| Summary of the Organization, Description of Business and Significant Accounting Policies | (1) Summary of the Organization,
Description of Business and Significant Accounting Policies
(a) Organization and Description of
Business
Hennessy Advisors, Inc. (the “Company”) was founded on
February 1, 1989 as a California corporation under the name
Edward J. Hennessy, Incorporated. In 1990, the Company became a
registered investment advisor and on April 15, 2001, the
Company changed its name to Hennessy Advisors, Inc.
The Company’s operating activities consist primarily of
providing investment advisory services to 16 open-end mutual funds
branded as the Hennessy Funds. The Company serves as the investment
advisor to all classes of the Hennessy Cornerstone Growth Fund, the
Hennessy Focus Fund, the Hennessy Cornerstone Mid Cap 30 Fund, the
Hennessy Cornerstone Large Growth Fund, the Hennessy Cornerstone
Value Fund, the Hennessy Large Value Fund, the Hennessy Total
Return Fund, the Hennessy Equity and Income Fund, the Hennessy
Balanced Fund, the Hennessy Core Bond Fund, the Hennessy Gas
Utility Fund, the Hennessy Small Cap Financial Fund, the Hennessy
Large Cap Financial Fund, the Hennessy Technology Fund, the
Hennessy Japan Fund, and the Hennessy Japan Small Cap Fund. The
Company also provides shareholder services to the entire family of
the Hennessy Funds. Prior to March 1, 2015, the Company only
earned shareholder service fees from some of the Hennessy
Funds.
The Company’s operating revenues consist of contractual
investment advisory and shareholder service fees paid to it by the
Hennessy Funds. The Company earns investment advisory fees from
each Hennessy Fund by, among other things:
• acting as portfolio manager for the
fund or overseeing the sub-advisor
• performing daily reconciliations of
portfolio positions and cash for the fund;
• monitoring the compliance of the fund
with its investment objectives and restrictions and federal
securities laws;
• performing activities such as
maintaining a compliance program, conducting ongoing reviews of the
compliance programs of service providers to the fund (including
sub-advisors, on-site sub-advisors,
• overseeing the selection and
continued employment of sub-advisors and monitoring such
sub-advisors’ investment performance and adherence to
investment policies;
• overseeing service providers that
support the fund in providing fund accounting, fund administration,
fund distribution, transfer agency, custodial, sales and marketing,
audit, information technology, and legal services;
• maintaining comprehensive and
nationwide in-house
• overseeing an ongoing and
wide-ranging public relations campaign on behalf of the fund;
• being actively involved with
preparing regulatory filings for the fund;
• preparing or reviewing a written
summary of the fund’s performance for the most recent
six-month twelve-month semi-annual
• overseeing distribution of the fund
through third party financial intermediaries;
• paying the incentive compensation of
the fund’s compliance officers and employing other staff such
as management executives, legal personnel, marketing personnel,
national accounts and distribution personnel, sales personnel,
administrative personnel, and trading oversight personnel;
• providing a quarterly certification
to Hennessy Funds Trust; and
• preparing or reviewing materials for
the Funds’ Board of Trustees, presenting or leading
discussions to or with the Funds’ Board of Trustees,
preparing or reviewing meeting minutes, and arranging for training
and education of the Funds’ Board of Trustees.
The Company earns shareholder service fees from the Hennessy Funds
by, among other things, maintaining an “800” number
that the current investors of the Hennessy Funds may call to ask
questions about the Hennessy Funds or their accounts, or to get
help with processing exchange and redemption requests or changing
account options. These fee revenues are earned and calculated daily
by the Hennessy Funds’ accountants at U.S. Bancorp Fund
Services, LLC. The fees are computed and billed monthly, at which
time they are recognized in accordance with ASC 605.
In the past, the Company has waived fees with respect to some of
the Hennessy Funds to comply with contractual expense ratio
limitations, but all such expense ratio limitations expired or were
terminated as of February 28, 2015. The fee waivers were
calculated daily by the Hennessy Funds’ accountants at U.S.
Bancorp Fund Services, LLC and were charged to expense monthly by
the Company as an offset to revenue. The waived fees were deducted
from investment advisory fee income, and reduced the amount of
advisory fees that the Hennessy Funds paid in the subsequent month.
To date, the Company has only waived fees based on contractual
obligations, but the Company has the ability to waive fees at its
discretion to compete with other mutual funds with lower expense
ratios. If the Company were to elect voluntarily to waive fees, the
decision to waive fees would not apply to previous periods, but
would only apply on a going forward basis. As of September 30,
2015, the Company has never voluntarily waived fees, and has no
current intention to voluntarily waive fees.
The Company’s contractual agreements provide persuasive
evidence that an arrangement exists with fixed and determinable
fees, and the services are rendered daily. The collectability
is probable as the fees are received from the Hennessy Funds’
in the month subsequent to the month in which the services are
provided.
(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
Investments in highly liquid financial instruments with remaining
maturities of less than one year are classified as short-term
investments. Financial instruments with remaining maturities of
greater than one year are classified as long-term
Marketable securities classified as available-for-sale
The Company holds investments in publicly traded mutual funds,
which are accounted for as trading securities. Accordingly,
unrealized gains of $0.003 million per year were recognized in
operations for fiscal years 2015 and 2014.
Dividend income is recorded on the ex-dividend
(d) Management Contracts Purchased
The Company has purchased assets related to the management of
open-end
Under the FASB guidance on “Intangibles – Goodwill and
Other,” intangible assets that have indefinite useful lives
are not amortized but are tested at least annually for impairment.
The Company reviews the life of the management contracts each
reporting period to determine if they continue to have an
indefinite useful life. The Company considers the mutual fund
management contracts to be intangible assets with an indefinite
useful life and are not impaired as of September 30, 2015.
On October 26, 2012, the Company purchased the assets related
to the management of the entire family of ten FBR funds (the
“FBR Funds”), adding approximately $2.2 billion in
assets under management. The purchase was consummated in accordance
with the terms and conditions of that certain Asset Purchase
Agreement, dated as of June 6, 2012, between the Company and
FBR Fund Advisers, Inc. The purchase price was comprised of two
payments: an initial payment of $19,692,137 made on
October 26, 2012 based upon the net asset value of the FBR
Funds as of October 25, 2012 and a contingent payment of
$19,193,595 made on November 5, 2013 based upon the net asset
value of the FBR Funds as of October 28, 2013. The initial
payment was funded with $3.4 million of available cash and
$16.3 million of debt proceeds that were obtained pursuant to
an amendment and restatement of the Company’s existing loan
agreement with U.S. Bank National Association that allowed the
Company to borrow the additional amount due. The additional
capitalized transaction costs of $1.3 million, of which
$1.2 million was capitalized in prior years, include legal
fees, printing fees and other costs related to the purchase.
The contingent payment due under the Asset Purchase Agreement was
determined to be $19.2 million as of October 28, 2013. The
amount of the liability was booked as of September 30, 2013
because it was measurable. The contingent payment was funded in
part with $13.3 million of debt proceeds that were obtained
pursuant to an amendment of the Company’s then-existing long-term long-term
(e) Fair Value of Financial
Instruments
The FASB guidance on “Disclosures about Fair Value of
Financial Instruments” requires disclosures regarding the
fair value of all financial instruments for financial statement
purposes. The estimates presented in these financial statements are
based on information available to management as of
September 30, 2015 and 2014. Accordingly, the fair values
presented in the Company’s financial statements as of
September 30, 2015 and 2014 may not be indicative of amounts
that could be realized on disposition of the financial instruments.
The fair value of receivables, accounts payable and notes payable
has been estimated at carrying value due to the short maturity of
these instruments. The fair value of purchased management contracts
is estimated at the cost of the purchase. The fair value of
marketable securities and money market accounts is based on closing
net asset values as reported by securities exchanges registered
with the Securities and Exchange Commission.
(f) 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 one
to ten years.
(g) Income Taxes
The Company, under the FASB guidance on “Accounting for
Uncertainty in Income Tax,” uses a recognition threshold and
measurement attribute for the financial statement recognition and
measurement of uncertain tax positions taken or expected to be
taken in a company’s income tax return, and also provides
guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. The
Company utilizes a two-step approach for evaluating uncertain tax
positions. Step one, recognition, requires a company to determine
if the weight of available evidence indicates that a tax position
is more likely than not to be sustained upon audit, including
resolution of related appeals or litigation processes, if any. Step
two, measurement, is based on the largest amount of benefit, which
is more likely than not to be realized on ultimate settlement.
The Company believes the positions taken on the tax returns are
fully supported, but tax authorities may challenge these positions,
which may not be fully sustained on examination by the relevant tax
authorities. Accordingly, the income tax provision includes amounts
intended to satisfy assessments that may result from these
challenges. Determining the income tax provision for these
potential assessments and recording the related effects requires
management judgement and estimates. The amounts ultimately paid on
resolution of an audit could be materially different from the
amounts previously included in the income tax provision, and,
therefore, could have a material impact on our income tax
provision, net income and cash flows. The accrual for uncertain tax
positions is attributable primarily to uncertainties concerning the
tax treatment of our domestic operations, including the allocation
of income among different jurisdictions. For a further discussion
on taxes, refer to Note 8 to the Financial Statements.
The Company files U.S. federal and state tax returns and has
determined that its major tax jurisdictions are the United States,
California, Massachusetts, Texas, New Hampshire, North Carolina,
Illinois, Maryland, Michigan, Minnesota, New Jersey, and New
York. The tax years ended in 2011 through 2014 remain
open and subject to examination by the appropriate governmental
agencies in the U.S.; the 2010 through 2014 tax years remain
open in California; the 2012 through 2014 tax years remain
open in Massachusetts and New Hampshire; and the 2014 tax year
remains open in Texas. For the unfiled tax returns: Illinois,
Maryland, Michigan, Minnesota, New Jersey, and New York, the
statute of limitations will be open indefinitely.
The Company’s effective tax rate of 39.4% and 41.3% for the
fiscal years ended September 30, 2015 and 2014, respectively,
differ from the federal statutory rate primarily due to the effects
of state income taxes.
(h) Earnings Per Share
Basic earnings per share is determined by dividing net earnings by
the weighted average number of shares of common stock outstanding,
while diluted earnings per share is determined by dividing net
earnings by the weighted average number of shares of common stock
outstanding adjusted for the dilutive effect of common stock
equivalents.
There were no common stock equivalents excluded from the earnings
per share calculation for the fiscal year ended September 30,
2015 and 2014 because they were anti-dilutive.
(i) Stock-Based Compensation
Effective January 17, 2013, the Company established, and the
Company’s shareholders approved, the 2013 Omnibus Incentive
Plan providing for the issuance of options, stock appreciation
rights, restricted stock, restricted stock units, performance
awards, and other equity awards for the purpose of attracting and
retaining executive officers, key employees, and outside directors
and advisors and increasing shareholder value. The 2013 Omnibus
Incentive Plan replaced the 2001 Omnibus Plan that the Company had
previously adopted and had in place. On March 26, 2014, the
Company adopted, and the Company’s shareholders approved, the
Amended and Restated 2013 Omnibus Incentive Plan (the
“Plan”), pursuant to which amounts that a Plan
participant is entitled to receive with respect to certain types of
awards were increased as compared to the limitations included in
the 2013 Omnibus Incentive Plan. The maximum number of shares that
may be issued under the Plan is 50% of the number of outstanding
shares of common stock of the Company, subject to adjustment by the
compensation committee of the Board of Directors of the Company
upon the occurrence of certain events. The number of shares of
common stock subject to awards that remain outstanding under the
2001 Omnibus Plan reduces the number of shares available for
issuance under the Plan. The 50% limitation does not invalidate any
awards made prior to a decrease in the number of outstanding
shares, even if such awards have result or may result in shares
constituting more than 50% of the outstanding shares being
available for issuance under the Plan. Shares available under the
Plan that are not awarded in one particular year may be awarded in
subsequent years.
The compensation committee of the Board of Directors of the Company
has the authority to determine the awards granted under the Plan,
including among other things, the individuals who receive the
awards, the times when they receive them, vesting schedules,
performance goals, whether an option is an incentive or
nonqualified option and the number of shares to be subject to each
award. However, no participant may receive options or stock
appreciation rights under the Plan for an aggregate of more than
50,000 shares in any calendar year. The exercise price and term of
each option or stock appreciation right is fixed by the
compensation committee except that the exercise price for each
stock option that 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% or
more 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 his or her options in
cash, shares of common stock or any combination thereof.
The exercise price of all options granted under the 2001 Omnibus
Plan was equal to the market price of the underlying common stock
on the grant date and all options were granted and fully vested on
the grant date. There were no options granted during the fiscal
year ended September 30, 2015.
Under the Plan, participants may be granted restricted stock units
(“RSUs”), representing an unfunded, unsecured right to
receive a share of the Company’s common stock on the date
specified in the recipient’s award. The Company issues new
shares of its common stock when it is required to deliver shares to
an RSU recipient. The RSUs granted under the Plan vest over four
years, at a rate of 25 percent per year. The Company recognizes
compensation expense on a straight-line basis over the four-year
vesting term of each award. There were 182,500 and 77,800 RSUs
granted during the fiscal years ended September 30, 2015 and
2014, respectively.
The Company, per the fair value recognition provisions of the FASB
guidance on Stock Compensation, uses the “Modified
Perspective” method in accordance with the transition and
disclosure provisions for stock based compensation. All
compensation costs related to RSUs vested during the fiscal years
ended September 30, 2015 and 2014 have been recognized in the
financial statements.
The Company has available up to 2,523,314 shares of the
Company’s common stock in respect of granted stock awards, in
accordance with terms of the Plan. There are no outstanding stock
options as of September 30, 2015.
RSU activity for the fiscal years ended September 30, 2015 and
2014 was as follows:
Restricted Stock Unit Activity
Number of Restricted Weighted Avg.
Non-vested Balance at September 30, 2013 59,375 $ 8.61
Granted 77,800 $ 14.39
Vested (1) (22,712 ) $ 8.89
Forfeited (1,500 ) $ 9.01
Non-vested Balance at September 30, 2014 112,963 $ 12.53
Granted 182,500 $ 21.12
Vested (1) (50,036 ) $ 13.83
Forfeited (600 ) $ 9.01
Non-vested Balance at September 30, 2015 244,827 $ 18.67
(1) The restricted share units vested
includes partially vested shares. Shares of common stock have not
been issued for the partially vested shares, but the related
compensation costs have been charged to expense. There were 27,222
and 10,500 shares of common stock issued for restricted stock units
vested in the fiscal years ended September 30, 2015 and 2014,
respectively.
Restricted Stock Unit Compensation Fiscal Year Ended September 30, 2015
(In Thousands)
Total expected compensation expense related to Restricted Stock
Units $ 7,622
Compensation Expense recognized as of September 30, 2015 (3,050 )
Unrecognized compensation expense related to RSU’s at
September 30, 2015 $ 4,572
As of September 30, 2015, there was $4.6 million of total RSU
compensation expense related to non-vested awards not yet
recognized that is expected to be recognized over a
weighted-average vesting period of 3.3 years.
(j) Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ
from those estimates. |
