As filed with the Securities and Exchange Commission on August 6, 2001
Registration No. 333-______
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
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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. |_|
(1) In accordance with Rule 457(o) under the Securities Act of 1933, the number of shares of common stock being registered and the proposed maximum offering price per share are not included in this table. The proposed maximum aggregate offering price is estimated solely for the purpose of calculating the registration fee pursuant to Section 6(b) and Rule 457(o) of the Securities Act of 1933.
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 August ___, 2001.
450,000 Shares Minimum
1,000,000 Shares Maximum
[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 a selling shareholder, all of the 1,000,000 shares of common stock are being sold by Hennessy Advisors.
We expect to close this offering once we have received commitments to purchase 450,000 shares, and may hold additional closings for up to 550,000 more shares during the 90 days from the date of this prospectus unless extended. 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. If we have not received commitments to purchase 450,000 shares by December 31, 2001, we may extend the offering for up to 90 days. Until the initial closing, funds will be held in escrow by WestAmerica Bank. If the offering terminates before we receive commitments to purchase 450,000 shares, all funds will be returned to purchasers without interest. Our selling shareholder will be entitled to sell up to 10% of the shares we sell in any closing of this offering, including the closing of the minimum offering.
Hennessy Advisors, through its officers, will sell these shares without employing underwriters or other sales agents.
Prior to this offering, there has been no public market for the common stock. It is currently estimated that 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.
Minimum Maximum
Per Share Total Total
--------- ----- -----
Initial public offering price .................................... $ 10.00 $ 4,500,000 $ 10,000,000
Proceeds, before expenses, to Hennessy Advisors................... $ 10.00 $ 4,050,000 $ 9,000,000
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Because the offering will be made by officers of Hennessy Advisors, no underwriting discounts or commissions will be paid.
Prospectus dated ____________, 2001
In this prospectus, "Hennessy," "we," "us," and "our" refer to Hennessy Advisors, Inc. Our executive offices are located at The Courtyard Square, 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.
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.
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 and invest primarily through formula based investment strategies. As of March 31, 2001, we managed approximately $208 million in total assets, of which approximately $188 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.
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 manage. We also apply formula-based 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 18.
The Offering
Unless noted otherwise, information in this prospectus is based on 760,860 shares outstanding as of March, 31, 2001 and giving effect to the conversion of 200,000 shares of Hennessy Advisors convertible preferred shares to common shares which occurred in June 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, and (ii) the issuance of 93,240 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.
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.......................... 1,953,920 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.
4
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Conditions to closing........................................... We will not close this offering if we do
not receive subscriptions to purchase at
least the minimum offering amount.
Escrow period................................................... Up to 90 days from the date of this
prospectus.
Extension of escrow period...................................... We may extend the escrow period for up to
an additional 90 days.
Extension of offering period.................................... We may continue to sell shares after
breaking escrow.
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.................................................... WestAmerica Bank will serve as escrow
agent for the subscription funds pending
the closing of the minimum offering.
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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. As of March 31, 2001, approximately 90% of our assets under management were invested in equity portfolios. 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 Dog 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 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 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. During the fiscal year 2000, and the six months ended March 31, 2001, The Hennessy Management Co. 2, L.P., the investment advisor to the Hennessy Leveraged Dogs Fund waived fees for the Hennessy Leveraged Dogs Fund of $80,726 and $45,726, respectively.
We are dependent on our information systems.
We operate in an industry that is highly dependent on information systems and technology. We outsource a significant portion of our information systems operations to third parties who are responsible for providing the management, maintenance and updating of these systems. There can be no assurance, however, that our information systems and technology will accommodate our growth or that the cost of these outsourcing arrangements will not increase. A failure to accommodate growth or an increase in the cost of these information systems could have a material adverse effect on us.
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 inability to meet cash needs could have a negative effect on our financial condition and business operations.
Our ability to meet anticipated cash needs depends upon factors including our asset value, our creditworthiness as perceived by lenders and the market value of our stock. We will still owe significant debt if we only sell the minimum offering amount, since we will have insufficient proceeds to pay off our debt entirely. If we are unable, for any reason, to obtain funds we need to meet our cash requirements, we may be forced to incur additional indebtedness or raise additional equity capital.
We face increased competition in hiring and retaining qualified employees.
Our continued success will depend upon our ability to attract and retain qualified personnel. Competition to hire these employees has increased. We may be forced to offer compensation and benefits to these employees at a level that exceeds inflation. With historically low unemployment in the United States, qualified personnel are now moving between firms and starting their own companies with greater frequency. If we are not able to attract and retain qualified employees, our overall business condition and revenues could suffer.
Our officers and directors own enough of our shares to significantly influence our company, which will limit your ability to influence corporate matters.
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 1,053,920 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 $827,548 for the six months ended March 31, 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 current size of Hennessy or a public company. We cannot assure you that our historical rate of growth will continue.
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. 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 arbitrarily.
There is no relationship between the price of these shares and any standard or accepted method of valuation. The offering price bears no relationship to our assets, sales, book value, or other generally accepted criteria of value.
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 $5.02 per share in the net book value of the common stock from the initial public offering price of $10.00 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.
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 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.
As Adjusted
-----------------------------------
Actual(1) Minimum(2) Maximum(2)
--------- ---------- ----------
Cash...................................................... $ 11,186 $ 11,186 $ 4,632,036
============ ============= =============
Short-Term Payables....................................... $ 142,516 $ 142,516 $ -
============ ============= =============
Long-Term Debt............................................ $ 3,946,634 $ 186,634 $ -
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, 1,458,920 and 1,953,920 shares issued and
outstanding, as adjusted, 487,840 5,220,240 10,170,240
respectively.........................................
Additional paid-in capital............................. 24,008 24,008 24,008
Accumulated deficit.................................... (457,544) (468,753) (468,753)
Total Capitalization................................... $ 4,040,938 $ 4,962,129 $ 9,725,495
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(1) Adjusted to reflect the conversion of 200,000 shares of convertible preferred stock into 200,000 shares of common stock which occurred in June 2001.
(2) Adjusted to reflect the issuance of 93,240 shares of common stock issuable to limited partners in the merger of our limited partnerships and retirement of adjustable rate preferred stock, as if each had occurred on March 31, 2001.
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 $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 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.
As of March 31, 2001, amounts owed to Netfolio were $1,849,709. We will issue a subordinated promissory note to Netfolio dated as of June 30, 2001 for this amount. The note will be payable in 60 equal monthly installments, together with interest at Firstar Bank's prime rate and will be subordinated to our debt to Firstar Bank. If we cannot make a payment to Netfolio on its subordinated note because of the Firstar subordination provisions, interest on the subordinated note will accrue at 18% per annum.
As of March 31, 2001, the debt to Firstar Bank incurred in connection with prior payments to Netfolio had an outstanding balance of $2,096,925 (which accrues interest at Firstar Bank prime rate) and matures on April 10, 2005.
If we sell only the minimum offering amount, the net proceeds will be applied to repay the April 10, 2005 note to Firstar Bank in full and, upon board approval, to repay a portion of the June 30, 2006 note to Netfolio. If we sell the maximum offering amount, we may repay the Netfolio debt in its entirety upon board approval.
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.
Mr. Hennessy is currently our 67.53% shareholder, owning 711,680 shares of common stock. Assuming the sale of 100,000 shares by Mr. Hennessy, Mr. Hennessy will be our 31.31% 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 tangible book value per share by calculating the total assets (excluding assets attributable to adjustable rate preferred stockholders and investments in limited partnerships which will be liquidated upon the merger of the partnerships) 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 share to new investors. The following table illustrates this per share dilution on a pro forma basis as of March 31, 2001:
Maximum Minimum
Offering(1) Offering(1)
----------- -----------
Initial public offering price per share......................................... $ 10.00 $ 10.00
Pro forma net tangible book value per share at March 31,2001 ................ 0.04 0.04
Increase per share attributable to new investors............................. 4.94 3.23
Pro forma net tangible book value per share after this offering................. 4.98 3.27
Dilution per share to new investors............................................. 5.02 6.73
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The following table summarizes on a pro forma basis, as of March 31, 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 49.17% $ 511,848 4.90% $ 0.53
New investors........................ 993,240 50.83% 9,932,400 95.10% $ 10.00
--------- ------- ----------- -------
Totals.................. 1,953,920 100.00% $ 10,444,248 100.00%
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(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 93,240 shares in connection with the merger of our limited partnerships.
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 $208 million, $256 million and $45 million as of March 31, 2001, September 30, 2000 and September 30, 1999, respectively. Approximately 89.8% of Hennessy's total revenues were attributable to the four Hennessy mutual funds for the six months ended March 31, 2001. On June 30, 2000, our assets under management increased by approximately $197 million as the result of entering into investment advisory agreements 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.
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 investment advisory agreements with the Cornerstone Funds. We are amortizing the capitalized cost of these agreements over 15 years, resulting in a carrying value of $3,981,298 at March 31, 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.
Six Months Ended March 31,
2001 2000
Percentage of Percentage of
Amounts Total Revenue Amounts Total Revenue
------- ------------- ------- -------------
REVENUE:
Advisor fees $ 742,608 89.74% $ 86,905 57.31
Expert witness fees $ 83,705 10.11% $ 54,238 35.77%
Commissions $ 0 0.00% $ 9,214 6.08%
Other income $ 1,235 .15% $ 1,275 .84%
Total Revenue $ 827,548 100.00% $ 151,632 100.00%
OPERATING EXPENSES:
Employee compensation and
benefits $ 314,699 38.03% $ 117,030 77.18%
General and administrative $ 106,122 12.82% $ 50,630 33.39%
Mutual fund distribution
expenses $ 84,384 10.20% $ 7,685 5.07%
Amortization and depreciation $ 147,142 17.78% $ 4,655 3.07%
Interest $ 92,636 11.19% $ 919 0.60%
Total operating expenses $ 744,983 90.02% $ 180,919 119.31%
Income (loss) before income
taxes $ 82,565 9.98% $ (29,287) (19.31%)
Income taxes $ 400 0.05% $ 400 0.26%
Net income (loss) $ 82,165 9.93% $ (29,687) (19.57%)
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 .34% $ 0 0.00%
Total Revenue $ 663,367 100.00% $ 314,902 100.00%
OPERATING EXPENSES:
Employee compensation and
benefits $ 320,693 48.34% $ 187,309 59.48%
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%
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Year Ended September 30,
2000 1999
Percentage of Percentage of
Amounts Total Revenue Amounts Total Revenue
Income (loss) before income
taxes $ (40,576) -6.12% $ 4,397 1.40%
Income taxes $ 800 0.12% $ 800 0.25%
Net income (loss) $ (41,376) -6.24% $ 3,597 1.15%
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Six Months Ended March 31, 2001 Compared to Six Months Ended March 31, 2000
Total revenue increased by $675,916 or 445.8% in the six months ended March 31, 2001 from $151,632 in the same period of 2000. Advisory fee revenue increased by $655,703 or 754.5% in the six months ended March 31, 2001 from $86,905 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 increased by $29,467 or 54.3% from $54,238 in the six months ended March 31, 2000 to $83,705 in the same period of 2001 as a result of the company changing its policy toward Mr. Hennessy's expert witness income. 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.
Total expense increased $564,064, or 311.8%, in the six months ended March 31, 2001 from $180,919 in the same period of 2000 due to an increase in interest expense, depreciation, distribution expenses, employee compensation and general and administrative costs. As a percent of total revenue, total expense decreased to 90.0% in the six months ended March 31, 2001 compared to 119.3% in the prior comparable period due to an increase in revenue from assets under management.
Compensation and benefits expense increased by $197,669, or 168.9%, to $314,699 for the six months ended March 31, 2001 from $117,030 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 38.0% in the six months ended March 31, 2001 compared to 77.2% in the prior comparable period.
General and administrative expense increased by $55,492, or 109.6%, to $106,122 in the six months ended March 31, 2001 from $50,630 in the six months ended March 31, 2000 due to an increase in total managed assets and an increase in overall business.. As a percentage of total revenue, general and administrative expense decreased to 12.8% in the six months ended March 31, 2001 from 33.4% in the prior comparable period.
Expense for amortization and depreciation increased by $142,487, or 3,060.9%, to $147,142 in the six months ended March 31, 2001 from $4,655 in the six months ended March 31, 2000 due to amortization expense associated with the investment advisory agreements 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 $91,717, or 9,980.1%, to $92,636 in the six months ended March 31, 2001 from $919 in the six months ended March 31, 2000. This increase is due to interest costs associated with financing to license the automated trading strategies from Netfolio. For the six months ended March 31, 2001, the average amount borrowed was $1,006,913 with an average interest rate of 9.2%.
Mutual fund distribution expenses increased $76,699, or 998.0%, to $84,384 in the six months ended March 31, 2001 from $7,685 in the six months ended March 31, 2000 due to the costs of the "no transaction fee" programs through which our mutual fund shares are distributed.
Our income tax expense remained the same for the six months ended March 31, 2001, compared to the prior period and represents California state franchise taxes. We recorded no income tax expense during the first six months ended March 31, 2001 or 2000 due to a tax loss carry forward from prior years.
Net income increased by $111,852, or 376.8%, to $82,165 in the six months ended March 31, 2001 compared to a loss of $29,687 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 our entering into of the investment advisory agreements 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.
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 due to an increase in employee compensation, interest expense, mutual fund distribution fees and amortization and depreciation. 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.
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 to total managed assets and an increase in overall 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 investment advisory agreements for the Hennessy Cornerstone funds. Interest expense increased from $0 in fiscal 1999 to $71,510 in fiscal 2000 as a result of borrowings incurred to finance the license payments for the automated investment trading strategies from Netfolio.
Interest expense was $71,510 for the year ended September 30, 2000. During that period the average amount borrowed was $751,327 and the average interest rate paid was 9.3%. We did not incur any interest expense for the year ended September 30, 1999.
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.
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. We have sufficient cash flow from operations to meet our current obligations.
Our outstanding bank debt as of September 30, 2000 and March 31, 2001 was $2,310,897 and $2,096,925, respectively. We will use the net proceeds from this offering to repay all of this debt. As of March 31, 2001, the debt incurred with Firstar Bank in connection with prior payments to Netfolio had an outstanding balance of $2,096,965 and matures on April 10, 2005. This loan accrues interest at the Firstar Bank prime rate.
We also expect to use the net proceeds of the offering to pay amounts owed in connection 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 March 31, 2001 amounts owed to Netfolio were $1,849,709. We will issue a subordinated promissory note to Netfolio dated as of June 30, 2001 for this amount. The note will be payable in 60 equal monthly installments, together with interest at Firstar Bank's prime rate and will be subordinated to our debt to Firstar Bank. If we cannot make a payment to Netfolio on its subordinated note because of the Firstar subordination provisions, interest on the subordinated note will accrue at 18% per annum.
If we sell only the minimum-offering amount, the net proceeds will be applied to repay in full the note to Firstar Bank due April 10, 2005 and, upon board approval, to repay a portion of the amounts owed Netfolio due June 30, 2006. If we sell the maximum offering amount, we may repay the Netfolio debt in its entirety, if approved by our board of directors.
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 March 31, 2001 we had approximately $208 million in total assets under management, of which approximately $188 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 an 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. At that time, shareholders of these funds approved Hennessy Advisors as the funds' manager. 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.
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. 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 93,240 shares of common stock in exchange for their partnership interests in the merger. Our revenues will not increase materially as a result of the merger.
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. This is achieved through the use of leverage (borrowed money) so 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.
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 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 $188 million of assets under management in the mutual funds as of March 31, 2001, approximately 43.3% 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. The value of the research received is approximately $60,000 per annum.
Employees
As of March 31, 2001, we had 8 employees, 6 of whom were full-time employees.
Properties
As of March 31, 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.
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, advisory 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
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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.
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 29, 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.
Jeffrey Colella, age 31, is currently vice president of 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..............
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(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. 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 March 31, 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 $10.00, 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 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.
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 1,053,920 shares outstanding as of March 31, 2001, including 93,240 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 67.52% 31.31%(2)
Teresa M. Nilsen........................ 20,000 1.89% 1.02%
Brian A. Hennessy(1).................... 55,000 5.22% 2.81%
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 75.71% 35.75%
Five Percent Stockholders
Helen Hennessy(1)....................... 55,000 5.22% 2.81%
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(1) The address for Neil J. Hennessy, Brian A. Hennessy and Helen Hennessy
is 750 Grant Avenue, Suite 100, Novato, California 94945.
(2) Assumes the sale by Mr. Hennessy of 100,000 shares in this offering.
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 March 31, 2001, there were 760,680 shares of common stock outstanding that were held of record by two stockholders. Based upon the number of shares outstanding as of March 31, 2001, and giving effect to 200,000 shares issued upon conversion of our convertible preferred stock which occurred in June 2001, the 93,240 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 1,953,920 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 March 31, 2001, there were 1,600 shares of adjustable rate preferred stock outstanding, which will be redeemed out of the proceeds of the offering and 200,000 shares of convertible preferred stock which were converted to common stock in June 2001. 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 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.
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 1,953,920 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 1,053,520 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) 93,240 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 960,280 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 19,539 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.
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. 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, if the minimum offering amount is not sold, 90 days after the date of this prospectus, unless we extend the offering for one or more periods not to exceed an additional 90 days in the aggregate. All proceeds from subscriptions will be deposited promptly into an escrow account with WestAmerica Bank 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. Because our selling shareholder may elect to sell up to 10% of the shares we sell in any offering, 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 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.
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 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
In June 2001, in preparation for our initial public offering, we engaged KPMG LLP as our auditors. The board of directors approved the engagement because of KPMG LLP's extensive experience in auditing public companies. Prior to the engagement of KPMG LLP, our financial statements were audited by Bregante & Co., LLP. 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.
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 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.
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 in a non-interest bearing account 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 under- signed understands that if this event has not occurred by December 31 (or 90 days thereafter, if the Company exercises its right to extend the termination date 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 ($10.00 per share) $_________
Exact name or names (registration) investor desires on record:
Executed this ____ day of _____________, 2001, at _______________, _________.
(City) (State)
Accepted this ___ day of ____________, 2001.
HENNESSY ADVISORS, INC.
By:______________________________________________
Neil J. Hennessy, President, Chief Executive Officer and Chairman of the Board
Index to Financial Statements
Reports of Independent Public Auditors................................. F-2 Balance Sheets as of September 30, 2000 and March 31, 2001 (unaudited). F-4 Statements of Operations for the Years ended September 30, 1999 and September 30, 2000 and for the Six Months ended March 31, 2000 (unaudited) and March 31, 2001 (unaudited).......................... F-5 Statements of Changes in Stockholders' Equity for the Years Ended September 30, 1999 and September 30, 2000 and the Six Months Ended March 31, 2001 (unaudited)........................................... F-6 Statements of Cash Flows for the Years ended September 30, 1999 and September 30, 2000 and for the Six Months ended March 31, 2000 (unaudited) and March 31, 2001 (unaudited)..................... F-7 Notes to Financial Statements.......................................... F-8 |
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.
July 30, 2001
San Francisco, California
BREGANTE & CO., LLP
Board of Directors
Edward J. Hennessy, Incorporated
We have audited the accompanying statements of operations, changes in stockholders' equity and cash flows of 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 Edward J. Hennessy, Incorporated's operations, changes in stockholders' equity and cash flows for the year ended September 30, 1999, in conformity with generally accepted accounting principles.
December 6, 1999
San Francisco, California
HENNESSY ADVISORS, INC.
Balance Sheets
Assets September 30, March 31,
2000 2001
------------------- -----------------
(unaudited)
Cash $ 5,650 $ 11,186
Investments in marketable securities, at fair value 4,031 4,303
Investments in limited partnerships 11,209 11,209
Investment advisory fees receivable 127,297 119,070
Expert witness fees receivable 21,993 --
Management contracts acquired, net of accumulated amortization of $69,847
and $209,542 at September 30, 2000 and March 31, 2001, respectively 4,120,993 3,981,298
Property and equipment, net of accumulated depreciation of $15,272
and $22,719 at September 30, 2000 and March 31, 2001, respectively 57,233 51,755
Other assets 23,917 4,633
------------------- -----------------
Total assets $ 4,372,323 $ 4,183,454
=================== =================
Liabilities and Stockholders' Equity
Accrued liabilities and accounts payable $ 165,060 $ 116,660
Payable for management contracts acquired 1,849,709 1,849,709
Due to affiliate 34,518 25,856
Note payable 2,310,897 2,096,925
------------------- -----------------
Total liabilities 4,360,184 4,089,150
------------------- -----------------
Stockholders' equity:
Convertible preferred stock, $1 stated value; 300,000 shares
authorized; 200,000 shares issued and outstanding 200,000 200,000
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 shares issued and outstanding 287,840 287,840
Additional paid-in capital 24,008 24,008
Accumulated deficit (539,709) (457,544)
------------------- -----------------
Total stockholders' equity 12,139 94,304
------------------- -----------------
Commitments
Total liabilities and stockholders' equity $ 4,372,323 $ 4,183,454
=================== =================
|
See accompanying notes to financial statements.
HENNESSY ADVISORS, INC.
Statements of Operations
Years ended September 30, Six-Months Ended March 31,
2000 1999 2001 2000
------------- ------------- ------------- -------------
(unaudited)
Income:
Investment advisory fees $ 511,786 193,377 $ 742,608 86,905
Expert witness fees 138,500 70,253 83,705 54,238
Commissions 10,804 51,272 -- 9,214
Other income 2,277 -- 1,235 1,275
------------- ------------- ------------- -------------
Total income 663,367 314,902 827,548 151,632
------------- ------------- ------------- -------------
Expenses:
Compensation and benefits 320,693 187,309 314,699 117,030
General and administrative 172,722 102,888 106,122 50,630
Mutual fund distribution expenses 47,506 -- 84,384 --
Commissions and floor brokerage 12,354 16,267 -- 7,685
Amortization and depreciation 79,158 4,041 147,142 4,655
Interest 71,510 -- 92,636 919
------------- ------------- ------------- -------------
Total expenses 703,943 310,505 744,983 180,919
------------- ------------- ------------- -------------
Earnings before income tax expense (40,576) 4,397 82,565 (29,287)
Income tax expense 800 800 400 400
------------- ------------- ------------- -------------
Net earnings (loss) $ (41,376) 3,597 $ 82,165 (29,687)
============= ============= ============= =============
Earnings (loss) per share-Basic $ (0.05) -- 0.11 (0.04)
============= ============= ============= =============
Earnings (loss) per share-Diluted $ (0.05) -- 0.09 (0.04)
============= ============= ============= =============
|
See accompanying notes to financial statements.
HENNESSY ADVISORS, INC.
Statements of Changes in Stockholders' Equity
Years Ended September 30, 2000 and 1999 and the Six-Months Ended March 31, 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
Net earnings for the six months ended
March 31, 2001 (unaudited) -- -- -- -- 82,165 82,165
------------ ------------ ------------ ------------ ------------ -------------
Balances at March 31, 2000 $ 200,000 40,000 287,840 24,008 (457,544) 94,304
(unaudited) ============ ============ ============ ============ ============ =============
|
See accompanying notes to financial statements.
HENNESSY ADVISORS, INC.
Statements of Cash Flows
Years Ended September 30, Six Months Ended March 31,
2000 1999 2001 2000
-------------- ------------- ------------- -------------
(unaudited)
Cash flows from operating activities:
Net earnings (loss) $ (41,376) 3,597 82,165 (29,687)
Adjustments to reconcile net earnings (loss)
to net cash provided by operating activities:
Depreciation and amortization 79,158 4,041 147,142 4,655
Unrealized net losses (gains) on marketable
securities 548 (472) (152) (252)
(Increase) decrease in operating assets
Investment advisory fees receivable (119,770) (5,014) 8,227 6,307
Expert witness fees receivable (21,993) -- 21,993 --
Other assets (11,432) 12,256 19,284 (2,394)
Decrease (increase) in operating liabilities
Due to/from affiliate 18,182 -- 1,338 16,344
Accrued liabilities and accounts payable 157,039 (13,033) (48,400) 1,339
-------------- ------------- ------------- -------------
Net cash provided by (used in) operating
activities 60,356 1,375 231,597 (3,688)
-------------- ------------- ------------- -------------
Cash flows from investing activities:
Management contracts acquired (2,341,131) -- -- --
Purchases of property and equipment (59,767) (1,229) (1,969) (35,215)
Purchases of investments (332) (5,774) (120) (25)
Sales of investments -- 3,996 -- --
-------------- ------------- ------------- -------------
Net cash used in investing activities (2,401,230) (3,007) (2,089) (35,240)
-------------- ------------- ------------- -------------
Cash flows provided by (used in) financing activities
Proceeds lent from affiliate 36,761 -- -- 36,761
Repayment of amounts due to affiliate (5,000) -- (10,000) --
Proceeds from note payable 2,310,897 -- (213,972) --
-------------- ------------- ------------- -------------
Net cash provided by (used in)
financing activities 2,342,658 -- (223,972) 36,761
Net increase (decrease) in cash and cash equivalents 1,784 (1,632) 5,536 (2,167)
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 11,186 1,699
============== ============= ============= =============
Supplemental disclosures of cash flow information:
Cash paid during the year:
Income taxes $ 800 1,600 -- 400
============== ============= ============= =============
Interest $ 56,556 -- 91,298 919
============== ============= ============= =============
|
See accompanying notes to financial statements.
HENNESSY ADVISORS, INC.
Notes to Financial Statements
September 30, 2000 and March 31, 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 limited partnerships are carried at cost, as adjusted for the Company's equity in the operations of the partnerships.
(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 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. If payments are not made to Netfolio, Inc. when due because of the Firstar Bank note payable subordination provisions, then interest will be charged at an annual rate of 18%.
Management contracts acquired reflect the consideration paid on June 30, 2000, associated costs incurred with the acquisition, and management's estimate of the additional consideration to be remitted on June 30, 2001 in the form of a promissory note. As of September 30, 2000, management had estimated the additional consideration to be $1,849,709. The total acquisition costs capitalized are being amortized on a straight-line basis over a period of 15 years. 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.
(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.
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.
(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:
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 carry- forwards 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 six months ended March 31, 2001 and 2000, respectively. For the year ended September 30, 2000 and the six months ended March 31, 2000 the convertible preferred stock is not considered to be a common stock equivalent as its impact is anti-dilutive.
Year ended Six Months ended
September 30, March 31,
--------------------------- ---------------------------
2000 1999 2001 2000
----------- ----------- ----------- ----------
(unaudited)
Weighted average common stock
outstanding 760,680 760,680 760,680 760,680
Common stock equivalents
Convertible preferred stock -- 200,000 200,000 --
----------- ----------- ----------- ----------
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) 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 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.
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 12). 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.
(12) Subsequent Events
In June 2001, the 200,000 shares of the Company's convertible preferred stock were converted into shares of common stock.
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 up to 93,240 shares of the Company's common stock in exchange for their partnership interests.
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.
Until ________, 200__, all dealers that effect transactions in these securities, 450,000 Shares Minimum whether or not participating in this offering, may be required to deliver a 1,000,000 Shares Maximum prospectus. This is in addition to the dealers' obligation to deliver 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
Cautionary Note Regarding Forward-
Looking Statements.................. 10 HENNESSY ADVISORS, INC.
Use of Proceeds....................... 11
Selling Shareholder................... 11
Dividend Policy....................... 11 Common Stock
Dilution.............................. 12
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 13
Business.............................. 18
Management............................ 21
Certain Transactions.................. 25
Principal Stockholders................ 26
Description of Capital Stock.......... 27
Shares Eligible for Future Sale....... 29
Plan of Distribution.................. 31
Legal Matters......................... 32
Experts............................... 32
Changes in Accountants................ 32
Additional Information................ 32
Index to Financial Statements.........F-1
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).................................... 80,000
Transfer Agent's fees and expenses (estimate)......................... 8,000
Miscellaneous (estimate).............................................. 54,500
-------
Total............................................... $ 250,000
=======
|
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the Registrant has sold no shares of common stock, except as follows:
II-1
In June 2001, 10 holders of 200,000 shares of convertible preferred stock converted their convertible preferred shares for 200,000 shares of common stock in accordance with the terms of the convertible preferred shares.
On August 1, 2001, a majority in interest of the 70 limited partners of the Hennessy Management Co., LP and Hennessy Management Co. 2, LP (of which the Registrant is the general partner) agreed to merge the partnerships into the Registrant. The limited partners will receive up to 93,240 shares of common stock in exchange for their partnership interests upon the merger of the partnerships into the Registrant. The limited partners will receive one share of common stock for each ten dollars ($10.00) of invested capital in the partnerships. The merger is conditioned on the consummation of the offering registered hereby.
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
10.7 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
23.1 Consent of Foley & Lardner (included in Exhibit 5.1)
23.2 Consent of KPMG LLP
23.3 Consent of Bregante & Co., LLP
99.1 Escrow Agreement between Hennessy Advisors, Inc. and West
America Bank dated July 30, 2001
|
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
II-2
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.
(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-3
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 August 6, 2001.
HENNESSY ADVISORS, INC.
By: /s/ Neil J. Hennessy
--------------------------------------
Neil J. Hennessy, Chief Executive
Officer, President and Chairman of
the Board
|
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears on the Signature Page to this Registration Statement constitutes and appoints Neil J. Hennessy and Teresa M. Nilsen, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, including any amendment or registration statement filed pursuant to Rule 462, and to file the same, with all exhibits hereto, and other documents in connection therewith, with the Securities and Exchange Commission, and grants unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done in about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or his or her substitute or substitutes may lawfully do or cause to be done by virtue hereof.
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: August 6, 2001 /s/ Neil J. Hennessy
-----------------------------------------
Neil J. Hennessy, Chief Executive
Officer, President, Chairman of the Board
and Director
Date: August 6, 2001 /s/ Teresa M. Nilson
-----------------------------------------
Teresa M. Nilsen, Executive Vice
President, Chief Financial Officer, Chief
Accounting Officer, Secretary and
Director
Date: August 6, 2001 /s/ Daniel B. Steadman
-----------------------------------------
Daniel B. Steadman, Executive Vice
President and Director
|
II-4
Date: August 6, 2001 /s/ Brian A. Hennessy
-----------------------------------------
Brian A. Hennessy, Director
Date: August 6, 2001 /s/ Daniel G. Libarle
-----------------------------------------
Daniel G. Libarle, Director
Date: August 6, 2001 /s/ Roger Offenbach
-----------------------------------------
Rodger Offenbach, Director
Date: August 6, 2001 /s/ Thomas L. Seavey
-----------------------------------------
Thomas L. Seavey, Director
Date: August 6, 2001 /s/ Henry Hansel
-----------------------------------------
Henry Hansel, Director
|
II-5
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
10.7 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
23.1 Consent of Foley & Lardner (included in Exhibit 5.1)
23.2 Consent of KPMG LLP
23.3 Consent of Bregante & Co., LLP
99.1 Escrow Agreement between Hennessy Advisors, Inc. and West America Bank
dated July 30, 2001
|
II-6
Exhibit 2.1
AGREEMENT OF MERGER
OF
HENNESSY ADVISORS, INC.,
a California corporation
HENNESSY MANAGEMENT CO., L.P.,
a California limited partnership
and
HENNESSY MANAGEMENT CO. 2, L.P.,
a California limited partnership
THIS AGREEMENT OF MERGER is entered into on May __, 2001 between Hennessy Advisors, Inc., a corporation duly organized and existing under the laws of the state of California, (herein called the "Surviving Corporation"), Hennessy Management Co., L.P., a limited partnership duly organized and existing under the laws of the state of California (herein called "Merging LP One") and Hennessy Management Co. 2, L.P., a limited partnership duly organized and existing under the laws of the state of California (herein called "Merging LP Two").
1. Merging LP One and Merging LP Two shall be merged with and into the Surviving Corporation. The laws of California permit the merger of a California limited partnership with and into a California business corporation.
2. The separate existences of Merging LP One and Merging LP Two shall cease upon the effective date of the merger. The Surviving Corporation shall continue its existence under its present name.
3. The Articles of Incorporation of the Surviving Corporation upon the effective date of the merger in the State of California shall be the Articles of Incorporation of said Surviving Corporation and shall continue in full force and effect until amended and changed in the manner prescribed by the provisions of the California Corporations Code.
4. The bylaws of the Surviving Corporation upon the effective date of the merger in the State of California shall be the bylaws of said Surviving Corporation and shall continue in full force and effect until changed, altered or amended as therein provided and in the manner prescribed by the provisions of the California Corporations Code.
5. The directors and officers in office of the Surviving Corporation upon the effective date of the merger in the State of California shall continue to be the members of the Board of Directors and the officers of the Surviving Corporation, all of whom shall hold their directorships and offices until the election, appointment, and qualification of their respective successors or until their tenure is otherwise terminated in accordance with the bylaws of the Surviving Corporation.
6. At the effective time of the merger, the limited partnership interests of Merging LP One and Merging LP Two shall be converted into common stock of the Surviving Corporation as follows: every Ten Dollars ($10.00) of Invested Capital, as defined in the respective Limited Partnership Agreements, shall be converted into one share of common stock of the Surviving Corporation. The issued shares of the Surviving Corporation shall not be converted or exchanged in any manner or any consideration be paid therefor, but each share of the Surviving Corporation which is issued as of the effective date of the merger in the State of California shall continue to represent one issued share of the surviving corporation.
7. In the event that the merger herein provided for shall have been fully authorized in accordance with the provisions of the California Corporations Code, Merging LP One, Merging LP Two and the Surviving Corporation hereby agree that they will cause to be executed and filed and/or recorded any document or documents prescribed by the laws of the State of California, and that they will cause to be performed all necessary acts therein and elsewhere to effectuate the merger.
8. The general partners of Merging LP One and Merging LP Two and the Board of Directors and the proper officers of the Surviving Corporation, are hereby authorized, empowered and directed to do any and all acts and things, and to make, execute, deliver, file, and/or record any and all instruments, papers and documents which shall be or become necessary, proper or convenient to carry out or put into effect any of the provisions of this Agreement of Merger or of the merger herein provided for.
Signed on ___________, 2001.
SURVIVING CORPORATION
HENNESSY ADVISORS, INC.,
A California Corporation
By:______________________________________
Name: Neil J. Hennessy
Title: President
MERGING LP ONE
HENNESSY MANAGEMENT CO., L.P.,
a California limited partnership
By: Hennessy Advisors, Inc.,
A California corporation
Its General Partner
By:_____________________________
Name: Neil J. Hennessy
Title: President
MERGING LP TWO
HENNESSY MANAGEMENT CO. 2, L.P.,
a California limited partnership
By: Hennessy Advisors, Inc.,
A California corporation
Its Sole General Partner
By:_____________________________
Name: Neil J. Hennessy
Title: President
Exhibit 3.1
FORM OF
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
HENNESSY ADVISORS, INC.
A California Corporation
Neil J. Hennessy and Teresa Mariani Nilsen certify that:
1. They are the duly-elected and acting President and Secretary, respectively, of Hennessy Advisors, Inc., a California corporation.
2. The Articles of Incorporation, as amended, of this corporation are hereby restated to read as follows:
ARTICLE I
The name of the corporation is Hennessy Advisors, Inc.
ARTICLE II
The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the California Corporations Code, other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code.
ARTICLE III
a. The total number of shares of stock which this corporation shall have authority to issue is twenty million (20,000,000), consisting of fifteen million (15,000,000) shares of Common Stock and five million (5,000,000) shares of Preferred Stock.
b. The Board of Directors is hereby empowered, by resolution or resolutions adopted from time to time, to authorize the issuance of one or more series of Preferred Stock, to fix the number of shares of any series of Preferred Stock, and to determine the designation of any such series of Preferred Stock. The Board of Directors is also authorized to determine or alter the rights, preferences, privileges, and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock and, within the limits and restrictions stated in any resolution or resolutions of the Board of Directors originally fixing the number of shares constituting any series, to increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any such series subsequent to the issuance of shares of that series.
ARTICLE IV
The liability of the directors of the Corporation for monetary damages shall be eliminated to the fullest extent permissible under California law.
ARTICLE VI
This corporation is authorized to indemnify the agents (as defined in
Section 317 of the California Corporations Code) of the Corporation to the
fullest extent permissible under California law. Any amendment, repeal or
modification of any provision of this Article VI shall not adversely affect the
right or protection of an agent of this corporation existing at the time of such
amendment, repeal or modification.
3. The foregoing Amended and Restated Articles of Incorporation has been duly approved by the board of directors of this corporation.
4. The Amended and Restated Articles of Incorporation has been duly
approved by the vote of the shareholders of this corporation in accordance with
Section 902 and 903 of the California Corporations Code. The total number of
outstanding shares of Common Stock of this corporation is 962,280. The number of
shares voting in favor of the Amendment equaled or exceeded the vote required,
such required vote being a majority of the total number of shares of Common
Stock.
Each of the undersigned declares under penalty of perjury under the laws of the State of California that he or she has read the foregoing Amended and Restated Articles of Incorporation and the contents thereof and that the same is true of his or her own knowledge.
Executed at Novato, California, on the _____ day of August, 2001.
Exhibit 3.2
FORM OF
AMENDED AND RESTATED BYLAWS
OF hennessy advisors, INC.
ARTICLE I
OFFICES
Section 1. PRINCIPAL OFFICES. The board of directors shall fix the location of the principal executive office of the corporation at any place within or outside the State of California. If the principal executive office is located outside this state, and the corporation has one or more business offices in this state, the board of directors shall fix and designate a principal business office in the State of California.
Section 2. OTHER OFFICES. The board of directors or officers of the corporation may at any time establish branch or subordinate offices at any place or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 1. PLACE OF MEETINGS. Meetings of shareholders shall be held at any place within or outside the State of California designated by the board of directors. In the absence of any such designation, shareholders' meetings shall be held at the principal executive office of the corporation.
Section 2. ANNUAL MEETING. The annual meeting of shareholders shall be held each year on a date and at a time designated by the board of directors. At each annual meeting directors shall be elected, and any other proper business may be transacted.
Section 3. SPECIAL MEETING. A special meeting of the shareholders may be called at any time by the board of directors, or by the chairman of the board of directors, or by the president, or by one or more shareholders holding shares in the aggregate entitled to cast not less than ten percent (l0%) of the votes at that meeting. If a special meeting is called by any person or persons other than the board of directors, the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the chairman of the board of directors, the president, any vice president, or the secretary of the corporation. The officer receiving the request shall cause notice to be promptly given to the shareholders entitled to vote, in accordance with the provisions of Sections 4 and 5 of this Article II, that a meeting will be held at the time requested by the person or persons calling the meeting, not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after receipt of the request, the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph of this Section 3 shall be construed as limiting,
fixing or affecting the time when a meeting of shareholders called by action of the board of directors may be held.
Section 4. NOTICE OF SHAREHOLDERS' MEETINGS. All notices of
meetings of shareholders shall be sent or otherwise given in accordance with
Section 5 of this Article II not less than ten (10) nor more than sixty (60)
days before the date of the meeting. The notice shall specify the place, date
and hour of the meeting and (i) in the case of a special meeting, the general
nature of the business to be transacted, or (ii) in the case of the annual
meeting, those matters which the board of directors, at the time of giving the
notice, intends to present for action by the shareholders. The notice of any
meeting at which directors are to be elected shall include the name of any
nominee or nominees whom, at the time of the notice, management intends to
present for election. If action is proposed to be taken at any meeting for
approval of (i) a contract or transaction in which a director has a direct or
indirect financial interest, pursuant to Section 310 of the California
Corporations Code, (ii) an amendment of the articles of incorporation, pursuant
to Section 902 of that Code, (iii) a reorganization of the corporation, pursuant
to Section 1201 of that Code, (iv) a voluntary dissolution of the corporation,
pursuant to Section 1900 of that Code, or (v) a distribution in dissolution
other than in accordance with the rights of outstanding preferred shares,
pursuant to Section 2007 of that Code, the notice shall also state the general
nature of that proposal.
Section 5. MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Notice of any meeting of shareholders shall be given either personally or by first-class mail or telegraphic or other written communication, charges prepaid, addressed to the shareholder at the address of that shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice. If no such address appears on the corporation's books or is given, notice shall be deemed to have been given if sent to that shareholder by first-class mail or telegraphic or other written communication to the corporation's principal executive office, or if published at least once in a newspaper of general circulation in the county where that office is located. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. If any notice addressed to a shareholder at the address of that shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the shareholder at that address, all future notices or reports shall be deemed to have been duly given without further mailing if these shall be available to the shareholder on written demand of the shareholder at the principal executive office of the corporation for a period of one year from the date of the giving of the notice. An affidavit of the mailing or other means of giving any notice of any shareholders' meeting shall be executed by the secretary, assistant secretary, or any transfer agent of the corporation giving the notice, and shall be filed and maintained in the minute book of the corporation.
Section 6. QUORUM. The presence in person or by proxy of the holders of a majority of the shares entitled to vote at any meeting of shareholders shall constitute a quorum for the transaction of business. The shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment,
notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum.
Section 7. ADJOURNED MEETING; NOTICE. Any shareholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of the majority of the shares represented at that meeting, either in person or by proxy, but in the absence of a quorum, no other business may be transacted at that meeting, except as provided in Section 6 of this Article II. When any meeting of shareholders, either annual or special, is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place are announced at a meeting at which the adjournment is taken, unless a new record date for the adjourned meeting is fixed, or unless the adjournment is for more than forty-five (45) days from the date set for the original meeting, in which case the board of directors shall set a new record date. Notice of any such adjourned meeting shall be given to each shareholder of record entitled to vote at the adjourned meeting in accordance with the provisions of Sections 4 and 5 of this Article II. At any adjourned meeting the corporation may transact any business which might have been transacted at the original meeting.
Section 8. VOTING. The shareholders entitled to vote at any
meeting of shareholders shall be determined in accordance with the provisions of
Section 11 of this Article II, subject to the provisions of Sections 702 to 704,
inclusive, of the California Corporations Code (relating to voting shares held
by a fiduciary, in the name of a corporation, or in joint ownership). The
shareholders' vote may be by voice vote or by ballot; provided, however, that
any election for directors must be by ballot if demanded by any shareholder
before the voting has begun. On any matter other than elections of directors,
any shareholder may vote part of the shares in favor of the proposal and refrain
from voting the remaining shares or vote them against the proposal, but, if the
shareholder fails to specify the number of shares which the shareholder is
voting affirmatively, it will be conclusively presumed that the shareholder's
approving vote is with respect to all shares that the shareholder is entitled to
vote. If a quorum is present, the affirmative vote of the majority of the shares
represented at the meeting and entitled to vote on any matter (other than the
election of directors) shall be the act of the shareholders, unless the vote of
a greater number of shares voting by classes is required by California
Corporations Code or by the articles of incorporation. At a shareholders'
meeting at which directors are to be elected, no shareholder shall be entitled
to cumulate votes (i.e., cast for any one or more candidates a number of votes
greater than the number of shareholder's shares) unless the candidates' names
have been placed in nomination prior to commencement of the voting and a
shareholder has given notice prior to commencement of the voting of the
shareholder's intention to cumulate votes. If any shareholder has given such a
notice, then every shareholder entitled to vote may cumulate votes for
candidates in nomination and give one candidate a number of votes equal to the
number of directors to be elected multiplied by the number of votes to which
that shareholder's shares are entitled, or distribute the shareholder's votes on
the same principle among any or all of the candidates, as the shareholder thinks
fit. The candidates receiving the highest number of votes, up to the number of
directors to be elected, shall be elected.
Section 9. CUMULATIVE VOTING. No shareholder may cumulate votes in the election of directors. This Section 9 of Article II shall become, and remain, effective only when this corporation becomes a "listed corporation" within the meaning of Section 301.5 of the California Corporations Code.
Section 10. WAIVER OF NOTICE OR CONSENT BY ABSENT
SHAREHOLDERS. The transactions of any meeting of shareholders, either annual or
special, however called and noticed, and wherever held, shall be as valid as
though had at a meeting duly held after regular call and notice, if a quorum be
present either in person or by proxy, and if, either before or after the
meeting, each person entitled to vote, who was not present in person or by
proxy, signs a written waiver of notice or a consent to a holding of the
meeting, or an approval of the minutes. The waiver of notice or consent need not
specify either the business to be transacted or the purpose of any annual or
special meeting of shareholders, except that if action is taken or proposed to
be taken for approval of any of those matters specified in the last sentence of
Section 4 of this Article II, the waiver of notice or consent shall state the
general nature of the proposal. All such waivers, consents or approvals shall be
filed with the corporate records or made a part of the minutes of the meeting.
Attendance by a person at a meeting shall also constitute a waiver of notice of
that meeting, except when the person objects, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called or
convened, and except that attendance at a meeting is not a waiver of any right
to object to the consideration of matters not included in the notice of the
meeting if that objection is expressly made at the meeting.
Section 11. SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A
MEETING. Any action which may be taken at any annual or special meeting of
shareholders may be taken without a meeting and without prior notice, if a
consent in writing, setting forth the action so taken, is signed by the holders
of outstanding shares having not less than the minimum number of votes that
would be necessary to authorize or take that action at a meeting at which all
shares entitled to vote on that action were present and voted. In the case of
election of directors, such a consent shall be effective only if signed by the
holders of all outstanding shares entitled to vote for the election of
directors; provided, however, that a director may be elected at any time to fill
a vacancy on the board of directors that has not been filled by the directors,
by the written consent of the holders of a majority of the outstanding shares
entitled to vote for the election of directors. All such consents shall be filed
with the secretary of the corporation and shall be maintained in the corporate
records. Any shareholder giving a written consent, or the shareholder's proxy
holders, or a transferee of the shares or a personal representative of the
shareholder or their respective proxy holders, may revoke the consent by a
writing received by the secretary of the corporation before written consents of
the number of shares required to authorize the proposed action have been filed
with the secretary. If the consents of all shareholders entitled to vote have
not been solicited in writing, and if the unanimous written consent of all such
shareholders shall not have been received, the secretary shall give prompt
notice of the corporate action approved by the shareholders without a meeting.
This notice shall be given in the manner specified in Section 5 of this Article
II. In the case of approval of (i) contracts or transactions in which a director
has a direct or indirect financial interest, pursuant to Section 310 of the
California Corporations Code, (ii)
indemnification of agents of the corporation, pursuant to Section 317 of that Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of that Code, or (iv) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of that Code, the notice shall be given at least ten (10) days before the consummation of any action authorized by that approval.
Section 12. RECORD DATE FOR SHAREHOLDER NOTICE, VOTING, AND GIVING CONSENTS. For purposes of determining the shareholders entitled to notice of any meeting or to vote or entitled to give consent to corporate action without a meeting, the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days before the date of any such meeting nor more than sixty (60) days before any such action without a meeting, and in this event only shareholders of record on the date so fixed are entitled to notice and to vote or to give consents, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the California Corporations Code. If the board of directors does not so fix a record date: (a) the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held; (b) the record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, (i) when no prior action by the board of directors has been taken, shall be the date on which the first written consent is given, or (ii) when prior action of the board of directors has been taken, shall be at the close of business on the date on which the board of directors adopts the resolution relating to that action, or the sixtieth (60th) day before the date of such action, whichever is later.
Section 13. PROXIES. Every person entitled to vote for directors or on any other matter shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the secretary of the corporation. A proxy shall be deemed signed if the shareholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission, or otherwise) by the shareholder or the shareholder's attorney-in-fact. A validly executed proxy which does not state that it is irrevocable shall continue in full force and effect unless (i) revoked by the person executing it, before the vote pursuant to that proxy, by a writing delivered to the corporation stating that the proxy is revoked, or by a subsequent proxy executed by, or attendance at the meeting and voting in person by, the person executing the proxy, or (ii) written notice of the death or incapacity of the maker of that proxy is received by the corporation before the vote pursuant to that proxy is counted; provided, however, that no proxy shall be valid after the expiration of eleven (11) months from the date of the proxy, unless otherwise provided in the proxy. The revocability of a proxy that states on its face that is irrevocable shall be governed by the provisions of Sections 705(e) and 705(f) of the California Corporations Code.
Section 14. CONDUCT OF MEETING. The chairman of the board of directors, or in the absence of the chairman of the board of directors, the President, shall preside
over meetings of the shareholders. The person presiding over the meeting shall preside in a businesslike and fair manner in accordance with such rules and procedures as that person deems appropriate. The presiding officer's rulings on procedural matters shall be conclusive and binding on all shareholders, unless at the time of ruling a request for a vote is made to the shareholders holding shares entitled to vote and which are represented in person or by proxy at the meeting, in which case, the decision of a majority of such shares shall be conclusive and binding on all shareholders with respect to that procedural matter.
Section 15. INSPECTORS OF ELECTION. Before any meeting of
shareholders, the board of directors may appoint any persons other than nominees
for office to act as inspectors of election at the meeting or its adjournment.
If no inspectors of election are so appointed, the chairman of the meeting may,
and on the request of any shareholder or a shareholder's proxy shall, appoint
inspectors of election at the meeting. The number of inspectors shall be either
one (l) or three (3). If inspectors are appointed at a meeting on the request of
one or more shareholders or proxies, the holders of a majority of shares or
their proxies present at the meeting shall determine whether one (l) or three
(3) inspectors are to be appointed. If any person appointed as inspector fails
to appear or fails or refuses to act, the chairman of the meeting may, and upon
the request of any shareholder or a shareholder's proxy shall, appoint a person
to fill that vacancy. These inspectors shall: (a) determine the number of shares
outstanding and the voting power of each, the shares represented at the meeting,
the existence of a quorum, and the authenticity, validity, and effect of
proxies; (b) receive votes, ballots, or consents; (c) hear and determine all
challenges and questions in any way arising in connection with the right to
vote; (d) count and tabulate all votes or consents; (e) determine when the polls
shall close; (f) determine the result; and (g) do any other acts that may be
proper to conduct the election or vote with fairness to all shareholders.
Section 16. SHAREHOLDER NOMINATIONS AND PROPOSALS. Any shareholder nomination or proposal for action at a forthcoming shareholder meeting must be delivered to the corporation no later than the deadline for submitting shareholder proposals pursuant to Securities Exchange Commission Regulations Section 240.14a-8. The presiding officer at any shareholder meeting shall not be required to recognize any proposal or nomination which did not comply with such deadline.
ARTICLE III
DIRECTORS
Section 1. POWERS. Subject to the provisions of the California Corporations Code and any limitations in the articles of incorporation and these bylaws relating to action required to be approved by the shareholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. Without prejudice to these general powers, and subject to the same limitations, the directors shall have the power to: (a) select and remove all officers, agents, and employees of the corporation; prescribe any powers and duties for them that are consistent with law, with the articles of incorporation, and with these bylaws; fix their compensation; and require from them security for faithful service, (b) change the principal
executive office or the principal business office in the State of California from one location to another; cause the corporation to be qualified to do business in any other state, territory, dependency, or country and conduct business within or without the State of California; and designate any place within or without the State of California for the holding of any shareholders' meeting, or meetings, including annual meetings, (c) adopt, make and use a corporation seal; prescribe the forms of certificates of stock; and alter the form of the seal and certificates, (d) authorize the issuance of shares of stock of the corporation on any lawful terms, in consideration of money paid, labor done, services actually rendered, debts or securities canceled, or tangible or intangible property actually received, (e) borrow money and incur indebtedness on behalf of the corporation, and cause to be executed and delivered for the corporation's purposes, in the corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages, pledges, hypothecations, and other evidences of debt and securities.
Section 2. NUMBER OF DIRECTORS.
A. The authorized number of directors shall be not less than five nor more than nine. The exact number of directors shall be fixed from time to time by resolution of the board of directors, except that in the absence of any such designation, such number shall be five.
B. The maximum or minimum authorized number of directors may only be changed by an amendment of this Section approved by the vote or written consent of a majority of the outstanding shares entitled to vote; provided, however, that an amendment reducing the minimum number to a number less than five shall not be adopted if the votes cast against its adoption at a meeting (or the shares not consenting in the case of action by written consent) exceed 16-2/3% of such outstanding shares; and provided further, that in no case shall the stated maximum authorized number of directors exceed two times the stated minimum number of authorized directors minus one.
Section 3. ELECTION AND TERM OF OFFICE OF DIRECTORS.
A. Until the corporation becomes a "listed corporation" within the meaning of Section 301.5 of the General Corporation Law, directors shall be elected at each annual meeting of the shareholders to hold office until the next annual meeting. Each director, including a director elected to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified.
B. This paragraph B of this Section 3 shall become effective
only when the corporation becomes a "listed corporation" within the meaning of
Section 301.5 of the General Corporation Law. The board of directors shall be
divided into three classes, designated Class I, Class II and Class III, as
nearly equal in number as possible, and the term of office of directors of one
class shall expire at each annual meeting of shareholders, but in all cases
continue as to each director until his or her successor shall be elected and
shall qualify or until his or her earlier resignation, removal from office,
death or incapacity. Additional directorships resulting from an increase in the
number of directors shall be apportioned among
the classes as equally as possible. The initial terms of office shall be determined by resolution, duly adopted by the board of directors. At each annual meeting of shareholders, the number of directors equal to the number of directors of the class whose term expires at the time of such meeting (or, if fewer, the number of directors properly nominated and qualified for election) shall be elected to hold office until the third succeeding annual meeting of shareholders after their election.
Section 5. VACANCIES. Vacancies in the board of directors may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director, except that a vacancy created by the removal of a director by the vote or written consent of the shareholders or by court order may be filled only by the vote of a majority of the shares entitled to vote represented at a duly held meeting at which a quorum is present, or by the written consent of holders of a majority of the outstanding shares entitled to vote. Each director so elected shall hold office until the next annual meeting of the shareholders and until a successor has been elected and qualified. A vacancy or vacancies in the board of directors shall be deemed to exist in the event of the death, resignation, or removal of any director, or if the board of directors by resolution declares vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony, or if the authorized number of directors is increased, or if the shareholders fail, at any meeting of shareholders at which any director or directors are elected, to elect the number of directors to be voted for at that meeting. The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors, but any such election by written consent shall require the consent of a majority of the outstanding shares entitled to vote. Any director may resign effective on giving written notice to the chairman of the board of directors, the president, the secretary, or the board of directors, unless the notice specifies a later time for that resignation to become effective. If the resignation of a director is effective at a future time, the board of directors may elect a successor to take office when the resignation becomes effective. No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires.
Section 6. PLACE OF MEETING AND MEETINGS BY TELEPHONE. Regular meetings of the board of directors may be held at any place within or outside the State of California that has been designated from time to time by resolution of the board of directors. In the absence of such a designation, regular meetings shall be held at the principal executive office of the corporation. Special meetings of the board of directors shall be held at any place within or outside the State of California that has been designated in the notice of the meeting or, if not stated in the notice or there is no notice, at the principal executive office of the corporation. Any meeting, regular or special, may be held by conference telephone or similar communication equipment, so long as all directors participating in the meeting can hear one another, and all such directors shall be deemed to be present in person at the meeting.
Section 7. ANNUAL MEETING. Immediately following each annual meeting of shareholders, the board of directors shall hold a regular meeting for the purpose of organization, any desired election of officers, and the transaction of other business. Notice of this meeting shall not be required.
Section 8. OTHER REGULAR MEETINGS. Other regular meetings of the board of directors shall be held without call at such time as shall from time to time be fixed by the board of directors. Such regular meetings may be held without notice.
Section 9. SPECIAL MEETINGS. Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board of directors or the president or any vice president or the secretary or any two directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the corporation. In case the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. In case the notice is delivered personally, or by telephone or telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose of the meeting nor the place if the meeting is to be held at the principal executive office of the corporation.
Section 10. QUORUM. A majority of the authorized number of director shall constitute a quorum for the transaction of business, except to adjourn as provided in Section 12 of this Article III. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the board of directors, subject to the provisions of Section 310 of the California Corporations Code (as to approval of contracts or transactions in which a director has a direct or indirect material financial interest), Section 311 of that Code (as to appointment of committees), and Section 317(e) of that Code (as to indemnification of directors). A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting.
Section 11. WAIVER OF NOTICE. The transaction of any meeting of the board of directors, however called and noticed or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice if a quorum is present and if, either before or after the meeting, each of the directors not present signs a written waiver of notice, a consent to holding the meeting or an approval of the minutes. The waiver of notice or consent need not specify the purpose of the meeting. All such waivers, consents, and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Notice of a meeting shall also be deemed given to any director who attends the meeting without protesting, before or at its commencement, the lack of notice to that director.
Section 12. ADJOURNMENT. A majority of the directors present, whether or not constituting a quorum, may adjourn any meeting to another time and place.
Section 13. NOTICE OF ADJOURNMENT. Notice of the time and place of holding an adjourned meeting need not be given, unless the meeting is adjourned for more than twenty-four (24) hours, in which case notice of the time and place shall be given before the time of the adjourned meeting, in the manner specified in Section 8 of this Article III, to the directors who were not present at the time of the adjournment.
Section 14. ACTION WITHOUT MEETING. Any action required or permitted to be taken by the board of directors may be taken without a meeting, if all members of the board of directors shall individually or collectively consent in writing to that action. Such action by written consent shall have the same force and effect as a unanimous vote of the board of directors. Such written consent or consents shall be filed with the minutes of the proceedings of the board of directors.
Section 15. FEES AND COMPENSATION OF DIRECTORS. Directors and members of committees may receive such compensation, if any, for their services, and such reimbursement of expenses, as may be fixed or determined by resolution of the board of directors. This Section 15 shall not be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee, or otherwise, and receiving compensation for those services.
ARTICLE IV
COMMITTEES
Section 1. COMMITTEES OF DIRECTORS. The board of directors
may, by resolution adopted by a majority of the authorized number of directors,
designate one or more committees, each consisting of two or more directors, to
serve at the pleasure of the board of directors. The board of directors may
designate one or more directors as alternate members of any committee, who may
replace any absent member at any meeting of the committee. Any committee, to the
extent provided in the resolution of the board of directors, shall have all the
authority of the board of directors, except with respect to: (a) the approval of
any action which, under the General Corporation Law of California, also requires
shareholder's approval or approval of the outstanding shares, (b) the filling of
vacancies on the board of directors or in any committee, (c) the fixing of
compensation of the directors for serving on the board of directors or on any
committee, (d) the amendment or repeal of bylaws or the adoption of new bylaws,
(e) the amendment or repeal of any resolution of the board of directors which by
its express terms is not so amendable or repealable, (f) a distribution to the
shareholders of the corporation, except at a rate or in a periodic amount or
within a price range determined by the board of directors, or (g) the
appointment of any other committees of the board of directors or the members of
these committees.
Section 2. MEETINGS AND ACTION OF COMMITTEES. Meetings and
action of committees shall be governed by, and held and taken in accordance
with, the provisions of Article III of these bylaws, Sections 6 (Place of
Meetings), 8 (Regular Meetings), 9 (Special Meetings and Notice), 10 (Quorum),
11 (Waiver of Notice), 12 (Adjournment), 13
(Notice of Adjournment), and 14 (Action Without Meeting), with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the board of directors and its members, except that the time of regular meetings of committees may be determined either by resolution of the board of directors or by resolution of the committee; special meetings of the committees may also be called by resolution of the board of directors; and notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws.
ARTICLE V
OFFICERS AND EMPLOYEES
Section 1. OFFICERS. The officers of the corporation shall be a president, a secretary, and a chief financial officer. The corporation may also have, at the discretion of the board of directors, a chairman of the board of directors, one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers, and such other officers as may be appointed in accordance with the provisions of Section 3 of this Article V. Any number of offices may be held by the same person.
Section 2. ELECTION OF OFFICERS. The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 3 or Section 5 of this Article V, shall be chosen by the board of directors, and each shall serve at the pleasure of the board of directors, subject to the rights, if any, of an officer under any contract of employment.
Section 3. SUBORDINATE OFFICERS. The board of directors may appoint, and may empower the president to appoint, such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in the bylaws or as the board of directors may from time to time determine.
Section 4. REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by the board of directors, at any regular or special meeting of the board of directors, or, except in case of an officer chosen by the board of directors, by an officer upon whom such power of removal may be conferred by the board of directors. Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party.
Section 5. VACANCIES IN OFFICES. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these bylaws for regular appointments to that office.
Section 6. CHAIRMAN OF THE BOARD OF DIRECTORS. The chairman of the board of directors, if such an officer be elected, shall preside at meetings of the board of directors and exercise and perform such other powers and duties as from time to time may be assigned to him by the board of directors or prescribed by these bylaws. If there is no president, the chairman of the board of directors shall in addition be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 7 of this Article V.
Section 7. PRESIDENT. Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board of directors, if there be such an officer, the president shall be the chief executive officer of the corporation and shall, subject to the control of the board of directors, have general supervision, direction, and control of the business and the officers of the corporation. He shall preside at all meetings of the shareholders and, in the absence of the chairman of the board of directors, or if there be none, at all meetings of the board of directors. He shall have the general powers and duties of management usually vested in the office of president of a corporation, and shall have such other powers and duties as may be prescribed by the board of directors or the bylaws.
Section 8. VICE PRESIDENTS. In the absence or disability of the president, the vice presidents, if any, in order of their rank as fixed by the board of directors or, if not ranked, a vice president designated by the board of directors, shall perform all the duties of the president, and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors, the chairman of the board of directors, the president or the bylaws.
Section 9. SECRETARY. The secretary shall keep or cause to be kept, at the principal executive office or such other place as the board of directors may direct, a book of minutes of all meetings and actions of directors, committees of directors, and shareholders, with the time and place of holding, whether regular or special, and, if special, how authorized, the notice given, the names of those present at directors' meetings or committee meetings, the number of shares present or represented at shareholders' meetings, and the proceedings. The secretary shall keep, or cause to be kept, at the principal executive office or at the office of the corporation's transfer agent or registrar, as determined by resolution of the board of directors, a share register, or a duplicate share register, showing the names of all shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the shareholders and of the board of directors required by the bylaws or by law to be given, and he shall keep the seal of the corporation if one be adopted, in safe custody, and shall have such
other powers and perform such other duties as may be prescribed by the board of directors or by the bylaws.
Section 10. CHIEF FINANCIAL OFFICER. The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any directors. The chief financial officer shall deposit all monies and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the board of directors. He shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the president and directors, whenever they request it, an account of all of his transactions as chief financial officer and of the financial condition of the corporation, and shall have other powers and perform such other duties as may be prescribed by the board of directors or the bylaws.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER
AGENTS
Section 1. AGENTS, PROCEEDINGS, AND EXPENSES. For the purposes of this Article VI, "agent" means any person who is or was a director, officer, employee, or other agent of this corporation, or is or was serving at the request of this corporation as a director, officer, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or was a director, officer, employee, or agent of a foreign or domestic corporation which was a predecessor corporation of this corporation or of another enterprise at the request of such predecessor corporation; "proceeding" means any threatened, pending or completed action or proceeding, whether civil, criminal, administrative, or investigative; and "expenses" includes, without limitation, attorneys' fees and any expenses of establishing a right to indemnification under Section 4 or Section 5(c) of this Article VI.
Section 2. ACTIONS OTHER THAN BY THE CORPORATION. Subject to the provisions of Section 5, Section 8 and Section 9 of this Article VI, this corporation shall indemnify any person who was or is a party, or is threatened to be made a party, to any proceeding (other than an action by or in the right of this corporation) by reason of the fact that such person is or was an agent of this corporation, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with such proceeding if that person acted in good faith and in a manner that person reasonably believed to be in the best interests of this corporation and, in the case of a criminal proceeding, had no reasonable cause to believe the conduct of that person was unlawful. The termination of any proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the person did not act in good faith and
in a manner which the person reasonably believed to be in the best interests of this corporation or that the person had reasonable cause to believe that the person's conduct was unlawful.
Section 3. ACTIONS BY THE CORPORATION. Subject to the provisions of Section 5, Section 8 and Section 9 of this Article VI, this corporation shall indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action by or in the right of this corporation to procure a judgment in its favor by reason of the fact that person is or was an agent of this corporation, against expenses actually and reasonably incurred by that person in connection with the defense or settlement of that action if that person acted in good faith, in a manner that person believed to be in the best interests of this corporation and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances. No indemnification shall be made under this Section 3: (a) in respect of any claim, issue or matter as to which that person shall have been adjudged to be liable to this corporation in the performance of that person's duty to this corporation, unless and only to the extent that the court in which that action was brought shall determine upon application that, in view of all the circumstances of the case, that person is fairly and reasonably entitled to indemnity for the expenses which the court shall determine, (b) of amounts paid in settling or otherwise disposing of a threatened or pending action, without court approval, or (c) of expenses incurred in defending a threatened or pending action which is settled or otherwise disposed of without court approval.
Section 4. SUCCESSFUL DEFENSE BY AGENT. To the extent that an agent of this corporation has been successful on the merits in defense of any proceeding referred to in Sections 2 or 3 of this Article IV, or in defense of any claim, issue, or matter therein, the agent shall be indemnified against expenses actually and reasonably incurred by the agent in connection therewith.
Section 5. REQUIRED APPROVAL. Except as provided in Section 4 of this Article IV, any indemnification under this Article IV shall be made by this corporation only if authorized in the specific case on a determination that indemnification of the agent is proper in the circumstances because the agent has met the applicable standard of conduct set forth in Sections 2 or 3 of this Article IV, by: (a) a majority vote of a quorum consisting of directors who are not parties to the proceeding, (b) approval by the affirmative vote of a majority of the shares of this corporation entitled to vote represented at a duly held meeting at which a quorum is present or by the written consent of holders of a majority of the outstanding shares entitled to vote (for this purpose, the shares owned by the person to be indemnified shall not be considered outstanding or entitled to vote thereon), or (c) the court in which the proceeding is or was pending, on application made by this corporation or the agent or the attorney or other person rendering services in connection with the defense, whether or not such application by the agent, attorney, or other person is opposed by this corporation.
Section 6. ADVANCE OF EXPENSES. Expenses incurred in defending any proceeding may be advanced by this corporation before the final disposition of the proceeding on receipt of an undertaking by or on behalf of the agent to repay the amount if it
shall be determined ultimately that the agent is not entitled to be indemnified as authorized in this Article IV.
Section 7. OTHER CONTRACTUAL RIGHTS. Nothing contained in this Article IV shall affect any right to indemnification to which persons other than directors and officers of this corporation or any subsidiary hereof may be entitled by contract or otherwise.
Section 8. LIMITATIONS. No indemnification or advance shall be made under this Article IV, except as provided in Section 4 or Section 5(c), in any circumstance where it appears: (a) that it would be inconsistent with a provision of the articles of incorporation of this corporation, a resolution of the shareholders, or an agreement in effect at the time of the accrual of the alleged cause of action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification, or (b) that it would be inconsistent with any condition expressly imposed by a court in approving a settlement.
Section 9. INSURANCE. Upon and in the event of a determination by the board of directors of this corporation to purchase such insurance, this corporation shall purchase and maintain insurance on behalf of any agent of the corporation against any liability asserted against or insured by the agent in such capacity or arising out of the agent's status as such whether or not this corporation would have the power to indemnify the agent against that liability under the provisions of this Section.
Section 10. FIDUCIARIES OF CORPORATION EMPLOYEE BENEFIT PLAN. This Article does not apply to any proceeding against any trustee, investment manager, or other fiduciary of an employee benefit plan in that person's capacity as such, even though that person may also be an agent of the corporation as defined in Section 1 of this Article IV. Nothing contained in this Article shall limit any right to indemnification to which such a trustee, investment manager, or other fiduciary may be entitled by contract or otherwise, which shall be enforceable to the extent permitted by applicable law other than this Article IV.
ARTICLE VII
RECORDS AND REPORTS
Section 1. MAINTENANCE AND INSPECTION OF SHARE REGISTER. The corporation shall keep at its principal executive office, or at the office of its transfer agent or registrar, if either be appointed and as determined by resolution of the board of directors, a record of its shareholders, giving the names and addresses of all shareholders and the number and class of shares held by each shareholder. A shareholder or shareholders of the corporation holding at least five percent (5%) in the aggregate of the outstanding voting shares of the corporation may (i) inspect and copy the records of shareholders' names and addresses and share holdings during usual business hours on five (5) days prior written demand on the corporation and (ii) obtain from the transfer agent of the corporation, on written demand and on the tender of such transfer agent's usual charges for such list, a list of the shareholders'
names and addresses, who are entitled to vote for the election of directors, and their share holdings, as of the most recent record date for which that list has been compiled or as of a date specified by the shareholder after the date of demand. This list shall be made available to any such shareholder by the transfer agent on or before the later of five (5) days after the demand is received or the date specified in the demand as the date as of which the list is to be compiled. The record of shareholders shall also be open to inspection on the written demand of any shareholder or holder of a voting trust certificate, at any time during usual business hours, for a purpose reasonably related to the holder's interests as a shareholder or as the holder of a voting trust certificate. Any inspection and copying under this Section 1 may be made in person or by an agent or attorney of the shareholder or holder of a voting trust certificate making the demand.
Section 2. MAINTENANCE AND INSPECTION OF BYLAWS. The corporation shall keep at its principal executive office, or if its principal executive office is not in the State of California, at its principal business office in this state, the original or a copy of the bylaws as amended to date, which shall be open to inspection by the shareholders at all reasonable times during office hours. If the principal executive office of the corporation is outside the State of California and the corporation has no principal business office in this state, the Secretary shall, upon the written request of any shareholder, furnish to that shareholder a copy of the bylaws as amended to date.
Section 3. MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS. The accounting books and records and minutes of proceedings of the shareholders and the board of directors and any committee or committees of the board of directors shall be kept at such place or places designated by the board of directors, or, in the absence of such designation, at the principal executive office of the corporation. The minutes shall be kept in written form and the accounting books and records shall be kept either in written form or in any other form capable of being converted into written form. The minutes and accounting books and records shall be open to inspection upon the written demand of any shareholder or holder of a voting trust certificate, at any reasonable time during usual business hours, for a purpose reasonably related to the holder's interests as a shareholder or as the holder of a voting trust certificate. The inspection may be made in person or by an agent or attorney, and shall include the right to copy and make extracts. These rights of inspection shall extend to the records of each subsidiary corporation of the corporation.
Section 4. INSPECTION BY DIRECTORS. Every director shall have the absolute right at any reasonable time to inspect all books, records and documents of every kind and the physical properties of the corporation and each of its subsidiary corporations. This inspection by a director may be made in person or by an agent or attorney and the right of inspection includes the right to copy and make extracts of documents.
Section 5. ANNUAL REPORT TO SHAREHOLDERS. The annual report to shareholders referred to in Section 1501 of the California Corporations Code is expressly dispensed with, but nothing herein shall be interpreted as prohibiting the board of directors
from issuing annual or other periodic reports to the shareholders of the corporation as they consider appropriate.
Section 6. FINANCIAL STATEMENTS. A copy of any annual financial statement and any income statement of the corporation for each quarterly period of each fiscal year, and any accompanying balance sheet of the corporation as of the end of each period, that has been prepared by the corporation shall be kept on file in the principal executive office of the corporation for twelve (12) months and each such statement shall be exhibited at all reasonable times to any shareholder demanding an examination of any such statement or a copy shall be mailed to any such shareholder. If a shareholder or shareholders holding at least five percent (5%) of the outstanding shares of any class of stock of the corporation makes a written request to the corporation for an income statement of the corporation for the three-month, six-month or nine-month period of the then current fiscal year ended more than thirty (30) days before the date of the request, and a balance sheet of the corporation as of the end of that period, the chief financial officer shall cause that statement to be prepared, if not already prepared, and shall deliver personally or mail that statement or statements to the person making the request within thirty (30) days after the receipt of the request. If the corporation has not sent to the shareholders its annual report for the last fiscal year, this report shall likewise be delivered or mailed to the shareholder or shareholders within thirty (30) days after the request. The corporation shall also, on the written request of any shareholder, mail to the shareholder a copy of the last annual, semi-annual, or quarterly income statement which it has prepared, and a balance sheet as of the end of that period. The quarterly income statements and balance sheets referred to in this section shall be accompanied by the report, if any, of any independent accountants engaged by the corporation or the certificate of an authorized officer of the corporation that the financial statements were prepared without audit from the books and records of the corporation.
Section 7. STATEMENT OF GENERAL INFORMATION. The corporation shall, within the statutorily required time period, file with the Secretary of State of the State of California, on the prescribed form, a statement setting forth the authorized number of directors, the names and complete business or residence addresses of all incumbent directors, the names and complete business or residence addresses of the chief executive officer, secretary, and chief financial officer, the street address of its principal executive office or principal business office in this state, and the general type of business constituting the principal business activity of the corporation, together with a designation of the agent of the corporation for the purpose of service of process, all in compliance with Section 1502 of the California Corporations Code.
ARTICLE VIII
GENERAL CORPORATE MATTERS
Section 1. RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING. For purposes of determining the shareholders entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in
respect of any other lawful action (other than action by shareholders by written consent without a meeting), the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days before any such action, and in that case only shareholders of record on the date so fixed are entitled to receive the dividend, distribution, or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date so fixed, except as otherwise provided in the California Corporations Code. If the board of directors does not so fix a record date, the record date for determining shareholders for any such purpose shall be at the close of business on the day on which the board of directors adopts the applicable resolution or the sixtieth (60) day before the date of that action, whichever is later.
Section 2. CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS. All checks, drafts, or other orders for payment of money, notes, or other evidences of indebtedness, issued in the name of or payable to the corporation, shall be signed or endorsed by such person or persons and in such manner as, from time to time, shall be determined by resolution of the board of directors.
Section 3. CORPORATION CONTRACTS AND INSTRUMENTS; HOW EXECUTED. The board of directors, except as otherwise provided in these bylaws, may authorize any officer or officers, agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation, and this authority may be general or confined to specific instances; and, unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent, or employee shall have the power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount.
Section 4. CERTIFICATES FOR SHARES. A certificate or certificates for shares of the capital stock of the corporation shall be issued to each shareholder when any of these shares are fully paid, and the board of directors may authorize the issuance of certificates or shares as partly paid provided that these certificates shall state the amount of the consideration to be paid for them and the amount paid. All certificates shall be signed in the name of the corporation by the chairman of the board of directors or vice chairman of the board of directors or the president or vice president and by the chief financial officer or an assistant treasurer or the secretary or any assistant secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed on a certificate shall have ceased to be that officer, transfer agent, or registrar before that certificate is issued, it may be issued by the corporation with the same effect as if that person were an officer, transfer agent, or registrar at the date of issuance.
Section 5. LOST CERTIFICATES. Except as provided in this
Section 5, no new certificates for shares shall be issued to replace an old
certificate unless the latter is surrendered to the corporation and canceled at
the same time. The board of directors may, in case any share certificate or
certificate for any other security is lost, stolen, or destroyed,
authorize the issuance of a replacement certificate on such terms and conditions as the board of directors may require, including provision for indemnification of the corporation secured by a bond or other adequate security sufficient to protect the corporation against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft, or destruction of the certificate or the issuance of the replacement certificate.
Section 6. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The chairman of the board of directors, the president, or any vice president, or any other person authorized by resolution of the board of directors or by any of the foregoing designated officers, is authorized to vote on behalf of the corporation any and all shares of any other corporation or corporations, foreign or domestic, standing in the name of the corporation. The authority granted to these officers to vote or represent on behalf of the corporation any and all shares held by the corporation in any other corporation or corporations may be exercised by any of these officers in person or by any person authorized to do so by a proxy duly executed by these officers.
Section 7. CONSTRUCTION AND DEFINITIONS. Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the California Corporations Code shall govern the construction of these bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person.
ARTICLE IX
AMENDMENTS
Section 1. AMENDMENT BY SHAREHOLDERS. New bylaws may be adopted or these bylaws may be amended or repealed by the vote or written consent of holders of a majority of the outstanding shares entitled to vote except as otherwise provided by law or by the articles of incorporation.
Section 2. AMENDMENT BY DIRECTORS. Subject to the rights of the shareholders as provided in Section I of this Article IX, other than a bylaw or an amendment of a bylaw changing the authorized number of directors, new bylaws may be adopted or these bylaws may be amended or repealed by the vote or written consent of a majority of the authorized number of directors.
Exhibit 5
FOLEY & LARDNER
ATTORNEYS AT LAW
CHICAGO POST OFFICE BOX 240 SACRAMENTO
DENVER JACKSONVILLE, FLORIDA 32201-0240 SAN DIEGO
JACKSONVILLE THE GREENLEAF BUILDING SAN FRANCISCO
LOS ANGELES 200 LAURA STREET TALLAHASSEE
MADISON JACKSONVILLE, FLORIDA 32202-3510 TAMPA
MILWAUKEE TELEPHONE (904) 359-2000 WASHINGTON, D.C.
ORLANDO FACSIMILE (904) 359-8700 WEST PALM BEACH
EMAIL ADDRESS CLIENT/MATTER NUMBER
lkelso@foleylaw.com 082961-0107
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August 6, 2001
Hennessy Advisors, Inc.
750 Grant Avenue, Suite 200
Novato, California 94945
Re: Registration Statement on Form S-1
Gentlemen:
This opinion is being furnished in connection with the Registration Statement on Form SB-2 of Hennessy Advisors, Inc. (the "Company"), under the Securities Act of 1933, as amended, for the registration of 1,000,000 shares of common stock, no par value, including up to 10,000 shares to be sold by a selling shareholder (the "Shares"). The Registration Statement filed concurrently herewith is referred to herein as the "Registration Statement."
As counsel for the Company, we have examined and are familiar with the following:
(a) Articles of Incorporation as filed in the Office of the Secretary of State of the State of California;
(b) Form of Amended and Restated Articles of Incorporation of the Company to be filed in the Office of the Secretary of State of the State of California;
(c) Form of Bylaws of the Company;
(d) The proceedings of the Board of Directors of the Company in connection with or with respect to the issuance and sale of the Shares to be sold by the Company pursuant to the Registration Statement; and
(e) Such other documents, Company records, and matters of law as we deemed to be pertinent.
Based upon our examination of such documents and our familiarity with such proceedings, it is our opinion that:
Hennessy Advisors, Inc.
August 6, 2001
1. The Company has been duly incorporated and is validly existing and in good standing under the laws of the State of California.
2. Upon filing of the Amended and Restated Articles of Incorporation with the Office of the Secretary of State of the State of California the Shares covered by the Registration Statement to be sold by the Company will, when issued and delivered to the purchasers against payment of the consideration therefor specified in the Registration Statement, be duly and validly issued, fully paid and nonassessable.
3. The Shares held by the Selling Shareholder for resale are validly issued, fully paid and nonassessable.
We hereby consent to the inclusion of this opinion as Exhibit 5 in said
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the Prospectus. In giving this consent we do not hereby admit
that we come within the category of persons whose consent is required under
Section 7 of the Securities Act of 1933, as amended, or the rules or regulations
of the Securities and Exchange Commission promulgated thereunder.
Sincerely,
FOLEY & LARDNER
/s/ Foley & Lardner
LYK/sr.
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Exhibit 10.4
HENNESSY ADVISORS, INC.
2001 Omnibus Plan
HENNESSY ADVISORS, INC.
2001 Omnibus Plan
Table of Contents
Page
Article I. Purpose................................................. 1
1.1 Purpose................................................. 1
1.2 Adoption................................................ 1
Article II. Definitions............................................. 1
2.1 Advisor................................................. 1
2.2 Affiliate............................................... 1
2.3 Award................................................... 1
2.4 Award Agreement......................................... 1
2.5 Board................................................... 1
2.6 Change of Control....................................... 2
2.7 Code.................................................... 2
2.8 Committee............................................... 2
2.9 Exchange Act............................................ 2
2.10 Fair Market Value....................................... 2
2.11 Incentive Stock Option.................................. 2
2.12 Key Employee............................................ 2
2.13 Non-Employee Director................................... 2
2.14 Non-Qualified Stock Option.............................. 3
2.15 Option.................................................. 3
2.16 Outside Directors....................................... 3
2.17 Participant............................................. 3
2.18 Performance Award....................................... 3
2.19 Performance Goal........................................ 3
2.20 Plan.................................................... 3
2.21 Plan Year............................................... 4
2.22 Released Securities..................................... 4
2.23 Restricted Stock........................................ 4
2.24 Rule 16b-3.............................................. 4
2.25 Shares.................................................. 4
2.26 Stock Appreciation Rights............................... 4
Article III. Administration.......................................... 4
3.1 Committee............................................... 4
3.2 Delegation of Authority................................. 5
Article IV. Shares.................................................. 6
4.1 Number of Shares Available.............................. 6
4.2 Shares Subject to Terminated Awards..................... 6
4.3 Adjustments............................................. 6
Article V. Participation........................................... 7
5.1 Eligible Participants................................... 7
i
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Article VI. Stock Options and Stock Appreciation Rights............. 7
6.1 Grant of Option......................................... 7
6.2 Stock Appreciation Rights............................... 8
6.3 Compliance With Code Section 162(m)..................... 8
6.4 Acceleration of Options on Change of Control............ 9
Article VII. Restricted Stock........................................ 9
7.1 Restricted Stock Awards................................. 9
7.2 Compliance with Code Section 162(m)..................... 10
Article VIII. Performance Awards...................................... 11
8.1 Performance Awards...................................... 11
8.2 Compliance with Code Section 162(m)..................... 11
Article IX. Other Share-Based Awards................................ 12
9.1 Grant of Other Awards................................... 12
9.2 Terms of Other Awards................................... 12
Article X. Terms Applicable to All Awards Granted Under the Plan... 12
10.1 Award Agreement......................................... 12
10.2 No Consideration for Awards............................. 13
10.3 Awards May Be Granted Separately or Together; No
Limitations on Other Awards............................. 13
10.4 Limitations on Transfer of Awards....................... 13
10.5 Term.................................................... 13
10.6 Taxes................................................... 13
10.7 Rights and Status of Recipients......................... 14
10.8 Awards Not Includable for Benefit Purposes.............. 14
10.9 Share Certificates; Representation by Key Employee
Participants; Registration Requirements................. 14
10.10 Amendments to Awards.................................... 14
10.11 Correction of Defects, Omissions, and Inconsistencies... 14
Article XI. Amendment and Termination............................... 15
11.1 Amendment............................................... 15
11.2 Termination............................................. 15
Article XII. General Provisions...................................... 15
12.1 Effective Date of the Plan.............................. 15
12.2 Term of Plan............................................ 15
12.3 Governing Law........................................... 15
12.4 Unfunded Status of Plan................................. 16
12.5 Headings................................................ 16
12.6 Severability............................................ 16
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HENNESSY ADVISORS, INC.
2001 Omnibus Plan
Article I. Purpose
1.1 Purpose. The purpose of the Hennessy Advisors, Inc. 2001 Omnibus Plan (the "Plan") is to assist Hennessy Advisors, Inc. (the "Company"), together with any successor thereto, and its Affiliates, to attract and retain highly competent individuals to serve as Key Employees, Non-Employee Directors and Advisors who will contribute to the Company's success, and to motivate such persons to achieve long-term objectives which will inure to the benefit of all shareholders of the Company.
1.2 Adoption. The Plan has been approved by the Board of Directors of the Company subject to the approval of the Company's shareholders.
Article II. Definitions
For purposes of this Plan, capitalized terms shall have the following meanings:
2.1 Advisor means a person other than an employee who provides services to the Company or any Affiliate as a consultant or advisor and who is responsible for or contributes to the management, growth, or profitability of the business of the Company or any Affiliate, as determined by the Committee.
2.2 Affiliate means any entity of which shares (or other ownership interests) having 50 percent or more of the voting power are owned or controlled, directly or indirectly, by the Company.
2.3 Award means any Non-Qualified Stock Options or Incentive Stock Options, Stock Appreciation Rights, Restricted Stock, Performance Awards, or any other award made under the terms of the Plan.
2.4 Award Agreement means a written agreement, contract or other document specifically setting forth the terms and conditions of any Award granted under the Plan.
2.5 Board means the Board of Directors of the Company.
2.6 Change of Control means the occurrence of any of the following:
(a) the Board approves the sale of all or substantially all of the assets of the
Company in a single transaction or series of related transactions; (b) the
Company sells and/or one or more shareholders sells a sufficient amount of its
capital stock (whether by tender offer, original issuance, or a single or series
of related stock purchase and sale agreements and/or transactions) sufficient to
confer on the purchaser or purchasers thereof (whether individually or a group
acting in concert) the ability to elect a majority of the Board; (c) the Company
is party to a merger, consolidation or combination, other than any merger,
consolidation or combination that would result in the holders of the voting
securities of the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity) more than 50% of the combined voting power
of the voting securities of the Company (or such surviving entity) outstanding
immediately after such merger, consolidation or combination.
2.7 Code means the Internal Revenue Code of 1986, as amended from time to time.
2.8 Committee means a committee of the Board designated by the Board to administer the Plan and composed of not less than two directors. At least two of the members of the Committee shall qualify as Outside Directors.
2.9 Exchange Act means the Securities Exchange Act of 1934, as amended.
2.10 Fair Market Value means, with respect to any property (including, without limitation, any Shares or other securities), the fair market value of such property determined by such methods or procedures as shall be established from time to time by the Committee.
2.11 Incentive Stock Option means an Option designated as an incentive stock option as defined in Code Section 422.
2.12 Key Employee means any officer or other key employee of the Company or of any Affiliate who is responsible for or contributes to the management, growth, or profitability of the business of the Company or any Affiliate, as determined by the Committee.
2.13 Non-Employee Director means each member of the Board who is not an employee of the Company or any Affiliate.
2.14 Non-Qualified Stock Option means an Option that is not an Incentive Stock Option as defined by Code Section 422.
2.15 Option means any option to purchase Shares granted pursuant to the Plan, including any reload feature which also may be awarded.
2.16 Outside Directors means a Non-Employee Director who qualifies as both an outside director for purposes of Section 162(m) of the Code and as a non-employee director for purposes of Rule 16b-3 under the Exchange Act.
2.17 Participant shall mean any Key Employee (referred to as a Key Employee Participant), any Non-Employee Director (referred to as a Non-Employee Director Participant), or any Advisor (referred to as an Advisor Participant) receiving an Award under the Plan.
2.18 Performance Award means the right, granted pursuant to Article VIII, to receive an Award, payable in cash or Shares or a combination of both at the end of a specified period for which Performance Goals have been established.
2.19 Performance Goal means a target level of performance during an
Award period specified by the Committee for the Company as a whole, for one or
more Affiliates, for a division or other operating unit, and/or for a
Participant or a group of Participants, in each case as established by the
Committee. The Performance Goals for an Award made to a Key Employee Participant
that is intended to be "performance-based compensation" (within the meaning of
Code Section 162(m)) shall be based on one or more of the following measures of
performance as determined by the Committee: (a) net revenues; (b) gross profit;
(c) operating or other expenses (or any individual type of expense); (d)
earnings before interest and taxes; (e) earnings before interest, taxes,
depreciation and amortization; (f) earnings before interest, taxes, depreciation
and amortization; (g) net income; (h) earnings per share (basic or diluted);
(i) cash flow; (j) average sales; (k) return on investment (determined with reference to one or more categories of income or cash flow and one or more categories of assets, capital or equity); and (l) stock price.
2.20 Plan means the Hennessy Advisors, Inc. 2001 Omnibus Plan as set forth herein, and as the same may be amended from time to time.
2.21 Plan Year means the twelve month period ending on any December 31.
2.22 Released Securities mean Shares of Restricted Stock with respect to which all applicable restrictions have expired, lapsed, or been waived.
2.23 Restricted Stock means Shares subject to restrictions imposed in connection with Awards granted under the Plan.
2.24 Rule 16b-3 means Rule 16b-3 as promulgated by the Securities and Exchange Commission under Section 16 of the Exchange Act, as the same may be amended from time to time, and any successor rule.
2.25 Shares mean the shares of common stock of the Company and such other securities or property as may become subject to Awards pursuant to an adjustment made under Section 4.3 of the Plan.
2.26 Stock Appreciation Rights mean awards granted in accordance with
Section 6.2.
Article III. Administration
3.1 Committee. The Plan will be administered by the Committee; provided, however, that if at any time the Committee shall not be in existence, the functions of the Committee shall be exercised by the Board. Subject to the terms of the Plan and applicable law, the Committee shall have full power and authority to:
(i) designate Key Employees, Non-Employee Directors and Advisors to be Participants;
(ii) determine the type or types of Awards to be granted to Participants under the Plan;
(iii) determine the number of Shares to be covered by (or with respect to which payments, rights, or other matters are to be calculated in connection with) Awards granted to Participants;
(iv) determine the terms and conditions of any Award granted to a Participant;
(v) determine whether, to what extent, and under what circumstances Awards granted to Participants may be settled or exercised in cash, Shares, other securities, other awards, or other property, or canceled, forfeited, or suspended to the
extent permitted in Sections 4.3, 10.10 and 10.11 of the Plan, and the method or methods by which Awards may be settled, exercised, canceled, forfeited, or suspended;
(vi) determine whether, to what extent, and under what circumstances cash, Shares, other securities, other Awards, other property, and other amounts payable with respect to an Award granted to Participants under the Plan shall be deferred either automatically or at the election of the holder thereof;
(vii) interpret and administer the Plan and any instrument or agreement relating to, or Award made under, the Plan (including, without limitation, any Award Agreement);
(viii) establish, amend, suspend, or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and
(ix) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan.
Unless otherwise expressly provided in the Plan, all designations, determinations, interpretations, and other decisions under or with respect to the Plan or any Award shall be within the discretion of the Committee, may be made at any time, and shall be final, conclusive, and binding upon all persons, including the Company, any Affiliate, any Participant, any holder or beneficiary of any Award, any shareholder, and any employee of the Company or of any Affiliate.
3.2 Delegation of Authority. To the extent permitted by applicable law, the Board may, in its discretion, delegate to another committee of the Board or to one or more officers of the Company any or all of the authority and responsibility of the Committee with respect to awards to Key Employee Participants other than those who are subject to the provisions of Section 16 of the Exchange Act or Section 162(m) of the Code at the time any such delegated authority or responsibility is exercised. In the event that each member of the Committee is not an Outside Director, the Committee shall may delegate the authority and responsibility of the Committee with respect to Awards to Key Employee Participants who are subject to the provisions of Section 16 of the Exchange Act and who are or may be subject to Section 162(m) of the Code to a subcommittee consisting of at least two Committee members each of whom qualify as an Outside Director. To the extent that the Board has delegated to such other committee or one or more officers, or to the extent the Committee has delegated to such subcommittee, the authority and responsibility of the Committee, all references to the Committee herein shall include such other committee or one or more officers or subcommittee.
Article IV. Shares
4.1 Number of Shares Available. The maximum number of Shares which may be issued under the Plan is twenty-five (25%) of all Shares then outstanding, except that this 25% limitation shall not invalidate any Awards made prior to a decrease in the number of outstanding Shares even though such Awards have resulted or may result in Shares constituting more than 25% of the outstanding Shares being available for issuance under the Plan. Shares available under the Plan which are not awarded in one particular year may be awarded in subsequent
years. Any and all Shares may be issued in respect of any of the types of Awards. The Shares to be offered under the Plan may be authorized and unissued Shares or treasury Shares. The number of Shares covered by an Award under the Plan, or to which such Award relates, shall be counted on the date of grant of such Award against the number of Shares available for granting Awards under the Plan.
4.2 Shares Subject to Terminated Awards. The (a) Shares covered by any unexercised portions of terminated Options, (b) Shares forfeited as provided under the Plan, and (c) Shares subject to any Awards which are otherwise surrendered by the Participant and as to which Shares no Participant has received any payment or other benefit of ownership with respect thereto, may again be subject to new Awards under the Plan. In the event the purchase price of an Option is paid in whole or in part through the delivery of Shares, the gross number of Shares issuable in connection with the exercise of the Option shall not again be available for the grant of Awards under the Plan. Shares used to measure the amount payable to a Participant in respect of an earned Performance Award shall not again be available for the grant of Awards under the Plan. Shares issued in payment of Performance Awards which are denominated in cash amounts shall not again be available for the grant of Awards under the Plan.
4.3 Adjustments.
(a) General. In the event that the Committee shall
determine that any dividend or other distribution (whether in the form of cash,
Shares, other securities, or other property), recapitalization, stock split,
reverse stock split, reclassification, reorganization, merger, consolidation,
split-up, spin-off, combination, repurchase, or exchange of securities of the
Company, or other similar corporate transaction or event affects the Shares such
that an adjustment is determined by the Committee to be appropriate in order to
prevent dilution or enlargement of the benefits or potential benefits intended
to be made available under the Plan, then the Committee shall, in such manner as
it may deem equitable, adjust (i) the number and type of Shares subject to the
Plan and which thereafter may be issued under the Plan, (ii) the individual Key
Employee Participant maximums for Awards granted during any calendar year,
(iii) the number and type of Shares subject to outstanding Awards, and (iv) the
grant, purchase, or exercise price with respect to any Award, or, if deemed
appropriate, make provisions for the mandatory surrender of an Award and a cash
payment to the holder of an outstanding Award upon such surrender. With respect
to Awards of Incentive Stock Options no such adjustment shall be authorized to
the extent that such authority would cause the Plan to violate Section 422(b)(1)
of the Code or any successor provision thereto; and provided further, that the
number of Shares subject to any Award payable or denominated in Shares shall
always be a whole number. Nonqualified Stock Option Awards subject to grant or
previously granted to Non-Employee Directors under the Plan at the time of any
event described in the preceding sentence shall be subject to only such
adjustment as shall be necessary to maintain the proportionate interest of the
optionee and preserve, without exceeding, the value of such Option Awards.
(b) Adjustment to Awards Upon Certain Acquisitions. In the event the Company or any Affiliate shall assume outstanding employee awards or the right or obligation to make future awards in connection with the acquisition of another business or another corporation or business entity, the Committee may make such adjustments, not inconsistent with the terms of the Plan, in the terms of Awards granted to Participants as it shall deem
appropriate in order to achieve reasonable comparability or other equitable relationship between the assumed awards and the Awards granted under the Plan to Participants as so adjusted.
Article V. Participation
5.1 Eligible Participants. Any Key Employee, including any executive officer or employee-director of the Company or of any Affiliate, shall be eligible to be designated a Key Employee Participant. All Non-Employee Directors shall be eligible to receive Options under Article VI and other Awards under Article IX. Any Advisor shall be eligible to be designated an Advisor Participant.
Article VI. Stock Options and Stock Appreciation Rights
6.1 Grant of Option. The Committee is hereby authorized to grant Options to Key Employee Participants and Advisor Participants as set forth below and with such additional terms and conditions, in either case not inconsistent with the provisions of the Plan, as the Committee shall determine. The Board is hereby authorized to grant Options to Non-Employee Directors as set forth below with such additional terms and conditions, in either case not inconsistent with the provisions of the Plan, as the Board shall determine, and any reference to the Committee in this Section 6.1 shall mean the Board with reference to any Options granted to Non-Employee Directors under this Section 6.1.
(a) Exercise Price. The exercise price per Share purchasable under an Option shall be determined by the Committee at the time of grant but, unless approved by the Board, shall be not less than 100% of the Fair Market Value of the Share on the date of grant of such Option.
(b) Option Term. The term of each Option shall be fixed by the Committee, but no Incentive Stock Option shall be exercisable more than ten years after the date of grant.
(c) Exercisability and Method of Exercise. An Option Award may contain such Performance Goals and waiting periods, and shall become exercisable in such manner and within such period or periods and in such installments or otherwise, as shall be determined by the Committee at the time of grant. The Committee shall also determine the method or methods by which, and the form or forms, including, without limitation, cash, Shares, other securities, other Awards, or other property, or any combination thereof, having a Fair Market Value on the exercise date equal to the relevant exercise price, in which payment of the exercise price with respect to any Option may be made or deemed to have been made (including payment in accordance with a cashless exercise program under which, if so instructed by the Participant, Shares may be issued directly to the Participant's broker or dealer upon receipt of the purchase price in cash from the broker or dealer). No Shares shall be issued until payment therefor, as provided herein, has been made. In the case of Incentive Stock Options the right to make payment of the purchase price in the form of Shares may be authorized only at the time of grant. Board approval shall be required in order for Shares held by a Participant for fewer than six months to be used in payment of the exercise price of an Option.
(d) Incentive Stock Options. The terms of any Incentive Stock Option granted under the Plan shall comply in all respects with the provisions of Code Section 422, or any successor provision thereto, and any regulations promulgated thereunder. To the extent an Incentive Stock Option fails to meet the requirements of Code Section 422, the Option shall be treated as a Non-Qualified Stock Option.
(e) Reload Feature. The Committee shall have the authority to specify, at the time of grant of Incentive Options or, with respect to Non-qualified Stock Options, at or after the time of grant, that a Key Employee Participant's Options, in part or in whole, shall include a "reload feature." The reload feature is a provision which the Committee may, but is not required to, include in any Option granted to Key Employee Participants under this Plan to the effect that at such time as the original Option is exercised, the optionee shall automatically be granted a new Option pursuant hereto to purchase a number of Shares equal to the number of Shares utilized by the optionee to pay the option exercise price on the original option. A reload Option shall have an exercise price equal to the Fair Market Value of the Shares on the date it is granted and shall expire on the stated expiration date of the original Option. A reload Option shall contain such other terms and conditions as the Committee, in its discretion, deems to be desirable.
6.2 Stock Appreciation Rights. The Committee is hereby authorized to grant Stock Appreciation Rights to Key Employee Participants and Advisor Participants. Stock Appreciation Rights granted in tandem with Incentive Stock Options may only be granted simultaneously with the grant of the related Incentive Stock Option to such Participant. Subject to the terms of the Plan, the grant price, term, methods of exercise, methods of settlement (including whether Stock Appreciation Rights will be settled in cash, Shares, other securities, other Awards, or other property, or any combination thereof), and any other terms and conditions of any Stock Appreciation Right shall be as determined by the Committee. The Committee may impose such conditions or restrictions on the exercise of any Stock Appreciation Right as it may deem appropriate.
6.3 Compliance With Code Section 162(m). Notwithstanding any other provision of the Plan, the maximum number of Shares with respect to which Options and Stock Appreciation Rights, in the aggregate, may be awarded to any Participant during any calendar year under the Plan is 50,000.
6.4 Acceleration of Options on Change of Control. In the event that a Change of Control occurs, immediately before such Change of Control (or in the case where the Change of Control results from sales of capital stock by share- holders, immediately after such Change of Control), all outstanding Options shall become exercisable in full without regard to whether the Options by their terms are at such time exercisable in full; provided, however, that in the event of a business combination which is intended to be accounted for as a "pooling of interests" and with respect to which the independent auditors for the Company issue an opinion to the Company that, but for the acceleration of vesting of the Options in anticipation of the Change of Control, the business combination will qualify for pooling of interests accounting treatment, the Company and the acquiring or surviving entity may convert the Options into options to purchase shares of stock in the acquiring or surviving entity (as the case may be) on a fair and equitable basis, and in such case, the vesting of the Options shall not accelerate on such a Change of Control. The Committee (or the Board in the case of Options granted to Non-Employee
Directors) may, at the time of grant of an Option, include different acceleration provisions in the Award Agreement, in which case the provisions of the Award Agreement shall control.
Article VII. Restricted Stock
7.1 Restricted Stock Awards. The Committee is hereby authorized to grant Awards of Restricted Stock to Key Employee Participants and Advisor Participants as set forth below and with such additional terms and conditions, in either case not inconsistent with the provisions of the Plan, as the Committee shall determine. The Board is hereby authorized to grant Restricted Stock to Non-Employee Directors as set forth below with such additional terms and conditions, in either case not inconsistent with the provisions of the Plan, as the Board shall determine, and any reference to the Committee in this Section 7.1 shall mean the Board with reference to any Restricted Stock granted to Non-Employee Directors under this Section 7.1.
(a) Restrictions. The Committee may grant to any Key Employee or Advisor an Award of Restricted Stock in such number, and subject to such terms and conditions relating to forfeitability (whether based on Performance Goals, periods of service or otherwise) and relating to restrictions (including, without limitation, any limitation on the right to vote a share of Restricted Stock or the right to receive any dividend or other right or property), which restrictions may lapse separately or in combination at such time or times, in such installments or otherwise, as the Committee may deem appropriate.
(b) Registration. Any Restricted Stock granted under the Plan to a Key Employee Participant or Advisor Participant may be evidenced in such manner as the Committee may deem appropriate, including, without limitation, book-entry registration or issuance of a stock certificate or certificates. In the event any stock certificate is issued in respect of Shares of Restricted Stock granted under the Plan to a Key Employee Participant or Advisor Participant, such certificate shall be registered in the name of the employee or Advisor and shall bear an appropriate legend (as determined by the Committee) referring to the terms, conditions, and restrictions applicable to such Restricted Stock.
(c) Shareholder Rights. Unless otherwise provided by an Award Agreement, a Key Employee Participant or Advisor Participant shall become a shareholder of the Company with respect to all Shares subject to the Award Agreement and shall have all of the rights of a shareholder, including, but not limited to, the right to vote such Shares and the right to receive dividends; provided, however, that any Shares distributed as a dividend or otherwise with respect to any Restricted Stock as to which the restrictions have not yet lapsed shall be subject to the same restrictions, and evidenced in the same manner, as such Restricted Stock.
(d) Payment of Restricted Stock. At the end of the applicable restriction period relating to Restricted Stock granted to a Key Employee Participant or Advisor Participant, one or more stock certificates for the appropriate number of Shares, free of restrictions, shall be delivered to the Participant, or, if the Participant received stock certificates representing the Restricted Stock at the time of grant, the legends placed on such certificates shall be removed.
(e) Forfeiture. Except as otherwise determined by the Committee, upon termination of employment of a Key Employee or the termination of an Advisor as a consultant
or advisor (as determined under criteria established by the Committee) for any reason during the applicable restriction period, all Shares of Restricted Stock still subject to restriction shall be forfeited by the Participant and reacquired by the Company; provided, however, that the Committee may, when it finds that a waiver would be in the interests of the Company, waive in whole or in part any or all remaining restrictions with respect to Shares of Restricted Stock held by a Participant.
7.2 Compliance with Code Section 162(m). Notwithstanding any other provision of the Plan, with respect to an Award of Restricted Stock made to any Key Employee Participant that is intended to be "performance-based compensation" (within the meaning of Code Section 162(m)), the following provisions shall apply:
(a) the maximum number of Shares of Restricted Stock that may be awarded to any individual Key Employee Participant during any calendar year under the Plan is 50,000 Shares;
(b) each Award of Restricted Stock shall provide that the restrictions imposed on such Award shall not lapse until, at a minimum, one or more preestablished (within the meaning of Code section 162(m)) Performance Goals has been achieved by the Company and/or any Affiliate during the performance period specified by the Committee; and
(c) in all other respects, the Restricted Stock shall be administered in accordance with the requirements of Code section 162(m) for performance-based compensation.
Article VIII. Performance Awards
8.1 Performance Awards. The Committee is hereby authorized to grant Performance Awards to Key Employee Participants and Advisor Participants as set forth below and with such additional terms and conditions, in either case not inconsistent with the provisions of the Plan, as the Committee shall determine. The Board is hereby authorized to grant Performance Awards to Non-Employee Directors as set forth below with such additional terms and conditions, in either case not inconsistent with the provisions of the Plan, as the Board shall determine, and any reference to the Committee in this Section 8.1 shall mean the Board with reference to any Performance Awards granted to Non-Employee Directors under this Section 8.1.
(a) Issuance. A Performance Award shall consist of the right to receive a payment (measured by (i) the Fair Market Value of a specified number of Shares at the end of the Award period or (ii) the increase in the Fair Market Value of a specified number of Shares during the Award period or (iii) a fixed cash amount payable at the end of the Award period) contingent upon the extent to which certain predetermined Performance Goals have been met during an Award period.
(b) Earning Performance Awards. The Committee at the date of grant shall prescribe a formula to determine the percentage of the Performance Award to be earned based upon the degree of attainment of Performance Goals. The degree of attainment of Performance Goals shall be determined as of the last day of the Award period. The Committee, in its sole discretion, but only under circumstances when events or transactions occur to cause
the Performance Goals to be an inappropriate measure of achievement as determined by the Committee, may change the Performance Goals for any Award period at any time prior to the final determination of the Award, except with respect to Performance Awards that are intended to be "performance-based compensation" (within the meaning of Code Section 162(m)). In the event the minimum performance targets established by the Committee are not achieved, no payment shall be made to the Participant.
(c) Payment of Earned Performance Awards. Payments of earned Performance Awards shall be made in cash or Shares (based on the Fair Market Value of a Share on the last day of the Award period), or a combination of cash and Shares at the sole discretion of the Committee. Payment normally will be made as soon as is practicable following the end of an Award period; the Committee, however, may permit deferral of the payment of all or a portion of a Performance Award payable in cash upon the request of the Participant timely made in accordance with rules prescribed by the Committee. Deferred amounts may generate earnings for the Participant under the conditions of a separate agreement approved by the Committee and executed by the Participant. The Committee, in its sole discretion, may define in the Award Agreement such other conditions of payment of earned Performance Awards as it may deem desirable in carrying out the purposes of the Plan.
8.2 Compliance with Code Section 162(m). Notwithstanding any other provision of the Plan, with respect to a Performance Award granted to any Key Employee Participant that is intended to be "performance-based compensation" (within the meaning of Code Section 162(m)), the following provisions shall apply:
(a) the aggregate value of Performance Awards granted to an individual Key Employee Participant during a calendar year under the Plan shall not be more than $100,000;
(b) payment under each Award shall not be made unless one or more preestablished (within the meaning of Code section 162(m)) Performance Goals has been achieved by the Company and/or any Affiliate during the Award period specified by the Committee; and
(c) in all other respects, the Performance Awards (and income resulting from any deferral thereof) shall be administered in accordance with the requirements of Code section 162(m) for performance-based compensation.
Article IX. Other Share-Based Awards
9.1 Grant of Other Awards. Other Awards, valued in whole or in part by reference to, or otherwise based on, Shares may be granted either alone or in addition to or in conjunction with other Awards under the Plan by the Committee to Key Employee Participants or Advisor Participants or by the Board to Non- Employee Directors. Subject to the provisions of the Plan, the Committee (or the Board in the case of an Award to a Non-Employee Director) shall have authority to determine the persons to whom and the time or times at which such Awards shall be made, the number of Shares to be granted pursuant to such Awards, and all other conditions of the Awards. Any such Award shall be confirmed by an Award Agreement executed by the Committee and the Participant, which Award Agreement shall contain such provisions as the Committee (or the Board in the case of an Award to a Non-Employee
Director) determines to be necessary or appropriate to carry out the intent of this Plan with respect to such Award.
9.2 Terms of Other Awards. In addition to the terms and conditions specified in the Award Agreement, Shares issued as a bonus pursuant to this Article IX shall be issued for such consideration as the Committee (or the Board in the case of an Award to a Non-Employee Director) shall determine, in its sole discretion, but purchase rights shall be priced at 100% of Fair Market Value on the date of the Award.
Article X. Terms Applicable to All Awards Granted Under the Plan
10.1 Award Agreement. No person shall have any rights under any Award granted under the Plan unless and until the Company and the Participant to whom such Award shall have been granted shall have executed and delivered an Award Agreement or received any other Award acknowledgment authorized by the Committee expressly granting the Award to such person and containing provisions setting forth the terms of the Award. If there is any conflict between the provisions of an Award Agreement and the terms of the Plan, the terms of the Plan shall control.
10.2 No Consideration for Awards. Awards shall be granted to Key Employee Participants or Advisor Participants for no cash consideration unless otherwise determined by the Committee.
10.3 Awards May Be Granted Separately or Together; No Limitations on Other Awards. Awards to Participants under the Plan may be granted either alone or in addition to, in tandem with, or in substitution for any other Award or any award granted under any other plan of the Company or any Affiliate and the terms and conditions of an Award need not be the same with respect to each such Participant. Awards granted in addition to or in tandem with other Awards, or in addition to or in tandem with awards granted under any other plan of the Company or any Affiliate may be granted either at the same time as or at a different time from the grant of such other Awards or awards.
10.4 Limitations on Transfer of Awards. Awards granted under the Plan shall not be transferable other than by will or the laws of descent and distribution, except that a Participant may, to the extent allowed by the Committee and in a manner specified by the Committee (or the Board with respect to Options granted pursuant to Article X), (a) designate in writing a beneficiary to exercise the Award after the Participant's death, as the case may be, and (b) transfer any award. No Award (other than Released Securities), and no right under any such Award, may be pledged, alienated, attached, or otherwise encumbered, and any purported pledge, alienation, attachment, or encumbrance thereof shall be void and unenforceable against the Company or any Affiliate.
10.5 Term. Except as otherwise provided in the Plan, the term of each Award shall be for such period as may be determined by the Committee.
10.6 Taxes. The Company shall be entitled, if the Committee deems it necessary or desirable, to withhold (or secure payment from the Participant in lieu of withholding) the amount of any withholding or other tax required by law to be withheld or paid by the Company with respect to any amount payable and/or Shares issuable to such Participant under the Plan, or
with respect to any income recognized upon the lapse of restrictions applicable to an Award or upon a disqualifying disposition of Shares received pursuant to the exercise of an Incentive Stock Option, and the Company may defer payment or issuance of the cash or Shares upon the grant, exercise or vesting of an Award unless indemnified to its satisfaction against any liability for any such tax. The amount of such withholding or tax payment shall be determined by the Committee and shall be payable by the Participant at such time as the Committee determines. The Committee may prescribe in each Award Agreement one or more methods by which the Participant will be permitted to satisfy his or her tax withholding obligation, which methods may include, without limitation, the payment of cash by the Participant to the Company and the withholding from the Award, at the appropriate time, of a number of Shares sufficient, based upon the Fair Market Value of such Shares, to satisfy such minimum tax withholding requirements. The Committee shall be authorized, in its sole discretion, to establish such rules and procedures relating to any such withholding methods as it deems necessary or appropriate.
10.7 Rights and Status of Recipients. No Employee, Participant, or other person shall have any claim or right to be granted an Award under this Plan. Neither the Plan nor any action taken hereunder shall be construed as giving any employee any right to be retained in the employ of the Company or any Affiliate. The grant of an Award to a Non-Employee Director shall confer no right on such Non-Employee Director to continue as a director of the Company, and the grant of an Award to an Advisor shall confer no right on such Advisor to continue as a consultant or advisor to the Company or any Affiliate.
10.8 Awards Not Includable for Benefit Purposes. Income recognized by a Participant pursuant to the provisions of the Plan shall not be included in the determination of benefits under any employee pension benefit plan (as such term is defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended) or group insurance or other benefit plans applicable to the Participant which are maintained by the Company, except as may be provided under the terms of such plans or determined by resolution of the Board.
10.9 Share Certificates; Representation by Key Employee Participants; Registration Requirements. In addition to the restrictions imposed pursuant to Article VII hereof, all certificates for Shares delivered under the Plan, whether pursuant to any Award or the exercise thereof or otherwise, shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the rules, regulations, and other requirements of the Securities Exchange Commission, any stock exchange or other market upon which such Shares are then listed or traded, and any applicable federal or state securities laws, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. The Committee may require each Participant or other person who acquires Shares under the Plan to represent to the Company in writing that such person is acquiring the Shares without a view to the distribution thereof.
10.10 Amendments to Awards. The Committee may, in whole or in part, waive any conditions or other restrictions with respect to, and may amend, alter, suspend, discontinue, or terminate any Award granted under the Plan to a Key Employee Participant or Advisor Participant (and the Board may so do with respect to any Non-Employee Director), prospectively or retroactively, but no such action shall impair the rights of any Participant without his or her consent except as provided in Sections 4.3 and 8.1(b).
10.11 Correction of Defects, Omissions, and Inconsistencies. The Committee may correct any defect, supply any omission, or reconcile any inconsistency in any Award or Award Agreement in the manner and to the extent it shall deem desirable to carry the Plan into effect.
Article XI. Amendment and Termination
11.1 Amendment. The Board may amend, alter, suspend or discontinue
the Plan or any part thereof at any time it is deemed necessary or appropriate;
provided, however, that no amendment, alteration, suspension or discontinuation
of the Plan shall in any manner (except as otherwise provided in this Article
XI) adversely affect any Award granted and then outstanding under the Plan,
without the consent of the Participant; and provided, further, that shareholder
approval of any amendment of the Plan shall also be obtained if otherwise
required by (i) the Code or any rules promulgated thereunder (in order to allow
for Incentive Stock Options to be granted under the Plan or to enable the
Company to comply with the provisions of Section 162(m) of the Code so that the
Company can deduct compensation in excess of the limitation set forth therein),
or (ii) the listing requirements of the principal securities exchange or market
on which the Shares are then traded (in order to maintain the listing or
quotation of the Shares thereon).
11.2 Termination. The Board shall have the right and the power to terminate the Plan at any time. No Award shall be granted under the Plan after the termination of the Plan, but the termination of the Plan shall not have any other effect and any Award outstanding at the time of the termination of the Plan may be exercised after termination of the Plan at any time prior to the expiration date of such Award to the same extent such Award would have been exercisable had the Plan not terminated.
Article XII. General Provisions
12.1 Effective Date of the Plan. The Plan shall be effective as of the date that the Company's shareholders approve the Plan.
12.2 Term of Plan. The term of the Plan shall be indefinite except that no Incentive Stock Option Award shall be granted under the Plan after the tenth anniversary of the effective date of the Plan. However, unless otherwise expressly provided in the Plan or in an applicable Award Agreement, any Incentive Stock Option Award theretofore granted may extend beyond such date, and, to the extent set forth in the Plan, the authority of the Committee to amend, alter, adjust, suspend, discontinue, or terminate any such Award, or to waive any conditions or restrictions with respect to any such Award, and the authority of the Board to amend the Plan, shall extend beyond such date.
12.3 Governing Law. The Plan and all determinations made and actions taken pursuant to the Plan shall be governed by the laws of the state of California and applicable federal laws.
12.4 Unfunded Status of Plan. Unless otherwise determined by the Committee, the Plan shall be unfunded and shall not create (or be construed to create) a trust or a separate fund or funds. The Plan shall not establish any fiduciary relationship between the Company and any Key Employee Participant, Non-Employee Director Participant, Advisor or other person. To the extent any person holds any right by virtue of a grant under the Plan, such right
(unless otherwise determined by the Committee) shall be no greater than the right of an unsecured general creditor of the Company.
12.5 Headings. Section headings are used in the Plan for convenience only, do not constitute a part of the Plan, and shall not be deemed in any way to be material or relevant to the construction or interpretation of the Plan or any provision thereof.
12.6 Severability. Whenever possible, each provision in the Plan and every Award and right at any time granted under the Plan shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of the Plan or any Award at any time granted under the Plan shall be held to be prohibited by or invalid under applicable law, then (a) such provision shall be deemed amended to accomplish the objectives of the provision as originally written to the fullest extent permitted by law and (b) all other provisions of the Plan and every other Award or right at any time granted under the Plan shall remain in full force and effect.
Exhibit 10.4(a)
HENNESSY ADVISORS, INC.
2001 OMNIBUS PLAN
OPTION AWARD AGREEMENT FOR KEY EMPLOYEES
THIS AGREEMENT is made and entered into as of the date set forth on the signature page hereof by and between HENNESSY ADVISORS, INC., a California corporation ("Company"), and the Key Employee of the Company whose signature is set forth on the signature page hereof (the "Key Employee").
W I T N E S S E T H
WHEREAS, the Company has adopted the Hennessy Advisors, Inc. 2001 Omnibus Plan ("Plan"), the terms of which, to the extent not stated herein, are specifically incorporated by reference in this Agreement;
WHEREAS, the purpose of the Plan is to permit Awards under the Plan to be granted to certain Key Employees of the Company and its Affiliates and to further specify the terms and conditions under which such individuals may receive such Awards;
WHEREAS, the Key Employee is now employed or engaged by the Company or an Affiliate in a key employee capacity and the Company desires him or her to remain in such capacity, and to secure or increase his or her ownership of Shares in order to increase his or her incentive and personal interest in the success and growth of the Company; and
WHEREAS, defined terms used herein and not otherwise defined herein shall have the meanings set forth in the Plan.
NOW, THEREFORE, in consideration of the premises and of the covenants and agreements herein set forth, the parties hereby mutually covenant and agree as follows:
1. Option Grant.
(a) Grant. Subject to the terms and conditions set forth herein, the Company hereby grants to the Key Employee an option (the "Option") to purchase from the Company all or any part of the aggregate number of Shares (hereinafter referred to as the "Option Stock") set forth on the signature page hereof, at the purchase price per Share set forth on the signature page hereof.
(b) Term. The Option may not be exercised prior to the Initial Exercise Date set forth on the signature page hereof or after the Expiration Date set forth thereon, except that other than as provided herein, the Option shall not be exercisable after the termination of the Key Employee's employment with the Company and all Affiliates. Absence of the Key Employee on leave approved by a duly appointed and acting officer of the
Company, other than the Key Employee, shall not be considered a termination of employment during the period of such leave.
(c) Exercise Amount. The Option may be exercised in whole or in part (but no exercise shall be for fewer than 25 Shares or all of the Shares subject to the Option, if fewer) by notice in writing to the Company.
(d) Payment for Shares. The aggregate purchase price for the Shares for which the Option is exercised shall be paid to the Company at the time of exercise in cash, Shares registered in the name of the Key Employee, or by a combination thereof, all as provided on the signature page hereof, however, Board approval shall be required in order for shares held by a participant for fewer than six months to be used in payment of the exercise price of an Option. If the purchase price may be paid wholly or partly in Shares, any Shares tendered in payment thereof shall be free of all adverse claims and duly endorsed in blank by the Key Employee or accompanied by stock powers duly endorsed in blank. Shares tendered shall be valued at Fair Market Value on the date on which the Option is exercised. As used herein, "Fair Market Value" means the per Share closing price on the date in question in the principal market in which the Shares are then traded or, if no sales of Shares have taken place on such date, the closing price on the most recent date on which selling prices were quoted; provided, however, that for any Option that is not an Incentive Stock Option, the Committee in its discretion may elect to determine Fair Market Value with respect to such Shares, based on the average of the closing prices, as of the date of determination and a period of up to 20 trading days immediately preceding such date. If such proviso is to be applicable, the signature page hereof sets forth the number of trading days in such period.
(e) ISO/NSO. Unless otherwise provided on the signature page hereof, the Option shall not be an Incentive Stock Option for purposes of Section 422 of the Code.
(f) Reload Feature. Unless otherwise provided on the signature page hereof, the Option shall not have the "reload feature" described in Section 6.1 of the Plan, as of the date of grant.
2. Nontransferability of Option. This Option is not transferable other than by will or by the laws of descent and distribution. The Option may be exercised during the life of the Key Employee only by the Key Employee, except as otherwise expressly set forth in Section 4(b) below.
3. Securities Law Restrictions. The Key Employee agrees and acknowledges for himself/herself and his/her heirs, legatees and legal representatives, with respect to all Option Stock (or any shares of stock issued pursuant to a stock dividend or stock split thereon or any securities issued in lieu thereof or in substitution or exchange therefor), that he/she and his/her heirs, legatees and legal representatives will not sell or otherwise dispose of such shares except pursuant to an effective registration statement under the Securities Act of 1933 (the "Act") and applicable state securities laws, or except in a transaction which, in the opinion of counsel for the Company, is exempt from registration under the Act and applicable state securities laws.
As further conditions to the issuance of the Option Stock, the Key Employee
agrees for himself/herself, and his/her heirs, legatees and legal
representatives, prior to such issuance, to (i) execute and deliver to the
Company such investment representations and warranties, and to take such other
actions, as counsel for the Company determines may be necessary or appropriate
for compliance with the Act and any applicable state securities laws, and
(ii) execute and thereby become a party to any stock restriction agreement then
in effect among the Company and its other shareholders. The Key Employee agrees
that any certificate representing Option Stock shall bear the following legend
(or such other legend of similar effect as Company may determine):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR QUALIFIED UNDER THE APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER THE ACT, PURSUANT TO RULE 144 OR PURSUANT TO AN OPINION OF COUNSEL IN A FORM SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT, AND SUCH QUALIFICATION IS NOT REQUIRED UNDER APPLICABLE STATE SECURITIES LAWS.
4. Exercise of Option.
(a) Except as provided herein, the Option shall be exercisable only (i) prior to the Expiration Date, and (ii) after the date that escrow is first released with respect to completion of an initial public offering of a minimum offering amount of 450,000 of the Company's shares of common stock.
(b) If the Key Employee's employment with the Company and all Affiliates is terminated because of death, Retirement or Total Disability (as such terms are defined below) on or after the Initial Exercise Date, the Key Employee or, in the case of his death, his Beneficiary (as defined herein) shall be entitled to exercise the Option, in the full amount granted until the Expiration Date.
(c) As used herein, (i) "Retirement" means termination of employment with the Company and all Affiliates as defined by Company policies as in effect from time to time, except that if the Key Employee's employment is terminated for Cause (as hereinafter defined) or because of death or Total Disability, such termination shall not be "Retirement" for purposes hereof, and (ii) "Total Disability" means permanent and total disability within the meaning of Code Section 22(e)(3).
(d) If the Key Employee's employment with the Company is terminated on or after the Initial Exercise Date for any reason other than Cause (as defined below), the Key
Employee shall be entitled to exercise the Option, to the extent exercisable pursuant to paragraph (a), above (i) until 6 months after such termination of employment if due to death or Total Disability and (ii) until 3 months after such termination of employment if such termination is not due to death or Total Disability. If such a termination of employment occurs prior to the Initial Exercise Date, the Key Employee shall be entitled to exercise the Option to the extent, if any, as the Committee may determine.
(e) As used herein, "Cause" means, as determined by the Committee, the Key Employee's failure to perform his duties or intentional dishonest or illegal conduct in connection with his performance of services for the Company or any Affiliate.
(f) If the Key Employee's employment with the Company is terminated for Cause, the Key Employee shall have no right to exercise any portion of any Option not yet exercised as of the date of such termination for Cause.
5. Beneficiary.
(a) The person whose name appears on the signature page hereof after the caption "Beneficiary" or any successor designated by the Key Employee in accordance herewith (the person who is the Key Employee's Beneficiary at the time of his death herein referred to as the "Beneficiary") shall be entitled to exercise the Option, to the extent it is exercisable, after the death of the Key Employee. The Key Employee may from time to time revoke or change his Beneficiary without the consent of any prior Beneficiary by filing a new designation with the Committee. The last such designation received by the Committee shall be controlling; provided, however, that no designation, or change or revocation thereof, shall be effective unless received by the Committee prior to the Key Employee's death, and in no event shall any designation be effective as of a date prior to such receipt.
(b) If no such Beneficiary designation is in effect at the time of a Key Employee's death, or if no designated Beneficiary survives the Key Employee or if such designation conflicts with law, the Key Employee's estate shall be entitled to exercise the Option, to the extent it is exercisable after the death of the Key Employee. If the Committee is in doubt as to the right of any person to exercise the Option, the Company may refuse to recognize such exercise, without liability for any interest or dividends on the Option Stock, until the Committee determines the person entitled to exercise the Option, or the Company may apply to any court of appropriate jurisdiction and such application shall be a complete discharge of the liability of the Company therefor.
6. No Rights As Stockholder.
The Key Employee shall have no rights as a holder of the Option Stock until the issuance of a certificate for the Option Stock.
7. Tax Withholding.
(a) It shall be a condition of the obligation of the Company to issue Option Stock to the Key Employee or the Beneficiary, and the Key Employee agrees, that the Key Employee shall pay to the Company upon its demand, such amount as may be requested by the Company for the purpose of satisfying its liability to withhold federal, state, or local income or other taxes incurred by reason of the exercise of the Option.
(b) If the Option is not an Incentive Stock Option, the Key Employee may elect to have the Company withhold that number of Shares of Option Stock otherwise issuable to the Key Employee upon exercise of the Option or to deliver to the Company a number of Shares, in each case, having a Fair Market Value on the Tax Date (as defined below) equal to the minimum amount required to be withheld as a result of such exercise. The election must be made in writing and, if the Key Employee is an Insider (as defined below), must be delivered to the Company 6 months or more prior to the Tax Date and shall not be effective until at least 6 months after the Grant Date, provided, however, that this restriction shall not apply in the event death of the Key Employee occurs prior to the expiration of such 6 month period. If the Key Employee is not an Insider, the election must be delivered to the Company prior to the Tax Date. If the Key Employee is an Insider, the full number of shares of Option Stock issuable on exercise of the Option may be issued to the Key Employee, and in such event the Key Employee shall be unconditionally obligated to tender back to the Company, as soon as practicable after the Tax Date, a number of shares of the minimum amount required to be withheld. If the number of shares so determined shall include a fractional share, the Key Employee shall deliver cash in lieu of such fractional share. All elections shall be made in a form approved by the committee and shall be subject to disapproval, in whole or in part by the Committee. Any election under this paragraph (b) by an Insider shall be irrevocable and may not be changed until another irrevocable election is effective. As used herein, (i) Tax Date means the date on which the Key Employee must include in his gross income for federal income tax purposes the fair market value of the Option Stock over the purchase price therefor and (ii) "Insider" means an officer or director of the Company or a beneficial owner of more than 10 percent of the Shares.
8. Adjustments in Event of Change in Shares.
In the event that the Committee shall determine that any dividend or other distribution (whether in the form of cash, Shares, other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, reclassification, repurchase, or exchange of securities of the Company, or other similar corporate transaction or event affects the Shares issuable on exercise of the Option, such that an adjustment is determined by the Committee to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Committee shall, in such manner as it may deem equitable, adjust the number and type of Shares awarded pursuant to this Agreement, or the terms, conditions, or restrictions of this Agreement; provided, however, that with respect to Awards of Incentive Stock Options no such adjustment shall be authorized to the extent that such authority would cause the Plan to violate Section 422(b)(1) of the Code
or any successor provision thereto; and provided further, however, that the number of Shares subject to any Award payable or denominated in Shares shall always be a whole number.
9. Powers of Company Not Affected. The existence of the Option shall not affect in any way the right or power of the Company or its stockholders to make or authorize any combinations, subdivision or reclassification of the Shares or any reorganization, merger, consolidation, business combination, exchange of Shares, or other change in the Company's capital structure or its business, or any issue of bonds, debentures or stock having rights or preferences equal, superior or affecting the Option Stock or the rights thereof or dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. Nothing in this Agreement shall confer upon the Key Employee any right to continue in the employment of the Company or any Affiliate, or interfere with or limit in any way the right of the Company or any Affiliate to terminate the Key Employee's employment at any time.
10. Interpretation by Committee. The Key Employee agrees that any dispute or disagreement which may arise in connection with this Agreement shall be resolved by the Committee, in its sole discretion, and that any interpretation by the Committee of the terms of this Agreement or the Plan and any determination made by the Committee under this Agreement or the Plan may be made in the sole discretion of the Committee and shall be final, binding, and conclusive. Any such determination need not be uniform and may be made differently among Key Employees awarded Option Stock.
11. Financial Statements. The Company shall deliver to Key Employee annually copies of the Company's annual financial statements.
12. Miscellaneous.
(a) This Agreement shall be governed and construed in accordance with the laws of the State of California applicable to contracts made and to be performed therein between residents thereof.
(b) This Agreement may not be amended or modified except by the written consent of the parties hereto.
(c) The captions of this Agreement are inserted for convenience of reference only and shall not be taken into account in construing this Agreement.
(d) Any notice, filing or delivery hereunder or with respect to Option Stock shall be given to the Key Employee at either his usual work location or his home address as indicated in the records of the Company, and shall be given to the Committee or the Company at 750 Grant Avenue, Suite 100, Novato, California 94945, Attention Corporate Secretary. All such notices shall be given by first class mail, postage prepaid, or by personal delivery.
(e) This Agreement shall be binding upon and inure to the benefit of the Company and its successors and assigns and shall be binding upon and inure to the personal
benefit of the Key Employee, the Beneficiary and the personal representative(s) and heirs of the Key Employee.
IN WITNESS WHEREOF, the Company has caused this instrument to be executed by its duly authorized officer and its corporate seal hereunto affixed, and the Key Employee has hereunto affixed his hand and seal, all on the day and year set forth below.
HENNESSY ADVISORS, INC.
[CORPORATE SEAL] By: _____________________________________
Its: ________________________________
___________________________________(Seal)
Key Employee
[Print Name]: ___________________________
No. of Shares of Option Stock: _____ Incentive Stock Option: All Options
granted by this Agreement are
Incentive Stock Options provided,
however, if the Purchase Price per
Share multiplied by the number of
Shares as to which Options are
exercisable for the first time by the
Key Employee in any calendar year
exceeds $100,000, then the Options
with regard to the number of Shares
determined by dividing such excess
amount over $100,000 by the Purchase
Price per Share shall be Nonqualified
Stock Options.
Reload Feature: ____________________ Purchase Price
Per Share: $10.00
------------------------
Payment of Purchase Price: _________ Number of Days to Determine
Fair Market Value: _______________
Date of Agreement: _________________ Grant Date: __________________________
Initial Exercise Date: _____________ Expiration Date: _____________________
Beneficiary: _______________________ Address of Beneficiary:
Beneficiary Tax Identification No.: ______________________________________
____________________________________ ______________________________________
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Exhibit 10.5
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made as of the ____ day of _______________, 2001 (the "Effective Date"), between:
HENNESSY ADVISORS, INC.
750 Grant Avenue, Suite 100
Novato, California 94945-7024
(the "Company")
and
WHEREAS, the Company desires to retain the services of the Employee, and the Employee desires to be employed by the Company in accordance with the terms and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the covenants and agreements set forth herein, the parties hereto, intending to be legally bound, hereby agree as follows:
(a) The Company hereby employs the Employee and the Employee hereby accepts such employment by the Company, upon the terms and conditions contained in this Agreement. The Employee shall have such duties and responsibilities as may be from time to time reasonably designated by the Company's Board of Directors. The Employee shall perform his duties in a conscientious, reasonable and competent manner, shall devote his best efforts, skill and abilities to promote the Company's interests, and shall devote his full time and attention to the performance of his duties. The Employee shall initially serve in the capacity of Chairman of the Board and Chief Executive Officer and President of the Company and as Chief Investment Officer and Portfolio Manager for the Company's mutual funds and shall at all times discharge his duties as an officer and employee of the Company subject to the direction of the Company's Board of Directors (the "Board").
(b) Until such time as Employee's duties and responsibilities are changed in writing by the Board of Directors of the Company, Employee's responsibilities shall include without limitation:
(i) Managing or overseeing the management of the Company's mutual funds;
(ii) Attracting mutual fund accounts, attracting or managing accounts for high net worth individuals or retirement accounts or otherwise generating revenue; and
(iii) Supervising all Company officers and employees instructed to report directly to him.
The initial term (the "Initial Term") of this Agreement shall commence on the Effective Date and shall continue until the fifth anniversary of the Effective Date (the "Initial Expiration Date"), unless earlier terminated as provided herein. On the Initial Expiration Date and each anniversary of the Initial Expiration Date, the term of this Agreement automatically shall be extended for an additional one year term (the "Extended Term") unless either party hereto shall have provided written notice to the other party hereto of its, or his, intent not to extend this Agreement not less than sixty (60) days prior to the end of the Initial Term or the Extended Term, as the case may be. For purposes of this Agreement, "Term" means the Initial Term and, if so extended, the Extended Term.
(a) Base Salary. Initially, the Company shall pay the Employee an annual base salary of $180,000. The Employee shall be eligible to receive an increase in salary at the start of each calendar year starting January 1, 2002. This increase, if any, shall be in an amount as decided by the Board in its sole discretion.
(b) Bonus Compensation. The Board shall grant to Employee an annual bonus equal to 10% of the pre-tax profit of the Company, as computed for financial reporting purposes in accordance with generally accepted accounting principles ("Annual Bonus"). The Annual Bonus shall be payable within 30 days after the Company's accountants have completed their audit of the Company's financial statements.
(c) Employee Benefits. The Employee shall be eligible for all benefits on the same basis as otherwise generally available to other similarly situated employees. The Employee will be eligible to participate in any 401(k) plan or profit sharing plan of the Company as in effect from time to time or such other benefit plans as may be approved by the Board, subject to the Employee's satisfaction of any applicable eligibility requirements, for so long as such plans are in effect. In addition, the Employee shall be eligible to participate in any supplemental pension, retirement, hospitalization, health plan, bonus plan, or other employee benefits which the Company offers or which the Board may, from time to time, make available to similarly situated employees of the Company.
(d) Other Terms and Benefits. The Company shall pay ____% of the premiums for life insurance coverage of up to $_________________for the Employee. The Company shall pay ____% of the premiums for disability insurance coverage of up to $____________ for the Employee.
(e) Automobile Allowance. In recognition of the Employee's need for an automobile for business purposes, the Company will provide the Employee with an automobile allowance of $1,250 per month, which automobile allowance shall not preclude Employee from receiving reimbursement for business travel expenses.
(f) Taxes. The Company shall deduct from any payments or deemed payments or other income to the Employee taxes required as determined by the Company to be withheld and paid to any federal, state or local government as a result of the Employee's employment.
(g) Bonus/Incentive Programs. During the Term, Employee shall be eligible to participate in any bonus/incentive compensation programs available to senior Employee officers of the Company as may be adopted by the Company.
(h) Stock Options. During the Term, Employee shall be eligible for stock or stock option grants and similar awards under any plans of the Company or its affiliates adopted by the Board in which executive officers of the Company are entitled to participate.
(i) Expenses. The Employee shall be reimbursed in full for all reasonable and necessary expenses incurred during the performance of those services relating to his employment by the Company in accordance with the policies established by the Board from time to time.
The Employee shall be entitled to receive five weeks annual vacation with pay during each year of his employment hereunder. Such vacation may be taken, in Employee's discretion, at such time or times as are not inconsistent with the reasonable business needs of the Company. Employee shall not be entitled to any additional compensation in the event that Employee, for whatever reason, fails to take such vacation during any year. Employee shall also be entitled to all paid holidays given by the Company to its executives.
At all times after termination of employment hereunder for any reason, the Employee shall not, directly or indirectly, in any fashion, form or manner, divulge, disclose, furnish, communicate or make accessible to any person who is not authorized by the Company to receive such information any client or prospect list, financial data, sales data, advertising or marketing plans, technological information or any other confidential information of the Company. All files, records, documents, forms, plans, policy and procedures manuals, client or prospective client lists, written memoranda and similar materials relating to the business of the Company or its affiliates whether prepared by the Employee or otherwise coming into the Employee's possession or knowledge during the term of this Agreement, shall remain the exclusive property of the Company or its affiliates.
(a) Cause. Employee shall be terminated for cause if he:
(i) Is convicted of, or enters a plea of nolo contendere to, a felony (other than a traffic related offense) under any state, federal or local law or any felony involving the Company. Conviction includes any final disposition of the charge which does not result in the charges being completely dismissed or Employee being completely acquitted.
(ii) Materially breaches (A) this Agreement or (B) the Company's policies and procedures, which breach is not cured, if capable of cure, after written notice within thirty (30) days of the date such notice is received by Employee.
(iii) Engages in willful or gross misconduct or willful or gross negligence in performing his duties, or fraud, misappropriation or embezzlement.
(b) Termination in the Event of Death or Disability. This Agreement shall terminate automatically upon the death of the Employee or termination by the Company on account of disability. In such event, the Company shall pay to the Employee or the Employee's legal representative, as applicable, only the salary due to the Employee up to the date of termination as well as the benefits and reimbursed expenses due to the Employee at the time of death or disability, including all bonuses earned or accrued as of the date of termination. Notwithstanding the foregoing, in the event that this Agreement terminates on account of disability, Employee shall continue to receive salary and benefits for a period not to exceed three (3) months from the date of such termination until the date that Employee begins receiving benefits under a plan or policy of disability insurance. For purposes of this Section 6(b), disability shall mean physical or mental disability or infirmity that prevents Employee from performing substantially the duties assigned to him (based upon such competent medical evidence as shall be presented to the Company by any physician or group of physicians or other competent medical experts employed by the Company) for a continuous period of more than 180 days. Employee shall cooperate fully with the Company in providing all medical information reasonably requested by such medical experts and shall provide such medical experts with the medical records of Employee's personal physician which relate to the disability, provided that such medical experts give adequate assurances of protecting the confidentiality of such records if requested by Employee. If reasonably requested by the Company, the Employee will submit to an examination by a physician designated by the Company, which examination shall be at the Company's expense.
(a) If the Employee is terminated by the Company without Cause (other than due to death or disability), or the Employee terminates his employment hereunder for "Good Reason" (as defined below), during the Term of this Agreement (including any Extended Term), he shall be entitled to receive a severance payment equal to the greater of
(i) full base salary and an Allocable Bonus (as defined below) for the remaining Term, or (ii) one year's full base salary and an Allocable Bonus. The term "Allocable Bonus" shall mean (x) the average Annual Bonus (annualized with respect to any partial period bonus) actually paid to the Employee for each year or partial year of service during the term of his employment, times (y) seventy- five percent (75.0%). In the case of any partial year for which the Employee is entitled to receive the Allocable Bonus, such payment shall be prorated for the actual number of days in such partial year.
For purposes hereof, the term "Good Reason" shall mean
(i) the assignment to the Employee of duties materially inconsistent with the
Employee's position, authority, duties or responsibilities on the date of this
Agreement, or (ii) any action which results in a material diminution of the
position, authority, duties or responsibilities of the Employee on the date of
this Agreement; provided, however, that the Company fails to promptly reverse or
remedy within thirty (30) days any assignment or action described in subsection
(i) or (ii) above, after notice thereof is delivered by the Employee to the
Board. Good Reason shall not exist at any time that the Employee could be
terminated for Cause.
(b) In the event the Employee is terminated for cause or voluntarily terminates his employment hereunder, other than for Good Reason, no severance shall be due or payable and salary and benefits shall be payable to Employee only through the date of such termination.
8. Nonrenewal. Subject to the second paragraph of Section 2 of this Agreement, notice by the Company to the Employee that the Company will not renew this Agreement after the expiration of the Initial Term or any Extended Term shall not be considered a termination without Cause and will not entitle the Employee to terminate for Good Reason as contemplated herein. In the event of any such nonrenewal, the Employee shall be entitled to the base salary, benefits and all bonuses earned or accrued through the expiration date of this Agreement.
9. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the Employee and his heirs and personal representatives and the Company and its successors, assigns and legal representatives. This Agreement is for the personal services of the Employee. The benefits hereunder are personal to the Employee and are not assignable or transferable by the Employee. In the event of any sale, transfer or other disposition of all or substantially all of the Company's assets or business, whether by merger, consolidation or otherwise, the Company may assign this Agreement and its rights hereunder, provided that the assignee assumes all of the obligations of the Company hereunder, and upon such assignment and assumption, Employee shall have no right to look to Employer for obligations arising hereunder after the effective date of such assignment.
10. Indemnification. The Company agrees that it shall indemnify, defend and hold harmless Employee to the fullest extent permitted by applicable law from and against any and all liabilities, costs, claims and expenses including, without limitation, all costs
and expenses incurred in defense of litigation, including attorneys' fees, arising out of the employment of Employee hereunder, except to the extent arising out of or based upon the gross negligence or willful misconduct of Employee.
11. Notices. All notices and other communications hereunder shall be in writing and shall be deemed given when delivered to, or on the fifth (5th) day after being deposited in the United States mail, certified mail, return receipt requested, postage prepaid, to the person at the address first listed above or to such other person and/or address as may be designated from time to time in writing.
12. Entire Agreement. This Agreement constitutes the entire understanding between the Company and the Employee with respect to the subject matter hereof.
13. Modification and Waiver. No provision of this Agreement may be amended, modified or waived unless such amendment, modification or waiver shall be agreed to in writing and signed by the Employee and by a person duly authorized by the Board. Any waiver by either party of any breach of any of the terms of this Agreement shall not be considered a waiver of any subsequent breach.
14. No Assignment of Compensation. No right to or interest in any compensation or reimbursement payable hereunder shall be assignable or divisible by the Employee; provided, however, that this provision shall not preclude the Employee from designating one or more beneficiaries to receive any amount that may be payable after his death and shall not preclude his executor or administrator from receiving or assigning any right hereunder to the person or persons entitled thereto.
15. No Attachments. Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge or hypothecation, or to execution, attachment, levy or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect.
16. Headings. The heading of sections and subsections hereof are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement.
17. Governing Law. This Agreement shall be construed in accordance with and governed for all purposes by the laws of the State of California.
18. Severability. In the event that any provision of this Agreement shall be held invalid and unenforceable for any reason whatsoever, such provision shall be deleted and the remainder of the Agreement shall not be affected and shall be valid and enforceable to the fullest extent permitted by law without the deleted provision or provisions.
19. Counterparts. This Agreement shall become effective only upon execution hereof by the Company and the Employee. It may be executed in several counterparts, any one of which shall constitute the agreement between the parties.
20. Existing Agreements. The Employee represents to the Company that he is not subject or a party to any employment or consulting agreement, confidentiality, non-competition covenant or other agreement, covenant or understanding which might prohibit him from executing this Agreement or limit his ability to fulfill his responsibilities hereunder.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed all as of the day and year first above written.
COMPANY:
HENNESSY ADVISORS, INC.
By:______________________________________
EMPLOYEE:
Exhibit 10.6
LICENSE AGREEMENT
Between
EDWARD J. HENNESSY INCORPORATED
and
NETFOLIO, INC.
April 10, 2000
License Agreement -
Netfolio/Hennessy
Table of Contents
ARTICLE I - DEFINED TERMS ....................................................1
ARTICLE II - LICENSE..........................................................3
Section 2.1 Grant of License........................................4
Section 2.2 Delivery of Books and Records...........................4
Section 2.3 Terms of License........................................5
Section 2.4 License Fee.............................................6
Section 2.5 Payment of License fee..................................6
Section 2.6 Reliance on License fee Allocation......................6
ARTICLE III - REPRESENTATION AND WARRANTIES OF LICENSOR.......................7
Section 3.1 Organization Standing and Authority.....................7
Section 3.2 Authorization and Binding Obligation....................7
Section 3.3 Registered Investment Adviser...........................7
Section 3.4 Absence of Conflicting Agreements.......................7
Section 3.5 Title to and Condition of Assets........................8
Section 3.6 Consents................................................8
Section 3.7 Financial Conditions; Effects of Sale of Assets.........8
Section 3.8 Legal Actions...........................................8
Section 3.9. Compliance with Laws...................................8
Section 3.10 The O'Shaughnessy Funds.................................9
Section 3.11 Trade Rights...........................................12
Section 3.12 Disclaimer of Warranties with Respect to Investment
Selection .............................................12
Section 3.13 Sales or Transfer Taxes................................12
Section 3.14 Full Disclosure .......................................13
ARTICLE IV - REPRESENTATION AND WARRANTIES OF LICENSEE.......................13
Section 4.1 Organization Standing and Authority....................13
Section 4.2 Authorization and Binding Obligation...................13
Section 4.3 No Violations..........................................13
Section 4.4 Governmental/Regulatory Authorities....................13
Section 4.5 Disqualifying Conduct..................................14
Section 4.6 Litigation; Proceedings................................14
Section 4.7 Registered Investment Advisor..........................14
Section 4.8 Compliance with Law....................................14
ARTICLE V - COVENANTS........................................................14
Section 5.1 Pre-Closing Covenants of Licensor......................14
Section 5.2 Negative Covenants.....................................15
Section 5.3 Affirmative Covenants of Licensor......................15
Section 5.4 Affirmative Covenant of Licensee -
Access to Information..................................16
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ARTICLE VI - SPECIAL COVENANTS AND AGREEMENTS................................16
Section 6.1 Fees and Expenses......................................16
Section 6.2 Brokers................................................16
Section 6.3 Noncompetition.........................................16
Section 6.4 Confidential Information...............................17
Section 6.5 Cooperation............................................17
Section 6.6 Technical Assistance...................................17
Section 6.7 Covenants With Respect to Changes in Condition and
Litigation.............................................17
Section 6.8 Covenants With Respect to Information in Proxy
Materials and Registration Statements..................18
Section 6.6 Access to Third Parties................................19
ARTICLE VII - CONDITIONS TO OBLIGATIONS OF LICENSEE AND
LICENSOR................................................19
Section 7.1 Conditions to Obligations of Licensee..................19
Section 7.2 Conditions to Obligations of Licensor..................20
Section 7.3 Effect of Consummation of Fund Transactions............21
ARTICLE VIII - CLOSING AND CLOSING DELIVERIES................................21
Section 8.1 Closing................................................21
Section 8.2 Deliveries by Licensor.................................21
Section 8.3 Deliveries by Licensee.................................22
ARTICLE IX - RIGHTS OF LICENSEE AND LICENSOR ON TERMINATION
OR BREACH................................................23
Section 9.1 Termination Rights.....................................23
Section 9.2 Effect of Termination..................................24
Section 9.3 Default; Liquidated Damages............................24
ARTICLE X - REPRESENTATIONS .................................................24
Section 10.1 Representations and Warranties.........................24
Section 10.2 Indemnification by Licensor............................24
Section 10.3 Indemnification by Licensee............................25
Section 10.4 Procedure for Indemnification .........................25
ARTICLE XI - MISCELLANEOUS...................................................27
Section 11.1 Notices................................................27
Section 11.2 Benefit and Binding Effect.............................28
Section 11.3 Governing Law..........................................28
Section 11.4 Headings...............................................28
Section 11.5 Gender and Rules of Construction.......................28
Section 11.6 Entire Agreement.......................................28
Section 11.7 Counterparts...........................................28
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LICENSE AGREEMENT
THIS LICENSE AGREEMENT is made and entered into on this 10th day of April, 2000, by and between EDWARD J. HENNESSY INCORPORATED, a California corporation ("Licensee"), and NETFOLIO, INC., a Minnesota corporation (formerly known as O'Shaughnessy Capital Management, Inc., "Licensor").
RECITALS
A. Licensor is a registered investment adviser under the Investment Advisers Act of 1940, as amended.
B. Licensor serves as investment adviser to each of the O'Shaughnessy Funds, as defined herein, and is the owner of certain intellectual property rights, including those used in providing investment advisory services to the O'Shaughnessy Funds.
C. Licensor desires to license Licensee, and Licensee wishes to acquire a license for, certain assets of Licensor and certain rights used in the operation of Licensor's business of providing investment advisory services to the O'Shaughnessy Funds for a license fee and upon the terms and subject to the conditions hereinafter set forth.
AGREEMENTS
In consideration of the foregoing premises and the covenants and agreements contained herein, Licensee and Licensor, intending to be bound legally, agree as follows:
The following terms shall have the following meanings in this Agreement (other terms shall be defined in the text of this Agreement).
"Affiliated Person" means an affiliated person as defined in Section 2(a)(3) of the Investment Company Act.
"Affiliate" means a person or entity that directly or indirectly controls, is controlled by or is under common control with a specified person or entity.
"Agreement" means this License Agreement together with all schedules and exhibits attached hereto, and all amendments hereto and thereof.
"Anniversary Date" means the date one year after the Closing Date.
"Closing" means the completion of those actions described in Section 8.2 and Section 8.3 of this Agreement.
"Closing Date" means the date of the Closing specified in Section 8.1 of this Agreement.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Cornerstone Growth Fund" means the O'Shaughnessy Cornerstone Growth Fund including the O'Shaughnessy Aggressive Growth Fund.
"Cornerstone Value Fund" means the O'Shaughnessy Cornerstone Value Fund including the O'Shaughnessy Dogs of the Market(R) Fund.
"Fund Transactions" means (i) the termination of the Management Agreement and any amendments thereto and the execution and delivery of a management agreement between O'Shaughnessy Funds, Inc and Licensee or an Affiliate of Licensee designated by Licensee (ii) the resignation of the directors of O'Shaughnessy Funds, Inc. and the election of new directors for O'Shaughnessy Funds, Inc. designated by the Licensee and (iii) the change of corporate name of O'Shaughnessy Funds, Inc. to "Hennessy Mutual Funds, Inc."
"Hennessy Funds" means those investment companies registered under the Investment Company Act for which an Affiliate of Licensee serves as investment adviser.
"Investment Advisers Act" means the Investment Advisers Act of 1940, as amended, and rules and regulations promulgated thereunder.
"Investment Company Act" means the Investment Company Act of 1940, as amended, and rules and regulations promulgated thereunder.
"Liens" means any security interest, mortgage, lien, pledge, charge, title retention, security agreement, lease, option, defect of title or other encumbrance or right of others, except for taxes not yet due or payable and encumbrances which do not materially impair the use, value or marketability of the assets to which they relate.
"Management Agreement" means the Management Agreement dated October 11, 1996 between Licensor and O'Shaughnessy Funds, Inc. and any and all amendments thereto.
"Marks" means STRATEGY INDEXING(R), STRATEGIC INDEX(R), STRATEGY INDEXES(R), STRATEGY INDEX(R), DOGS OF THE MARKET(R), CORNERSTONE GROWTH(sm) and CORNERSTONE VALUE(SM).
"Material Adverse Effect" with respect to Licensor means an effect on the business, licenses, prospects or condition (financial or otherwise) of Licensor that would materially and adversely affect the ability of Licensor to consummate the transactions contemplated by this Agreement or materially and adversely affect the Licensee's ability to advise or manage the investments of the O'Shaughnessy Funds, and with respect to the Licensee, means an effect on the business, licenses, prospects or condition (financial or otherwise) of the License that would materially and adversely affect Licensee's ability to advise or manage the investments of the Hennessy Funds or the O'Shaughnessy Funds or adversely affect the ability of Licensee to consummate the transaction contemplated by this Agreement; provided, however, that any condition materially and adversely affecting the mutual fund or investment management industries generally shall not be deemed to constitute a Material Adverse Effect.
"Mutual Fund" means any investment company which is registered under Section 8(b) of the Investment Company Act, 15 U.S.C. ss. 80a-8(b).
"Notice of Termination" means the notice described in Section 9.1 of this Agreement.
"O'Shaughnessy Funds" means Cornerstone Growth Fund and the Cornerstone Value Fund including those funds as they presently exist and as they may exist and by whatever name they may be known after the Closing.
"O'Shaughnessy Funds, Inc." means O'Shaughnessy Funds, Inc., a Maryland Corporation.
"Patent" means U.S. Patent No. 5,978,778 covering certain automated strategies for investment management, together with all divisions, continuations, continuations-in-part, reissues and extensions thereof.
"License fee" means the license fee specified in Section 2.4 of this Agreement.
"Securities Act" means the Securities Act of 1933, as amended, and rules and regulations thereunder.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as amended, and rules and regulations thereunder.
"Segregated Accounts" means those shareholder accounts of the O'Shaughnessy Funds to which Segregated Shares are allocated.
"Segregated Shares" means and includes (i) the shares of the O'Shaughnessy Funds which are outstanding at the close of business on the Closing Date and (ii) any Shares of the O'Shaughnessy Funds issued after the Closing Date and before the Anniversary Date as a distribution on other Segregated Shares, but does not include any additional shares of the O'Shaughnessy Funds purchased for Segregated Accounts after the Closing Date.
Section 2.1 Grant of License. Subject to the terms and conditions set forth in this Agreement, Licensor hereby licenses to Licensee on the Closing Date, and Licensee accepts the license hereinafter set forth:
Section 2.2 Delivery of Books and Records. On the Closing date, Licensor shall deliver to Licensee originals or true copies of the following books and records:
(a) All files, books, records and data files (in whatever form or forms including hard copy, microfilm, microfiche, CD ROM or other electronic media, including the software necessary to access the same) owned by or in the possession of Licensor relating to investment accounts and investment histories of the O'Shaughnessy Funds (except to the extent that Licensor is required by applicable law to retain such materials or copies thereof in which event Licensor shall, at Licensor's expense, provide to Licensee such materials or copies thereof, whichever is available); and
(b) All records required to be maintained and retained under the Investment Company Act or the Investment Advisers Act in connection with Licensor's provision of investment advisory services to the O'Shaughnessy Funds (except to the extent that Licensor or O'Shaughnessy Funds, Inc. is required by applicable law to retain such materials or copies thereof in which event Licensor shall provide to Licensee such materials or copies thereof, whichever is available).
Section 2.3 Terms of License. Licensor agrees that, effective upon the Closing, the parties shall be deemed, without more, to have entered into the following License:
(a) Subject to all of the terms and conditions hereof, Licensor shall grant to Licensee the perpetual, paid-up, royalty-free exclusive license to use the Patent, the Marks and the know-how of Licensor heretofore employed in the management of the O'Shaughnessy Funds, including the CORNERSTONE GROWTH and CORNERSTONE VALUE models (collectively, the "Trade Rights") solely for the purpose of managing Mutual Funds. The license to be granted hereby is personal to Licensee (and to its Affiliates, successors and assigns which agree in writing to be bound by the provisions of this Agreement) and for the use of Licensee and such permitted Affiliates, successors and assigns solely in portfolio selection and management in rendering its investment-management services to Mutual Funds and does not include the right to sublicense, publish and distribute Trade Rights or any software incorporating the same, unless expressly approved by Licensor in writing. All rights which are not specifically granted by Licensor to Licensee are expressly reserved by Licensor. Nothing herein shall be construed to prohibit Licensor from using, implementing, licensing,
publishing or distributing the Trade Rights for any other purpose; provided, however, that for so long as Licensee shall be in compliance with the terms hereof, Licensor shall not license or permit any third party to use the Trade Rights in the management of any Mutual Fund.
(b) Except as expressly set forth in the last sentence of the preceding paragraph, nothing in this Agreement shall preclude Licensor from employing, marketing, selling, leasing, licensing or maintaining the Trade Rights or any other products or services of Licensor to or for any other party. Licensee recognizes that Licensor has historically provided, and may in the future provide, professional services through its own personnel (including services which may be delivered over the Internet by Licensor), in direct and substantial competition with the anticipated services of Licensee as licensed hereby; Licensor shall not have any obligation to refrain from performing such services in the future and shall not be deemed to violate any provision of this Agreement by continuing to provide such services. Licensee acknowledges that Licensor presently renders, and in the future will render, investment management services based on the Trade Rights and that Licensor and its Affiliates may from time to time be the sponsor or various software, literary and investment products (other than management investment companies registered under the Investment Company Act) based on the Trade Rights which may be sold worldwide, none of which activities of Licensor shall be deemed a breach of this Agreement.
(c) This Agreement only permits Licensee to use the Trade Rights as provided by Licensor to Licensee for use in the management of Mutual Funds as aforesaid. Neither this Agreement nor any conduct by Licensor pursuant hereto conveys any right to reproduce or modify the Marks.
(d) At all times the relationship between the parties established by this Agreement is that of independent contractors, and nothing contained in this Agreement shall be construed to: (a) give either party the power to direct or control the day-to-day activities of the other; (b) constitute the parties as partners, joint ventures, co-owners or otherwise as participants in a joint or common undertaking; or (c) allow Licensee to create or assume any obligation on behalf of Licensor for any purpose whatsoever.
(e) All of Licensee's advertising, marketing, promotional and other materials incorporating or referring to the Marks shall be subject to Licensor's prior approval in writing, which approval shall be not be unreasonably withheld or delayed and which approval shall be deemed to have been granted if Licensor shall fail to respond to any request for approval within five business days following receipt thereof; provided, however, the Licensee need not obtain Licensor's approval of any proposed use which is substantially unchanged from (i) any prior use by Licensor in its own business on or prior to the date hereof, or (ii) any use previously approved by Licensor in writing.
(f) At no time hereafter shall Licensee challenge (whether by way of suit, administrative or inter partes proceedings, protest, objection or otherwise), or assist others to challenge, Licensor's rights in the Marks or any of Licensor's other trademarks,
trade-names or service marks or the registration thereof, nor shall Licensee seek to register or assist others in an attempt to register any trademark or service mark that is confusingly similar to any trademark, tradename or service mark of Licensor.
Section 2.4 License Fee. Subject to any and all conditions and adjustments set forth herein, the License Fee shall be the sum of the following:
(a) an initial payment equal to .225% of the aggregate net asset value of the O'Shaughnessy Funds at the close of business on April 7, 2000; plus
(b) an amount equal to (i) 1.125 % of the aggregate net asset value of the O'Shaughnessy Funds at the close of business on the business day immediately preceding the Closing Date less (ii) the amount determined in accordance with clause (a) of this Section 2.4; plus
(c) an amount equal to (i) 1.125 % of the aggregate net asset value of the O'Shaughnessy Funds at the close of business on the business day immediately preceding the Closing Date minus (ii) an amount equal to 2.25 % of the excess of (A) the aggregate redemption price of all Segregated Shares redeemed subsequent to the Closing Date and before the Anniversary Date over (B) the aggregate purchase price of all shares of the O'Shaughnessy Funds purchased for the Segregated Accounts subsequent to the Closing Date and before the Anniversary Date; provided, however, that in no event shall the amount subtracted pursuant to clause (c)(ii) exceed the aggregate of the amounts determined in accordance with clauses (c)(i) and (d) of this Section 2.4; plus
(d) 125 % of the aggregate net asset value of the O'Shaughnessy Funds at the close of business on the business day immediately preceding the Closing Date; plus
(e) an amount equal to 10% of the payment determined under clause (c) of this Section 2.4.
No amount shall be payable by the Licensee with respect to purchases of Shares of the O'Shaughnessy Funds occurring after the Closing Date.
Section 2.5 Payment of License fee. Concurrently with the execution hereof, Licensee has paid to Firstar Bank, N.A., as escrow agent pursuant to a separate agreement between the parties and said escrow agent, the amount determined in accordance with clause (a) of Section 2.4 in immediately available funds. On the Closing Date, Licensee shall cause such escrow funds and all interest thereon to be paid to Licensor, and shall pay to Licensor in immediately available funds the amount determined in accordance with clause (b) of Section 2.4. On the Anniversary Date, Licensee shall pay the amounts determined in accordance with clauses (c), (d) and (e) of Section 2.4 by executing and delivering at Closing to Licensor Licensee's promissory note substantially in the form of Exhibit A hereto in the principal
amount equal to the aggregate of the amounts determined in accordance with clauses (c) and (d) of Section 2.4 hereof.
The principal amount of Licensee's promissory note shall be adjusted
(i) upward by an amount, if any, equal to any Damages owed by Licensee to
Licensor as of the Anniversary Date pursuant to Article X hereof as then
finally determined by a court of competent jurisdiction or agreed to in writing
by the parties hereto, and (ii) downward by an amount, if any, equal to the sum
of any Damages owed by Licensor to Licensee as of the Anniversary Date pursuant
to Article X hereof as then finally determined by a court of competent
jurisdiction or agreed to in writing by the parties hereto.
Section 2.6 Reliance on License fee Allocation. Licensor and Licensee mutually agree to allocate the License fee among those items described in Section 2.1 above. Licensor and Licensee agree to use such allocation and be bound thereby for all purposes, including without limitation, computing any federal, state, county, local or other tax liability and, unless required to do so in accordance with a "determination" as defined in Section 1313(a)(1) of the Code, to take no position in any tax return, tax proceeding, tax audit or otherwise that is inconsistent with such allocation.
Licensor represents and warrants to Licensee as follows:
Section 3.1 Organization, Standing and Authority. Licensor is a corporation duly organized, validly existing and in good standing under the laws of the State of Minnesota. Licensor has all requisite corporate power and authority to conduct its business as presently conducted as it relates to providing investment advisory services to the O'Shaughnessy Funds, to execute and deliver this Agreement and the documents contemplated hereby and to perform and comply with all of the terms, covenants and conditions to be performed and complied with by Licensor hereunder and thereunder. Licensor is duly qualified or licensed to do business as a foreign corporation, and is in good standing, in every jurisdiction where failure to be so qualified or licensed would be reasonably likely to have a Material Adverse Effect on Licensor.
Section 3.2 Authorization and Binding Obligation. The execution, delivery and performance of this Agreement by Licensor have been duly authorized by all necessary corporate action on the part 6f Licensor. This Agreement has been duly executed and delivered by Licensor and, assuming the due authorization, execution and delivery of this Agreement by Licensee constitutes the legal, valid and binding obligation of Licensor, enforceable against Licensor in accordance with its terms, except as the enforceability hereof may be limited by bankruptcy, insolvency, reorganization or similar laws relating to or affecting creditors' rights generally, or by general equity principles (whether applied in a court of law or a court of equity and including limitations on the availability of specific performance or other equitable remedies).
Section 3.3 Registered Investment Adviser. Licensor is registered as an investment adviser under the Investment Advisers Act. Licensor has not received any written notice by any state that Licensor's registration as an investment adviser is, is to be, or will be restricted or terminated.
Section 3.4 Absence of Conflicting Agreements. The execution, delivery and performance by Licensor of this Agreement and the documents contemplated hereby (i) will not conflict with any provision of Licensor's articles of incorporation or by-laws; (ii) will not conflict with, result in a breach of, or constitute a default under, any applicable law, judgment, order, ordinance, injunction, decree, rule, regulation or ruling of any court or governmental instrumentality, except as will not individually or in the aggregate have a Material Adverse Effect with respect to Licensor or Licensee or as will be cured or waived prior to the Closing Date; and (iii) will not conflict with, constitute grounds for termination of, result in a breach of, constitute a default under or accelerate or permit the acceleration of any performance required by the terms of, any agreement, instrument, license or permit to which Licensor is a party or by which Licensor may be bound, except as will not singly or in the aggregate have a Material Adverse Effect with respect to Licensor or Licensee, or as will be cured or waived prior to the Closing Date.
Section 3.5 Title to and Condition of Assets. As of the date hereof, Licensor has good and marketable title to the Trade Rights, and on the Closing Date will have good and marketable title to the Trade Rights sufficient to grant to Licensee the license hereinabove set forth, free and clear of all Liens.
Section 3.6 Consents. Licensor is not required to submit any notice, report or other filing with, or obtain any authorization, consent or approval from, any governmental authority or self-regulatory organization prior to the execution, delivery and performance by Licensor of this Agreement or the consummation of the transaction contemplated herein, other than notices, reports or other filings, authorizations, consents or approvals relating to matters that, in the aggregate, will not have a Material Adverse Effect with respect to the Licensor.
Section 3.7 Financial Condition: Effect of Sale of Assets. Licensor is not insolvent on the date of this Agreement and shall not be insolvent on the Closing Date. The license contemplated by this Agreement (i) will not constitute a disposition of all or substantially all of the assets of Licensor, (ii) will not render Licensor insolvent or leave Licensor with assets unreasonably small in relation to the business in which it is engaged and (iii) is not being undertaken by Licensor with the intent to hinder, delay or defraud its creditors.
Section 3.8 Legal Actions. There is no material action, suit, proceeding, complaint, litigation, investigation, inquiry or governmental proceeding pending, or to the knowledge of the Licensor threatened, before any court or governmental or regulatory
authority, against (i) any of the Assets or (ii) Licensor, or to the knowledge of Licensor any party, that reasonably could be expected to have a material Adverse Effect on Licensor or Licensee.
Section 3.9 Compliance with Laws. Licensor's business of providing investment advisory services to the O'Shaughnessy Funds is being operated in material compliance with all applicable laws, rules, regulations, ordinances, orders or requirements of all federal, state and local governmental or regulatory authorities. Licensor has complied in all material respects with all written notices and demands to it from all governmental or regulatory authorities with respect to the ownership, use and operation of all of the Trade Rights and the provision of investment advisory services to the O'Shaughnessy Funds.
Section 3.10 The O'Shaughnessy Funds.
To the knowledge of Licensor:
(a) Registration and Regulation of the O'Shaughnessy Funds. O'Shaughnessy Funds, Inc. is duly registered with the Commission as an investment company under the Investment Company Act, and all shares of each of the O'Shaughnessy Funds which, since their organization, have been or are being offered for sale have been duly registered under the Securities Act and have been duly registered, qualified or are exempt from registration or qualification under the securities laws of each state or other jurisdiction in which such shares have been or are being offered to revoke or rescind any such registration or qualification. O'Shaughnessy Funds, Inc. and each of the O'Shaughnessy Funds is in compliance with all applicable laws, rules and regulations, including, without limitation, the Investment Company Act, the Securities Act, the Securities Exchange Act and all applicable state securities laws, except where the failure to be so in compliance would not have a material adverse effect on O'Shaughnessy Funds Inc. or such O'Shaughnessy Fund. Each of the O'Shaughnessy Funds is in compliance with the investment policies and restrictions set forth in the registration statement of O'Shaughnessy Funds, Inc. currently in effect under the Securities Act, except where the failure to be so in compliance would not have a material adverse effect on O'Shaughnessy Funds, Inc. or such O'Shaughnessy Fund. The value of the net assets of each O'Shaughnessy Fund is determined pursuant to the requirements of the Investment Company Act and purchases and redemptions of shares of the O'Shaughnessy Funds, since their organization have been effected at the net asset value per share calculated in such manner. There are no legal or governmental actions, investigations, inquiries or proceedings pending or threatened against O'Shaughnessy Funds, Inc. or either of the O'Shaughnessy Funds which could have a material adverse effect on the condition (financial or otherwise) of O'Shaughnessy Funds, Inc. or either of the O'Shaughnessy Funds.
(b) Organization, Standing and Authority. O'Shaughnessy Funds, Inc., is a corporation duly organized, validly existing and in good standing under the laws of the State of Maryland. O'Shaughnessy Funds, Inc. has all requisite power and authority to own
all of its properties and assets and to issue its shares. All of the shares of the O'Shaughnessy Funds that are issued and outstanding are fully paid and non-assessable.
(c) Financial Statements. The books of account and related records of O'Shaughnessy Funds, Inc. and the O'Shaughnessy Funds fairly reflect the respective assets of the O'Shaughnessy Funds, liabilities and transactions in accordance with generally accepted accounting principles applied on a consistent basis. The audited financial statements dated September 30, 1999, of O'Shaughnessy Funds, Inc. previously delivered to Licensee (the "Fund Financial Statements") present fairly in all material respects the financial position of each of the O'Shaughnessy Funds and the results of operations and cash flows for the accounting principles applied on a consistent basis as at the dates indicated. The Fund Financial Statements have been certified by an independent accounting firm.
(d) No Material Adverse Changes. Since September 30, 1999, no material adverse change has occurred in the financial condition, results of operations, business, assets or liabilities of O'Shaughnessy Funds, Inc. or the status of O'Shaughnessy Funds, Inc. as a regulated company under the Code, other than changes resulting from any change in the mutual fund industry, in general conditions in the financial or securities markets or the performance of any investments made by any of the O'Shaughnessy Funds and other than changes occur ring in the ordinary course of business of each of O'Shaughnessy Funds, Inc.
(e) Contracts. Except for contracts and agreements disclosed on Schedule 3.10(e) (which shall be updated by Licensor at Closing), O'Shaughnessy Funds, Inc. is not a party to any material contract, debt arrangement, futures contract, plan, lease, franchise, license or permit (other than permits issued under any state securities law) of any kind or nature whatsoever. No default by O'Shaughnessy Funds, Inc., nor to the knowledge of Licensor by any other party, exists under any of the contracts and agreements listed on Schedule 3.10(e) which would have a material adverse effect on O'Shaughnessy Funds, Inc.
(f) Taxes. All federal income tax returns, all other material federal tax returns, and all material state and local tax returns for any open tax periods required to be filed by O'Shaughnessy Funds, Inc. on or prior to the Closing Date have been or will be timely filed, such returns are or will be correct in all material respects, and all taxes shows as payable on such returns have been or will be timely paid. For any period for which tax returns of O'Shaughnessy Funds, Inc. are not required to have been filed in accordance with the previous sentence by the Closing Date, O'Shaughnessy Funds, Inc. has made, or will make by the Closing Date, an adequate accrual on its books of any taxes due or to become due, if any, as a result of actions occurring on or before the Closing Date. O'Shaughnessy Funds, Inc. has qualified as a regulated investment company under the Code in respect of each taxable year of O'Shaughnessy Funds, Inc. since commencement of its operations and O'Shaughnessy Funds, Inc. was, and shall be, in compliance with the requirements of Section 851 of Subchapter M of the Code for each of the applicable fiscal periods ending on or prior to the Closing Date. O'Shaughnessy Funds, Inc. has timely provided to the shareholders of each of the O'Shaughnessy Funds any notices relating to the character of shareholder distributions or
portions thereof required under Sections 852 or 853 of the Code and Section 19 of the Investment Company Act and has properly withheld or collected all taxes required by law to be withheld or collected from amounts payable to the shareholders of each of the O'Shaughnessy Funds and has timely remitted such withheld or collected taxes to the appropriate taxing authority, agency or body.
(g) Books and Records. The books and records of O'Shaughnessy Funds reflecting, among other things, the purchase and sale of shares of the O'Shaughnessy Funds by shareholders of the O'Shaughnessy Funds, the number of issued and outstanding shares owned by each shareholder and the state or other jurisdiction in which such shares were offered and sold, are complete and accurate in all material respects.
(h) Prospectus. The current prospectus and statement of additional O'Shaughnessy Funds as of the date on which they were issued did not contain, and as supplemented by any supplement thereto dated prior to or on the Closing Date, do not and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading.
(i) Ability to Conduct Business. Neither O'Shaughnessy Funds, Inc., nor either of the O'Shaughnessy Funds is subject to, or bound by, any judgment, order, writ, injunction or decree of any court, or of any governmental body, including the Commission, or of any arbitrator, that would prevent the conduct of business material to O'Shaughnessy Funds, Inc., or the O'Shaughnessy Funds in accordance with current practice.
(j) Litigation or Proceeding. No litigation is pending or threatened, and no investigation, inquiry or governmental proceeding is pending or, to the best of Licensor's knowledge, threatened against or affecting O'Shaughnessy Funds, Inc. or either of the O'Shaughnessy Funds before any court, arbitrator or federal, state, local or foreign governmental or regulatory agency or authority or self-regulatory authority (including, but not limited to, the Commission, the Commodities Futures Trading Commission and the Internal Revenue Service) that would be reasonably likely to materially and adversely affect the business operation's or financial condition of O'Shaughnessy Funds, or either of the O'Shaughnessy Funds or materially delay, materially hinder or prohibit the solicitation of proxies from shareholders of either of the O'Shaughnessy Funds.
(k) Absence of Undisclosed Liabilities. As of September 30, 1999, O'Shaughnessy Funds, Inc. had no material debts, obligations or liabilities, whether due or to become due, absolute, contingent or otherwise, that are required to be reflected in the Fund Financial Statements in accordance with generally accepted accounting principles, that are not so reflected.
(l) No Pending Transaction. O'Shaughnessy Funds, Inc. is not a party to or bound by any agreement, undertaking or commitment (i) to merge or consolidate with, or acquire all or substantially all of the property and assets of, any other corporation,
trust or person or (ii) to sell, lease or exchange all or substantially all of its property and assets to any other corporation, trust or person.
(m) Suspension or Revocation of Adviser Registration. Except as previously disclosed in writing by Licensor to Licensee, on the date of this Agreement neither the Licensor nor O'Shaughnessy Funds, Inc., nor any Affiliated Person of O'Shaughnessy Funds, Inc. or the Licensor has been convicted of any felony or misdemeanor, described in Section 9(a)(1) of the Investment Company Act, nor has any investment adviser, or any "person associated" (as defined in the Investment Advisers Act) with any investment adviser, of the O'Shaughnessy Funds been subject, or presently is subject, to any disqualification that would be a basis for denial, suspension or revocation of registration of an investment adviser under Section 203(e) of the Investment Advisers Act or Rule 206(4)4(b) thereunder or of a broker-dealer under Section 15 of the Securities Exchange Act, or for disqualification as an investment adviser, employee, officer or director of an investment company under Section 9 of the Investment Company Act, and, to Licensor's knowledge, there is no proceeding or investigation that is reasonably likely to become the basis for, any such disqualification, denial, suspension or revocation.
Section 3.11 Trade Rights. Schedule 3.11 lists all Trade Rights in which Licensor now has any interest and which are used in the management of O'Shaughnessy Funds, specifying whether such Trade Rights are owned, controlled, used or held (under license or otherwise) by Licensor, and also indicating which of such Trade Rights are registered. All Trade Rights shown as registered in Schedule 3.11 have been properly registered, all pending registrations and applications have been properly made and filed and all annuity, maintenance, renewal and other fees relating to registrations or applications are current. In order to conduct the management or operations of the O'Shaughnessy Funds, as such is currently being conducted or proposed to be conducted, Licensor does not require any Trade Rights that it does not already have or that are not readily available from third-party sources upon payment of customary fees therefor. Licensor is not infringing and has not infringed any Trade Rights of another in the management or operations of the O'Shaughnessy Funds, nor is any other person infringing the Trade Rights of Licensor. Licensor does not pay any royalties or other consideration for the right to use any Trade Rights of others. There is no Litigation pending or threatened to challenge Licensor's right, title and interest with respect to its continued use and right to preclude others from using any Trade Rights of Licensor. To the best of Licensor's knowledge, all Trade Rights of Licensor are valid, enforceable and in good standing, and there are no equitable defenses to enforcement based on any act or omission of Licensor. The know-how included in the Trade Rights includes all methods and procedures of every kind necessary for Licensee to apply the CORNERSTONE VALUE and CORNERSTONE GROWTH stock-selection models in the operation of the O'Shaughnessy Funds as heretofore operated by Licensor.
Section 3.12 Disclaimer of Warranties with Respect to Investment
Selection. LICENSOR DISCLAIMS ALL WARRANTIES OF ANY KIND WITH RESPECT TO THE
INVESTMENT PERFORMANCE OF THE TRADE RIGHTS AND
WITH RESPECT TO THE SUITABILITY OF ANY INVESTMENTS SELECTED IN ACCORDANCE THEREWITH. LICENSOR SHALL NOT BE RESPONSIBLE OR LIABLE WITH RESPECT TO ANY INVESTMENT UNDERTAKEN IN ACCORDANCE WITH THE TRADE RIGHTS UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY OR OTHER THEORY OF LIABILITY: (i) FOR ANY INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES INCLUDING, BUT NOT LIMITED TO CAPITAL LOSS, LOSS OF INCOME, LOSS OF REVENUES AND LOSS OF PROFITS; OR (ii) FOR ANY MATTER BEYOND LICENSOR'S REASONABLE CONTROL. LICENSOR IS NOT RESPONSIBLE FOR AND WILL HAVE NO LIABILITY FOR SOFTWARE, SERVICES OR OTHER ITEMS PROVIDED BY ANY PERSONS OTHER THAN LICENSOR.
Section 3.13 Sales or Transfer Taxes. The transactions contemplated by this Agreement shall not result in either Licensee or Licensor incurring any liability for sales, use, transfer or purchase taxes or fees under the laws of the State of Connecticut.
Section 3.14 Full Disclosure. No representation or warranty made by Licensor herein nor any certificate furnished or to be furnished by Licensor pursuant hereto contains or, at the date of its delivery, will contain any untrue statement of a material fact, or omits or will omit any statement of a material fact known to Licensor and known by Licensor to be required to make the statements herein or therein not misleading.
Licensee represents and warrants to Licensor as follows:
Section 4.1 Organization, Standing and Authority. Licensee is a corporation duly organized, validly existing and in good standing under the laws of the State of California. Licensee is duly qualified or licensed to do business as a foreign corporation, and is in good standing, in every jurisdiction where the failure to be so qualified or licensed would be reasonably likely to have a Material Adverse Effect on the Licensee. Licensee has all requisite corporate power and authority to execute and deliver this Agreement and the documents contemplated hereby, and to perform and comply with all of the terms, covenants and conditions to be performed and complied with by Licensee hereunder and thereunder.
Section 4.2 Authorization and Binding Obligation. The execution, delivery and performance of this Agreement by Licensee have been duly authorized by all necessary corporate action on the part of Licensee. This Agreement has been duly executed and delivered by Licensee and, assuming the due authorization, execution and delivery of this Agreement by Licensor, constitutes the legal, valid and binding obligation of Licensee, enforceable against Licensee in accordance with its terms, except as the enforceability hereof may be affected by bankruptcy, insolvency, reorganization or similar laws relating to or affecting creditors' rights generally, or by general equity principles (whether applied in a court of law or a court of
equity and including limitations on the availability of specific performance or other equitable remedies).
Section 4.3 No Violations. The execution, delivery and performance
by Licensee of this Agreement and the documents contemplated hereby (i) will not
conflict with any provision of Licensee's articles of incorporation or by-laws;
(ii) will not conflict with, result in a breach of, or constitute a default
under, any applicable law, judgment, order, ordinance, injunction, decree, rule,
regulation or ruling of any court or governmental instrumentality, except as
will not individually or in the aggregate have a Material Adverse Effect with
respect to Licensee or Licensor or as will be cured by waiver prior to the
Closing Date; and (iii) will not conflict with, constitute grounds for
termination of, result in a breach of, constitute a default under or accelerate
or permit the acceleration of any performance required by the terms of, any
agreement, instrument, license or permit to which Licensee is a party or which
Licensee is bound, except as will not singly or in the aggregate have a Material
Adverse Effect with respect to Licensee or Licensor or as will be cured or
waived prior to the Closing Date.
Section 4.4 Governmental/Regulatory Authorities. Licensee is not required to submit any notice, report or other filing with, or obtain any authorization, consent or approval from, any governmental authority or self- regulatory organization prior to the execution, delivery and performance by Licensee of this Agreement or the consummation of the transaction contemplated hereby, other than notices, reports or other filings, authorizations, consents or approvals relating to matters that, in the aggregate, will not have a Material Adverse Effect with respect to Licensee.
Section 4.5 Disqualifying Conduct. Neither Licensee nor any
Affiliated Person of Licensee is ineligible to serve as an employee, officer,
director, member of an advisory board, investment adviser, depositor or
principal underwriter of any investment company registered under the Investment
Company Act by reason of any conviction of a felony or misdemeanor, described in
Section 9(a)(1) of the Investment Company Act, or by reason of any order,
judgment or decree of any court of competent jurisdiction, described in Section
9(a)(2) of the Investment Company Act, and is not subject to any order issued by
the Commission under Section 9(b) of the Investment Company Act. Neither
Licensee nor any "associated person" (as defined in the Investment Advisers Act)
of Licensee that is registered as an investment adviser is ineligible pursuant
to Section 203 of the Investment Advisers Act to serve as an investment advisor
or an associated person thereof. To the best of Licensee's knowledge, no facts
exist with respect to Licensee, or any Affiliated Person or associated person of
Licensee, which would form a basis for any such disqualification or
ineligibility.
Section 4.6 Litigation; Proceedings. No litigation, proceeding or governmental investigation, or inquiry is pending or, to the best of Licensee's knowledge, threatened, against Licensee that seeks to delay, hinder or prohibit execution of this Agreement
or consummation of the transaction contemplated herein or that, if determined against Licensee would be reasonably likely to have a Material Adverse Effect on Licensee.
Section 4.7 Registered Investment Adviser. Licensee or an Affiliated Person thereof is registered as an investment adviser under the Investment Advisers Act. Licensee has not received any written notice by any State that Licensee's registration as an investment adviser is, is to be, or will be restricted or terminated.
Section 4.8 Compliance with Law. Licensee is in compliance with all applicable laws, rules and regulations, including, without limitation, federal and state securities laws, except where failure to be so in compliance would not be reasonably likely to have a Material Adverse Effect on Licensee.
Section 5.1 Pre-Closing Covenants of Licensor.
(a) Maintenance of Business. Except as contemplated by this Agreement or with the prior written consent of Licensee, between the date hereof and the Closing Date, Licensor shall operate Licensor's business as it relates to management of the investments of the O'Shaughnessy Funds in the ordinary course of business in accordance with past practices (except where such action would conflict with Licensor's obligations under this Agreement) and agrees not to engage in any extraordinary transactions affecting the O'Shaughnessy Funds.
(b) Approvals. Subject in all cases to any fiduciary duties to which it may be subject, Licensor shall use its reasonable best efforts, prior to the Closing Date or earlier termination of this Agreement in accordance with its terms, to obtain the actions of the Board of Directors of the O'Shaughnessy Funds, Inc. enumerated in Section 7.1(c) and to cause O'Shaughnessy Funds, Inc. to solicit the shareholders of each of the O'Shaughnessy Funds with regard to approval of the Fund Transaction for which shareholder approval is required, as well as other matters relating directly or indirectly to such Fund Transaction, consistent with all requirements of the Investment Company Act and the Securities Exchange Act applicable to such solicitation.
Section 5.2 Negative Covenants. Licensor shall not, without the prior written consent of Licensee or as contemplated by this Agreement (with notice to Licensee), do any of the following:
(a) Disposition of Assets. Sell, assign or otherwise transfer or dispose of any of the Trade Rights;
(b) Contracts. Enter into any contract relating to Licensor's business of providing investment advisory services to the O'Shaughnessy Funds after the date hereof,
other than contracts that will not result in any liability or duty on the part of Licensee without notifying Licensee prior to execution of such contracts. Such notice shall be in writing and shall include a copy of each such contract.
Section 5.3 Affirmative Covenants of Licensor.
(a) Access to Information. Subject to applicable
confidentiality agreements, Licensor shall allow Licensee and its authorized
representatives on prior notice reasonable access at Licensee's expense during
normal business hours to Licensor's employees responsible for the O'Shaughnessy
Funds, the Assets and to all other properties, equipment and contracts relating
to Licensor's business of providing investment advisory services to the
O'Shaughnessy Funds and to the books and records described in Section 2.1(a) and
(b) for the purpose of review and inspection, and furnish or cause to be
furnished to Licensee or its authorized representatives all information with
respect to Licensor's business of providing investment advisory services to the
O'Shaughnessy Funds as Licensee may reasonably request, it being understood that
the rights of Licensee hereunder shall not be exercised in such a manner as to
interfere with the operation of Licensor's business.
(b) Transition. Licensor shall cooperate with and assist Licensee in effecting the transfer to Licensee of Licensor's business of providing investment advisory services to the O'Shaughnessy Funds contemplated by this Agreement, and shall provide the Licensee with such information maintained by Licensor As Licensee may reasonably request to facilitate (i) preparation and filing of tax returns for the O'Shaughnessy Funds for their tax years next ending after the date of this Agreement and (ii) the provision of information to shareholders in compliance with the Code.
(c) O'Shaughnessy Funds Prospectus. Licensor shall cause O'Shaughnessy Funds, Inc. to supplement pursuant to Rule 497 of the Commission under the Securities Act the prospectus used to sell the shares of the O'Shaughnessy Funds pending the approval of the Fund Transactions by the shareholders of the O'Shaughnessy Funds to disclose the transactions contemplated by this Agreement.
Section 5.4 Affirmative Covenant of Licensee - Access to Information. Licensee shall provide Licensor with such information regarding Licensee and Affiliated Persons of Licensee as Licensor or the Board or Directors of O'Shaughnessy Funds, Inc. may reasonably request to assist it in fulfilling its duties to O'Shaughnessy Funds, Inc. under the Investment Company Act and under the General Corporation Law of the State of Maryland and as may be reasonably necessary or desirable in connection with the solicitation of proxies from the shareholders of the O'Shaughnessy Funds.
Section 6.1 Fees and Expenses. Except as hereinafter provided, the Licensee shall pay all costs associated with the satisfaction of the condition set forth in Section 7.1(d) of
this Agreement except that Licensor shall pay all fees and disbursements of Swidler, Berlin, Shereff, Friedman, LLP or other counsel for the O'Shaughnessy Funds related thereto in excess of an aggregate of $25,000 and all fees and disbursements of Wadsworth & Associates or other administrator for the O'Shaughnessy Funds in excess of an aggregate of $2,500. In the event that the shareholders of the O'Shaughnessy Funds do not approve the Fund Transactions and Licensee decides to resolicit proxies for such approval, the Licensee shall pay all costs related to such resolicitation.
Section 6.2 Brokers. Licensor and Licensee each represent to the other that they have not used any finder or broker in connection with the transaction contemplated by this Agreement. Licensee and Licensor agree to indemnify and hold harmless the other party with respect to any claim or liability for any finders' or brokers' fees or commissions in connection with the transaction contemplated by this Agreement as a result of the indemnifying party's conduct or alleged conduct upon which any such claim or liability is based.
Section 6.3 Noncompetition. Subject to the Closing, and as an inducement to Licensee to execute this Agreement and complete the transactions contemplated hereby, in order to preserve the goodwill associated with the Trade Rights of Licensor being licensed pursuant to this Agreement, Licensor hereby covenants and agrees that for a period two years from the Closing Date, it will not, directly or indirectly, organize, sponsor, provide investment advisory service to or otherwise assist any Mutual Fund which has or proposes to have investment policies or uses or proposes to use investment strategies substantially similar to those of the O'Shaughnessy Funds; provided, however, that the foregoing provisions shall not be construed to preclude Licensor from continuing to render services and investment advice in accordance with Licensor's past practices in connection with unit investment trusts sponsored by affiliates of Merrill Lynch Pierce Fenner & Smith, Inc. and Nike Securities, respectively. The parties acknowledge that Licensor is the investment sub-advisor to three investment companies formed in 1997 by Royal Bank of Canada which employ computer-based stock-selection techniques similar to the Trade Rights and that, while Licensor does not believe that the sponsor of such funds has any intention to offer them in the United States, Licensor does not exercise any control over the territory in which such investment companies may be offered. Except as otherwise expressly set forth in this Agreement, nothing contained herein shall be construed to preclude Licensor from soliciting the holder of any Segregated Account as a client of Licensor's Internet-based business or in any other lawful manner. In the event a court of competent jurisdiction determines that the provisions of this covenant not to compete are excessively broad as to duration, geographical scope or activity, it is expressly agreed that this covenant not to compete shall be construed so that the remaining provisions shall not be affected, but shall remain in full force and effect, and any such overbroad provisions shall be deemed, without further action on the part of any person, to be modified, amended and/or limited, but only to the extent necessary to render the same valid and enforceable in such jurisdiction.
Section 6.4 Confidential Information. The confidentiality agreements previously entered into between Licensor and Licensee relating to confidentiality of
information provided by either to the other shall remain in effect following the execution of this Agreement; provided, however, that the restrictions on Licensee contained in such agreements shall lapse and be of no further force and effect on and after the Closing Date.
Section 6.5 Cooperation. Licensee and Licensor shall cooperate fully with each other and their respective counsel and accountants in connection with any actions required to be taken as part of their respective bligations under this Agreement, and Licensee and Licensor shall execute such other documents as may be necessary and desirable to the implementation and consummation of this Agreement, and otherwise use their reasonable best efforts to consummate the transaction contemplated hereby and to fulfill their obligations hereunder.
Section 6.6 Technical Assistance. Licensor shall provide technical assistance without charge to Licensee respecting the day-to-day operations of the O'Shaughnessy Funds during the period commencing with the Closing Date and ending on the last day of the calendar quarter which commences immediately following the Closing Date. If on-site assistance is reasonably required at places other than Licensor's principal place of business, Licensee will pay for reasonable accommodations and travel cost of Licensor's personnel providing such on-site assistance, but Licensee shall not pay Licensor's compensation costs for such personnel.
Section 6.7 Covenants With Respect to Changes in Condition and Litigation.
(a) Litigation; Proceedings.
(i) From the date of this Agreement through the Closing Date or earlier termination of this Agreement in accordance with its terms: (A) Licensor shall notify Licensee promptly of any actions, proceedings or investigations that from the date of this Agreement are commenced against Licensor and relate to the administration, management, operation or distribution of shares of the O'Shaughnessy Funds and (B) Licensee shall notify Licensor promptly of any actions, proceedings or investigations that from the date of this Agreement are commenced against any of the Hennessy Funds or Licensee or any of its Affiliates and relate to the administration, management, operation or distribution of the Hennessy Funds.
(ii) From the date of this Agreement through the Closing Date or earlier termination of this Agreement in accordance with its terms, Licensee shall notify Licensor, and Licensor shall notify Licensee, promptly of any actions, proceedings or investigations that are commenced against Licensee or any of its Affiliates or any actions, proceedings or investigations that are commenced against Licensor or any of its affiliates, respectively, that would be reasonably likely to affect adversely the O'Shaughnessy Funds, the Hennessy Funds, the Fund Transactions, the transaction contemplated herein or that would restrain or enjoin the consummation of, or declare unlawful, the Fund Transactions or the transaction contemplated herein, or cause such transaction to be rescinded or that would restrain or enjoin execution or performance of this Agreement.
(b) Change in Condition. From the date of this Agreement through the Closing Date or earlier termination of this Agreement, Licensee agrees to advise Licensor promptly in writing of any change in the financial condition, operations, properties or business of Licensee or any of its Affiliates which individually or taken as a whole would have a Material Adverse Effect with respect to Licensee. From the date of this Agreement through the Closing Date or earlier termination of this Agreement, Licensor agrees to advise Licensee promptly and in writing of any material adverse change in the financial condition, operations, properties or businesses of the O'Shaughnessy Funds, other than changes in the value of fund assets resulting from changes occurring in the financial or securities markets. From the date of this Agreement through the Closing Date or earlier termination of this Agreement, Licensor agrees to advise Licensee promptly in writing of any change in the financial condition, operations, properties or business of Licensor which individually or taken as a whole would have a Material Adverse Effect with respect to Licensor.
Section 6.8 Covenants With Respect to Information in Proxy Materials and Registration Statements.
(a) Licensor covenants that the last post effective amendment to the registration statement on Form N-lA filed by O'Shaughnessy Funds, Inc. with the Commission preceding the date of this Agreement, any subsequent post-effective amendment thereto hereafter filed by O'Shaughnessy Funds, Inc. prior to the shareholder approval of the Fund Transactions and any prospectus or supplement thereto used for the sale of shares of the O'Shaughnessy Funds and the proxy materials required for the shareholders' meeting or meetings or meetings of O'Shaughnessy Funds, Inc. called for the purpose, pursuant to the Investment Company Act, of approving the Fund Transactions or other matters relating directly or indirectly to the Fund Transactions do not or will not contain, at the time any such amendment becomes effective or such prospectus is delivered in connection with a sale of shares of the O'Shaughnessy Funds or at the time such proxy materials are furnished or at the time of such meeting or meetings, any untrue statement of material fact or omit to state any material fact required to be stated therein, where necessary in order to make the statements made therein, in the light of the circumstances under which they are made, not misleading; provided, however, that this covenant shall not apply to any information or data provided by Licensee that describes Licensee, the Hennessy Funds or any of their respective business operations or plans for use in the prospectus or proxy materials.
(b) Licensee covenants that any information or data provided by Licensee that describes Licensee, the Hennessy Funds or any of their respective business operations or plans for use in and prospectus or prospectus supplement for the O'Shaughnessy Funds or the proxy materials required for the shareholders' meeting or meetings of the O'Shaughnessy Funds called for the purpose, pursuant to the Investment Company Act, of approving the Fund Transactions or other matters relating directly or indirectly to the Fund Transactions will not contain, at the time any such prospectus or prospectus supplement is delivered, or at the times such proxy materials are furnished or at the time of such meeting or meetings, any untrue statement of material fact or omit to state any material fact required to be
stated therein, where necessary in order to make the statements made therein, in the light of the circumstance under which they were made, not misleading.
Section 6.9 Access to Third Parties. Licensee and Licensor shall agree on mutually acceptable procedures to contact O'Shaughnessy Funds, Inc. and third party providers of Licensor or O'Shaughnessy Funds, Inc. including, but not limited to, auditors, transfer agents, administrators or any other service providers, and authorize such third party providers to communicate with Licensee and to provide information requested by Licensee.
Section 7.1 Conditions to Obligations of Licensee. All obligations of Licensee at the Closing hereunder are subject to the fulfillment prior to and at the Closing Date of each of the following conditions, which may be waived, in writing, in whole or in part by Licensee.
(a) Representations and Warranties. All representations and warranties of Licensor shall be true, correct and complete at and as of the Closing Date as though such representations and warranties were made at and as of such time, unless the facts causing such representation or warranty not to be true, correct or complete could not reasonably be expected to have a Material Adverse Effect with respect to Licensor or Licensee.
(b) Covenants and Conditions. Licensor shall have in all material respects performed and complied with all covenants, agreements and conditions required by this Agreement to be performed or complied with by it prior to or on the Closing Date.
(c) O'Shaughnessy Funds Board Action. The O'Shaughnessy Funds Board of Directors have taken action:
(1) to approve the Fund Transactions and authorize and direct appropriate officers to take all necessary actions to fulfill the conditions precedent thereto; and
(2) to call shareholders meetings of the O'Shaughnessy Funds to approve the Fund Transactions.
(d) Shareholder Approval. The Fund Transactions shall have been approved by the requisite vote of the outstanding voting securities of each of the O'Shaughnessy Funds.
(e) Conditions Precedent to Fund Transactions. All conditions precedent to consummation of each of the Fund Transactions shall have been satisfied or complied with in all material respects prior to the Closing Date.
(f) Deliveries. Licensor shall have made or stand willing and able to make all the deliveries to Licensee set forth in Section 8.2.
Section 7.2 Conditions to Obligations of Licensor. All obligations of Licensor at the Closing hereunder are subject to the fulfillment prior to and at the Closing Date of each of the following conditions which may be waived, in writing, in whole or in part by Licensor.
(a) Representations and Warranties. All representations and warranties of Licensee contained in this Agreement shall be true and complete at and as of the Closing Date as though such representations and warranties were made at and as of such time, unless the fact causing such representation or warranty not to be true, correct or compete could not reasonably be expected to have a Material Adverse Effect with respect to Licensee or Licensor.
(b) Covenants and Conditions. Licensee shall have in all material respects performed and complied with all covenants, agreements and conditions required by this Agreement to be performed or complied with by it prior to or on the Closing Date.
(c) O'Shaughnessy Funds, Inc. Board Action. The Board of Directors of O'Shaughnessy Funds, Inc. have taken action:
(1) to approve the Fund Transactions and authorize and direct appropriate officers to take all necessary actions to fulfill the conditions precedent thereto; and
(2) to call a shareholders meeting of the O'Shaughnessy Funds to approve the Fund Transactions.
(d) Shareholder Approval. The Fund Transactions shall have been approved by the requisite vote of the outstanding voting securities of each of the O'Shaughnessy Funds.
(e) Conditions Precedent to Fund Transactions. All conditions precedent to consummation of each of the Fund Transactions shall have been satisfied or complied with in all material respects prior to the Closing Date.
(f) Deliveries. Licensee shall have made or stand willing and able to make all the deliveries set forth in Section 8.3.
Section 7.3 Effect of Consummation of Fund Transactions. Notwith- standing any other provision of this Agreement, in the event the Fund Transactions are consummated prior to the Closing:
(a) This Agreement shall not be subject to termination pursuant to Section 9.1; and
(b) Licensor shall license the Trade Rights to Licensee on the date the Fund Transactions are consummated (the "Consummation Date"), and Licensee shall
thereupon become obligated to deliver the unpaid portion of the License Fee to Licensor in the manner described in Section 2.4 of this Agreement;
Except as otherwise specifically provided herein, nothing in this Section 7.3 shall be deemed to relieve a party of liability under this Agreement if on the Consummation Date such party shall not have performed or complied, in all material respects with all covenants, agreements and conditions required by this Agreement to be performed or complied with by such party prior to or on the Closing, or if a representation or warranty held by such party in this Agreement shall not be true, correct and complete on and as of the Consummation Date (unless the facts causing such representation or warranty not to be true; correct or complete could not reasonably be expected to have a Material Adverse Effect with respect to Licensor or Licensee).
Section 8.1 Closing. The Closing Date shall be on or before June 30, 2000, or as soon as practicable after the satisfaction or waiver of the conditions set forth in Article VII of this Agreement, whichever is earlier; provided, however, that if the meeting of shareholders of the O'Shaughnessy Funds called to approve the Fund Transactions is adjourned to a date on or after June 30, 2000, and such adjournment does not require the fixing of a new record date for such adjourned meeting, the Closing Date shall be as soon as practicable after the conclusion of such adjourned meeting. Closing shall be held at the offices of Licensor or such other place as shall be mutually agreed upon by Licensee and Licensor.
Section 8.2 Deliveries by Licensor. Prior to or on the Closing Date, Licensor shall deliver to Licensee the following, in form and substance reasonably satisfactory to Licensee and its counsel:
(a) Management Agreement. The management agreement in the form approved by the shareholders of the O'Shaughnessy Funds duly executed on behalf of O'Shaughnessy Funds Inc.
(b) Amendment to Articles of Incorporation of O'Shaughnessy Funds, Inc. An amendment to the Articles of Incorporation of O'Shaughnessy Funds, Inc. changing its corporate name to "Hennessy Mutual Funds, Inc." in appropriate form for filing in the office of the appropriate state official of the State of Maryland.
(c) Resignations. Resignations executed by each of the directors and officers of O'Shaughnessy Funds, Inc. effective as of the Closing Date, other than the directors elected by the shareholders of the O'Shaughnessy Funds as part of the Fund Transactions.
(d) Officer's Certificate. A certificate, dated as of the Closing Date, executed on behalf of Licensor by an authorized officer certifying that the conditions set forth in Sections 7.1(a) and (b) have been satisfied;
(e) Certificate of Secretary of Licensor. A certificate, dated as of the Closing Date, executed by Licensor's Secretary on Licensor's behalf: certifying (i) that the resolutions, as attached to such certificate, were duly adopted by Licensor authorizing and approving the execution of this Agreement and the consummation of the transaction contemplated hereby and that such resolutions remain in full force and effect; and (ii) that Licensor has taken no action to dissolve and that no grounds exist for administrative of judicial action to dissolve the Licensor and providing, as an attachment thereto, a certificate of good standing certified by an appropriate state official of the State of Maryland as of a date not more than fifteen (15) days before the Closing Date;
(f) A certificate, dated as of the Closing Date executed by the Secretary of O'Shaughnessy Funds, Inc., certifying (i) that the resolutions attached to such certificate were duly adopted by the shareholders of each of the O'Shaughnessy Funds approving the Fund Transactions and that such resolutions remain in full force and effect and (ii) that O'Shaughnessy Funds, Inc. has taken no action to dissolve and that no grounds exist for administrative or judicial action to dissolve O'Shaughnessy Funds, Inc., and providing, as an attachment thereto Articles of Incorporation of O'Shaughnessy Funds, Inc., as amended, and a certificate of good standing, each certified by an appropriate state official of the State of Maryland as of a date not more than fifteen (15) days before the Closing Date.
(g) Opinion of Counsel. Opinion of Licensor's counsel dated as of the Closing Date in a form reasonably acceptable to Licensee and its counsel as to the matters set forth in Schedule 8.2(d); and
(h) Delivery of Assets. Delivery by Licensor to a location
specified by Licensee of originals, if available, or copies, if originals are
not available, of all of the files, books, records of Licensor referred to in
Section 2.1.
Section 8.3 Deliveries by Licensee. Prior to or on the Closing Date, Licensee shall deliver to Licensor the following, in form and substance reasonably satisfactory to Licensor and its counsel:
(a) License Fee. The portion of the License fee that is to be paid on the Closing Date as provided in Section 2.4 and Licensee's duly executed promissory note in the form attached hereto as Exhibit B in the aggregate amount determined in accordance with clauses (c) and (d) of Section 2.4;
(b) Officer's Certificate. A certificate, dated as of the Closing Date, executed on behalf of Licensee by an authorized officer certifying that the conditions set forth in Section 7.2(a) and (b) have been satisfied;
(c) Secretary's Certificate. A certificate, dated as of the Closing Date, executed by Licensee's Secretary on its behalf: certifying (i) that the resolutions, as attached to such certificate, were duly adopted by Licensee's Board of Directors, authorizing
and approving the execution of this Agreement and the consummation of the transaction contemplated hereby and that such resolutions remain in full force and effect; and (ii) that Licensee has taken no action to dissolve and that no grounds exist for administrative or judicial action to dissolve the Licensee and providing, as attachments thereto, a certificate of good standing certified by an appropriate state official of the State of California as of a date not more than fifteen (15) days before the Closing Date and by Licensee's Secretary as of the Closing Date; and
(d) Opinion of Counsel. An opinion of Licensee's counsel dated as of the Closing Date in a form reasonably acceptable to Licensor and Licensor's counsel as to the matters set forth in Schedule 8.3(d).
Section 9.1 Termination Rights. This Agreement and, subject to the provisions of this Article IX, the obligations hereunder may be terminated and the transaction contemplated hereby abandoned:
(a) by Licensee at any time if all of the conditions set forth in Section 7.1 hereof shall not have been satisfied or waived by Licensee on the Closing Date (or the latest permissible time for the Closing Date provided in Section 8.1); or
(b) by Licensor at any time if all of the conditions set forth in Section 7.2 hereof shall not have been satisfied or waived by Licensor on the Closing Date (or the latest permissible time for the Closing Date provided in Section 8.1); or
(c) by Licensee or Licensor if there is in effect on the
Closing Date (or the latest permissible time for the Closing Date provided in
Section 8.1) any judgment, decree or order that would prevent or make unlawful
the Closing hereunder.
Any termination of this Agreement pursuant to this Section 9.1 shall be effected by notice in writing to the other party.
Section 9.2 Effect of Termination. If this Agreement is terminated
pursuant to and in accordance with Section 9.1, the termination shall be without
liability of any party, or of any Affiliate of such party, or any shareholder,
director, trustee, officer, employee, agent, consultant or representative, of
such party or of any of its Affiliates, or of O'Shaughnessy Funds and any of its
officers or trustees, to the other party to this Agreement; provided, however,
that, if the termination shall result from the breach by a party of any covenant
or agreement of such party contained in this Agreement, such party responsible
for the breach shall be fully liable for any and all reasonable costs and
expenses (including reasonable counsel fees and disbursements) sustained or
incurred by the non-breaching party; and provided further that the terms of
Section 6.3 and the confidentiality obligations of the parties to this Agreement
set forth in this Agreement shall survive any termination of this Agreement.
Section 9.3 Default; Liquidated Damages. Notwithstanding the
provisions of the foregoing Section 9.2, if Licensee fails to close, Licensor
being not in default and all conditions to the obligations of Licensee to close
having been satisfied or waived, Licensor's sole remedy shall be the right to
terminate this Agreement by fifteen (15) days' written notice to Licensee. Upon
such termination: (a) Licensee shall forfeit all rights and claims pursuant to
this Agreement; (b) Licensor shall hold and retain all sums of money paid or
payable in accordance with clause (a) of Section 2.4 of this Agreement as
liquidated damages for Licensor's default, this Agreement serving without more
as an irrevocable direction on behalf of Licensee to Firstar Bank, N.A. to pay
such sums to Licensor; and (c) all rights and remedies under this Agreement
shall thereupon be void. The parties hereby agree that the aforesaid sums shall
be deemed to be adequate but not excessive liquidated damages based upon the
following considerations, which Seller and Purchaser agree would constitute
damages to Licensor for any default by Licensee but are impossible to quantify,
to wit: (a) the removal of the Trade Rights from the market, together with the
uncertainty of obtaining a new licensee at the same or greater license fee;
(b) the expenses incurred by Licensor, including (but not by way of limitation)
attorneys' fees, interest and other costs incidental to the maintenance of
Licensor's Mutual Fund business until a new licensee can be identified; and
(c) all other expenses incurred by Licensor as a result of Licensee's default.
Section 10.1 Representations and Warranties. The representations and warranties contained in this Agreement shall survive until June 30, 2003, except for: (a) those representations and warranties of Licensor related to the Patent, which shall survive for the full life of the Patent (including continuations, continuations-in-part, reissues and extensions thereof); (b) those representa- tions and warranties of Licensor related to the Marks, which shall survive indefinitely.
Section 10.2 Indemnification by Licensor. Licensor shall indemnify, defend and hold harmless the Licensee against any and all claims, actions, damages, obligations, losses, liabilities, costs and expenses of which Licensee gives Licensor notice pursuant to Section 10.4(a) on or before the expiration of the appropriate survival period as set forth above (including reasonable attorneys' fees, costs of collection and other costs of defense) (collectively, "Damages"), arising from or in connection with any breach of any representation or warranty of Licensor or any covenant by Licensor contained in this Agreement.
Section 10.3 Indemnification by Licensee. Licensee shall indemnify defend and hold harmless Licensor against any and all claims, actions, damages, obligations, losses, liabilities, costs and expenses of which Licensor gives Licensee notice pursuant to Section 10.4(a) on or before June 30, 2003 (including reasonable attorney's fees and costs of collection and other costs of defense) (collectively, "Damages") incurred or suffered arising from or in connection with:
(a) any breach of any representation or warranty of Licensee or any covenant by Licensee contained in this Agreement; and
(b) Licensee's license of the Trade Rights or the provision of services to the O'Shaughnessy Funds by Licensee or any of its Affiliates on and after the Closing Date.
Section 10.4 Procedure for Indemnification. The procedure for seeking indemnification shall be as follows.
(a) The party claiming indemnification (the "Claimant") shall promptly give notice to the party from whom indemnification is claimed (the "Indemnifying Party") of any claim, whether between the parties or brought by a third party, specifying (i) the factual basis for such claim and (ii) if known, the estimated amount of the claim. If the claim relates to an action, suit or proceeding filed by a third party against Claimant, such notice shall be given by Claimant within five (5) days after written notice of such action, suit or proceeding was given to Claimant. Such notice shall not be a condition precedent to any liability of the Indemnifying Party under the provisions for indemnification contained in this Agreement, unless (and only to the extent that) failure to give such notice materially prejudices the rights of the Indemnifying Party with respect to such actions or proceedings.
(b) Following receipt of notice from the Claimant of a claim for indemnification, the Indemnifying Party shall have thirty (30) days to make such investigation of the claim as the Indemnifying Party deems necessary or desirable. For the purposes of such investigation, the Claimant agrees to make available to the Indemnifying Party and its authorized representative(s) the information relied upon by the Claimant to substantiate the claim. If the Claimant and the Indemnifying Party agree at or prior to the expiration of said thirty (30) day period (or any mutually agreed upon extension thereof) to the validity and amount of such claim, the Indemnifying Party shall immediately pay to the Claimant the full amount of the claim. If the Claimant and the Indemnifying Party do not agree within said period (or any mutually agreed upon extension thereof), the Claimant may seek appropriate legal remedy.
(c) With respect to any claim by a third party as to which Claimant is entitled to indemnification hereunder, the Indemnifying Party shall have the right at its own expense, to participate in or assume control of the defense of such claim, and the Claimant shall cooperate fully with the Indemnifying Party, subject to reimbursement for actual out-of-pocket expenses incurred by the Claimant as the result of a request by the Indemnifying Party. If the Indemnifying Party elects to assume control of the defense of any third- party claim, (the Claimant shall have the right to participate in the defense of such claim at its own expense. Notwithstanding the election of the Indemnifying Party to assume the defense of such action, the Claimant shall have the right to employ separate counsel and to participate in the defense of such action, and the Indemnifying Party shall bear the reasonable fees, costs and expenses of separate counsel if (a) in the reasonable judgment of the Claimant the use of counsel chosen by the Indemnifying Party to represent the Claimant would present such counsel with a conflict of
interest; (b) the defendants in, or targets of, any such action include both thc Indemnifying Party and the Claimant, and the Claimant shall have reasonably concluded that there may be legal defenses available to it which are different from or additional to those available to the Indemnifying Party (in which case the Indemnifying Party shall not have the right to direct the defense of such action on behalf of the Claimant); (c) the Indemnifying Party shall not have employed counsel satisfactory to the Claimant, in the exercise of the Claimant's reasonable judgment, to represent the Claimant within a reasonable time after notice of the institution of such action; or (d) the Indemnifying Party shall authorize in writing the Claimant to employ separate counsel at the expense of the Indemnifying Party. If the Indemnifying Party chooses to defend any claim, the Claimant shall make available to the Indemnifying Party any books, records or other documents within its control that are necessary or appropriate for such defense, subject to attorney client privilege and confidentiality agreements. In any event, the Claimant, the Indemnifying Party and the Indemnifying Party's counsel (and, if applicable, the Claimant's counsel), shall cooperate (at no material cost to the Claimant other than the cost of Claimant's counsel) in the compromise of, or defense against, any such asserted liability. If the Indemnifying Party assumes the defense of such an action, no compromise or settlement thereof may be effected by the Indemnifying Party without the Claimant's consent (which shall in any event not be unreasonably withheld) unless (i) there is no finding or admission of any violation of the rights of any person by the Claimant and no effect on any other claims that may be made against the Claimant and (ii) the sole relief provided is monetary damages that are paid in full by the Indemnifying Party.
(d) If a claim, whether between the parties or by a third party, requires immediate action, the parties will make every effort to reach a decision with respect thereto as expeditiously as possible.
(e) The Claimant may not compromise any such claim without the prior written consent of the Indemnifying Party, which consent may not be unreasonably withheld.
(f) The indemnification rights provided in Sections 10.2 and 10.3 shall extend to the shareholders, directors, officers, employees, Affiliates and agents of the Claimant although for the purpose of the procedures set forth in this Section 10.4, any indemnification claims by such parties shall be made by and through the Claimant.
(g) The indemnification obligations of Licensee and Licensor under this Article X shall constitute the sole and exclusive remedies of Licensee and Licensor for recovery of money damages after the Closing Date.
Section 11.1 Notices. All notices, demands and requests required or permitted to be given under the provisions of this Agreement shall be (i) in writing (ii) delivered by personal delivery, or sent by commercial delivery service or registered or certified mail, return
receipt requested (iii) deemed to have been given on the date of personal delivery or the date set forth in the records of the delivery service or on the return receipt or on the date receipt is confirmed as set forth in the confirmation of the properly transmitted facsimile, and (iv) addressed as follows:
If to Licensor: Netfolio, Inc.
-------------- 35 Mason Street - 4th Floor
Greenwich, Connecticut 06830-5436
Attention: James P. O'Shaughnessy, Chairman
|
Hilary B. Miller, Esq.
112 Parsonage Road
Greenwich, Connecticut 06830-3942
If to Licensee: Edward J. Hennessy Incorporated
-------------- The Courtyard Square
750 Grant Avenue, Suite 100
Novato, California 94945
|
Richard L. Teigen
Foley & Lardner
777 East Wisconsin Avenue
37th Floor
Milwaukee, Wisconsin 53202
(414) 297-5900 (fax)
or to any such other or additional persons and addresses as the parties may from time to time designate in a writing delivered in accordance with this Section 11.1; provided that any facsimile should be sent to a number provided by the intended recipient.
Section 11.2 Benefit and Binding Effect. Neither party hereto may assign this Agreement without the prior written consent of the other party hereto, except that Licensee may assign some or all of its rights and obli- gations under this Agreement to any member of the affiliated group of corporations of which Licensee is a part or to any purchaser of successor to Licensee's business, provided that such assignee agrees in writing to be bound by the provisions of this Agreement. This Agreement is for the sole benefit of and shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns and is not for the benefit of any other person.
Section 11.3 Governing Law. This Agreement shall be governed, construed and enforced in accordance with the substantive laws of (without regard to conflict of law principles), and the sole forum for the judicial resolution of any dispute arising under this Agreement shall be, the State of New York. The parties hereto consent and submit to the exclusive personal and subject-matter jurisdiction of the state and federal courts located in the State and County of New York. Trial by jury in any action, proceeding or counterclaim arising hereunder is hereby waived.
Section 11.4 Headings. The headings herein are included for ease of reference only and shall not control or affect the meaning or construction of the provisions of this Agreement.
Section 11.5 Gender and Rules of Construction. All references in this Agreement to the masculine gender shall include the feminine and neuter genders, and vice versa, and all references to the singular shall include the plural, and vice versa. Any reference to any Section, Schedule or Exhibit contained in this Agreement shall refer to such Section, Schedule or Exhibit as set forth in or attached to this Agreement, notwithstanding use of or failure to use the term "hereof," "hereto" or "herein" in connection with such reference.
Section 11.6 Entire Agreement. This Agreement, all Schedules hereto, and all documents and certificates to be delivered by the parties pursuant hereto collectively represent the entire understanding and agreement between Licensee and Licensor with respect to the subject matter hereof except as otherwise provided in Section 6.4(b). All Schedules required by this Agreement shall be deemed part of this Agreement and incorporated herein, where applicable, as if fully set forth herein. This Agreement supersedes all prior negotiations between Licensee and Licensor and all letters of intent and other writings relating to such negotiations, and cannot be amended, supplemented or modified except by an agreement in writing which makes specific reference to this Agreement or an agreement delivered pursuant hereto, as the case may be, and which is signed by the party against which enforcement of any such amendment, supplement or modification is sought.
Section 11.7 Counterparts. This Agreement may be signed in any number of counterparts with the same effect as if the signature on each such counterpart were upon the same instrument. An electronic facsimile or photocopy of this Agreement shall he deemed an original and may be admitted in evidence for all purposes.
IN WITNESS WHEREOF, this Agreement has been executed by Licensee and Licensor as of the date first above written.
EDWARD J. HENNESSY INCORPORATED
By: /s/ Neil J. Hennessy -------------------------------------- |
NETFOLIO, INC.
By: /s/ James P. O'Shaughnessy -------------------------------------- |
EXHIBIT A
THE OBLIGATIONS EVIDENCED HEREBY ARE SUBORDINATED TO OBLIGATIONS TO FIRSTAR BANK, NATIONAL ASSOCIATION, IN ACCORDANCE WITH THE TERMS OF A SUBORDINATION AGREEMENT HELD BY SAID BANK.
SUBORDINATED PROMISSORY NOTE
$___________ __________, 2001
FOR VALUE RECEIVED, EDWARD J. HENNESSY INCORPORATED a corporation organized under the laws of the State of California ("Maker"), promises to pay to the order of NETFOLIO, INC., a corporation organized under the laws of the State of Minnesota ("Payee") the principal sum of ___________ Dollars ($_____), at the principal office of the Payee in Greenwich, Connecticut, or such other place within the United States as the holder hereof may from time to time designate, payable in sixty (60) equal monthly installments of ____________ Dollars ($_____) each on the 15th day of each month commencing ______ 15, 2001. 1
The unpaid principal balance hereof shall bear interest, payable with each installment of principal computed at a per annum rate equivalent to the rate announced by Firstar Bank, National Association, Cincinnati, Ohio ("Firstar") as its prime rate (the "Prime Rate") with the interest rate hereon changing quarterly effective on the 15th day of each third calendar month, beginning on the 15th day of the third calendar month following the month in which this Promissory Note is executed, to reflect the Prime Rate as last previously announced by Firstar.
In the event any payment of interest or principal due hereunder shall not be paid on the date when due (including any such non-payment which arises as a result of the subordination in right of payment of the obligations evidenced hereby to certain indebtedness of Maker to Firstar Bank, N.A.), such past-due payment shall bear interest at the rate of eighteen (18%) percent per annum, compounded monthly, from the date when such payment first became due until receipt of payment thereof by Payee. In addition, Maker shall pay a late payment premium of two (2%) percent of any principal or interest payment made more than five (5) business days after the due date thereof, which premium shall be paid with such late payment and shall be deemed part of such payment for the purpose of computing interest under the preceding sentence. This paragraph shall not be deemed to extend or otherwise modify or amend the date when such payments are due hereunder.
This note may be prepaid in full or in part at any time without premium or penalty. All prepayments shall be applied against installments of principal due hereunder in the inverse order of their maturity.
This note is issued pursuant to the provisions of a certain License Agreement between Maker and Payee dated April 10, 2000. In the event of any inconsistency between the terms of this note and such License Agreement, the terms of such License Agreement shall control.
If any payment is not made when due, the unpaid balance of this note shall, at the option of the holder and without notice or demand, mature and become immediately payable. The unpaid balance shall automatically mature and become immediately payable in the event Maker becomes the subject of bankruptcy or other insolvency proceedings.
Maker waives presentment, demand, notice of dishonor and protest. Maker agrees to pay all costs of collection, including reasonable attorney's fees and legal expenses.
This note is governed by the internal laws of the State of New York, except to the extent superseded by federal law.
EDWARD J. HENNESSY INCORPORATED
By:______________________________________
Name:
Title:
Attest:
By:______________________________________
Name:
Title:
Exhibit 10.7
LOAN AGREEMENT
THIS LOAN AGREEMENT is dated as of April 10, 2000, by and between EDWARD J. HENNESSY, INCORPORATED, a California corporation (hereinafter referred to as "Borrower") and FIRSTAR BANK, N.A., a national banking association (hereinafter referred to as the "Bank").
1. Borrower's Representations and Warranties. To induce
the Bank to enter into this Agreement to agree to make the loans described in
Section 4 of this Agreement (the "Loan"), Borrower makes the following
representations and warranties:
(a) Corporate existence. Borrower is duly organized, validly existing and in good standing under the laws of the State of California. Borrower is duly qualified as a foreign corporation and in good standing under the laws of the jurisdictions listed in Exhibit "1(a)" of this Agreement which are the only jurisdictions where the failure to be so qualified by Borrower would have a material adverse effect on its respective business prospects or financial condition.
(b) Corporate Authority. Borrower has full corporate power and authority to own its properties and to conduct its business as such business is now being conducted and to execute, deliver and perform under this Agreement and each of the other documents contemplated or required by or related to this Agreement (the "Loan Documents"), including, but not by way of limitation, all those documents required by Section 4 of this Agreement.
(c) Borrowing Authorization. The execution by Borrower and the delivery and performance of this Agreement, the Note and other Loan Documents in connection with the borrowings hereunder (i) have been duly authorized by all requisite corporate action of Borrower and (ii) will not violate (A) any provision of law, (B) any order of any court or other agency of government, (C) the Articles of Incorporation or Regulations of Borrower, (D) any provision of any indenture, agreement or other instrument to which Borrower is a party, or by which it or any of its properties or assets are bound, which would have a material adverse effect on Borrower or its assets or business, and (iii) will not be in conflict with, result in a breach of or constitute (with due notice and/or lapse of time) a default under any such indenture, agreement, or other instrument, which would have a material adverse effect on Borrower or its assets or business, and (iv) will not result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of the material properties or assets of Borrower (other than in favor of the Bank hereunder).
(d) Financial Information and Reports. Exhibit "1(d)" to this Agreement is a true and complete list of the financial statements and projected financial statements previously furnished to the Bank in connection with the borrowings to be made hereunder. The audited annual financial statements have been prepared in accordance with generally accepted accounting principles, consistently applied in accordance with past practices, and all such statements accurately present the financial condition of
Borrower and its operations as of the date (or with respect to the period) noted in such financial statements. Other than any liability incident to litigation described in Exhibit "1(f)" to this Agreement, Borrower has no material contingent liabilities not provided for or disclosed in such financial statements. Each such statement is true, correct and complete. No such statement omits to state a material fact necessary to make such report not misleading in light of the circumstances under which it was made. There has been no material adverse change in the business or financial condition of Borrower since the date of the last financial statement noted in Exhibit "1(d)".
(e) Indebtedness. Except as reflected in the Financial Statements listed in Exhibit "1(d)" attached hereto or as described in Exhibit "1(e)" to this Agreement, Borrower has no indebtedness, other than the obligations provided for in this Agreement, and has not guaranteed the obligations of any other person (except by endorsement of negotiable instruments payable on sight for deposit or collection or similar banking transactions in the usual course of business).
(f) Actions Pending. There is no action or proceeding pending or, to the knowledge of Borrower, threatened against or affecting Borrower before any court or administrative agency except for those described in Exhibit "1(f)" to this Agreement, none of which might result in any material adverse change in the business or condition of Borrower.
(g) Title to Collateral Security. Borrower has good,
indefeasible and merchantable title to and ownership of all of its real
and personal property including, without limitation, the Collateral
Security (as defined in Section 4(e) of this Agreement) and other
security for any of the obligations provided for in this Agreement,
free and clear of all liens, claims, security interests and
encumbrances except those liens: (i) in favor of the Bank pursuant to
Sections 4(e) and 4(f) below or pursuant to prior loans from the Bank;
(ii) as allowed by Section 2(h) below; and (iii) permitted liens in
favor of third-parties specified in Exhibit "1(c)" to this Agreement or
specified in the financial statements noted in Exhibit "1(d)" (the
"Permitted Liens"). Borrower has and will continue to have full rights
and powers to give the Bank a security interest in the Collateral
Security.
(h) Employee Benefit Plans. No "reportable event" or "prohibited transaction," as defined by the Employee Retirement Income Security Act of 1974 ("ERISA") has occurred or is continuing, as to any plan of Borrower which poses a threat of taxes or penalties against or termination of such plans (or trusts related thereto). Borrower has not violated in any material respect the requirements of any "qualified pension benefit plan," as defined in ERISA and the Internal Revenue Code of 1986 or done anything to create any material liability under the Multi-Employee Pension Plan Amendment Act. Borrower has not incurred any material liability to the Pension Benefit Guarantee Corporation ("PBGC") in connection with such plans, including, but not limited to any funding deficiency (as defined by ERISA).
(i) Purpose of Loan. The purpose of the Loan is described in Exhibit "1(i)" to this Agreement. The Loan is not secured, directly or indirectly, by any stock for the purpose of purchasing or carrying any margin stock or for any purpose which would violate either Regulation U, 12 C.F.R. Part 221, or Regulation X, 12 C.F.R. Part 224, promulgated by the Board of Governors of the Federal Reserve System.
(j) Compliance. Borrower is in compliance in all material respects with all laws, statutes, ordinances, rules, regulations and orders of any governmental entity applicable to it (including, but not by way of limitation, any such laws, statutes, ordinances, rules, regulations and orders related to ecology, human health and the environment), the violation of which would have a material adverse effect on Borrower or its assets or operations.
(k) No Default. No default (or event which, with notice or lapse of time, or both, would constitute a default) exists under any agreement or instrument for borrowed money to which Borrower is a party or pursuant to which any property of Borrower is encumbered. Borrower warrants that it is current on all material money and trade obligations (other than the subject of a bona fide dispute), and that all dividend payments and or declarations owed to shareholders are current.
(l) Offering of Note. Neither Borrower nor any agent acting for it has offered the Note or any similar obligation of Borrower for sale to or solicited any offers to buy the Note or any similar obligation of Borrower from any person other than Bank and neither Borrower nor any agent acting for it will take any action which would subject the sale of the Note to the registration provisions of Section 5 of the Federal Securities Act of 1933, as amended.
(m) Ability to Conduct Business. Borrower possesses adequate management, employees, assets, governmental approvals, and, to the extent applicable, licenses, patents, patent applications, copyrights, trademarks, trademark applications and trade names, to continue to conduct its business as heretofore conducted by it.
(n) Adverse Contracts and Conditions. Borrower is not a party to any contract or agreement, or subject to any charge, corporate restrictions, judgment, decree or order, materially and adversely affecting its business, property, assets, operations or condition, financial or otherwise. Borrower is not a party to any labor disputes which could result in a general work stoppage or which could have a material adverse effect on Borrower's business operations. There are no strikes or walk-outs relating to any labor contracts entered into by Borrower.
(o) Taxes. Except as described in Exhibit "1(o)" to this Agreement, Borrower has filed all federal, state and local tax returns and other reports which it is required by law to file, has paid all taxes, assessments and other similar charges that are due and payable, and Borrower has withheld all employee and similar taxes which it is required by law to withhold.
(p) Broker's Fees. No brokerage, finder's or similar fee or commission is due to any party by reason of Borrower entering into this Agreement or by reason of any of the transactions contemplated hereby, and Borrower shall and hereby does indemnify and hold Bank harmless from all such fees and commissions.
2. Borrower's Covenants. In consideration of the Bank's promise to make the Loan, Borrower agrees that, from the date of this Agreement and until the Loan are paid in full and Borrower's obligations under this Agreement are fully performed, it shall:
(a) Books and Records. Keep and maintain complete books of accounts, records and files with respect to its business in accordance with generally accepted accounting principles consistently applied in accordance with past practices and shall accurately and completely record all transactions therein.
(b) Financial Statements: Periodic Reports: Verification. Furnish to the Bank: (i) within ninety (90) days after the last day of each fiscal year of Borrower, a copy of the annual audited financial statements of Borrower signed by independent certified accountants satisfactory to the Bank and prepared in accordance with generally accepted accounting principles applied on a basis consistent with that of the preceding fiscal year, with detail consistent with past financial statements (unless Bank requests additional detail, in which case Bank shall allow Borrower a reasonable opportunity to provide same), including, at a minimum, a balance sheet, profit and loss statement with proper footnotes, and statements of retained earnings and sources and application of funds; (ii) within ten (10) days after the last day of each quarter [or, upon written notice from Bank, thereafter, within ten (10) days after the last day of each calendar month] a copy of Borrower's unaudited financial statements, with detail consistent with past financial statements (unless Bank requests additional detail, in which case Bank shall allow Borrower a reasonable opportunity to provide the same), and such other statements and/or reports as Bank shall reasonably request all in sufficient detail to fully and accurately present the financial condition and results of operations of Borrower; (iii) at the request of Bank, any annual auditor's management letter; (iv) within ninety (90) days after the end of each fiscal year, an annual projection of income statements and cash forecasts for such year; and (v) within ten (10) days after the last day of each calendar month a monthly compliance certificate certifying that Borrower is in compliance with the financial covenants set forth in Exhibit 2(f) hereof and including a monthly income statement, with detail consistent with past financial statements; (vi) such other reports and information as the Bank may reasonably request. Borrower shall permit the Bank, or its agents or representatives, at all times to perform audits, inspect Borrower's property and to verify accounts, inspect, check, make copies of or extracts from the books, records and files of Borrower, and Borrower will make the same available to the Bank or its agents and representatives at any reasonable time (within usual business hours), and upon reasonable notice for such purposes. Borrower shall provide Bank or its agents or representatives with reasonable clerical assistance in order to permit Bank or its agents or representatives to complete any of its work as contemplated by this Agreement.
(c) Casualty Insurance. Maintain and/or cause to be maintained insurance policies on all real and personal property of Borrower (including, but not by way of limitation, the Collateral Security and other security for the obligations provided for herein) with responsible carriers acceptable to the Bank to such extent and against such hazards and liabilities as is commonly maintained by companies similarly situated, such policies to carry endorsements that require thirty (30) days advance notice to the Bank of any cancellation of same, and at least annually (and more frequently if requested by the Bank) provide the Bank with certificates of insurance or other satisfactory evidence thereof.
(d) Liability Insurance. Maintain in full force and effect such liability and business interruption insurance with respect to the activities of Borrower and other insurance as is commonly maintained by similar companies and as may be reasonably required by Bank, all such insurance to be provided by responsible carriers acceptable to Bank.
(e) Taxes. File all federal, state and local tax returns and other reports Borrower is required by law to file and pay when due all taxes, assessments, and other liabilities, except that Borrower shall not be obligated to pay any taxes or assessments which Borrower is contesting in good faith provided that adequate reserves therefor are established on Borrower's books and that such taxes and assessments are promptly paid when the dispute is finally determined.
(f) Financial Covenants. Comply with all of the financial covenants contained in Exhibit "2(f)" to this Agreement.
(g) Indebtedness. Not incur or permit to exist any indebtedness by Borrower except (i) the borrowings under this Agreement; (ii) indebtedness incurred in connection with the liens permitted by Section 2(h) herein; (iii) indebtedness existing as of the date of this Agreement and reflected in the financial statements described in Exhibit "1(d)" to this Agreement; (iv) other indebtedness existing as of the date of this Agreement and described in Exhibit "1(g)" to this Agreement; (v) short term unsecured trade credit or accounts incurred in the ordinary course of business; (vi) operating leases aggregating a maximum of $2,500.00 per month for normal business purposes; and (vii) indebtedness related to purchase money security interests arising in the ordinary course of Borrower's business and limited as noted in Section 2(h) below. "Indebtedness" shall mean for all purposes of this Agreement any indebtedness for borrowed money or indebtedness representing the deferred purchase price of property being acquired pursuant to installment or conditional sale agreements or capitalized lease obligations.
(h) Liens. Not create or permit to exist any mortgage, pledge, security interest, title retention right, lien or other encumbrance (collectively "liens") with respect to any assets now owned or hereafter acquired by Borrower except those liens: (i) created in favor of the Bank hereunder; (ii) related to current taxes not yet delinquent or as security for taxes being contested in good faith, or in connection with workers' compensation insurance, unemployment insurance or old age pensions, or of mechanics
and materialmen for sums not due or sums being contested in good faith
and for which adequate reserves are set aside on Borrower's books to
pay same when finally determined to be due; (iii) those granted in the
normal course of business to procure bid, performance or surety bonds;
(iv) liens which do not materially impair the value of Borrower's
assets or Bank's security interest granted herein (so long as any of
such liens noted in subsections (ii), (iii) and (iv) herein, separately
or in the aggregate, do not materially affect the property or
operations of Borrower or materially diminish the Collateral Security
or the Bank's interest therein); and (v) the Permitted Liens.
(i) Corporate Existence and Status. Except with the prior written consent of the Bank, maintain the corporate existence of Borrower in good standing under the laws of each jurisdictions described in Section 1(a) of this Agreement and not amend, without prior written notice to Bank, the Articles of Incorporation or Regulations, or fiscal year for tax and accounting purposes of Borrower.
(j) Contracts. Not enter into any agreement, contract or arrangement which would materially impair or adversely affect the right and/or ability of Borrower to carry on its business as now conducted or materially impair or adversely affect the Collateral Security or other security for the obligations provided for hereunder.
(k) Merger and Transfer of Assets. Except with the prior
written consent of the Bank, not (i) be a party to any merger,
consolidation, or reorganization (including any acquisition of all or
substantially all of the equity, assets or debt of any other
enterprise) or enter into or form any partnership or joint venture;
(ii) sell, transfer, convey, or lease, or grant an option to sell,
transfer, convey or lease all or any part of Borrower's property,
tangible or intangible, except in the normal course of business or as
authorized herein, or sales of damaged, obsolete, or discontinued
assets; (iii) not materially change the nature of or discontinue
Borrower's current business activities; (iv) not sell, discount,
encumber or assign, with or without recourse, any accounts receivable
except in the ordinary course of business in connection with the
collection of accounts which are at least ninety (90) days past due.
(l) Maintenance of Property . To the extent consistent with good business practices, maintain all tangible and intangible property of Borrower in good condition and repair and not in any way impair the value of said property or the Bank's Collateral Security hereunder.
(m) Guarantees. Not endorse, co-obligate, guaranty or in any way commit to the repayment of any credit obligations of any person, firm, corporation or other entity except with respect to indemnifications and/or guaranties involving Borrower's own directors, officers and employees in connection with actions taken on behalf of Borrower, or involving the endorsement of negotiable instruments for deposit or collection, or as to normal indemnities given bonding companies.
(n) Compliance with Law. Comply at all times, with all material laws, statutes, ordinances, rules, regulations and orders of any governmental entity (including,
but not by way of limitation, such laws, statutes, ordinances, rules, regulations and orders relating to ecology, human health and the environment) having jurisdiction over Borrower or any part of its assets, where such failure to comply would have a material adverse effect on Borrower or its assets. Borrower shall obtain and maintain all permits, licenses, approvals and other similar documents required by any such laws, statutes, ordinances, rules, regulations or orders.
(o) Restricted Payments. Not (i) declare or pay any dividend (cash or stock) to any of Borrower's shareholders; (ii) make any distributions of Borrower's assets or loans or advances to officers, directors or employees, other than salaries paid by Borrower in the normal course of business; or (iii) purchase, redeem, retire or otherwise acquire any shares of Borrower's stock from Borrower's shareholders.
(p) Notice of Litigation. Notify Bank in writing, promptly upon any Borrower learning thereof, of any litigation, suit or administrative proceeding which may materially affect the operations, financial condition or business of Borrower or Bank's security interest in the Collateral Security or other security for the obligations provided for herein, whether or not the claim is considered by Borrower to be covered by insurance.
(q) ERISA Notice. Notify Bank in writing (i) promptly upon the occurrence of any material event described in Section 4043 of ERISA, other than a termination, partial termination or merger of a "Plan" (as defined in ERISA) or a transfer of a Plan's assets and (ii) prior to any termination, partial termination or merger of a Plan or a transfer of a Plan's assets.
(r) Ability to Conduct Business. Maintain adequate management, employees, assets, governmental approvals, permits and licenses and/or, if applicable, patents, patent applications, copyrights, trademarks, trademark applications and trade names, to conduct its businesses as now or hereafter conducted by it, including after the purchase of the O'Shaughnessy Mutual Funds.
(s) Notice of Labor Dispute . Notify Bank, promptly upon Borrower's learning thereof, of any labor dispute to which Borrower may become a party which could result in a general work stoppage or which could have a material adverse effect on Borrower's business operations, any strikes or walkouts relating to any of its operations or facilities which could have a material adverse effect on Borrower or its assets or operations, and/or the expiration of any labor contract to which Borrower is a party or by which Borrower is bound.
(t) Notice of Default of Indebtedness. Notify Bank, promptly upon the occurrence thereof, of any default by Borrower under any note, indenture, loan agreement, mortgage, lease, deed of other similar agreement to which Borrower is a party or by which any of Borrower is bound.
(u) Sufficient Capital. At all times prior to, during and after any disbursement of the Loan, have capital sufficient to carry on its business and transactions as now conducted and all businesses and transactions in which it is about to engage and will be solvent and able to pay its debts as they mature, and Borrower will own property having a value, both at fair valuation and at present fair saleable value, greater than the amount required to pay its debts.
(v) Ownership and Operations: Compensation. Cause Neil J. Hennessy or his family (or any trust benefiting him and/or his family) to maintain direct or indirect ownership of at least one hundred percent (100%) of all the shares of Borrower, agree not to pledge his shares or grant any interest therein to anyone but a family member, and remain active in the day-to-day management of Borrower.
(w) Trust Relationship. Appoint and maintain Firstar Trust as the Transfer Agent, Fund Accountant, Custodian and Administrator for all of the mutual funds managed by Borrower, including, without limitation, the O'Shaughnessy Mutual Funds being purchased with the proceeds hereof.
(x) Waiver. Any variance from the covenants of Borrower pursuant to this Section 2 shall be permitted only with the prior written consent and/or waiver of the Bank. Any such variance by consent and/or waiver shall relate solely to the variance addressed in such consent and/or waiver, and shall not operate as the Bank's consent and/or waiver to any other variance of the same covenant or other covenants, nor shall it preclude the exercise by the Bank of any power or right under this Agreement.
3. Closing Conditions. The obligation of the Bank to make the Loan, or any portion thereof, is subject to the satisfaction of each of the following conditions precedent:
(a) Default. Before and after giving effect to any Loan or any portion thereof, no Event of Default, as defined in Section 5 of this Agreement, or any event which, with the passage of time or notice or both, would mature into an Event of Default shall have occurred or be continuing;
(b) Warranties. Before and after giving effect to any Loan or any portion thereof, the representations and warranties in Section 1 hereof shall be true and correct as though made on the date of such Loan or portion thereof;
(c) Certification . Borrower shall have delivered to the Bank certificates as of the date of this Agreement and any future date as Bank may request, in a form satisfactory to the Bank, of the President or chief financial officer of Borrower (i) as to the matters set out in Sections 3(a) and 3(b) of this Agreement, (ii) that the resolutions described in Section 3(d) of this Agreement have not been amended or rescinded, and (iii) as to incumbency of all officers of Borrower (with specimen signatures of such incumbent officers and whenever such officers have been changed); and.
(d) Resolutions . Borrower shall have delivered to the Bank a copy, duly certified as of the date of this Agreement by the secretary or assistant secretary of Borrower of (a) the resolutions of Borrower's Board of Directors authorizing all borrowings hereunder and the execution and delivery of this Agreement and the Note and other Loan Documents hereunder, (b) all documents evidencing other necessary corporate action by Borrower, and (c) all approvals or consents, if any, with respect to this Agreement, the Note and other Loan Documents.
(e) Note. Borrower shall have delivered its promissory note evidencing the Term Loan to the Bank substantially in the form of Exhibit "4(a)" to this Agreement, but with all blanks appropriately completed and properly executed by an authorized officer or officers of Borrower (collectively, with any renewal or replacement note, the "Note").
(f) Delivery of Collateral Security. The Collateral Security (and amendments thereof and additions thereto) specified in Section 4(e) has been provided to the satisfaction of the Bank.
(g) Opinion. Borrower shall have delivered to the Bank an opinion of present counsel to the Borrower (or other counsel acceptable to the Bank), dated the date of the Loan (or such other date acceptable to the Bank) to the effect that (i) Borrower is duly incorporated, validly existing and in good standing under the laws of the State of California; (ii) Borrower has full power to execute and deliver this Agreement, the Note and other Loan Documents and to perform its obligations under same; (iii) such actions have been duly authorized by all necessary corporate action, and are not in conflict with any provision of law or of the Articles of Incorporation and Regulations of Borrower nor, to the best knowledge of such counsel after due investigation, in conflict with any agreement, order or decree binding upon Borrower; and (iv) this Agreement and the Note and other Loan Documents are the legal and binding obligations of Borrower, and all other parties thereto, enforceable in accordance with their terms, except as the same may be affected by bankruptcy, insolvency, moratorium or similar laws now or hereafter in effect, or by legal and equitable principles relating to or limiting creditors' rights generally, or other rules of law or equity limiting the availability of attorney's fees or of specific performance, injunctive relief or other equitable remedies may limit, restrict, modify or otherwise impair the enforceability of the Agreement, the Note and other Loan Documents.
(h) Insurance. Evidence of insurance as required by Sections 2(c) and 2(d) of this Agreement reasonably satisfactory to Bank.
(i) Other Items. Borrower shall have delivered to Bank the other items specified in Exhibit "3(i)" to this Agreement.
(j) Other Documents; Inspection. Borrower shall have delivered to the Bank such other documents, certificates and instruments as the Bank, in its sole discretion, may reasonably request, and such post-loan closing documents as may be reasonably requested by the Bank to evidence, protect or perfect the Loan and any
collateral security therefore. The Bank or its designated representative shall have the continuing right to inspect and review, at reasonable times and upon reasonable notice, all Borrower's records, documents and assets, directly or indirectly related to the Loan or Borrower's obligations provided for in this Agreement.
(a) Term Loan. Subject to the terms and conditions set forth herein, the Bank agrees to lend to the Borrower up to a maximum principal amount of Two Million Five Hundred Thousand Dollars (US $2,500,000); provided, however, that such amount shall not exceed the amount of the Available Facility. "Available Facility" shall mean the lesser of (i) $2,500,000, or (ii) $100,000 plus 50% of the License Fee (as set forth, and defined in, the License Agreement which License Fee shall be calculated as 2.25% of the total fund assets of the O'Shaughnessy Mutual Funds calculated on the business day immediately preceding the Closing Date as defined in the License Agreement). Such loan shall be referred to herein as the "Term Loan."
The proceeds of the Term Loan shall be disbursed by Bank to Borrower as follows: (i) $100,000 less the Facility Fee less $10,000 for the Bank's legal fees in connection herewith, shall be payable to the Borrower on the date hereof which amount shall be used by the Borrower to pay the proxy fees and expenses associated with Borrower's purchase of the O'Shaughnessy Mutual Funds pursuant to the License Agreement, (ii) $484,129.79 (which amount is equal to 10% of the estimated purchase price of the O'Shaughnessy Mutual Funds calculated based on 2.25% of the total funds assets of the O'Shaughnessy Mutual Funds on the close of business on April 7, 2000) shall be payable to the Borrower on the date hereof, which amount shall be placed by Borrower into an escrow account with the Bank pursuant to that certain Escrow Agreement of even date herewith among Borrower, Bank and Licensor, and (iii) at the closing of the License Agreement, Bank shall pay to the Borrower, the remaining proceeds of the Term Loan.
The Term Loan shall be evidenced by a term note given by the Borrower to the Bank, in the form of Exhibit "4(a)" attached hereto and made a part hereof (the "Term Note"). The Bank is hereby authorized by the Borrower to enter from time to time on the reverse of the Term Note the principal balance of the Term Loan and all prepayments thereon, and the aggregate unpaid amount of the Term Loan set forth on the Term Note shall be contained in a monthly statement sent to Borrower and, if not objected to by Borrower within a reasonable time thereafter, shall be presumptive evidence of the principal amount owing to the Bank and unpaid thereon. No prepayment of the Term Loan by Borrower shall create any obligation on the part of the Bank to relend such repaid or prepaid amounts to Borrower. The Term Loan shall bear interest through its maturity date at the Prime Rate, such rate to be adjusted on the effective date of any change in the Prime Rate by the Bank, computed on the basis of a year consisting of 360 days but applied to the actual number elapsed. The "Prime Rate" shall mean the rate announced as such by the Bank from time-to-time and determined solely by the Bank pursuant to market factors and its own operating needs. Interest shall be payable to the
Bank monthly, in arrears, commencing May 10, 2000 and monthly there- after on the tenth day of each month and when the Term Note is due. After an Event of Default or other maturity, whether by acceleration or otherwise, the Term Loan shall bear interest (computed and adjusted in the same manner, and with the same effect, as interest on the Term Loan prior to maturity) payable on demand at a rate per annum equal to the Prime Rate plus three percent (3.0%) (the "Default Rate"), in all cases until paid and whether before or after entry of any judgment thereon. Borrower shall also pay any late payment fees specified in the Term Note. The Term Loan shall mature on May 10, 2005 and be repayable to the Bank in fifty-four (54) equal consecutive uninterrupted monthly installments of principal and interest, each due on the tenth day of the month, commencing November 10, 2000, with a final installment of the remaining balance and any accrued interest and fees due on April 10, 2005.
(b) Facility Fee. Borrower shall pay Bank a facility fee of $10,000 as of the date of this Agreement (the "Facility Fee").
(c) Mandatory Prepayments: Optional Prepayments. The Borrower shall make mandatory annual prepayments of the Term Loan principal balance outstanding as of September 30 of each year, commencing September 30, 2001, equal to fifty percent (50%) of Excess Cash Flow, but only if such Excess Cash Flow for the period in question exceeds $100,000 (in which case the 50% calculation shall be made on the entire Excess Cash Flow, without such $100,000 exclusion). "Excess Cash Flow" shall mean Borrower's net income after taxes plus depreciation and amortization.
The Borrower may also, from time to time, after the date of this Loan Agreement and from time to time thereafter, at its option, repay or prepay part or all of any Term Loan principal balance outstanding. There shall be no prepayment premium for any such prepayments by Borrower. All prepayments of the Term Loan shall be applied to unpaid principal installments of the Term Loan in the inverse order of the maturity dates of such installments, and each such repayment or prepayment shall include accrued interest to the date of prepayment on the principal amount being prepaid. No amounts repaid or prepaid on the Term Loan shall be reloaned to Borrower by the Bank.
(d) Place of Payment. All payments of principal and interest hereunder shall be made in immediately available funds to the Bank at 425 Walnut Street, M.L. CN-WN-06TC, Cincinnati, Ohio 45202, or at such other places as may be designated by the Bank to the Borrower in writing. Borrower directs the Bank to charge any account or charge or increase any loan balance of Borrower at the Bank for the amount of any interest or principal payments or fees due to the Bank hereunder. Further, the Bank shall have the power to charge and offset management fees as specified in Section 4(f) below.
(e) Collateral Security. All the obligations of the Borrower to the Bank under this Agreement and the Note shall be secured by the following (together called the "Collateral Security"):
(i) a security interest in and to all of the tangible and all of the intangible personal property of the Borrower, including, but not by way of limitation, machinery, equipment, furniture, fixtures, inventory, accounts (meaning accounts receivable, accounts, instruments, chattel paper, documents, contracts, contract rights (including, without limitation, the management agreements with the Hennessy Mutual Funds and the O'Shaughnessy Mutual Funds), choses of action and any form of obligation now or hereafter owing to Borrower), general intangibles (including, without limitation, any patents, copyrights, trademarks and trade names relating to managed mutual funds or otherwise), goodwill of Borrower, now owned or existing or hereafter acquired or arising, and their proceeds and products, cash or non-cash, as evidenced by the Bank's Security Agreement and Schedule, all attached hereto as Exhibit "4(e)(i)" and made a part hereof (hereinafter called the "Security Agreement");
(ii) a payment guaranty by Neil J. Hennessy ("Guarantor") in
the initial amount of $500,000 in the form of the Business Guaranty
attached hereto as Exhibit "4(e)(ii)" and made a part hereof
(hereinafter called the "Guaranty"), which Guaranty the Bank agrees (i)
to reduce to $300,000 at the Closing Date as defined in the License
Agreement or (ii) to cancel and eliminate the Guaranty at such time
after the Closing Date (as defined in the License Agreement) as
Guarantor has satisfactorily assigned to the Bank a replacement
Certificate of Deposit in the amount of $300,000;
(iii) a security interest in favor of the Bank as specified in
Section 4(f) herein;
(iv) a subordination to the Bank of all amounts owed by the Borrower to Netfolio, Inc. under the License Agreement or otherwise pursuant to the Bank's Subordination Agreement in the form of Exhibit "4(e)(iv)" attached hereto and made a part hereof (the "Subordination Agreement");
(v) an assignment of partnership interest to the Bank of all of Borrower's right, title and interest in Hennessy Management Company, L.P. and Hennessy Management Company II, L.P. in the form of Exhibit "4(e)(v)" attached hereto and made a part hereof; and
(vi) as may otherwise be specified in the Term Note, Security Agreement, Guaranty and/or Subordination Agreement, as same may be amended or restated from time to time.
The Collateral Security shall be in form satisfactory to the Bank and its counsel, and the Borrower agrees to execute or cause to be executed any and all documents and deliver to the possession of the Bank such documents or other assets of Borrower as are determined reasonably necessary by the Bank or its counsel to evidence or assure the protection, perfection and/or enforcement of such Collateral Security including, but not limited to additional confirmation security agreements as to newly acquired assets, and UCC financing statements). The provisions of the Term Note, Security Agreement, Guaranty, Subordination Agreement and other related documents provided or related to the Collateral Security for the Bank shall supplement and be in addition to those of this Agreement and any inconsistent provisions therein
shall be interpreted in all respects to be in favor of the Bank, provided, however, that whenever possible, such provisions shall be interpreted and limited consistent with the provisions and limitations of this Agreement.
(f) Lien; Right of Set-Off. Borrower hereby grants to Bank a continuing lien and a security interest for all obligations of Borrower to Bank in and to any and all moneys, securities and other properties of Borrower and the proceeds thereof now or hereafter held or received by or in transit to the Bank from or for the account of Borrower, whether for safekeeping, pledge, transmission, collection or otherwise, and also upon any and all deposits (general and special), account balances and credits of Borrower with Bank at any time existing. In addition to all statutory rights of Bank, Bank is hereby authorized at any time and from time to time after any Event of Default hereunder, without prior notice to Borrower to set-off, appropriate, apply and enforce said lien and security interest in any and all items hereinbefore specified in this subsection referred to against all obligations of Borrower to the Bank arising under this Agreement and the Note, and Borrower shall continue to be liable to the Bank for any deficiency with interest at the rates set forth herein and in the Note. Specifically, but without limitation, the Bank, as the Administrator of the Hennessy and O'Shaughnessy Mutual Funds, shall have the authority to set-off the amounts due from Borrower from the management fees due Borrower pursuant to such Fund agreements. The Bank, as such Administrator of the Funds, shall release to Borrower all amount in excess thereof.
(A) Events of Default. If any of the following events (any such event shall be referred to as an "Event of Default") shall occur, then Bank may, without further notice or demand, accelerate the Loan and declare it to be, and thereupon the Loan (and the Note) and other obligations due hereunder shall become immediately due and payable, and to the extent the maximum Available Facility or any amounts still available under the Term Loan have not yet been used or fully drawn on by Borrower, terminate the balance of same, and the Bank shall have all rights provided herein or in any of the other Loan Documents or otherwise provided by law to realize on the Collateral Security;
(a) Borrower does not pay or, repay to Bank any principal of or any interest on any Loan the Note or any fee or obligation when due whether by reason of demand, acceleration or otherwise, within ten (10) days of the due date, or any payment default or demand or acceleration based on non-payment to Bank shall occur under any Loan Document (and same shall not be cured within any available period);
(b) Borrower does not pay principal or interest on any other borrowed money obligation when due or the holder of such other obligation declares, or may declare, such obligation due prior to its stated maturity because of Borrower's default thereunder (unless such obligation is the subject of an unexpired cure period or a bona fide dispute by Borrower) except any money obligation due to Licensor pursuant to the License Agreement; or
(c) Borrower does not perform its obligations under any agreement material to its business and the other party to such agreement declares, or may declare, such agreement in default (unless such agreement is the subject of an unexpired cure period or a bona fide dispute by Borrower); or
(d) Any representation or warranty made by Borrower herein or in any other Loan Document or writing furnished in connection with this Agreement shall be false in any material respect when made; or
(e) Borrower violates in any material respect any covenant, agreement or condition contained herein or in any other Loan Document or writing (other than to make payment of principal, interest, fees or obligations) and does not cure such violation to the reasonable satisfaction of the Bank within ten (10) days of such occurrence; provided, however, that it shall be an immediate Event of Default (with no cure period) if Borrower makes any payment to Licensor on the Subordinated Debt (whether such payment is a payment of principal and interest or interest only) and such payment causes Borrower to be in breach of the Financial Covenant set forth in Exhibit "2(f)" or
(f) Borrower is unable to pay its business debts as due or Borrower's financial statement indicates insolvency or a deficit net worth; or
(g) With respect to the plans referred to in Section 1(i), or any other similar plan, a "reportable event" or "prohibited transaction" pursuant to ERISA has occurred which results in the imposition of material taxes or penalties against Borrower or the termination of such plans (or trusts related thereto), or Borrower incurs any material liability to PBGC in connection with such plans, and does not cure same to the satisfaction of the Bank within ten (10) days of such occurrence; or
(h) Borrower makes an assignment for the benefit of creditors; or
(i) Borrower applies for the appointment of a trustee or receiver of any part of the assets of Borrower or commences any proceedings relating to Borrower under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or other liquidation law of any jurisdiction; or any such application if filed, or any such proceedings are commenced, against Borrower and Borrower indicates approval, consent on acquiescence; or an order is entered appointing such trustee or receiver, or adjudicating Borrower bankrupt or insolvent, or approving the petition in any such proceedings, and such order remains in effect for thirty (30) days; or
(j) Any order is entered in any proceedings against Borrower decreeing the dissolution or division of Borrower or its assets, and such order remains in effect for thirty (30) days; or
(k) A part of Borrower's operations shall cease (which, if continued, would have a material adverse effect on Borrower's operations or financial condition); or
(l) Any final judgment in excess of confirmed insurance coverage satisfactory to Bank which, together with other outstanding judgments against Borrower which have not been discharged or execution thereon stayed, causes the aggregate of such judgments to exceed Fifty Thousand Dollars ($50,000), shall be rendered against Borrower and within sixty (60) days such judgment shall not have been discharged or execution stayed pending appeal or within sixty (60) days after the expiration of any such stay such judgment shall not have been discharged.
(m) If, in the reasonable opinion of Bank, there has been a material adverse change in the financial affairs or operating condition of Borrower, or in the value of the Collateral Security which, in the reasonable judgment of the Bank, imperils Borrower's ability to repay its obligations under this Agreement.
The above recitation of Events of Default: (i) shall supplement and be in addition to any defaults specified within the Term Note, Security Agreement, Subordination Agreement and any other Loan Document, which shall be interpreted in all respects in favor of the Bank but whenever possible shall be interpreted and limited consistent with the default provisions of this Agreement; and (ii) shall not in any way defer or in any way limit the Bank from exercising its rights in connection with other notes issued to the Borrower. To the extent any cure-of-default period is provided above, the Bank may nevertheless, at its option pending completion of such cure, suspend its obligations to consider further Loans hereunder.
(B) Remedies Upon Event of Default. At any time as of which an Event of Default shall have occurred, Bank, at its option, may, but shall not be obligated to, exercise any one or more of the following remedies without notice or demand, which notice and demand Borrower hereby expressly waives:
(i) Bank may declare the indebtedness evidenced by the Note and all other indebtedness and obligations of Borrower to Bank hereunder and under the Loan Documents to be forthwith due and payable, and thereupon the Note, interest accrued thereon and all such other indebtedness and obligations shall become and be immediately due and payable without presentment, demand, protest or further notice of any kind, all of which are expressly waived by Borrower;
(ii) Bank may take such actions, make such payments and, in doing so, incur such costs and expenses as Bank, in its sole discretion, may deem to be appropriate to correct or eliminate or attempt to correct or eliminate the condition or circumstance constituting such Event of Default, whereupon Borrower shall immediately reimburse Bank for the amount of all such payments made and costs and expenses incurred, together with interest thereon at the Default Rate, provided that no action or payment by Bank pursuant to this subsection shall constitute a waiver by Bank of, or be deemed to have cured, such Event of Default;
(iii) Bank may enforce, or otherwise avail itself of, any and all remedies provided in any of the Loan Documents; and/or
(iv) Bank may enforce, or avail itself of, any other remedies available to it at under this Agreement, any other Loan Document, at law or in equity.
(C) Remedies Cumulative. All powers and remedies given by this Section shall be cumulative and not exclusive of one another or of any other right or remedy or of any other powers and remedies available to Bank under the Loan Documents and/or applicable law to enforce the performance or observance of the covenants and agreements of Borrower contained in this Agreement. No delay or omission of Bank to exercise any right or power accruing upon the occurrence of any Event of Default shall constitute a waiver of any subsequent Event of Default or impair any rights or remedies consequent thereto. Every power and remedy given to Bank may be exercised from time to time and as often as may be deemed necessary by Bank, and such powers and remedies may be exercised by Bank simultaneously or in such order as Bank may determine in its sole discretion.
(a) Reasonable Actions. Bank agrees that in taking any action which it is permitted or empowered to take under this Loan Agreement, it will act reasonably under what it believes are the facts and circumstances existing at such time.
(b) Delay. No delay, omission or forbearance on the part of the Bank or the holder of any Note, in the exercise of any power or right shall operate as a waiver thereof, nor shall any single or partial delay, omission or forbearance in the exercise of any other power or right. The rights and/or remedies of the Bank herein provided are cumulative, shall be interpreted in all respects in favor of the Bank, and are not exclusive of any other rights and/or remedies provided by law.
(c) Notice. Any notice hereunder to Borrower or Bank shall be in writing and, if mailed, shall be deemed to be given by Borrower to Bank when received by the Bank at its address set forth below, and by Bank to Borrower when sent by mail, postage prepaid, and addressed to the Borrower at its address set forth below:
Bank: Firstar Bank, N.A.
425 Walnut Street
Location CN-WN-06TC
Cincinnati, Ohio 45202
Attention: LaDonna Bumpus
Vice President, Trust
Lending & Credit Officer
With a copy to: Taft, Stettinius & Hollister
1800 Firstar Tower
425 Walnut Street
Cincinnati, Ohio 45202-3957
Attention: Melvin S. Shotten, Esq.
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Borrower: Edward J. Hennessy, Incorporated
750 Grant Avenue, Suite 1000
Novato, CA 94945
Attention: Neil J. Hennessy
President
With a copy to: Foley & Lardner
Firstar Center
777 East Wisconsin Avenue
Milwaukee, WI 53202
Attention: Richard L. Teigen, Esq.
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The Borrower or the Bank may, by written notice to the other, designate another address for purposes hereunder.
(d) Expenses: Indemnity. Borrower agrees to pay all out-of-pocket expenses of the Bank and its employees (including attorney's fees and legal expenses, but excluding the salaries of the Bank's own employees) incurred by the Bank in entering into and closing this Agreement and preparing the documentation in connection herewith and in connection with any of the Loan Documents, and the Borrower agrees to pay the Bank upon demand for the same. Borrower agrees to pay all filing fees to protect the Bank's security interest under this Agreement, and if the Bank pays for same, Borrower shall reimburse the Bank upon demand. The Borrower agrees to pay the Bank upon demand for enforcing the obligations of the Borrower hereunder or under any Note or documents relative to the Collateral Security or under any of the Loan Documents (including reasonable attorney's fees and legal expenses), and to defend, indemnify and hold the Bank harmless from all liability, obligation, cost, damage or expense (including attorney's fees and legal expenses) for taxes (except income or franchise taxes), fees or third party claims which may arise or be related to the execution, delivery or performance of this Agreement or any of the Loan Documents or the issuance of the Note. Such obligations of the Borrower shall survive any termination of this Agreement.
(e) Survival. All covenants of Borrower made herein or otherwise in writing in connection with the transactions contemplated hereby shall survive the execution and delivery of this Loan Agreement, the Note and the Loan Documents, and shall remain in effect so long as any obligations of Borrower are outstanding hereunder or under any of the Loan Documents.
(f) Severability . Any provision of this Agreement (or any Exhibit hereto) which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition of enforceability without invalidating the remaining portions hereof or affecting the validity or enforceability of such provision in any other jurisdiction.
(g) Law. IMPORTANT: The Loan shall be deemed made in Ohio and the Term Note, and all other Loan Documents evidencing same, and all the rights and
obligations of Borrower and the Bank hereunder, shall in all respects be governed by and construed in accordance with the laws of the State of Ohio, including all matters of construction, validity and performance. Without limitation on the ability of the Bank to exercise all its rights as to the Collateral Security for the Loan or to initiate and prosecute any action or proceeding in any applicable jurisdiction related to loan repayment, Borrower and the Bank agree that any action or proceeding commenced by or on behalf of the parties arising out of or relating to the Loan and/or the Note and/or other documents evidencing same and/or the Loan Documents shall be commenced and maintained exclusively in the District Court of the United States for the applicable District of Ohio, or any other court of applicable jurisdiction located in Cincinnati, Ohio. The Borrower and the Bank also agree that a summons and complaint commencing an action or proceeding in any such Ohio courts by or on behalf of such parties shall be properly served and shall confer personal jurisdiction on a party to which said party consents, if (a) served personally or by certified mail to the other party at any of its addresses noted herein, or (b) as otherwise provided under the laws of the State of Ohio. The interest rate and all other terms of the Loan negotiated with Borrower are, in part, related to the aforesaid provisions on jurisdiction, which the Bank deems a vital part of this loan arrangement.
(h) Confession of Judgment. Borrower hereby irrevocably authorizes and empowers any attorney-at-law to appear for Borrower in any action upon or in connection with this Agreement at any time after the Term Loan and/or other obligations of Borrower hereunder become due, as herein provided, in any court in or of the State of Ohio or elsewhere, and waive the issuance and service of process with respect thereto, and irrevocably authorizes and empowers any such attorney-at-law to confess judgment in favor of Bank against Borrower in the amount due thereon or hereon, plus interest as herein provided, and all costs of collection, and waive and release all errors in any said proceedings and judgments and all rights of appeal from the judgment rendered. The Borrower agrees and consents that the attorney confessing judgment on behalf of the Borrower hereunder may also be counsel to the Bank and/or the Bank's affiliates, and the Borrower hereby further waives any conflict of interest which might otherwise arise and consents to the Bank paying such confessing attorney a legal fee or allowing such attorneys' fees to be paid from proceeds of collection of this Agreement and/or any and all collateral and security for the Terms Loan and obligations.
(i) Successors. This Agreement shall be binding upon Borrower and Bank and their respective successors and assigns, and shall inure to the benefit of Borrower and Bank and the successors and assigns of Bank. Borrower shall not assign its rights or duties hereunder without the prior written consent of Bank.
(j) Amendment. This Agreement may not be modified or amended except in writing signed by authorized officers of Bank and Borrower.
(k) Exhibits. For all purposes hereof, the Exhibits attached hereto shall be considered a part of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed at Cincinnati, Ohio by their respective officers thereunto duly authorized as of the date first above written.
BANK:
FIRSTAR BANK, N.A.
By: /s/ LaDonna Bumpus
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LaDonna Bumpus
Vice President, Trust
Lending & Credit Officer
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BORROWER:
EDWARD J. HENNESSY, INCORPORATED
By: /s/ Neil J. Hennessy
-----------------------------
Neil J. Hennessy
President
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1(a) - Jurisdictions 1(d) - Financial Information and Reports 1(e) - Description of Financial Statements 1(f) - Actions Pending 1(g) - Permitted Liens 1(i) - Purpose of Loan 1(o) - Tax Matters 2(f) - Financial Covenants 3(i) - Other Items Due At Closing 4(a) - Term Note 4(e)(i) - Security Agreement and Schedules 4(e)(ii) - Business Guaranty 4(e)(iv) - Subordination Agreement 4(e)(v) - Assignment of Partnership Interest |
Exhibit 10.7(a)
$2,500,000.00 Cincinnati, Ohio April 10, 2000
EDWARD J. HENNESSY, INCORPORATED, a California corporation (herein called "Borrower"), for value received, hereby promises to pay to the order of FIRSTAR BANK, N.A. (the "Bank") or its assigns or successors, on or before April 10, 2005, the principal sum of Two Million Five Hundred Thousand Dollars ($2,500,000.00), or such portion thereof as may be outstanding pursuant to the Loan Agreement (as hereinafter defined) and to pay interest from the date hereof (computed on the basis of a 360-day year) on the unpaid balance thereof at a per annum rate of interest equal at all times as specified in the Loan Agreement (as hereinafter defined).
Interest and principal shall be payable in installments as specified in the Loan Agreement. Payments of both principal and interest are to be made at the office of the Bank at 425 Walnut Street, in the City of Cincinnati, Ohio in lawful money of the United States of America, or as otherwise designated by the Bank.
At the option of the Bank, (a) prior to acceleration of this Note, in the event that any interest or principal amounts remain unpaid past thirty (30) days of the date due, and/or (b) upon the occurrence of any other Event of Default under this Note or upon the acceleration of this Note, interest (computed and adjusted in the same manner, and with the same effect, as interest on this Note prior to maturity) will be paid on the outstanding balance of this Note on demand at the Prime Rate plus three percent (3%) per annum up to any maximum rate permitted by law, in all cases until paid and whether before or after the entry of any judgment thereon. In addition, in the event that the Borrower should fail to make any payment hereunder within ten (10) days of the date due, the Borrower shall pay the Bank a fee in an amount of up to five percent (5%) of the amount of such payment, but in no event less than fifty dollars ($50.00), which fee shall be immediately due and payable without notice or demand.
This Note is the "Term Note" referred to in the Loan Agreement of even date herewith to which the Borrower and the Bank are parties (herein, as hereby or further amended, restated and/or supplemented from time to time, the "Loan Agreement"), and this Note is subject to the terms and conditions of and Collateral Security provided in the Loan Agreement, and its maturity is subject to acceleration upon the terms provided in the Loan Agreement. Terms used herein shall have the same defined meaning as set forth in the Loan Agreement. To the extent any provision of this Note shall be deemed to be inconsistent with any provision of the Loan Agreement, said provision of the Loan Agreement shall control.
This Note is being executed and delivered in, is intended to be performed in, shall be construed and enforceable in accordance with, and governed by, the laws of the State of Ohio and shall be subject to the venue limitations provided in the Loan Agreement.
Presentment for payment, notice of dishonor, protest and notice of protest are hereby waived.
Borrower hereby irrevocably authorizes and empowers any attorney-at-law to appear for Borrower in any action upon or in connection with this Agreement at any time after the Loans and/or other obligations of Borrower evidenced hereby become due, as herein provided, in any court in or of the State of Ohio or elsewhere, and waives the issuance and service of process with respect thereto, and irrevocably authorizes and empowers any such attorney-at-law to confess judgment in favor of Bank against Borrower in the amount due thereon or hereon, plus interest as herein provided, and all costs of collection, and waives and releases all errors in any said proceedings and judgments and all rights of appeal from the judgment rendered. The Borrower agrees and consents that the attorney confessing judgment on behalf of the Borrower hereunder may also be counsel to the Bank and/or the Bank's affiliates, and the Borrower hereby further waives any conflict of interest which might otherwise arise and consents to the Bank paying such confessing attorney a legal fee or allowing such attorneys' fees to be paid from proceeds of collection of this Agreement and/or any and all collateral and security for the Loans and obligations.
EDWARD J. HENNESSY, INCORPORATED
By: /s/ Neil J. Hennessy
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Neil J. Hennessy
President
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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 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 August 6, 2001 |
Exhibit 23.3
Board of Directors
Hennessy Advisors, Inc.
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
San Francisco, California
August 1, 2001
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Exhibit 99.1
ESCROW AGREEMENT
Westamerica Bank agrees to hold subscription funds for investors on record in the office of Hennessy Advisors, Inc. in an escrow account. All of the proceeds shall be released to Hennessy Advisors, Inc. upon receipt of a letter from Hennessy Advisors, Inc. stating:
1. Hennessy Advisors, Inc., has received subscriptions for at least 450,000 shares of common stock. (the "Minimum Offering").
If this event has not occurred by the close of business on December 31, 2001 (or such subsequent date not later than 90 days thereafter as Hennessy Advisors, Inc. specified to Westamerica Bank in writing prior thereto) all of the investor funds will be returned by cashiers check payable to the individual investors as reported by Hennessy Advisors, Inc., and delivered to Hennessy Advisors, Inc. for delivery to the subscribers. Any interest earned on the funds will be released to Hennessy Advisors, Inc., net any bank service charges.
Accepted 30th day of July, 2001
By: /s/ By: /s/
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Westamerica Bank Hennessy Advisors, Inc.
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