redemption risk.
• Intangible Assets: Review the valuation methodology for the $22.2 million in management contracts to assess impairment risk if AUM declines further.
• Acquisition Integration: Assess the performance and retention of assets in the newly acquired Tamarack and SPARX funds.