| 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 a daily reconciliation of
portfolio positions and cash for the fund;
• monitoring the fund’s
compliance 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 the fund’s service providers
(including its sub-advisor, on-site sub-advisor,
• overseeing the selection and
continued employment of the fund’s sub-advisor,
• overseeing service providers that
provide accounting, administration, distribution, transfer agency,
custodial, sales and marketing, audit, information technology, and
legal services to the fund;
• maintaining in-house
• being actively involved with
preparing all regulatory filings for the fund, including writing
and annually updating the fund’s prospectus and related
documents;
• preparing or reviewing a written
summary of the fund’s performance for the most
recent twelve-month
• monitoring and overseeing the
accessibility of the fund on third party platforms;
• 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 Investor Class
shares of 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
Accounting Standard Codification 605 “Revenue
Recognition.”
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,
2016, the Company has never voluntarily waived fees, and has no
current intention to voluntarily waive fees.
The Company’s contractual agreements for investment advisory
and shareholder services 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 that 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 $0.0006 million per year were recognized
in operations for fiscal years 2016 and 2015.
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, 2016.
On September 23, 2016, the Company purchased the assets
related to the management of the Westport Fund and the Westport
Select Cap Fund, adding approximately $435 million in assets
under management. The purchase was consummated in accordance with
the terms and conditions of that certain Transaction Agreement,
dated as of May 2, 2016, between the Company and Westport
Advisers, LLC. The purchase price of $11.3 million was funded
with available cash and was based on the aggregate average assets
under management for the Westport Fund and the Westport Select Cap
Fund as measured at the close of business on the effective date of
the Transaction Agreement and on each of the two trading days
immediately preceding the date of the Transaction Agreement. The
total capitalized costs related to the purchase were
$11.4 million.
(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, 2016 and 2015. Accordingly, the fair values
presented in the Company’s financial statements as of
September 30, 2016 and 2015, 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, and New York. The tax
years ended in 2012 through 2015 remain open and subject to
examination by the appropriate governmental agencies in the U.S.;
the 2011 through 2015 tax years remain open in California; the
2013 through 2015 tax years remain open in Massachusetts, North
Carolina, and New Hampshire; the 2014 and 2015 tax year remains
open for Illinois, Maryland, Michigan, Minnesota, New York, and
Texas. For any unfiled tax returns the statute of limitations will
be open indefinitely.
The Company’s effective tax rate of 36.3% and 39.4% for the
fiscal years ended September 30, 2016 and 2015, respectively,
differ from the federal statutory rate primarily due to the effects
of state income taxes. The effective income tax rate was lower for
the period ended September 30, 2016, due to changes in state
apportionment factors.
(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 years ended September 30,
2016 and 2015, 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. 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 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.
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 88,200 and 182,500 RSUs
granted during the fiscal years ended September 30, 2016 and
2015, respectively.
All compensation costs related to RSUs vested during the fiscal
years ended September 30, 2016 and 2015, have been recognized
in the financial statements.
The Company has available up to 2,553,990 shares of the
Company’s common stock in respect of granted stock awards, in
accordance with terms of the Plan.
RSU activity for the fiscal years ended September 30, 2016 and
2015, was as follows:
Restricted Stock Unit Activity
Years Ended September 30, 2016 and 2015
Weighted Avg.
Number of Restricted
Fair Value at
Share Units Each Date
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
Granted 88,200 $ 32.50
Vested (1) (80,051 ) $ 17.68
Forfeited
— $
—
Non-vested Balance at September 30, 2016 252,976 $ 24.28
(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 60,252
and 27,222 shares of common stock issued for restricted stock units
vested in the fiscal years ended September 30, 2016 and 2015,
respectively.
Restricted Stock
Unit Compensation
Fiscal Year Ended September 30, 2016
(In thousands)
Total expected compensation expense related to Restricted Stock
Units $ 10,608
Compensation Expense recognized as of September 30, 2016 (4,466 )
Unrecognized compensation expense related to RSU’s at
September 30, 2016 $ 6,142
As of September 30, 2016, there was $6.1 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 2.9 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. |
