| 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
14 open-end
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,
•
if applicable, overseeing the selection and continued
employment of the fund’s sub-advisor, sub-advisor’s
•
overseeing service providers that provide accounting,
administration, distribution, transfer agency, custodial, sales,
marketing, public relations, audit, information technology, and
legal services to the fund;
•
maintaining in-house
•
preparing or directing the preparation of 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 12-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 legal,
marketing, national accounts, distribution, sales, administrative,
and trading oversight personnel, as well as management
executives;
•
providing a quarterly compliance 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. Bank Global Fund Services and are
subsequently reviewed by management. The fees are computed and
billed monthly, at which time they are recognized in accordance
with Accounting Standard Codification 605 — Revenue
Recognition.
Effective February 28, 2017, the Company waives fees with
respect to the Hennessy Technology Fund to comply with a
contractual expense ratio limitation. The fee waiver is calculated
daily by the Hennessy Funds’ accountants at U.S. Bank Global
Fund Services, is subsequently reviewed by management, and is then
charged to expense monthly by the Company as an offset to revenue.
The waived fee is deducted from investment advisory fee income and
reduces the aggregate amount of advisory fees received by the
Company 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. Any decision to waive
fees voluntarily would not apply to previous periods, but would
only apply on a going forward basis.
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 deemed 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 with original maturities of three months or less
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
The Company holds investments in publicly traded mutual funds,
which are accounted for as trading securities. Accordingly,
unrealized gains of less than $1,000 per year were recognized in
operations for fiscal years 2018 and 2017.
Dividend income is recorded on the ex-dividend
(d)
Management Contracts Purchased
Throughout its history, the Company has completed nine purchases of
assets related to the management of 28 different mutual funds, some
of which were reorganized into already existing Hennessy Funds. In
accordance with the Financial Accounting Standards Board (the
“FASB”) guidance, the Company periodically reviews the
carrying value of its purchased management contracts to determine
if any impairment has occurred. The fair value of management
contracts is based on management estimates and assumptions,
including third-party valuations that utilize appropriate valuation
techniques. The fair value of the management contracts was
estimated by applying the income approach. It is the opinion of the
Company’s management that there was no impairment as of
September 30, 2018 or 2017.
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 no impairment as of September 30, 2018.
Most recently, the Company purchased the assets related to the
management of the Rainier Large Cap Equity Fund, the Rainier Mid
Cap Equity Fund, and the Rainier Small/Mid Cap Equity Fund
(collectively, the “Rainier Funds”). In the aggregate,
the Company paid $3.1 million for approximately
$375 million of assets related to management of the Rainier
Funds. The transaction, which was completed in two stages, was
consummated in accordance with the terms and conditions of the
Transaction Agreement, dated as of May 10, 2017, as amended,
between the Company, Manning & Napier Group, LLC, and
Rainier Investment Management, LLC (“Rainier”). The
total capitalized costs related to the purchases was
$3.5 million.
The details of the first stage of the transaction, which closed on
December 1, 2017, are as follows:
•
The Company purchased the assets related to the
management of (i) the Rainier Large Cap Equity Fund, which
were reorganized into the Hennessy Cornerstone Large Growth Fund,
and (ii) the Rainier Mid Cap Equity Fund, which were
reorganized into the Hennessy Cornerstone Mid Cap 30 Fund.
•
The purchase price of $1.0 million was funded
with available cash and was based on the total net assets under
management of the Rainier Large Cap Equity Fund and the Rainier Mid
Cap Equity Fund as measured at the close of business on
November 30, 2017.
•
The amount of the purchased assets under management as
of the closing date was approximately $122 million.
The details of the second stage of the transaction, which closed on
January 12, 2018, are as follows:
•
The Company purchased the assets related to the
management of the Rainier Small/Mid Cap Equity Fund and reorganized
them into the Hennessy Cornerstone Mid Cap 30 Fund.
•
The purchase price of $2.1 million was funded
with available cash and was based on the total net assets under
management of the Rainier Small/Mid Cap Equity Fund as measured at
the close of business on January 11, 2018.
•
The amount of the purchased assets under management as
of the closing date was approximately $253 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, 2018 and 2017. Accordingly, the fair values
presented in the Company’s financial statements as of
September 30, 2018 and 2017, 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 SEC.
(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
On December 22, 2017, during the Company’s first fiscal
quarter, the Tax Cuts and Jobs Act of 2017 (the “2017 Tax
Act”) was enacted into law. Among other changes to various
corporate income tax provisions within the existing Internal
Revenue Code, the 2017 Tax Act reduced the federal corporate income
tax rate from 35% to 21%, effective January 1, 2018. Because
the Company’s fiscal year ends on September 30, it
applied a blended statutory tax rate of 24.5% for fiscal year 2018,
which was based on the applicable tax rates and the corresponding
number of days in its fiscal year 2018 before and after the
effective date of the tax rate change. Under accounting principles
generally accepted in the United States, the Company is required to
recognize the effects of changes in tax laws and tax rates on
deferred tax liabilities in the period in which the new legislation
is enacted.
On the same day the 2017 Tax Act was enacted, the Securities and
Exchange Commission issued Staff Accounting Bulletin No. 118
(“SAB 118”), which permits companies a period of one
year from the enactment date of the 2017 Tax Act to account for the
resulting tax effects. Any required adjustment would be included in
“net earnings from continuing operations” as an
adjustment to income tax expense in the reporting period during
which such adjustment is identified. In the Company’s first
fiscal quarter, based on available information, it estimated the
impact of the reduced corporate tax rate
and re-measured one-time, non-cash
The Company’s effective income tax rates for fiscal years
2018 and 2017 were 11.9% and 35.7%, respectively. The effective
income tax rate was lower for fiscal year 2018 due to the 2017 Tax
Act.
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
The Company believes the positions taken on the tax returns are
fully supported, but tax authorities may challenge these positions
and they 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
and Supplementary Data.
The Company is subject to income tax in the U.S. federal
jurisdiction and multiple state jurisdictions. Following is a list
of jurisdictions that the Company has identified as its major tax
jurisdictions with the tax years that remain open and subject to
examination by the appropriate governmental agencies marked:
Tax Jurisdiction 2014 2015 2016 2017
United States X X X
California X X X X
Connecticut X
District of Columbia X X
Florida X
Georgia X
Illinois X X X
Maryland X X
Massachusetts X X X
Michigan X X
Minnesota X X
New Hampshire X X X
New York X X
North Carolina X X X
Texas X X
Wisconsin X
The Company did have a California Franchise Tax Board
(“FTB”) audit in process as of September 30, 2018,
relating to the details of the Company’s sales factors and
federal audit adjustments. The Company has worked with the FTB to
resolve all audit issues. In October, following the end of our
fiscal year 2018, a final audit determination was issued (see
further discussion in Footnote 15 to the Financial Statements under
Item 8, “Financial Statements and Supplementary Data,”
below).
For state tax jurisdictions with unfiled tax returns, the statute
of limitations will remain open indefinitely.
(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, which consist of restricted stock units
(“RSUs”).
All common stock equivalents were dilutive and therefore included
in the diluted earnings per share calculation for fiscal years 2018
and 2017.
On January 26, 2017, the Company’s Board of Directors
declared a 3-for-2 per-share
(i)
Equity
Amended and Restated 2013 Omnibus Incentive Plan
The Company has adopted, and the Company’s shareholders have
approved, the Amended and Restated 2013 Omnibus Incentive Plan (the
“Omnibus Plan”), providing for the issuance of options,
stock appreciation rights, restricted stock, RSUs, 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 maximum number
of shares that may be issued under the Omnibus Plan is 50% of the
number of outstanding shares of common stock of the Company,
subject to adjustment by the compensation committee of the
Company’s Board of Directors 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 Omnibus Plan. Shares available under the Omnibus Plan
that are not awarded in one particular year may be awarded in
subsequent years.
The compensation committee of the Company’s Board of
Directors has the authority to determine the awards granted under
the Omnibus 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 Omnibus Plan for an aggregate of more
than 75,000 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 10 years
from the date of adoption of the Omnibus 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 Omnibus Plan, participants may be granted 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 Omnibus Plan vest over four
years, at a rate of 25% per year. The Company
recognizes stock-based straight-line
All compensation costs related to RSUs vested during fiscal years
2018 and 2017 have been recognized in the financial statements.
The Company has available up to 3,948,573 shares of the
Company’s common stock in respect of granted stock awards, in
accordance with terms of the Omnibus Plan.
RSU activity for fiscal years 2018 and 2017 was as follows:
RSU Activity
Number of Restricted Weighted Avg. Fair
Non-vested 379,464 $ 16.19
Granted 130,900 $ 14.38
Vested (1) (152,073 ) $ 13.93
Forfeited
— $
—
Non-vested 358,291 $ 16.48
Granted 127,825 $ 13.03
Vested (1) (149,978 ) $ 15.75
Forfeited (11,367 ) $ 16.62
Non-vested 324,771 $ 15.43
(1)
The number of vested RSUs includes partially vested
shares. Shares of common stock have not been issued for the
partially vested shares, but the related compensation expense has
been recognized. There were 116,994 and 112,502 net shares of
common stock issued for vested and issued RSUs in fiscal years 2018
and 2017, respectively.
RSU Compensation Fiscal Year Ended September 30, 2018
(In thousands)
Total expected compensation expense related to RSUs $ 13,955
Compensation expense recognized at reporting date (8,945 )
Unrecognized compensation expense related to RSUs at reporting
date $ 5,010
As of September 30, 2018, there was $5.0 million of total
RSU compensation expense related to non-vested
Dividend Reinvestment and Stock Purchase Plan
In January 2018, the Company adopted an updated Dividend
Reinvestment and Stock Purchase Plan (the “DRSPP”),
replacing the previous Dividend Reinvestment and Stock Purchase
Plan established in March 2015, to provide shareholders and new
investors with a convenient and economical means of purchasing
shares of the Company’s common stock and reinvesting cash
dividends paid on the Company’s common stock. Under the DRSPP
and its predecessor, the Company issued 3,588 and 2,148 shares of
common stock in fiscal years 2018 and 2017, respectively. The
maximum number of shares that may be issued under the DRSPP is
1,550,000 shares, of which 1,546,963 shares remain available for
issuance.
Stock Buyback Program
In August 2010, the Company adopted a stock buyback program.
The program provides that the Company may repurchase up to
1,500,000 shares of its common stock and has no expiration
date. Share repurchases may be made in the open market, in
privately negotiated transactions, or otherwise. The Company did
not repurchase any shares pursuant to the stock buyback program
during fiscal years 2018 and 2017.
(j)
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
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. |
